Document:

Exhibit 10.2

 

NOTE AND WARRANT PURCHASE

 

AGREEMENT

 

 

Dated as of June 30, 2005

 

 

by and among

 

 

APOLLO RESOURCES INTERNATIONAL, INC.

 

 

and

 

 

THE PURCHASERS LISTED ON EXHIBIT A

 

 

TABLE OF CONTENTS

 

	
  ARTICLE I

  	
  Purchase and Sale of Notes and Warrants

  	
   

  
	
   

  	
  Section 1.1

  	
  Purchase and Sale of Notes
  and Warrants

  	
   

  
	
   

  	
  Section 1.2

  	
  Purchase Price and Closing

  	
   

  
	
   

  	
  Section 1.3

  	
  Conversion Shares / Warrant
  Shares

  	
   

  
	
   

  	
  Section 1.4

  	
  Additional Investment Right

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE II

  	
  Representations and Warranties

  	
   

  
	
   

  	
  Section 2.1

  	
  Representations and
  Warranties of the Company

  	
   

  
	
   

  	
  Section 2.2

  	
  Representations and
  Warranties of the Purchasers

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE III

  	
  Covenants

  	
   

  
	
   

  	
  Section 3.1

  	
  Securities
  Compliance

  	
   

  
	
   

  	
  Section 3.2

  	
  Registration and Listing

  	
   

  
	
   

  	
  Section 3.3

  	
  Inspection Rights

  	
   

  
	
   

  	
  Section 3.4

  	
  Compliance with Laws

  	
   

  
	
   

  	
  Section 3.5

  	
  Keeping of Records and Books
  of Account

  	
   

  
	
   

  	
  Section 3.6

  	
  Reporting Requirements

  	
   

  
	
   

  	
  Section 3.7

  	
  Other Agreements

  	
   

  
	
   

  	
  Section 3.8

  	
  Use of Proceeds

  	
   

  
	
   

  	
  Section 3.9

  	
  Reporting Status

  	
   

  
	
   

  	
  Section 3.10

  	
  Disclosure of Transaction

  	
   

  
	
   

  	
  Section 3.11

  	
  Disclosure of Material
  Information

  	
   

  
	
   

  	
  Section 3.12

  	
  Pledge of Securities

  	
   

  
	
   

  	
  Section 3.13

  	
  Amendments

  	
   

  
	
   

  	
  Section 3.14

  	
  Distributions

  	
   

  
	
   

  	
  Section 3.15

  	
  Reservation of Shares

  	
   

  
	
   

  	
  Section 3.16

  	
  Transfer Agent Instructions

  	
   

  
	
   

  	
  Section 3.17

  	
  Disposition of Assets

  	
   

  
	
   

  	
  Section 3.18

  	
  Form SB-2 Eligibility

  	
   

  
	
   

  	
  Section 3.19

  	
  Restrictions on Certain
  Issuances of Securities

  	
   

  
	
   

  	
  Section 3.20

  	
  Subsequent Financings

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE IV

  	
  Conditions

  	
   

  
	
   

  	
  Section 4.1

  	
  Conditions Precedent to the
  Obligation of the Company to Close and to Sell the Securities

  	
   

  
	
   

  	
  Section 4.2

  	
  Conditions Precedent to the
  Obligation of the Purchasers to Close and to Purchase the Securities

  	
   

  
	
   

  	
  Section 4.3

  	
  Conditions Precedent to the
  Obligation of the Purchasers to Close and to Purchase the Option Notes

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE V

  	
  Certificate Legend

  	
   

  
	
   

  	
  Section 5.1

  	
  Legend

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE VI

  	
  Indemnification

  	
   

  
	
   

  	
  Section 6.1

  	
  General Indemnity

  	
   

  
	
   

  	
  Section 6.2

  	
  Indemnification Procedure

  	
   

  
						

 

 

	
  ARTICLE VII

  	
  Miscellaneous

  	
   

  
	
   

  	
  Section 7.1

  	
  Fees and Expenses

  	
   

  
	
   

  	
  Section 7.2

  	
  Specific Performance;
  Consent to Jurisdiction; Venue

  	
   

  
	
   

  	
  Section 7.3

  	
  Entire Agreement; Amendment

  	
   

  
	
   

  	
  Section 7.4

  	
  Notices

  	
   

  
	
   

  	
  Section 7.5

  	
  Waivers

  	
   

  
	
   

  	
  Section 7.6

  	
  Headings

  	
   

  
	
   

  	
  Section 7.7

  	
  Successors and Assigns

  	
   

  
	
   

  	
  Section 7.8

  	
  No Third Party Beneficiaries

  	
   

  
	
   

  	
  Section 7.9

  	
  Governing Law

  	
   

  
	
   

  	
  Section 7.10

  	
  Survival

  	
   

  
	
   

  	
  Section 7.11

  	
  Counterparts

  	
   

  
	
   

  	
  Section 7.12

  	
  Publicity

  	
   

  
	
   

  	
  Section 7.13

  	
  Severability

  	
   

  
	
   

  	
  Section 7.14

  	
  Further Assurances

  	
   

  
					

 

 

NOTE AND WARRANT PURCHASE AGREEMENT

 

This NOTE AND WARRANT PURCHASE
AGREEMENT dated as of June 30, 2005   this “Agreement”) by and among Apollo
Resources International, Inc., a Utah corporation (the “Company”),
and each of the purchasers of the secured convertible promissory notes of the
Company whose names are set forth on Exhibit A attached hereto
(each a “Purchaser” and collectively, the “Purchasers”).

 

The parties hereto agree
as follows:

 

ARTICLE I

 

PURCHASE AND SALE OF NOTES AND WARRANTS

 

Section 1.1                                      Purchase
and Sale of Notes and Warrants.

 

(a)                                  Upon
the following terms and conditions, the Company shall issue and sell to the
Purchasers, and the Purchasers shall purchase from the Company, secured convertible
promissory notes in the aggregate principal amount of up to Three Million Five
Hundred Thousand Dollars ($3,500,000), convertible into shares of the Company’s
common stock, par value $0.001 per share (the “Common Stock”), in
substantially the form attached hereto as Exhibit B (the “Notes”).
The Company and the Purchasers are executing and delivering this Agreement in
accordance with and in reliance upon the exemption from securities registration
afforded by Section 4(2) of the U.S. Securities Act of 1933, as
amended, and the rules and regulations promulgated thereunder (the “Securities
Act”), including Regulation D (“Regulation D”), and/or upon such
other exemption from the registration requirements of the Securities Act as may
be available with respect to any or all of the investments to be made
hereunder.

 

(b)                                 Upon
the following terms and conditions, the Purchasers shall be issued Warrants, in
substantially the form attached hereto as Exhibit C (the “Warrants”),
to purchase a number of shares of Common Stock equal to one hundred percent (100%)
of the number of Conversion Shares (as defined in Section 1.3 hereof) issuable
upon conversion of such Purchaser’s Notes purchased pursuant to this Agreement
as set forth opposite such Purchaser’s name on Exhibit A attached
hereto. The Warrants shall expire five (5) years following the Closing
Date and shall have an exercise price per share equal to the Warrant Price (as
defined in the Warrants).

 

Section 1.2                                      Purchase
Price and Closing. Subject to the terms and conditions hereof, the Company
agrees to issue and sell to the Purchasers and, in consideration of and in
express reliance upon the representations, warranties, covenants, terms and
conditions of this Agreement, the Purchasers, severally but not jointly, agree
to purchase the Notes and Warrants for an aggregate purchase price of up to Three
Million Five Hundred Dollars ($3,500,000) (the “Purchase Price”). The
closing of the purchase and sale of the Notes and Warrants to be acquired by
the Purchasers from the Company under this Agreement shall take place at the
offices of Kramer Levin Naftalis & Frankel LLP, 1177 Avenue of the
Americas, New York, New York 10036 (the “Closing”) at 10:00 a.m.,
New York time (i) on or before July 6, 2005;

 

1

 

provided, that all of the conditions
set forth in Article IV hereof and applicable to the Closing shall have
been fulfilled or waived in accordance herewith, or (ii) at such other
time and place or on such date as the Purchasers and the Company may agree upon
(the “Closing Date”). Subject to the terms and conditions of this
Agreement, at the Closing the Company shall deliver or cause to be delivered to
each Purchaser (x) its Note for the principal amount set forth opposite the
name of such Purchaser on Exhibit A hereto and (y) a Warrant to
purchase such number of shares of Common Stock as is set forth opposite the
name of such Purchaser on Exhibit A attached hereto. At the
Closing, each Purchaser shall deliver its Purchase Price by wire transfer to an
account designated by the Company.

 

Section 1.3                                      Conversion
Shares / Warrant Shares. The Company has authorized and has reserved and
covenants to continue to reserve, free of preemptive rights and other similar
contractual rights of stockholders, a number of its authorized but unissued
shares of Common Stock equal to one hundred twenty percent (120%) of (a) the
aggregate number of shares of Common Stock to effect the conversion of the
Notes and any interest accrued and outstanding thereon and exercise of the
Warrants and (b) upon exercise of the Purchaser Option (as defined in Section 1.4
hereof), the aggregate number of shares of Common Stock to effect the
conversion of the Option Notes (as defined in Section 1.4 hereof) and any
interest accrued and outstanding thereon and exercise of the Additional
Warrants (as defined in Section 1.4 hereof). Any shares of Common Stock
issuable upon conversion of the Notes and the Option Notes and any interest
accrued and outstanding on the Notes and the Option Notes are herein referred
to as the “Conversion Shares”. Any shares of Common Stock issuable upon
exercise of the Warrants (and such shares when issued) are herein referred to
as the “Warrant Shares”. The Notes, the Option Notes, the Warrants, the
Additional Warrants (as defined in Section 1.4 hereof), the Conversion
Shares and the Warrant Shares are sometimes collectively referred to herein as
the “Securities”.

 

Section 1.4                                      Additional
Investment Right. Commencing thirty (30) days following the Effective Date
(as defined below) of the Registration Statement (as defined in the
Registration Rights Agreement), each Purchaser shall have the option to
purchase from the Company, and the Company shall issue and sell to each such
Purchaser who exercises such option, a Note for the principal amount of up to such
Purchaser’s pro rata portion of the Purchase Price pursuant to the terms hereof
(the “Purchaser Option”). For purposes of this Agreement, “Effective
Date” means the date that the Commission declares the Registration Statement
effective. If any Purchaser elects not to
exercise its Purchase Option, each other Purchaser may exercise its Purchaser
Option on a pro-rata basis so long as such participation in the aggregate does
not exceed the aggregate Purchase Price hereunder. For purposes of this Section 1.4,
all references to “pro rata” means, for any Purchaser electing to exercise its
Purchaser Option, the percentage obtained by dividing (x) the principal amount
of the Notes purchased by such Purchaser at the Closing by (y) the total
principal amount of all of the Notes purchased by each Purchaser exercising its
Purchaser Option. Upon the Purchaser Option being exercised, each Purchaser exercising
its Purchase Option shall receive a Warrant (the “Additional Warrants”)
to purchase a number of shares of Common Stock equal to one hundred percent
(100%) of the number of Conversion Shares issuable upon conversion of the Note
acquired by such Purchaser pursuant to this Section 1.4. Each such
Additional Warrant shall expire five (5) years following the date of
issuance thereof and shall have an exercise price per share equal to the
Warrant Price. The Purchaser Option shall expire six (6) months following
the Effective Date. The Company may cause each Purchaser to exercise its
Purchaser Option or forfeit its right to exercise such

 

2

 

Purchaser Option in the future upon five (5) business
days prior written notice in the event that (A) the average closing price
of the Common Stock exceeds $1.00 for a period of twenty (20) consecutive Trading
Days (as defined in Section 3.10 hereof), (B) the Common Stock trades
at least 100,000 shares for each Trading Day during such twenty (20)
consecutive Trading Day period and (C) the Registration Statement has been
declared effective by the Commission. Each Purchaser exercising the Purchaser
Option shall deliver to the Company an Exercise Form in the form attached
hereto as Exhibit D. Within five (5) days of receipt of such
Exercise Form, the Company shall deliver to the Purchaser exercising such
Purchaser Option a Note representing the principal amount purchased pursuant to
the Purchaser Option (the “Option Notes”) and the Purchaser’s Additional
Warrant.

 

ARTICLE II

 

REPRESENTATIONS AND WARRANTIES

 

Section 2.1                                      Representations
and Warranties of the Company. The Company hereby represents and warrants
to the Purchasers, as of the date hereof and the Closing Date (except as set
forth on the Schedule of Exceptions attached hereto with each numbered Schedule corresponding
to the section number herein), as follows:

 

(a)                                  Organization,
Good Standing and Power. The Company is a corporation duly incorporated,
validly existing and in good standing under the laws of the State of Utah and
has the requisite corporate power to own, lease and operate its properties and
assets and to conduct its business as it is now being conducted. The Company
does not have any Subsidiaries (as defined in Section 2.1(g)) or own
securities of any kind in any other entity except as set forth on Schedule 2.1(g) hereto.
The Company and each such Subsidiary (as defined in Section 2.1(g)) is
duly qualified as a foreign corporation to do business and is in good standing
in every jurisdiction in which the nature of the business conducted or property
owned by it makes such qualification necessary except for any jurisdiction(s)
(alone or in the aggregate) in which the failure to be so qualified will not
have a Material Adverse Effect. For the purposes of this Agreement, “Material
Adverse Effect” means any material adverse effect on the business,
operations, properties, prospects, or financial condition of the Company and
its Subsidiaries and/or any condition, circumstance, or situation that would
prohibit or otherwise materially interfere with the ability of the Company to
perform any of its obligations under this Agreement in any material respect.

 

(b)                                 Authorization;
Enforcement. The Company has the requisite corporate power and authority to
enter into and perform this Agreement, the Notes, the Warrants, the Registration
Rights Agreement by and among the Company and the Purchasers, dated as of the
date hereof, substantially in the form of Exhibit E attached hereto
(the “Registration Rights Agreement”), the Security Agreement by and
among the Company and the Purchasers, dated as of the date hereof,
substantially in the form of Exhibit F attached hereto (the “Security
Agreement”), and the Irrevocable Transfer Agent Instructions (as defined in
Section 3.16 hereof) (collectively, the “Transaction Documents”)
and to issue and sell the Securities in accordance with the terms hereof. The
execution, delivery and performance of the Transaction Documents by the Company
and the consummation by it of the transactions contemplated thereby have been

 

3

 

duly and validly authorized by all necessary corporate
action, and, except as set forth on Schedule 2.1(b), no further
consent or authorization of the Company, its Board of Directors or stockholders
is required. When executed and delivered by the Company, each of the
Transaction Documents shall constitute a valid and binding obligation of the
Company enforceable against the Company in accordance with its terms, except as
such enforceability may be limited by applicable bankruptcy, reorganization,
moratorium, liquidation, conservatorship, receivership or similar laws relating
to, or affecting generally the enforcement of, creditor’s rights and remedies
or by other equitable principles of general application.

 

(c)                                  Capitalization.
The authorized capital stock and the issued and outstanding shares of capital
stock of the Company as of the Closing Date is set forth on Schedule 2.1(c) hereto.
All of the outstanding shares of the Common Stock and any other outstanding
security of the Company have been duly and validly authorized. Except as set
forth in this Agreement, the Commission Documents (as defined in Section 2.1(f))
or as set forth on Schedule 2.1(c) hereto, no shares of Common
Stock or any other security of the Company are entitled to preemptive rights or
registration rights and there are no outstanding options, warrants, scrip,
rights to subscribe to, call or commitments of any character whatsoever
relating to, or securities or rights convertible into, any shares of capital
stock of the Company. Furthermore, except as set forth in this Agreement and as
set forth on Schedule 2.1(c) hereto, there are no contracts,
commitments, understandings, or arrangements by which the Company is or may
become bound to issue additional shares of the capital stock of the Company or
options, securities or rights convertible into shares of capital stock of the
Company. Except for customary transfer restrictions contained in agreements
entered into by the Company in order to sell restricted securities or as
provided on Schedule 2.1(c) hereto, the Company is not a party
to or bound by any agreement or understanding granting registration or
anti-dilution rights to any person with respect to any of its equity or debt
securities. Except as set forth on Schedule 2.1(c), the Company is
not a party to, and it has no knowledge of, any agreement or understanding
restricting the voting or transfer of any shares of the capital stock of the
Company.

 

(d)                                 Issuance
of Securities. The Notes and the Warrants to be issued at the Closing have
been duly authorized by all necessary corporate action and, when paid for or
issued in accordance with the terms hereof, the Notes shall be validly issued
and outstanding, free and clear of all liens, encumbrances and rights of refusal
of any kind. When the Conversion Shares and Warrant Shares are issued and paid
for in accordance with the terms of this Agreement and as set forth in the
Notes and Warrants, such shares will be duly authorized by all necessary
corporate action and validly issued and outstanding, fully paid and
nonassessable, free and clear of all liens, encumbrances and rights of refusal
of any kind and the holders shall be entitled to all rights accorded to a
holder of Common Stock. When the Option Notes are issued in accordance with the
terms of this Agreement, such Option Notes will be duly authorized by all
necessary corporate action and validly issued and outstanding, free and clear
of all liens, encumbrances and rights of refusal of any kind.

 

(e)                                  No
Conflicts. The execution, delivery and performance of the Transaction
Documents by the Company, the performance by the Company of its obligations
under the Notes and the consummation by the Company of the transactions contemplated
hereby and thereby, and the issuance of the Securities as contemplated hereby, do
not and will not (i) violate or conflict with any provision of the Company’s
Articles of Incorporation (the “Articles”) or Bylaws (the

 

4

 

“Bylaws”), each as amended to date, or any
Subsidiary’s comparable charter documents, (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, mortgage, deed of
trust, indenture, note, bond, license, lease agreement, instrument or
obligation to which the Company or any of its Subsidiaries is a party or by
which the Company or any of its Subsidiaries’ respective properties or assets
are bound, or (iii) result in a violation of any federal, state, local or
foreign statute, rule, regulation, order, judgment or decree (including federal
and state securities laws and regulations) applicable to the Company or any of
its Subsidiaries or by which any property or asset of the Company or any of its
Subsidiaries are bound or affected, except, in all cases, for such conflicts,
defaults, terminations, amendments, acceleration, cancellations and violations
as would not, individually or in the aggregate, have a Material Adverse Effect
(other than violations pursuant to clauses (i) or (iii) (with respect
to federal and state securities laws)). Neither the Company nor any of its
Subsidiaries is required under federal, state, foreign or local law, rule or
regulation to obtain any consent, authorization or order of, or make any filing
or registration with, any court or governmental agency in order for it to
execute, deliver or perform any of its obligations under the Transaction Documents
or issue and sell the Securities in accordance with the terms hereof (other
than any filings, consents and approvals which may be required to be made by
the Company under applicable state and federal securities laws, rules or
regulations or any registration provisions provided in the Registration Rights
Agreement).

 

(f)                                    Commission
Documents, Financial Statements. The Common Stock of the Company is
registered pursuant to Section 12(b) or 12(g) of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), and the Company
has timely filed all reports, schedules, forms, statements and other documents
required to be filed by it with the Commission pursuant to the reporting
requirements of the Exchange Act (all of the foregoing including filings incorporated
by reference therein being referred to herein as the “Commission Documents”).
At the times of their respective filings, the Form 10-QSB for the fiscal
quarters ended March 31, 2005, September 30, 2004 and June 30,
2004 (collectively, the “Form 10-QSB”) and the Form 10-KSB for
the fiscal year ended December 31, 2004 (the “Form 10-KSB”)
complied in all material respects with the requirements of the Exchange Act and
the rules and regulations of the Commission promulgated thereunder and
other federal, state and local laws, rules and regulations applicable to
such documents, and the Form 10-QSB and Form 10-KSB did not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. As of their respective dates, the financial statements of the
Company included in the Commission Documents complied as to form in all
material respects with applicable accounting requirements and the published rules and
regulations of the Commission or other applicable rules and regulations
with respect thereto. Such financial statements have been prepared in
accordance with generally accepted accounting principles (“GAAP”)
applied on a consistent basis during the periods involved (except (i) as
may be otherwise indicated in such financial statements or the notes thereto or
(ii) in the case of unaudited interim statements, to the extent they may
not include footnotes or may be condensed or summary statements), and fairly
present in all material respects the financial position of the Company and its
Subsidiaries as of 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 year-end audit adjustments).

 

5

 

(g)                                 Subsidiaries.
Schedule 2.1(g) hereto sets forth each Subsidiary of the
Company, showing the jurisdiction of its incorporation or organization and
showing the percentage of each person’s ownership of the outstanding stock or
other interests of such Subsidiary. For the purposes of this Agreement, “Subsidiary”
shall mean any corporation or other entity of which at least a majority of the
securities or other ownership interest having ordinary voting power (absolutely
or contingently) for the election of directors or other persons performing
similar functions are at the time owned directly or indirectly by the Company
and/or any of its other Subsidiaries. All of the outstanding shares of capital
stock of each Subsidiary have been duly authorized and validly issued, and are
fully paid and nonassessable. Except as set forth on Schedule 2.1(g) hereto,
there are no outstanding preemptive, conversion or other rights, options,
warrants or agreements granted or issued by or binding upon any Subsidiary for
the purchase or acquisition of any shares of capital stock of any Subsidiary or
any other securities convertible into, exchangeable for or evidencing the
rights to subscribe for any shares of such capital stock. Neither the Company
nor any Subsidiary is subject to any obligation (contingent or otherwise) to
repurchase or otherwise acquire or retire any shares of the capital stock of any
Subsidiary or any convertible securities, rights, warrants or options of the
type described in the preceding sentence except as set forth on Schedule 2.1(g) hereto.
Neither the Company nor any Subsidiary is party to, nor has any knowledge of,
any agreement restricting the voting or transfer of any shares of the capital
stock of any Subsidiary.

 

(h)                                 No
Material Adverse Change. Since March 31, 2005, the Company has not
experienced or suffered any Material Adverse Effect, except as disclosed on Schedule 2.1(h) hereto.

 

(i)                                     No
Undisclosed Liabilities. Except as disclosed on Schedule 2.1(i) hereto,
neither the Company nor any of its Subsidiaries has incurred any liabilities,
obligations, claims or losses (whether liquidated or unliquidated, secured or
unsecured, absolute, accrued, contingent or otherwise) other than those
incurred in the ordinary course of the Company’s or its Subsidiaries respective
businesses or which, individually or in the aggregate, are not reasonably
likely to have a Material Adverse Effect.

 

(j)                                     No
Undisclosed Events or Circumstances. Since March 31, 2005, except as
disclosed on Schedule 2.1(j) hereto, no event or circumstance has
occurred or exists with respect to the Company or its Subsidiaries or their
respective businesses, properties, prospects, operations or financial
condition, which, under applicable law, rule or regulation, requires
public disclosure or announcement by the Company but which has not been so
publicly announced or disclosed.

 

(k)                                  Indebtedness.
Schedule 2.1(k) hereto sets forth as of the date hereof 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 $100,000 (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

 

6

 

payments in excess of $25,000 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.

 

(l)                                     Title
to Assets. Each of the Company and the Subsidiaries has good and valid
title to all of its real and personal property reflected in the Commission
Documents, free and clear of any mortgages, pledges, charges, liens, security
interests or other encumbrances, except for those indicated on Schedule 2.1(l)
hereto or such that, individually or in the aggregate, do not cause a Material
Adverse Effect. Any leases of the Company and each of its Subsidiaries are
valid and subsisting and in full force and effect.

 

(m)                               Actions
Pending. There is no action, suit, claim, investigation, arbitration,
alternate dispute resolution proceeding or other proceeding pending or, to the
knowledge of the Company, threatened against the Company or any Subsidiary
which questions the validity of this Agreement or any of the other Transaction
Documents or any of the transactions contemplated hereby or thereby or any
action taken or to be taken pursuant hereto or thereto. Except as set forth in
the Commission Documents or on Schedule 2.1(m) hereto, there is no
action, suit, claim, investigation, arbitration, alternate dispute resolution
proceeding or other proceeding pending or, to the knowledge of the Company,
threatened against or involving the Company, any Subsidiary or any of their
respective properties or assets, which individually or in the aggregate, would
reasonably be expected, if adversely determined, to have a Material Adverse
Effect. There are no outstanding orders, judgments, injunctions, awards or
decrees of any court, arbitrator or governmental or regulatory body against the
Company or any Subsidiary or any officers or directors of the Company or
Subsidiary in their capacities as such, which individually or in the aggregate,
could reasonably be expected to have a Material Adverse Effect.

 

(n)                                 Compliance
with Law. The business of the Company and the Subsidiaries has been and is
presently being conducted in accordance with all applicable federal, state and
local governmental laws, rules, regulations and ordinances, except as set forth
in the Commission Documents or on Schedule 2.1(n) hereto or such
that, individually or in the aggregate, the noncompliance therewith could not
reasonably be expected to have a Material Adverse Effect. The Company and each
of its Subsidiaries have all franchises, permits, licenses, consents and other
governmental or regulatory authorizations and approvals necessary for the
conduct of its business as now being conducted by it unless the failure to
possess such franchises, permits, licenses, consents and other governmental or
regulatory authorizations and approvals, individually or in the aggregate, could
not reasonably be expected to have a Material Adverse Effect.

 

(o)                                 Taxes.
The Company and each of the Subsidiaries has accurately prepared and filed all
federal, state and other tax returns required by law to be filed by it, has
paid or made provisions for the payment of all taxes shown to be due and all
additional assessments, and adequate provisions have been and are reflected in
the financial statements of the Company and the Subsidiaries for all current
taxes and other charges to which the Company or any Subsidiary is subject and
which are not currently due and payable. Except as disclosed on Schedule 2.1(o)
hereto or in the Commission Documents, none of the federal income tax returns
of the Company or any Subsidiary have been audited by the Internal Revenue
Service. The Company has no knowledge of any additional assessments,
adjustments or contingent tax liability (whether federal

 

7

 

or state) of any nature whatsoever, whether pending or
threatened against the Company or any Subsidiary for any period, nor of any
basis for any such assessment, adjustment or contingency.

 

(p)                                 Certain
Fees. Except as set forth on Schedule 2.1(p) hereto, the
Company has not employed any broker or finder or incurred any liability for any
brokerage or investment banking fees, commissions, finders’ structuring fees,
financial advisory fees or other similar fees in connection with the
Transaction Documents.

 

(q)                                 Disclosure.
Except for the transactions contemplated by this Agreement, the Company
confirms that neither it nor any other person acting on its behalf has provided
any of the Purchasers or their agents or counsel with any information that
constitutes or might constitute material, nonpublic information. To the best of
the Company’s knowledge, neither this Agreement or the Schedules hereto nor any
other documents, certificates or instruments furnished to the Purchasers by or
on behalf of the Company or any Subsidiary in connection with the transactions
contemplated by this Agreement contain any untrue statement of a material fact
or omit to state a material fact necessary in order to make the statements made
herein or therein, in the light of the circumstances under which they were made
herein or therein, not misleading.

 

(r)                                    Operation
of Business. Except as set forth on Schedule 2.1(r) hereto, the
Company and each of the Subsidiaries owns or possesses the rights to all
patents, trademarks, domain names (whether or not registered) and any
patentable improvements or copyrightable derivative works thereof, websites and
intellectual property rights relating thereto, service marks, trade names,
copyrights, licenses and authorizations which are necessary for the conduct of
its business as now conducted without any conflict with the rights of others.

 

(s)                                  Environmental
Compliance. To the best knowledge of the Company, except as set forth on Schedule 2.1(s)
hereto or in the Commission Documents, the Company and each of its Subsidiaries
have obtained all material approvals, authorization, certificates, consents,
licenses, orders and permits or other similar authorizations of all
governmental authorities, or from any other person, that are required under any
Environmental Laws. “Environmental Laws” shall mean all applicable laws
relating to the protection of the environment including, without limitation,
all requirements pertaining to reporting, licensing, permitting, controlling,
investigating or remediating emissions, discharges, releases or threatened
releases of hazardous substances, chemical substances, pollutants, contaminants
or toxic substances, materials or wastes, whether solid, liquid or gaseous in
nature, into the air, surface water, groundwater or land, or relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of hazardous substances, chemical substances, pollutants,
contaminants or toxic substances, material or wastes, whether solid, liquid or
gaseous in nature. To the best of the Company’s knowledge, the Company has all
necessary governmental approvals required under all Environmental Laws as
necessary for the Company’s business or the business of any of its subsidiaries.
To the best of the Company’s knowledge, the Company and each of its
subsidiaries are also in compliance with all other limitations, restrictions,
conditions, standards, requirements, schedules and timetables required or
imposed under all Environmental Laws. Except for such instances as would not
individually or in the aggregate have a Material Adverse Effect, there are no
past or present events, conditions, circumstances, incidents, actions or
omissions relating to or in any way affecting the Company or its Subsidiaries
that violate or may violate any Environmental Law after the Closing Date or
that may give rise to any environmental

 

8

 

liability, or otherwise form the basis of any claim,
action, demand, suit, proceeding, hearing, study or investigation (i) under
any Environmental Law, or (ii) based on or related to the manufacture,
processing, distribution, use, treatment, storage (including without limitation
underground storage tanks), disposal, transport or handling, or the emission,
discharge, release or threatened release of any hazardous substance.

 

(t)                                    Books
and Records; Internal Accounting Controls. The records and documents of the
Company and its Subsidiaries accurately reflect in all material respects the
information relating to the business of the Company and the Subsidiaries, the
location and collection of their assets, and the nature of all transactions
giving rise to the obligations or accounts receivable of the Company or any
Subsidiary. The Company and each of its Subsidiaries maintain a system of
internal accounting controls sufficient, in the judgment of the Company’s board
of directors, to provide reasonable assurance that (i) transactions are
executed in accordance with management’s general or specific authorizations, (ii) transactions
are recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain asset
accountability, (iii) access to assets is permitted only in accordance
with management’s general or specific authorization and (iv) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate actions are taken with respect to any differences.

 

(u)                                 Material
Agreements. Except for the Transaction Documents (with respect to clause (i) only),
as disclosed in the Commission Documents or as set forth on Schedule 2.1(u)
hereto, or as would not be reasonably likely to have a Material Adverse Effect,
(i) the Company and each of its Subsidiaries have performed all
obligations required to be performed by them to date under any written or oral
contract, instrument, agreement, commitment, obligation, plan or arrangement,
filed or required to be filed with the Commission (the “Material Agreements”),
(ii) neither the Company nor any of its Subsidiaries has received any
notice of default under any Material Agreement and, (iii) to the best of
the Company’s knowledge, neither the Company nor any of its Subsidiaries is in
default under any Material Agreement now in effect.

 

(v)                                 Transactions
with Affiliates. Except as set forth on Schedule 2.1(v) hereto
and in the Commission Documents, there are no loans, leases, agreements,
contracts, royalty agreements, management contracts or arrangements or other
continuing transactions between (a) the Company, any Subsidiary or any of
their respective customers or suppliers on the one hand, and (b) on the
other hand, any officer, employee, consultant or director of the Company, or
any of its Subsidiaries, or any person owning at least 5% of the outstanding capital
stock of the Company or any Subsidiary or any member of the immediate family of
such officer, employee, consultant, director or stockholder or any corporation
or other entity controlled by such officer, employee, consultant, director or
stockholder, or a member of the immediate family of such officer, employee,
consultant, director or stockholder which, in each case, is required to be
disclosed in the Commission Documents or in the Company’s most recently filed
definitive proxy statement on Schedule 14A, that is not so disclosed in
the Commission Documents or in such proxy statement.

 

(w)                               Securities
Act of 1933. Based in material part upon the representations herein of the
Purchasers, the Company has complied and will comply with all applicable
federal

 

9

 

and state securities laws in connection with the
offer, issuance and sale of the Securities hereunder. Neither the Company nor
anyone acting on its behalf, directly or indirectly, has or will sell, offer to
sell or solicit offers to buy any of the Securities or similar securities to,
or solicit offers with respect thereto from, or enter into any negotiations
relating thereto with, any person, or has taken or will take any action so as
to bring the issuance and sale of any of the Securities under the registration
provisions of the Securities Act and applicable state securities laws, and
neither the Company nor any of its affiliates, nor any person acting on its or
their behalf, has engaged in any form of general solicitation or general
advertising (within the meaning of Regulation D under the Securities Act) in
connection with the offer or sale of any of the Securities.

 

(x)                                   Employees.
Neither the Company nor any Subsidiary has any collective bargaining
arrangements or agreements covering any of its employees, except as set forth
on Schedule 2.1(x) hereto. Except as set forth on Schedule 2.1(x)
hereto, neither the Company nor any Subsidiary has any employment contract,
agreement regarding proprietary information, non-competition agreement,
non-solicitation agreement, confidentiality agreement, or any other similar
contract or restrictive covenant, relating to the right of any officer,
employee or consultant to be employed or engaged by the Company or such
Subsidiary required to be disclosed in the Commission Documents that is not so
disclosed. No officer, consultant or key employee of the Company or any
Subsidiary whose termination, either individually or in the aggregate, would be
reasonably likely to have a Material Adverse Effect, has terminated or, to the
knowledge of the Company, has any present intention of terminating his or her
employment or engagement with the Company or any Subsidiary.

 

(y)                                 Absence
of Certain Developments. Except as set forth in the Commission Documents or
provided on Schedule 2.1(y) hereto, since March 31, 2005, neither
the Company nor any Subsidiary has:

 

(i)                                     issued
any stock, bonds or other corporate securities or any right, options or
warrants with respect thereto;

 

(ii)                                  borrowed
any amount in excess of $300,000 or incurred or become subject to any other
liabilities in excess of $100,000 (absolute or contingent) except current
liabilities incurred in the ordinary course of business which are comparable in
nature and amount to the current liabilities incurred in the ordinary course of
business during the comparable portion of its prior fiscal year, as adjusted to
reflect the current nature and volume of the business of the Company and its
Subsidiaries;

 

(iii)                               discharged or satisfied
any lien or encumbrance in excess of $250,000 or paid any obligation or
liability (absolute or contingent) in excess of $250,000, other than current
liabilities paid in the ordinary course of business;

 

(iv)                              declared
or made any payment or distribution of cash or other property to stockholders
with respect to its stock, or purchased or redeemed, or made any agreements so
to purchase or redeem, any shares of its capital stock, in each case in excess
of $50,000 individually or $100,000 in the aggregate;

 

10

 

(v)                                 sold,
assigned or transferred any other tangible assets, or canceled any debts or
claims, in each case in excess of $250,000, except in the ordinary course of
business;

 

(vi)                              sold,
assigned or transferred any patent rights, trademarks, trade names, copyrights,
trade secrets or other intangible assets or intellectual property rights in
excess of $250,000, or disclosed any proprietary confidential information to
any person except to customers in the ordinary course of business or to the
Purchasers or their representatives;

 

(vii)                           suffered any material losses
or waived any rights of material value, whether or not in the ordinary course
of business, or suffered the loss of any material amount of prospective
business;

 

(viii)                        made any changes in employee
compensation except in the ordinary course of business and consistent with past
practices;

 

(ix)                                made
capital expenditures or commitments therefor that aggregate in excess of
$500,000;

 

(x)                                   entered
into any material transaction, whether or not in the ordinary course of
business;

 

(xi)                                made
charitable contributions or pledges in excess of $25,000;

 

(xii)                             suffered any material
damage, destruction or casualty loss, whether or not covered by insurance;

 

(xiii)                          experienced any material
problems with labor or management in connection with the terms and conditions
of their employment; or

 

(xiv)                         entered into an agreement,
written or otherwise, to take any of the foregoing actions.

 

(z)                                   Public
Utility Holding Company Act and Investment Company Act Status. The Company
is not a “holding company” or a “public utility company” as such terms are
defined in the Public Utility Holding Company Act of 1935, as amended. The
Company is not, and as a result of and immediately upon the Closing will not
be, an “investment company” or a company “controlled” by an “investment
company,” within the meaning of the Investment Company Act of 1940, as amended.

 

(aa)                            ERISA.
No liability to the Pension Benefit Guaranty Corporation has been incurred with
respect to any Plan by the Company or any of its Subsidiaries which is or would
be materially adverse to the Company and its Subsidiaries. The execution and
delivery of this Agreement and the issuance and sale of the Securities will not
involve any transaction which is subject to the prohibitions of Section 406
of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) or
in connection with which a tax could be imposed pursuant to

 

11

 

Section 4975 of the Internal Revenue Code of
1986, as amended, provided that, if any of the Purchasers, or any person or
entity that owns a beneficial interest in any of the Purchasers, is an “employee
pension benefit plan” (within the meaning of Section 3(2) of ERISA)
with respect to which the Company is a “party in interest” (within the meaning
of Section 3(14) of ERISA), the requirements of Sections 407(d)(5) and
408(e) of ERISA, if applicable, are met. As used in this Section 2.1(aa),
the term “Plan” shall mean an “employee pension benefit plan” (as defined in Section 3
of ERISA) which is or has been established or maintained, or to which
contributions are or have been made, by the Company or any Subsidiary or by any
trade or business, whether or not incorporated, which, together with the
Company or any Subsidiary, is under common control, as described in Section 414(b) or
(c) of the Code.

 

(bb)                          Independent
Nature of Purchasers. The Company acknowledges that the obligations of each
Purchaser under the Transaction Documents are several and not joint with the
obligations of any other Purchaser, and no Purchaser shall be responsible in
any way for the performance of the obligations of any other Purchaser under the
Transaction Documents. The Company acknowledges that the decision of each
Purchaser to purchase Securities pursuant to this Agreement has been made by
such Purchaser independently of any other purchase and independently of any
information, materials, statements or opinions as to the business, affairs,
operations, assets, properties, liabilities, results of operations, condition
(financial or otherwise) or prospects of the Company or of its Subsidiaries
which may have made or given by any other Purchaser or by any agent or employee
of any other Purchaser, and no Purchaser or any of its agents or employees
shall have any liability to any Purchaser (or any other person) relating to or
arising from any such information, materials, statements or opinions. The
Company acknowledges that nothing contained herein, or in any Transaction
Document, and no action taken by any Purchaser pursuant hereto or 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. The
Company acknowledges that for reasons of administrative convenience only, the
Transaction Documents have been prepared by counsel for one of the Purchasers
and such counsel does not represent all of the Purchasers but only such
Purchaser and the other Purchasers have retained their own individual counsel
with respect to the transactions contemplated hereby.  The Company
acknowledges that it 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. The Company acknowledges
that such procedure with respect to the Transaction Documents in no way creates
a presumption that the Purchasers are in any way acting in concert or as a
group with respect to the Transaction Documents or the transactions
contemplated hereby or thereby.

 

(cc)                            No
Integrated Offering. Neither the Company, nor any of its affiliates, nor
any person acting on its or their behalf, has directly or indirectly made any
offers or sales of any security or solicited any offers to buy any security
under circumstances that would cause the offering of the Securities pursuant to
this Agreement to be integrated with prior offerings by the Company for
purposes of the Securities Act which would prevent the Company from selling the
Securities pursuant to Regulation D and Rule 506 thereof under the
Securities Act, or any applicable exchange-related stockholder approval
provisions, nor will the Company or any of its affiliates or subsidiaries take
any action or steps that would cause the offering of the Securities to

 

12

 

be integrated with other offerings. The Company does
not have any registration statement pending before the Commission or currently
under the Commission’s review and except as set forth on Schedule 2.1(cc)
hereto, since December 1, 2004, the Company has not offered or sold any of
its equity securities or debt securities convertible into shares of Common
Stock.

 

(dd)                          Sarbanes-Oxley
Act.  The Company is in compliance with the applicable provisions of
the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), and the rules and
regulations promulgated thereunder, that are effective and intends to comply
with other applicable provisions of the Sarbanes-Oxley Act, and the rules and
regulations promulgated thereunder, upon the effectiveness of such provisions.

 

(ee)                            Dilutive
Effect. The Company understands and acknowledges that the number of
Conversion Shares issuable upon conversion of the Notes and the Warrant Shares
issuable upon exercise of the Warrants will increase in certain circumstances. The
Company further acknowledges that its obligation to issue Conversion Shares
upon conversion of the Notes in accordance with this Agreement and the Notes
and its obligations to issue the Warrant Shares upon the exercise of the
Warrants in accordance with this Agreement and the Warrants, is, in each case,
absolute and unconditional regardless of the dilutive effect that such issuance
may have on the ownership interest of other stockholders of the Company.

 

Section 2.2                                      Representations
and Warranties of the Purchasers. Each of the Purchasers hereby represents
and warrants to the Company with respect solely to itself and not with respect
to any other Purchaser as follows as of the date hereof and as of the Closing
Date:

 

(a)                                  Organization and Standing of the Purchasers. If the Purchaser is an entity, such Purchaser
is a corporation, limited liability company or partnership duly incorporated or
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation or organization.

 

(b)                                 Authorization
and Power. Each Purchaser has the requisite power and authority to enter
into and perform the Transaction Documents and to purchase the Securities being
sold to it hereunder. The execution, delivery and performance of the
Transaction Documents by each Purchaser and the consummation by it of the
transactions contemplated hereby have been duly authorized by all necessary
corporate or partnership action, and no further consent or authorization of
such Purchaser or its Board of Directors, stockholders, or partners, as the
case may be, is required. When executed and delivered by the Purchasers, the
other Transaction Documents shall constitute valid and binding obligations of
each Purchaser enforceable against such Purchaser in accordance with their
terms, except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, liquidation, conservatorship,
receivership or similar laws relating to, or affecting generally the
enforcement of, creditor’s rights and remedies or by other equitable principles
of general application.

 

(c)                                  No
Conflict. The execution, delivery and performance of the Transaction Documents
by the Purchaser and the consummation by the Purchaser of the transactions
contemplated thereby and hereby do not and will not (i) violate any
provision of the Purchaser’s charter or organizational documents, (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

 

13

 

of termination, amendment, acceleration or
cancellation of, any agreement, mortgage, deed of trust, indenture, note, bond,
license, lease agreement, instrument or obligation to which the Purchaser is a
party or by which the Purchaser’s respective properties or assets are bound, or
(iii) result in a violation of any federal, state, local or foreign
statute, rule, regulation, order, judgment or decree (including federal and
state securities laws and regulations) applicable to the Purchaser or by which
any property or asset of the Purchaser are bound or affected, except, in all
cases, other than violations pursuant to clauses (i) or (iii) (with
respect to federal and state securities laws) above, except, for such
conflicts, defaults, terminations, amendments, acceleration, cancellations and
violations as would not, individually or in the aggregate, materially and
adversely affect the Purchaser’s ability to perform its obligations under the
Transaction Documents.

 

(d)                                 Acquisition
for Investment. Each Purchaser is purchasing the Securities solely for its
own account and not with a view to or for sale in connection with distribution.
Each Purchaser does not have a present intention to sell any of the Securities,
nor a present arrangement (whether or not legally binding) or intention to
effect any distribution of any of the Securities to or through any person or
entity; provided, however, that by making the representations
herein, such Purchaser does not agree to hold the Securities for any minimum or
other specific term and reserves the right to dispose of the Securities at any
time in accordance with Federal and state securities laws applicable to such
disposition. Each Purchaser acknowledges that it (i) has such knowledge
and experience in financial and business matters such that Purchaser is capable
of evaluating the merits and risks of Purchaser’s investment in the Company, (ii) is
able to bear the financial risks associated with an investment in the Securities
and (iii) has been given full access to such records of the Company and
the Subsidiaries and to the officers of the Company and the Subsidiaries as it
has deemed necessary or appropriate to conduct its due diligence investigation.

 

(e)                                  Rule 144.
Each Purchaser understands that the Securities must be held indefinitely unless
such Securities are registered under the Securities Act or an exemption from
registration is available. Each Purchaser acknowledges that such person is
familiar with Rule 144 of the rules and regulations of the
Commission, as amended, promulgated pursuant to the Securities Act (“Rule 144”),
and that such Purchaser has been advised that Rule 144 permits resales
only under certain circumstances. Each Purchaser understands that to the extent
that Rule 144 is not available, such Purchaser will be unable to sell any
Securities without either registration under the Securities Act or the
existence of another exemption from such registration requirement.

 

(f)                                    General.
Each Purchaser understands that the Securities are being offered and sold in
reliance on a transactional exemption from the registration requirements of
federal and state securities laws and the Company is relying upon the truth and
accuracy of the representations, warranties, agreements, acknowledgments and
understandings of such Purchaser set forth herein in order to determine the
applicability of such exemptions and the suitability of such Purchaser to
acquire the Securities. Each Purchaser understands that no United States
federal or state agency or any government or governmental agency has passed
upon or made any recommendation or endorsement of the Securities. Commencing on
the date that the Purchasers were initially contacted regarding an investment
in the Securities, none of the Purchasers has

 

14

 

engaged in any short sale of the Common Stock and will
not engage in any short sale of the Common Stock prior to the consummation of
the transactions contemplated by this Agreement.

 

(g)                                 No
General Solicitation. Each Purchaser acknowledges that the Securities were
not offered to such Purchaser by means of any form of general or public
solicitation or general advertising, or publicly disseminated advertisements or
sales literature, including (i) any advertisement, article, notice or
other communication published in any newspaper, magazine, or similar media, or
broadcast over television or radio, or (ii) any seminar or meeting to
which such Purchaser was invited by any of the foregoing means of
communications. Each Purchaser, in making the decision to purchase the
Securities, has relied upon independent investigation made by it and has not
relied on any information or representations made by third parties.

 

(h)                                 Accredited
Investor. Each Purchaser is an “accredited investor” (as defined in Rule 501
of Regulation D), and such Purchaser has such experience in business and
financial matters that it is capable of evaluating the merits and risks of an
investment in the Securities. Such Purchaser is not required to be registered
as a broker-dealer under Section 15 of the Exchange Act and such Purchaser
is not a broker-dealer. Each Purchaser acknowledges that an investment in the Securities
is speculative and involves a high degree of risk.

 

(i)                                     Certain
Fees. The Purchasers have not employed any broker or finder or incurred any
liability for any brokerage or investment banking fees, commissions, finders’
structuring fees, financial advisory fees or other similar fees in connection with
the Transaction Documents.

 

(j)                                     Independent
Investment. No Purchaser has agreed to act with any other Purchaser for the
purpose of acquiring, holding, voting or disposing of the Securities purchased
hereunder for purposes of Section 13(d) under the Exchange Act, and
each Purchaser is acting independently with respect to its investment in the Securities.

 

(k)                                  Short
Sales and Confidentiality. Each Purchaser covenants that neither it nor any
affiliates acting on its behalf or pursuant to any understanding with it will
execute any Short Sales (as defined below) during the period after the
date that such Purchaser first received a term sheet from the Company or any
other person or entity setting forth the material terms of the transactions
contemplated hereunder until the date that the transactions contemplated by
this Agreement are first publicly announced as described in Section 3.10. 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 3.10, 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 is a violation of Section 5 of the Securities Act, as set forth in
Item 65, Section 5 under Section A, of the Manual of Publicly
Available Telephone Interpretations, dated July 1997, compiled by the
Office of Chief Counsel, Division of Corporation Finance. Notwithstanding the
foregoing, no Purchaser makes any representation, warranty or covenant hereby
that it will not engage in Short Sales in
the securities of the Company after the time that the transactions contemplated
by this Agreement are first publicly

 

15

 

announced as described in Section 3.10. 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. Each
Purchaser covenants and agrees that it will (i) comply with Regulation M
under the Exchange Act, (ii) comply with all prospectus delivery
requirements and (iii) will not knowingly violate Regulation SHO under the
Exchange Act. The Company
further understands and acknowledges that (a) each Purchaser may engage in
hedging activities at various times while the Securities are outstanding,
including, without limitation, during any amortization pricing periods under
the Notes in which the value of the Conversion Shares issuable upon conversion
of the Notes is 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 this Agreement or the other Transaction
Documents. For purposes hereof, “Short Sales” shall include all “short
sales” as defined in Rule 200 of Regulation SHO under the Exchange Act.

 

ARTICLE III

 

COVENANTS

 

The
Company covenants with each Purchaser as follows, which covenants are for the
benefit of each Purchaser and their respective permitted assignees.

 

Section 3.1                                      Securities Compliance. The Company shall notify the Commission in
accordance with its rules and regulations, of the transactions
contemplated by any of the Transaction Documents and shall take all other
necessary action and proceedings as may be required and permitted by applicable
law, rule and regulation, for the legal and valid issuance of the Securities
to the Purchasers, or their respective subsequent holders.

 

Section 3.2                                      Registration
and Listing. The Company shall cause its Common Stock to continue to be
registered under Sections 12(b) or 12(g) of the Exchange Act, to comply in all respects with its reporting and
filing obligations under the Exchange Act, to comply with all requirements
related to any registration statement filed pursuant to this Agreement, and to
not take any action or file any document (whether or not permitted by the
Securities Act or the rules promulgated thereunder) to terminate or
suspend such registration or to terminate or suspend its reporting and filing
obligations under the Exchange Act or Securities Act, except as permitted
herein. The Company will take all action necessary to continue the
listing or trading of its Common Stock on the OTC Bulletin Board or other
exchange or market on which the Common Stock is trading. If required, the
Company will promptly file the “Listing Application” for, or in connection
with, the issuance and delivery of the Shares and the Warrant Shares. Subject to the terms of the Transaction
Documents, the Company further covenants that it will take such further action
as the Purchasers may reasonably request, all to the extent required from time
to time to enable the Purchasers to sell the Securities without registration
under the Securities Act within

 

16

 

the limitation of the
exemptions provided by Rule 144 promulgated under the Securities Act. Upon
the request of the Purchasers, the Company shall deliver to the Purchasers a
written certification of a duly authorized officer as to whether it has
complied with such requirements.

 

Section 3.3                                      Inspection
Rights. Provided same would not be in violation of Regulation FD, the
Company shall permit, during normal business hours and upon reasonable request
and reasonable notice, each Purchaser or any employees, agents or
representatives thereof, so long as such Purchaser shall be obligated hereunder
to purchase the Notes or shall beneficially own any Conversion Shares or
Warrant Shares, for purposes reasonably related to such Purchaser’s interests
as a stockholder, to examine the publicly available, non-confidential records
and books of account of, and visit and inspect the properties, assets,
operations and business of the Company and any Subsidiary, and to discuss the
publicly available, non-confidential affairs, finances and accounts of the
Company and any Subsidiary with any of its officers, consultants, directors,
and key employees.

 

Section 3.4                                      Compliance
with Laws. The Company shall comply, and cause each Subsidiary to comply,
with all applicable laws, rules, regulations and orders, noncompliance with
which would be reasonably likely to have a Material Adverse Effect.

 

Section 3.5                                      Keeping
of Records and Books of Account. The Company shall keep and cause each
Subsidiary to keep adequate records and books of account, in which complete
entries will be made in accordance with GAAP consistently applied, reflecting
all financial transactions of the Company and its Subsidiaries, and in which,
for each fiscal year, all proper reserves for depreciation, depletion,
obsolescence, amortization, taxes, bad debts and other purposes in connection
with its business shall be made.

 

Section 3.6                                      Reporting
Requirements. If the Company ceases to file its periodic reports with the
Commission, or if the Commission ceases making these periodic reports available
via the Internet without charge, then the Company shall furnish the following
to each Purchaser so long as such Purchaser shall be obligated hereunder to
purchase the Securities or shall beneficially own Securities:

 

(a)                                  Quarterly
Reports filed with the Commission on Form 10-QSB as soon as practical
after the document is filed with the Commission, and in any event within five (5) days
after the document is filed with the Commission;

 

(b)                                 Annual
Reports filed with the Commission on Form 10-KSB as soon as practical
after the document is filed with the Commission, and in any event within five (5) days
after the document is filed with the Commission; and

 

(c)                                  Copies
of all notices, information and proxy statements in connection with any
meetings, that are, in each case, provided to holders of shares of Common
Stock, contemporaneously with the delivery of such notices or information to
such holders of Common Stock.

 

Section 3.7                                      Other
Agreements. The Company shall not enter into any agreement in which the
terms of such agreement would restrict or impair the right or ability to
perform of the Company or any Subsidiary under any Transaction Document.

 

17

 

Section 3.8                                      Use
of Proceeds. The net proceeds from
the sale of the Securities hereunder shall be used by the Company to repay up
to $1,500,000 to satisfy the Koch pipeline indebtedness and the balance shall
be used for working capital and general corporate purposes and not to redeem
any Common Stock or securities convertible, exercisable or exchangeable into
Common Stock or to settle any outstanding litigation.

 

Section 3.9                                      Reporting Status. So long as a Purchaser beneficially
owns any of the Securities, the Company shall timely file all reports required
to be filed with the Commission pursuant to the Exchange Act, and the Company
shall not terminate its status as an issuer required to file reports under the
Exchange Act even if the Exchange Act or the rules and regulations
thereunder would permit such termination.

 

Section 3.10                                Disclosure
of Transaction. The Company shall issue a press release describing the
material terms of the transactions contemplated hereby (the “Press Release”)
on the day of the Closing but in no event later than one hour after the Closing;
provided, however, that if Closing occurs after 4:00 P.M. Eastern
Time on any Trading Day, the Company shall issue the Press Release no later
than 9:00 A.M. Eastern Time on the first Trading Day following the Closing
Date. The Company shall also file with the Commission a Current Report on Form 8-K
(the “Form 8-K”) describing the material terms of the transactions
contemplated hereby (and attaching as exhibits thereto this Agreement, the form
of Note, the Registration Rights Agreement, the Security Agreement, the form of
Warrant and the Press Release) as soon as practicable following the Closing Date
but in no event more than two (2) Trading Days following the Closing Date,
which Press Release and Form 8-K shall be subject to prior review and
comment by the Purchasers. “Trading Day” means any day during which the
principal exchange on which the Common Stock is traded shall be open for
trading.

 

Section 3.11                                Disclosure
of Material Information. The Company covenants and agrees that neither it
nor any other person acting on its behalf has provided or 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.

 

Section 3.12                                Pledge
of Securities. The Company acknowledges and agrees that the Securities may
be pledged by a Purchaser in connection with a bona  fide margin
agreement or other loan or financing arrangement that is secured by the Securities.
The pledge of Securities shall not be deemed to be a transfer, sale or
assignment of the Securities hereunder, and no Purchaser effecting a pledge of the
Securities shall be required to provide the Company with any notice thereof or
otherwise make any delivery to the Company pursuant to this Agreement or any
other Transaction Document; provided that a Purchaser and its pledgee shall be
required to comply with the provisions of Article V hereof in order to
effect a sale, transfer or assignment of Securities to such pledgee. At the
Purchasers’ expense, the Company hereby agrees to execute and deliver such
documentation as a pledgee of the Securities may reasonably request in
connection with a pledge of the Securities to such pledgee by a Purchaser.

 

18

 

Section 3.13                                Amendments.
The Company shall not amend or waive any provision of the Articles or Bylaws of
the Company in any way that would adversely affect exercise rights, voting
rights, conversion rights, prepayment rights or redemption rights of the holder
of the Notes.

 

Section 3.14                                Distributions.
So long as any Notes or Warrants remain outstanding, the Company agrees that it
shall not (i) declare or pay any dividends or make any distributions to
any holder(s) of Common Stock or (ii) purchase or otherwise acquire for
value, directly or indirectly, any Common Stock or other equity security of the
Company.

 

Section 3.15                                Reservation
of Shares. So long as any of the Notes or Warrants remain outstanding, the
Company shall take all action necessary to at all times have authorized and
reserved for the purpose of issuance, one hundred twenty percent (120%) of the
aggregate number of shares of Common Stock needed to provide for the issuance
of the Conversion Shares and the Warrant Shares.

 

Section 3.16                                Transfer
Agent Instructions. The Company shall issue irrevocable instructions to its
transfer agent, and any subsequent transfer agent, to issue certificates,
registered in the name of each Purchaser or its respective nominee(s), for the
Conversion Shares and the Warrant Shares in such amounts as specified from time
to time by each Purchaser to the Company upon conversion of the Notes or
exercise of the Warrants in the form of Exhibit G attached hereto
(the “Irrevocable Transfer Agent Instructions”). Prior to registration
of the Conversion Shares and the Warrant Shares under the Securities Act, all
such certificates shall bear the restrictive legend specified in Section 5.1
of this Agreement. The Company warrants that no instruction other than the
Irrevocable Transfer Agent Instructions referred to in this Section 3.16
will be given by the Company to its transfer agent and that the Conversion
Shares and Warrant Shares shall otherwise be freely transferable on the books
and records of the Company as and to the extent provided in this Agreement and
the Registration Rights Agreement. Nothing in this Section 3.16 shall
affect in any way each Purchaser’s obligations and agreements set forth in Section 5.1
to comply with all applicable prospectus delivery requirements, if any, upon
resale of the Conversion Shares and the Warrant Shares. If a Purchaser provides
the Company with an opinion of counsel, in a generally acceptable form, to the
effect that a public sale, assignment or transfer of the Conversion Shares or
Warrant Shares may be made without registration under the Securities Act or the
Purchaser provides the Company with reasonable assurances that the Conversion
Shares or Warrant Shares can be sold pursuant to Rule 144 without any
restriction as to the number of securities acquired as of a particular date
that can then be immediately sold, the Company shall permit the transfer, and,
in the case of the Conversion Shares and the Warrant Shares, promptly instruct
its transfer agent to issue one or more certificates in such name and in such
denominations as specified by such Purchaser and without any restrictive legend.
The Company acknowledges that a breach by it of its obligations under this Section 3.16
will cause irreparable harm to the Purchasers by vitiating the intent and
purpose of the transaction contemplated hereby. Accordingly, the Company
acknowledges that the remedy at law for a breach of its obligations under this Section 3.16
will be inadequate and agrees, in the event of a breach or threatened breach by
the Company of the provisions of this Section 3.16, that the Purchasers
shall be entitled, in addition to all other available remedies, to an order
and/or injunction restraining any breach and requiring immediate

 

19

 

issuance and transfer, without the necessity of
showing economic loss and without any bond or other security being required.

 

Section 3.17                                Disposition
of Assets. So long as the Notes remain outstanding, neither the Company nor
any subsidiary shall sell, transfer or otherwise dispose of any of its
properties, assets and rights including, without limitation, its software and
intellectual property, to any person except for sales of obsolete assets and sales
to customers in the ordinary course of business or with the prior written consent
of the holders of a majority of the Notes then outstanding.

 

Section 3.18                                Form SB-2 Eligibility. The Company currently meets, and
will take all necessary action to continue to meet, the “registrant eligibility”
and transaction requirements set forth in the general instructions to Form SB-2
applicable to “resale” registrations on Form SB-2 during the Effectiveness
Period (as defined in the Registration Rights Agreement) and the Company shall
file all reports required to be filed by the Company with the Commission in a
timely manner so as to maintain such eligibility for the use of Form SB-2.

 

Section 3.19                                Restrictions
on Certain Issuances of Securities. So long as at least thirty-five percent
(35%) of the principal amount of the Notes remain outstanding, the Company
shall not issue any securities that rank pari passu or senior to the Notes
without the prior written consent of at least seventy-five percent (75%) of the
principal amount of the Notes outstanding at such time.

 

Section 3.20                                Subsequent
Financings.

 

(a) 
For a period of one (1) year following the Closing Date, the Company
covenants and agrees to promptly notify (in no event later than five (5) days
after making or receiving an applicable offer) in writing (a “Rights Notice”)
the Purchasers of the terms and conditions of any proposed offer or sale to, or
exchange with (or other type of distribution to) any third party (a “Subsequent
Financing”), of Common Stock or any securities convertible, exercisable or
exchangeable into Common Stock, including convertible debt securities
(collectively, the “Financing Securities”). The Rights Notice
shall describe, in reasonable detail, the proposed Subsequent Financing, the
names and investment amounts of all investors participating in the Subsequent
Financing, the proposed closing date of the Subsequent Financing, which shall
be within twenty (20) calendar days from the date of the Rights Notice, and all
of the terms and conditions thereof
and proposed definitive documentation to be entered into in connection
therewith. The Rights Notice shall provide each Purchaser an option (the
“Rights Option”) during the ten (10) trading days following
delivery of the Rights Notice (the “Option Period”) to inform the
Company whether such Purchaser will purchase up to its pro rata portion of the securities being offered in such
Subsequent Financing on the same, absolute terms and conditions as contemplated
by such Subsequent Financing. If any
Purchaser elects not to participate in such Subsequent Financing, the other
Purchasers may participate on a pro-rata basis so long as such participation in
the aggregate does not exceed the total Purchase Price hereunder. For
purposes of this Section, all references to “pro rata” means, for any Purchaser
electing to participate in such Subsequent Financing, the percentage obtained
by dividing (x) the principal amount of the Notes purchased by such Purchaser
at the Closing by (y) the total principal amount of all of the Notes purchased
by all of the participating Purchasers at the

 

20

 

Closing. Delivery of any Rights Notice constitutes a
representation and warranty by the Company that there are no other material
terms and conditions, arrangements, agreements or otherwise except for those
disclosed in the Rights Notice, to provide additional compensation to any party
participating in any proposed Subsequent Financing, including, but not limited
to, additional compensation based on changes in the Purchase Price or any type
of reset or adjustment of a purchase or conversion price or to issue additional
securities at any time after the closing date of a Subsequent Financing. If the
Company does not receive notice of exercise of the Rights Option from the
Purchasers within the Option Period, the Company shall have the right to close
the Subsequent Financing on the scheduled closing date with a third party; provided
that all of the material terms and conditions of the closing are the same as
those provided to the Purchasers in the Rights Notice. If the closing of the
proposed Subsequent Financing does not occur on that date, any closing of the
contemplated Subsequent Financing or any other Subsequent Financing shall be
subject to all of the provisions of this Section 3.20(a), including,
without limitation, the delivery of a new Rights Notice. The provisions of this
Section 3.20(a) shall not apply to issuances of securities in a
Permitted Financing.

 

(b) 
For purposes of this Agreement, a Permitted Financing (as defined hereinafter)
shall not be considered a Subsequent Financing. A “Permitted Financing”
shall mean (i) securities issued (other than for cash) in
connection with a merger, acquisition, or consolidation, (ii) securities
issued pursuant to a bona fide firm underwritten public offering of the Company’s
securities, (iii) securities issued pursuant to the conversion or exercise
of convertible or exercisable securities issued or outstanding on or prior to
the date hereof or issued pursuant to this Agreement and the Notes, (iv) the
Warrant Shares, (v) securities issued in connection with bona fide
strategic license agreements or other partnering arrangements so long as such
issuances are not for the purpose of raising capital, (vi) Common Stock
issued or options to purchase Common Stock granted or issued pursuant to the
Company’s stock option plans as they now exist and employee stock purchase
plans as they now exist, (vii) any warrants issued to the placement agent
and its designees for the transactions contemplated by this Agreement, (viii) the
payment of any principal and accrued interest in shares of Common Stock
pursuant to the Notes, and (ix) the issuance of up to 6,000,000 shares of
Common Stock to the Company’s officers, directors and employees so long as such
shares of Common Stock are not offered, sold, assigned, transferred or pledged,
directly or indirectly, for a period of one (1) year following the
Effective Date.

 

(c)                                  For
a period of two (2) years following the Closing Date, if the Company
enters into any Subsequent Financing on terms more favorable than the terms
governing the Notes, then the Purchasers in their sole discretion may exchange
the Notes, valued at their stated value, together with accrued but unpaid
interest (which interest payments shall be payable, at the sole option of the Purchasers,
in cash or in the form of the new securities to be issued in the Subsequent
Financing), for the securities issued or to be issued in the Subsequent
Financing. The Company covenants and agrees to promptly notify in writing the
Purchasers of the terms and conditions of any such proposed Subsequent
Financing.

 

21

 

ARTICLE IV

 

CONDITIONS

 

Section 4.1                                      Conditions
Precedent to the Obligation of the Company to Close and to Sell the Securities.
The obligation hereunder of the Company to close and issue and sell the Securities
to the Purchasers at the Closing is subject to the satisfaction or waiver, at
or before the Closing of the conditions set forth below. These conditions are
for the Company’s sole benefit and may be waived by the Company at any time in
its sole discretion.

 

(a)                                  Accuracy
of the Purchasers’ Representations and Warranties. The representations and
warranties of each Purchaser shall be true and correct in all material respects
as of the date when made and as of the Closing Date as though made at that
time, except for representations and warranties that are expressly made as of a
particular date, which shall be true and correct in all material respects as of
such date.

 

(b)                                 Performance
by the Purchasers. Each Purchaser shall have performed, satisfied and
complied in all material respects with all covenants, agreements and conditions
required by this Agreement to be performed, satisfied or complied with by the
Purchasers at or prior to the Closing Date.

 

(c)                                  No
Injunction. No statute, rule, regulation, executive order, decree, ruling
or injunction shall have been enacted, entered, promulgated or endorsed by any
court or governmental authority of competent jurisdiction which prohibits the
consummation of any of the transactions contemplated by this Agreement.

 

(d)                                 Delivery
of Purchase Price. The Purchase Price for the Securities shall have been
delivered to the Company on the Closing Date.

 

(e)                                  Delivery
of Transaction Documents. The Transaction Documents shall have been duly
executed and delivered by the Purchasers to the Company.

 

Section 4.2                                      Conditions
Precedent to the Obligation of the Purchasers to Close and to Purchase the Securities.
The obligation hereunder of the Purchasers to purchase the Securities and
consummate the transactions contemplated by this Agreement is subject to the
satisfaction or waiver, at or before the Closing, of each of the conditions set
forth below. These conditions are for the Purchasers’ sole benefit and may be
waived by the Purchasers at any time in their sole discretion.

 

(a)                                  Accuracy
of the Company’s Representations and Warranties. Each of the
representations and warranties of the Company in this Agreement and the other
Transaction Documents shall be true and correct in all material respects as of
the Closing Date, except for representations and warranties that speak as of a
particular date, which shall be true and correct in all material respects as of
such date.

 

(b)                                 Performance
by the Company. The Company shall have performed, satisfied and complied in
all material respects with all covenants, agreements and conditions

 

22

 

required by this Agreement to be performed, satisfied
or complied with by the Company at or prior to the Closing Date.

 

(c)                                  No
Suspension, Etc. Trading in the Common Stock shall not have been suspended
by the Commission or the OTC Bulletin Board (except for any suspension of
trading of limited duration agreed to by the Company, which suspension shall be
terminated prior to the Closing), and, at any time prior to the Closing Date,
trading in securities generally as reported by Bloomberg Financial Markets (“Bloomberg”)
shall not have been suspended or limited, or minimum prices shall not have been
established on securities whose trades are reported by Bloomberg, or on the New
York Stock Exchange, 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 or crisis of such magnitude in its effect on, or any
material adverse change in any financial market which, in each case, in the
judgment of such Purchaser, makes it impracticable or inadvisable to purchase
the Securities.

 

(d)                                 No
Injunction. No statute, rule, regulation, executive order, decree, ruling
or injunction shall have been enacted, entered, promulgated or endorsed by any
court or governmental authority of competent jurisdiction which prohibits the
consummation of any of the transactions contemplated by this Agreement.

 

(e)                                  No
Proceedings or Litigation. No action, suit or proceeding before any
arbitrator or any governmental authority shall have been commenced, and no
investigation by any governmental authority shall have been threatened, against
the Company or any Subsidiary, or any of the officers, directors or affiliates
of the Company or any Subsidiary seeking to restrain, prevent or change the
transactions contemplated by this Agreement, or seeking damages in connection
with such transactions.

 

(f)                                    Opinion
of Counsel. The Purchasers shall have received an opinion of counsel to the
Company, dated the date of such Closing, substantially in the form of Exhibit H
hereto, with such exceptions and limitations as shall be reasonably acceptable
to counsel to the Purchasers.

 

(g)                                 Notes
and Warrants. At or prior to the Closing, the Company shall have delivered
to the Purchasers the Notes (in such denominations as each Purchaser may request)
and the Warrants (in such denominations as each Purchaser may request).

 

(h)                                 Secretary’s
Certificate. The Company shall have delivered to the Purchasers a secretary’s
certificate, dated as of the Closing Date, as to (i) the resolutions
adopted by the Board of Directors approving the transactions contemplated
hereby, (ii) the Articles, (iii) the Bylaws, each as in effect at the
Closing, and (iv) the authority and incumbency of the officers of the
Company executing the Transaction Documents and any other documents required to
be executed or delivered in connection therewith.

 

(i)                                     Officer’s
Certificate. On the Closing Date, the Company shall have delivered to the
Purchasers a certificate signed by an executive officer on behalf of the
Company, dated as of the Closing Date, confirming the accuracy of the Company’s
representations,

 

23

 

warranties and covenants as of the Closing Date and
confirming the compliance by the Company with the conditions precedent set forth
in paragraphs (b)-(e) and (l) of this Section 4.2 as of the Closing
Date (provided that, with respect to the matters in paragraphs (d) and (e) of
this Section 4.2, such confirmation shall be based on the knowledge of the
executive officer after due inquiry).

 

(j)                                     Registration
Rights Agreement. As of the Closing Date, the Company shall have executed
and delivered the Registration Rights Agreement to each Purchaser.

 

(k)                                  Material
Adverse Effect. No Material Adverse Effect shall have occurred at or before
the Closing Date.

 

(l)                                     Transfer
Agent Instructions. The Irrevocable Transfer Agent Instructions, in the
form of Exhibit G attached hereto, shall have been delivered to the
Company’s transfer agent.

 

(m)                               Security
Agreement. At the Closing, the Company shall have executed and delivered
the Security Agreement to each Purchaser.

 

(n)                                 UCC
Financing Statements. The Company shall have filed all UCC financing
statements in form and substance satisfactory to the Purchasers at the
appropriate offices to create a valid and perfected security interest in the
Collateral (as defined in the Security Agreement).

 

Section 4.3                                      Conditions
Precedent to the Obligation of the Purchasers to Purchase the Option Notes.
The obligation hereunder of each Purchaser to acquire and pay for the Option Notes
is subject to the satisfaction or waiver, at or before the closing and sale of
such Option Notes (the “Subsequent Closing Date”), of each of the
conditions set forth below. These conditions are for each Purchaser’s sole
benefit and may be waived by such Purchaser at any time in its sole discretion.

 

(a)                                  Accuracy
of the Company’s Representations and Warranties. Each of the
representations and warranties of the Company in this Agreement and the other
Transaction Documents shall be true and correct in all material respects as of
the Closing Date, except for representations and warranties that speak as of a
particular date, which shall be true and correct in all material respects as of
such date.

 

(b)                                 Performance
by the Company. The Company shall have performed, satisfied and complied in
all material respects with all covenants, agreements and conditions required by
this Agreement to be performed, satisfied or complied with by the Company at or
prior to the Closing Date.

 

(c)                                  No
Suspension, Etc. Trading in the Common Stock shall not have been suspended
by the Commission or the OTC Bulletin Board (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 Subsequent Closing
Date, trading in securities generally as reported by Bloomberg Financial
Markets (“Bloomberg”) shall not have been suspended or limited, or
minimum prices shall not have been established on securities whose trades are

 

24

 

reported by Bloomberg, or on the New York Stock
Exchange, nor shall a banking moratorium have been declared either by the
United States or New York State authorities, 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 or crisis of such magnitude in its
effect on, or any material adverse change in any financial market which, in
each case, in the judgment of such Purchaser, makes it impracticable or
inadvisable to purchase the Option Notes.

 

(d)                                 No
Injunction. No statute, rule, regulation, executive order, decree, ruling
or injunction shall have been enacted, entered, promulgated or endorsed by any
court or governmental authority of competent jurisdiction which prohibits the
consummation of any of the transactions contemplated by this Agreement.

 

(e)                                  No
Proceedings or Litigation. No action, suit or proceeding before any
arbitrator or any governmental authority shall have been commenced, and no
investigation by any governmental authority shall have been threatened, against
the Company or any Subsidiary, or any of the officers, directors or affiliates
of the Company or any Subsidiary seeking to restrain, prevent or change the
transactions contemplated by this Agreement, or seeking damages in connection
with such transactions.

 

(f)                                    Opinion
of Counsel, Etc. At the Subsequent Closing Date, the Purchasers shall have
received an opinion of counsel to the Company, dated the date of the Subsequent
Closing Date, in the form of Exhibit H hereto, and such other
certificates and documents as the Purchasers or its counsel shall reasonably
require incident to the Subsequent Closing.

 

(g)                                 Option
Notes and Warrants. At or prior to the Subsequent Closing Date, the Company
shall have delivered to the Purchasers the Option Notes (in such denominations
as each Purchaser may request) and the Warrants, in each case, being acquired
by the Purchasers at the Subsequent Closing Date.

 

(h)                                 Officer’s
Certificate. The Company shall have delivered to the Purchasers a
certificate of an executive officer of the Company, dated as of the Closing
Date, confirming the accuracy of the Company’s representations, warranties and
covenants as of such Closing Date and confirming the compliance by the Company
with the conditions precedent set forth in this Section 4.3 as of the
Subsequent Closing Date.

 

(i)                                     Material
Adverse Effect. No Material Adverse Effect shall have occurred at or before
the Subsequent Closing Date.

 

(j)                                     Effective
Registration Statement. The Registration Statement shall have been declared
effective by the Commission.

 

25

 

ARTICLE V

 

CERTIFICATE LEGEND 

 

Section 5.1                                      Legend.
Each certificate representing the Securities shall be stamped or otherwise
imprinted with a legend substantially in the following form (in addition to any
legend required by applicable state securities or “blue sky” laws):

 

THE
SECURITIES REPRESENTED BY THIS CERTIFICATE (THE “SECURITIES”) HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”)
OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF UNLESS REGISTERED UNDER THE SECURITIES ACT AND UNDER APPLICABLE
STATE SECURITIES LAWS OR APOLLO RESOURCES INTERNATIONAL, INC. SHALL HAVE
RECEIVED AN OPINION OF COUNSEL THAT REGISTRATION OF SUCH SECURITIES UNDER THE
SECURITIES ACT AND UNDER THE PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS
NOT REQUIRED.

 

The Company agrees to issue
or reissue certificates representing any of the Conversion Shares and the
Warrant Shares, without the legend set forth above if at such time, prior to making
any transfer of any such Conversion Shares or Warrant Shares, such holder
thereof shall give written notice to the Company describing the manner and
terms of such transfer and removal as the Company may reasonably request. Such
proposed transfer and removal will not be effected until: (a) either (i) the
Company has received an opinion of counsel reasonably satisfactory to the
Company, to the effect that the registration of the Conversion Shares or
Warrant Shares under the Securities Act is not required in connection with such
proposed transfer, (ii) a registration statement under the Securities Act
covering such proposed disposition has been filed by the Company with the
Commission and has become effective under the Securities Act, (iii) the
Company has received other evidence reasonably satisfactory to the Company that
such registration and qualification under the Securities Act and state
securities laws are not required, or (iv) the holder provides the Company
with reasonable assurances that such security can be sold pursuant to Rule 144
under the Securities Act; and (b) either (i) the Company has received
an opinion of counsel reasonably satisfactory to the Company, to the effect
that registration or qualification under the securities or “blue sky” laws of
any state is not required in connection with such proposed disposition, (ii) compliance
with applicable state securities or “blue sky” laws has been effected, or (iii) the
holder provides the Company with reasonable assurances that a valid exemption
exists with respect thereto. The Company will respond to any such notice from a
holder within three (3) business days. In the case of any proposed
transfer under this Section 5.1, the Company will use reasonable efforts
to comply with any such applicable state securities or “blue sky” laws, but
shall in no event be required, (x) to qualify to do business in any state where
it is not then qualified, (y) to take any action that would subject it to tax
or to the general service of process in any state where it is not then subject,
or (z) to comply with state securities or “blue sky” laws of any state for
which registration by coordination is unavailable to the Company. The
restrictions on transfer contained in this Section 5.1 shall be in
addition to, and not by way of limitation of, any other restrictions on 

 

26

 

transfer contained
in any other section of this Agreement. Whenever a certificate
representing the Conversion Shares or Warrant Shares is required to be issued
to a Purchaser without a legend, in lieu of delivering physical certificates
representing the Conversion Shares or Warrant Shares, provided the Company’s
transfer agent is participating in the Depository Trust Company (“DTC”) Fast Automated Securities
Transfer program, the Company shall use its reasonable best efforts to cause
its transfer agent to electronically transmit the Conversion Shares or Warrant
Shares to a Purchaser by crediting the account of such Purchaser’s Prime Broker
with DTC through its Deposit Withdrawal Agent Commission (“DWAC”) system
(to the extent not inconsistent with any provisions of this Agreement).

 

ARTICLE VI

 

INDEMNIFICATION

 

Section 6.1                                      General Indemnity. The Company agrees to indemnify and hold harmless the Purchasers (and
their respective directors, officers, affiliates, agents, successors and
assigns) from and against any and all losses, liabilities, deficiencies, costs,
damages and expenses (including, without limitation, reasonable attorneys’
fees, charges and disbursements) incurred by the Purchasers as a result of any
inaccuracy in or breach of the representations, warranties or covenants made by
the Company herein. Each Purchaser severally but not jointly agrees to
indemnify and hold harmless the Company and its directors, officers,
affiliates, agents, successors and assigns from and against any and all losses,
liabilities, deficiencies, costs, damages and expenses (including, without
limitation, reasonable attorneys’ fees, charges and disbursements) incurred by
the Company as result of any inaccuracy in or breach of the representations,
warranties or covenants made by such Purchaser herein. The maximum aggregate
liability of each Purchaser pursuant to its indemnification obligations under
this Article VI shall not exceed the portion of the Purchase Price paid by
such Purchaser hereunder.

 

Section 6.2                                      Indemnification
Procedure. Any party entitled to indemnification under this Article VI
(an “indemnified party”) will give written notice to the indemnifying party of
any matter giving rise to a claim for indemnification; provided, that the
failure of any party entitled to indemnification hereunder to give notice as
provided herein shall not relieve the indemnifying party of its obligations
under this Article VI except to the extent that the indemnifying party is
actually prejudiced by such failure to give notice. In case any such action,
proceeding or claim is brought against an indemnified party in respect of which
indemnification is sought hereunder, the indemnifying party shall be entitled
to participate in and, unless in the reasonable judgment of the indemnifying
party a conflict of interest between it and the indemnified party exists with
respect to such action, proceeding or claim (in which case the indemnifying party
shall be responsible for the reasonable fees and expenses of one separate
counsel for the indemnified parties), to assume the defense thereof with
counsel reasonably satisfactory to the indemnified party. In the event that the
indemnifying party advises an indemnified party that it will contest such a
claim for indemnification hereunder, or fails, within thirty (30) days of
receipt of any indemnification notice to notify, in writing, such person of its
election to defend, settle or compromise, at its sole cost and expense, any
action, proceeding or claim (or discontinues its defense at any time after it
commences such defense), then the indemnified party may, at its option, defend,
settle or otherwise compromise or pay such action

 

27

 

or claim. In any event, unless and until the
indemnifying party elects in writing to assume and does so assume the defense
of any such claim, proceeding or action, the indemnified party’s costs and
expenses arising out of the defense, settlement or compromise of any such
action, claim or proceeding shall be losses subject to indemnification
hereunder. The indemnified party shall cooperate fully with the indemnifying
party in connection with any negotiation or defense of any such action or claim
by the indemnifying party and shall furnish to the indemnifying party all
information reasonably available to the indemnified party which relates to such
action or claim. The indemnifying party shall keep the indemnified party fully
apprised at all times as to the status of the defense or any settlement
negotiations with respect thereto. If the indemnifying party elects to defend
any such action or claim, then the indemnified party shall be entitled to
participate in such defense with counsel of its choice at its sole cost and
expense. The indemnifying party shall not be liable for any settlement of any
action, claim or proceeding effected without its prior written consent. Notwithstanding
anything in this Article VI to the contrary, the indemnifying party shall
not, without the indemnified party’s prior written consent, settle or
compromise any claim or consent to entry of any judgment in respect thereof
which imposes any future obligation on the indemnified party or which does not
include, as an unconditional term thereof, the giving by the claimant or the
plaintiff to the indemnified party of a release from all liability in respect
of such claim. The indemnification obligations to defend the indemnified party required
by this Article VI shall be made by periodic payments of the amount
thereof during the course of investigation or defense, as and when bills are
received or expense, loss, damage or liability is incurred, so long as the
indemnified party shall refund such moneys if it is ultimately determined by a
court of competent jurisdiction that such party was not entitled to
indemnification. The indemnity agreements contained herein shall be in addition
to (a) any cause of action or similar rights of the indemnified party
against the indemnifying party or others, and (b) any liabilities the
indemnifying party may be subject to pursuant to the law. No indemnifying party
will be liable to the indemnified party under this Agreement to the extent, but
only to the extent that a loss, claim, damage or liability is attributable to
the indemnified party’s breach of any of the representations, warranties or
covenants made by such party in this Agreement or in the other Transaction
Documents.

 

ARTICLE VII

 

MISCELLANEOUS

 

Section 7.1                                      Fees
and Expenses. Each party shall pay the fees and expenses of its advisors,
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; provided, however, that
the Company shall pay all actual attorneys’ fees and expenses (including
disbursements and out-of-pocket expenses) incurred by the Purchasers in
connection with (i) the preparation, negotiation, execution and delivery
of the Transaction Documents and the transactions contemplated thereunder,
which payment shall be made at Closing and shall not exceed $27,500 (plus
disbursements and out-of-pocket expenses), of which $7,500 has been paid prior
to the Closing Date, and (ii) any amendments, modifications or waivers of
this Agreement or any of the other Transaction Documents. In addition, the
Company shall pay all reasonable fees and expenses incurred by the Purchasers
in connection with the

 

28

 

enforcement of this Agreement or any of the other
Transaction Documents, including, without limitation, all reasonable attorneys’
fees and expenses.

 

Section 7.2                                      Specific
Performance; Consent to Jurisdiction; Venue.

 

(a)                                  The
Company and the Purchasers acknowledge and agree that irreparable damage would
occur in the event that any of the provisions of this Agreement or the other
Transaction Documents were not performed in accordance with their specific
terms or were otherwise breached. It is accordingly agreed that the parties
shall be entitled to an injunction or injunctions to prevent or cure breaches
of the provisions of this Agreement or the other Transaction Documents and to
enforce specifically the terms and provisions hereof or thereof, this being in
addition to any other remedy to which any of them may be entitled by law or
equity.

 

(b)                                 The parties agree that venue for any dispute
arising under this Agreement will lie exclusively in the state or federal
courts located in New York County, New York, and the parties irrevocably waive
any right to raise forum non conveniens
or any other argument that New York is not the proper venue. The parties
irrevocably consent to personal jurisdiction in the state and federal courts of
the state of New York. The Company and each Purchaser consent to process
being served in any such suit, action or proceeding by mailing a copy thereof
to such party at the address in effect for notices to it under this Agreement
and agrees that such service shall constitute good and sufficient service of
process and notice thereof. Nothing in this Section 7.2 shall affect or
limit any right to serve process in any other manner permitted by law. The
Company and the Purchasers hereby agree that the prevailing party in any suit,
action or proceeding arising out of or relating to the Securities, this
Agreement or the other Transaction Documents, shall be entitled to
reimbursement for reasonable legal fees from the non-prevailing party. The
parties hereby waive all rights to a trial by jury.

 

Section 7.3                                      Entire
Agreement; Amendment. This Agreement and the Transaction Documents contain
the entire understanding and agreement of the parties with respect to the
matters covered hereby and, except as specifically set forth herein or in the
other Transaction Documents, neither the Company nor any Purchaser make any
representation, warranty, covenant or undertaking with respect to such matters,
and they supersede all prior understandings and agreements with respect to said
subject matter, all of which are merged herein. No provision of this Agreement
may be waived or amended other than by a written instrument signed by the
Company and the Purchasers holding at least a majority of the principal amount
of the Notes then held by the Purchasers. Any amendment or waiver effected in
accordance with this Section 7.3 shall be binding upon each Purchaser (and
their permitted assigns) and the Company.

 

Section 7.4                                      Notices.
Any notice, demand, request, waiver or other communication required or
permitted to be given hereunder shall be in writing and shall be effective (a) upon
hand delivery by telecopy or facsimile at the address or number designated
below (if delivered on a business day during normal business hours where such
notice is to be received), or the first business day following such delivery
(if delivered other than on a business day during normal business hours where
such notice is to be received) or (b) on the second business day following
the date of mailing by express courier service, fully prepaid, addressed to

 

29

 

such address, or upon actual receipt of such mailing,
whichever shall first occur. The addresses for such communications shall be:

 

	
  If to the
  Company:

  	
   

  	
  Apollo Resources
  International, Inc.

  
	
   

  	
   

  	
  3001 Knox
  Street, Suite 403

  
	
   

  	
   

  	
  Dallas, Texas
  75205

  
	
   

  	
   

  	
  Attention: Chief
  Executive Officer

  
	
   

  	
   

  	
  Tel. No.: (214) 389-9800

  
	
   

  	
   

  	
  Fax No.: (214) 389-9806

  
	
   

  	
   

  	
   

  
	
  with copies
  (which copies

  	
   

  	
   

  
	
  shall not
  constitute notice

  	
   

  	
   

  
	
  to the Company)
  to:

  	
   

  	
  Scheef &
  Stone, LLP

  
	
   

  	
   

  	
  5956 Sherry
  Lane, Suite 1400

  
	
   

  	
   

  	
  Dallas, Texas
  75225

  
	
   

  	
   

  	
  Attention: Roger
  A. Crabb

  
	
   

  	
   

  	
  Tel. No.: (214)
  706-4224

  
	
   

  	
   

  	
  Fax No.: (214)
  706-4242

  
	
   

  	
   

  	
   

  
	
  If to any
  Purchaser:

  	
   

  	
  At the address
  of such Purchaser set forth on Exhibit A to this Agreement, with
  copies to Purchaser’s counsel as set forth on Exhibit A or as
  specified in writing by such Purchaser with copies to:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Kramer Levin
  Naftalis & Frankel LLP

  
	
   

  	
   

  	
  1177 Avenue of
  the Americas

  
	
   

  	
   

  	
  New York, New
  York 10036

  
	
   

  	
   

  	
  Attention:
  Christopher S. Auguste

  
	
   

  	
   

  	
  Tel. No.: (212)
  715-9100

  
	
   

  	
   

  	
  Fax No.: (212)
  715-8000

  

 

Any party hereto may from
time to time change its address for notices by giving written notice of such
changed address to the other party hereto.

 

Section 7.5                                      Waivers.
No waiver by either party 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 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
accruing to it thereafter. No consideration shall be offered or paid to any
Purchaser 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. This provision constitutes
a separate right granted to each Purchaser by the Company 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.

 

30

 

Section 7.6                                      Headings.
The article, section and subsection headings in this Agreement are
for convenience only and shall not constitute a part of this Agreement for any
other purpose and shall not be deemed to limit or affect any of the provisions
hereof.

 

Section 7.7                                      Successors
and Assigns. This Agreement shall be binding upon and inure to the benefit
of the parties and their successors and assigns. After the Closing, the
assignment by a party to this Agreement of any rights hereunder shall not
affect the obligations of such party under this Agreement. Subject to Section 5.1
hereof, the Purchasers may assign the Securities and its rights under this
Agreement and the other Transaction Documents and any other rights hereto and
thereto without the consent of the Company.

 

Section 7.8                                      No
Third Party Beneficiaries. This Agreement is intended for the benefit of
the parties hereto and their respective permitted successors and assigns and is
not for the benefit of, nor may any provision hereof be enforced by, any other
person.

 

Section 7.9                                      Governing
Law. This Agreement shall be governed by and construed in accordance with
the internal laws of the State of New York, without giving effect to any of the
conflicts of law principles which would result in the application of the
substantive law of another jurisdiction. This Agreement shall not be
interpreted or construed with any presumption against the party causing this
Agreement to be drafted.

 

Section 7.10                                Survival.
The representations and warranties of the Company and the Purchasers shall
survive the execution and delivery hereof and the Closing until the second
anniversary of the Closing Date, except the agreements and covenants set forth
in Articles I, III, V, VI and VII of this Agreement shall survive the
execution and delivery hereof and the Closing hereunder.

 

Section 7.11                                Counterparts.
This Agreement may be executed in any number of counterparts, all of which
taken together shall constitute one and the same instrument and shall become
effective when counterparts have been signed by each party and delivered to the
other parties hereto, it being understood that all parties need not sign the
same counterpart.

 

Section 7.12                                Publicity.
The Company agrees that it will not disclose, and will not include in any
public announcement, the names of the Purchasers without the consent of the
Purchasers, which consent shall not be unreasonably withheld or delayed, or
unless and until such disclosure is required by law, rule or applicable
regulation, including without limitation any disclosure pursuant to the Registration
Statement, and then only to the extent of such requirement.

 

Section 7.13                                Severability.
The provisions of this Agreement are severable and, in the event that any court
of competent jurisdiction shall determine that any one or more of the
provisions or part of the provisions contained in this Agreement shall, for any
reason, be held to be invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other provision
or part of a provision of this Agreement and this Agreement shall be reformed
and construed as if such invalid or illegal or unenforceable provision, or part
of such provision, had never been contained herein, so that such provisions
would be valid, legal and enforceable to the maximum extent possible.

 

31

 

Section 7.14                                Further
Assurances. From and after the date of this Agreement, upon the request of
the Purchasers or the Company, the Company and each Purchaser shall execute and
deliver such instruments, documents and other writings as may be reasonably
necessary or desirable to confirm and carry out and to effectuate fully the
intent and purposes of this Agreement and the other Transaction Documents.

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

 

32

 

IN WITNESS WHEREOF, the
parties hereto have caused this Note and Warrant Purchase Agreement to be duly
executed by their respective authorized officers as of the date first above
written.

 

 

	
   

  	
  APOLLO
  RESOURCES INTERNATIONAL, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  PURCHASER:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

EXHIBIT A

LIST OF PURCHASERS

 

	
  Names and Addresses

  	
   

  	
  Investment Amount and Number of

  
	
  of Purchasers

  	
   

  	
  Warrants Purchased

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  

 

 

i

 

EXHIBIT B

FORM OF NOTE

 

 

 

ii

 

EXHIBIT C

FORM OF WARRANT

 

 

 

iii

 

EXHIBIT D

PURCHASER OPTION EXERCISE FORM

 

To:  Apollo Resources International, Inc.

 

The
undersigned hereby exercises its Purchaser Option to purchase $                 
of secured convertible promissory notes of Apollo Resources International, Inc.,
pursuant to and subject to the terms of that certain Note and Warrant Purchase
Agreement by and among the Company and the purchasers named therein dated as of
June 30, 2005, the terms of which are incorporated herein by reference.

 

The
undersigned is paying the option exercise price as follows:

 

	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Dated:

  	
   

  	
   

  	
  Signature

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Address

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
							

 

iv

 

EXHIBIT E

FORM OF REGISTRATION RIGHTS AGREEMENT

 

 

 

v

 

EXHIBIT F

FORM OF SECURITY AGREEMENT

 

 

 

vi

 

EXHIBIT G

FORM OF IRREVOCABLE TRANSFER
AGENT INSTRUCTIONS

 

APOLLO RESOURCES INTERNATIONAL, INC.

 

as of June 30,
2005

 

	
  [Name and
  address of Transfer Agent]

  
	
  Attn:

  	
   

  	
   

  

 

Ladies
and Gentlemen:

 

Reference
is made to that certain Note and Warrant Purchase Agreement (the “Purchase Agreement”), dated as of June 30, 2005, by and
among Apollo Resources International, Inc., a Utah corporation (the “Company”), and the purchasers named therein (collectively,
the “Purchasers”) pursuant to which the
Company is issuing to the Purchasers secured convertible promissory notes (the “Notes”) and warrants (the “Warrants”)
to purchase shares of the Company’s common stock, par value $0.001 per share
(the “Common Stock”). This letter shall serve
as our irrevocable authorization and direction to you (provided that you are
the transfer agent of the Company at such time) to issue shares of Common Stock
upon conversion of the Notes (the “Conversion Shares”)
and exercise of the Warrants (the “Warrant Shares”)
to or upon the order of a Purchaser from time to time upon (i) surrender
to you of a properly completed and duly executed Conversion Notice or Exercise
Notice, as the case may be, in the form attached hereto as Exhibit I and Exhibit II,
respectively, (ii) in the case of the conversion of Notes, a copy of the
Note (with the original delivered to the Company) representing the Notes being
converted or, in the case of Warrants being exercised, a copy of the Warrants
(with the original Warrants delivered to the Company) being exercised (or, in
each case, an indemnification undertaking with respect to such Notes or the
Warrants in the case of their loss, theft or destruction), and (iii) delivery
of a treasury order or other appropriate order duly executed by a duly
authorized officer of the Company. So long as you have previously received (x)
written confirmation from counsel to the Company that a registration statement
covering resales of the Conversion Shares or Warrant Shares, as applicable, has
been declared effective by the Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended (the “1933 Act”), and no subsequent notice by the Company or its
counsel of the suspension or termination of its effectiveness and (y) a copy of
such registration statement, and if the Purchaser represents in writing that the
prospectus delivery requirements have been or will be met, the Conversion
Shares or the Warrant Shares, as the case may be, were sold pursuant to the
Registration Statement, then certificates representing the Conversion Shares
and the Warrant Shares, as the case may be, shall not bear any legend
restricting transfer of the Conversion Shares and the Warrant Shares, as the
case may be, thereby and should not be subject to any stop-transfer restriction.
Provided, however, that if you have not previously received (i) written
confirmation from counsel to the Company that a registration statement covering
resales of the Conversion Shares or Warrant Shares, as applicable, has been
declared effective by the SEC under the 1933 Act, and (ii) a copy of such
registration statement, then the certificates for the Conversion Shares and the
Warrant Shares shall bear the following legend:

 

“THE SECURITIES
REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE SECURITIES ACT”), OR ANY STATE SECURITIES LAWS AND
MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS REGISTERED
UNDER THE SECURITIES ACT OR APPLICABLE STATE SECURITIES LAWS,

 

vii

 

OR APOLLO RESOURCES
INTERNATIONAL, INC. SHALL HAVE RECEIVED AN OPINION OF ITS COUNSEL THAT
REGISTRATION OF SUCH SECURITIES UNDER THE SECURITIES ACT AND UNDER THE
PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED.”

 

and, provided further,
that the Company may from time to time notify you to place stop-transfer
restrictions on the certificates for the Conversion Shares and the Warrant
Shares in the event a registration statement covering the Conversion Shares and
the Warrant Shares is subject to amendment for events then current.

 

A form
of written confirmation from counsel to the Company that a registration
statement covering resales of the Conversion Shares and the Warrant Shares has
been declared effective by the SEC under the 1933 Act is attached hereto as Exhibit III.

 

Please
be advised that the Purchasers are relying upon this letter as an inducement to
enter into the Purchase Agreement and, accordingly, each Purchaser is a third
party beneficiary to these instructions.

 

Please
execute this letter in the space indicated to acknowledge your agreement to act
in accordance with these instructions. Should you have any questions concerning
this matter, please contact me at                            .

 

	
   

  	
  Very truly
  yours,

  
	
   

  	
   

  
	
   

  	
  APOLLO
  RESOURCES INTERNATIONAL, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
							

 

ACKNOWLEDGED AND AGREED:

 

[TRANSFER
AGENT]

 

	
  By:

  	
   

  	
   

  
	
  Name:

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  
	
  Date:

  	
   

  	
   

  	
   

  
				

 

viii

 

EXHIBIT I

 

APOLLO RESOURCES INTERNATIONAL, INC.

CONVERSION NOTICE

 

(To be Executed by the Registered Holder in order to Convert the Note)

 

The undersigned hereby
irrevocably elects to convert $                                        
of the principal amount of the above Note No.       
into shares of Common Stock of APOLLO RESOURCES INTERNATIONAL, INC. (the “Maker”)
according to the conditions hereof, as of the date written below.

 

	
  Date of
  Conversion

  	
   

  	
   

  
	
   

  
	
  Applicable
  Conversion Price

  	
   

  	
   

  
	
   

  
	
  Number of shares of Common Stock beneficially
  owned or deemed beneficially owned by the Holder on

  
	
  the Date of Conversion:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Signature

  	
   

  	
   

  
	
   

  
	
  [Name]

  
	
   

  
	
  Address:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
										

 

ix

 

EXHIBIT II

 

FORM OF EXERCISE NOTICE

 

EXERCISE FORM

 

APOLLO RESOURCES INTERNATIONAL, INC.

 

The undersigned                             ,
pursuant to the provisions of the within Warrant, hereby elects to purchase            
shares of Common Stock of Apollo Resources International, Inc. covered by
the within Warrant.

 

	
  Dated:

  	
   

  	
   

  	
  Signature

  	
   

  	
   

  
	
   

  	
  Address

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
							

 

	
  Number of shares of Common Stock beneficially owned or deemed
  beneficially owned by the Holder on

  
	
  the date of Exercise:

  	
   

  	
   

  

 

ASSIGNMENT

 

FOR VALUE RECEIVED,                                      
hereby sells, assigns and transfers unto                                      
the within Warrant and all rights evidenced thereby and does irrevocably
constitute and appoint                            ,
attorney, to transfer the said Warrant on the books of the within named
corporation.

 

	
  Dated:

  	
   

  	
   

  	
  Signature

  	
   

  	
   

  
	
   

  	
  Address

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
							

 

PARTIAL ASSIGNMENT

 

FOR VALUE RECEIVED,                                      
hereby sells, assigns and transfers unto                                      
the right to purchase                      
shares of Warrant Stock evidenced by the within Warrant together with all
rights therein, and does irrevocably constitute and appoint                                      ,
attorney, to transfer that part of the said Warrant on the books of the within
named corporation.

 

	
  Dated:

  	
   

  	
   

  	
  Signature

  	
   

  	
   

  
	
   

  	
  Address

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
							

 

FOR USE BY THE ISSUER ONLY:

 

This Warrant No. W-           
canceled (or transferred or exchanged) this            
day of                         ,
            ,
shares of Common Stock issued therefor in the name of                                   ,
Warrant No. W-           
issued for           shares of
Common Stock in the name of                               .

 

x

 

EXHIBIT III

 

FORM OF NOTICE OF EFFECTIVENESS

OF REGISTRATION STATEMENT

 

	
  [Name and
  address of Transfer Agent]

  
	
  Attn:

  	
   

  	
   

  

 

Re:                               Apollo Resources International, Inc. 

 

Ladies and Gentlemen:

 

We are
counsel to Apollo Resources International, Inc., a Utah corporation (the “Company”), and have represented the Company in connection
with that certain Note and Warrant Purchase Agreement (the “Purchase Agreement”), dated as of June 30, 2005, by and
among the Company and the purchasers named therein (collectively, the “Purchasers”) pursuant to which the Company issued to the
Purchasers secured convertible promissory notes (the “Notes”)
and warrants (the “Warrants”) to
purchase shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”). Pursuant to the Purchase Agreement, the
Company has also entered into a Registration Rights Agreement with the
Purchasers (the “Registration Rights Agreement”),
dated as of June 30, 2005, pursuant to which the Company agreed, among
other things, to register the Registrable Securities (as defined in the
Registration Rights Agreement), including the shares of Common Stock issuable
upon conversion of the Notes and exercise of the Warrants, under the Securities
Act of 1933, as amended (the “1933 Act”). In
connection with the Company’s obligations under the Registration Rights
Agreement, on                                   ,
2005, the Company filed a Registration Statement on Form SB-2 (File No. 333-                   )
(the “Registration Statement”) with the
Securities and Exchange Commission (the “SEC”) relating
to the resale of the Registrable Securities which names each of the present Purchasers
as a selling stockholder thereunder.

 

In
connection with the foregoing, we advise you that a member of the SEC’s staff
has advised us by telephone that the SEC has entered an order declaring the
Registration Statement effective under the 1933 Act at [ENTER TIME
OF EFFECTIVENESS] on [ENTER DATE OF
EFFECTIVENESS] and we have no knowledge, after telephonic inquiry of
a member of the SEC’s staff, that any stop order suspending its effectiveness
has been issued or that any proceedings for that purpose are pending before, or
threatened by, the SEC and accordingly, the Registrable Securities are
available for resale under the 1933 Act pursuant to the Registration Statement.

 

	
   

  	
  Very truly
  yours,

  
	
   

  	
   

  
	
   

  	
  [COMPANY
  COUNSEL]

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  cc:

  	
  [LIST
  NAMES OF PURCHASERS]

  	
   

  	
   

  	
   

  
					

 

xi

 

EXHIBIT H

FORM OF OPINION

 

1.                                       The
Company is a corporation duly incorporated, validly existing and in good
standing under the laws of the State of Utah and has the requisite corporate power
to own, lease and operate its properties and assets, and to carry on its
business as presently conducted. The Company is duly qualified as a foreign
corporation to do business and is in good standing in every jurisdiction in
which the failure to so qualify would have a Material Adverse Effect.

 

2.                                       The
Company has the requisite corporate power and authority to enter into and
perform its obligations under the Transaction Documents and to issue the Notes,
the Warrants and the Common Stock issuable upon conversion of the Notes and
exercise of the Warrants. The execution, delivery and performance of each of
the Transaction Documents by the Company and the consummation by it of the
transactions contemplated thereby have been duly and validly authorized by all
necessary corporate action and no further consent or authorization of the
Company, its Board of Directors or its stockholders is required. Each of the
Transaction Documents have been duly executed and delivered, and the Notes and
the Warrants have been duly executed, issued and delivered by the Company and
each of the Transaction Documents constitutes a legal, valid and binding
obligation of the Company enforceable against the Company in accordance with
its respective terms. The Common Stock issuable upon conversion of the Notes
and exercise of the Warrants are not subject to any preemptive rights under the
Articles of Incorporation or the Bylaws.

 

3.                                       The
Notes and the Warrants have been duly authorized and, when delivered against
payment in full as provided in the Purchase Agreement, will be validly issued,
fully paid and nonassessable. The shares of Common Stock issuable upon conversion
of the Notes and exercise of the Warrants have been duly authorized and
reserved for issuance, and when delivered upon conversion or against payment in
full as provided in the Notes and the Warrants, as applicable, will be validly
issued, fully paid and nonassessable.

 

4.                                       The
execution, delivery and performance of and compliance with the terms of the
Transaction Documents and the issuance of the Notes, the Warrants and the
Common Stock issuable upon conversion of the Notes and exercise of the Warrants
do not (a) violate any provision of the Articles of Incorporation or
Bylaws, (b) 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 material agreement, mortgage, deed of trust, indenture, note, bond,
license, lease agreement, instrument or obligation to which the Company is a
party and which is set forth on Schedule I, (c) create or impose a
lien, charge or encumbrance on any property of the Company under any agreement
or any commitment which is set forth on Schedule I to which the Company is
a party or by which the Company is bound or by which any of its respective
properties or assets are bound, or (d) result in a violation of any
Federal, state, local or foreign statute, rule, regulation, order, judgment,
injunction or decree (including Federal and state securities laws and
regulations) applicable to the Company or by which any property or asset of the
Company is bound or affected, except, in all cases other than violations
pursuant to clauses (a) and (d) above, for such conflicts, default,
terminations, amendments, acceleration, cancellations and violations as would
not, individually or in the aggregate, have a Material Adverse Effect.

 

xii

 

5.                                       No
consent, approval or authorization of or designation, declaration or filing
with any governmental authority on the part of the Company is required under
Federal, state or local law, rule or regulation in connection with the
valid execution, delivery and performance of the Transaction Documents, or the
offer, sale or issuance of the Notes, the Warrants and the Common Stock
issuable upon conversion of the Notes and exercise of the Warrants other than
filings as may be required by applicable Federal and state securities laws and
regulations and any applicable stock exchange rules and regulations.

 

6.                                       To
our knowledge, there is no action, suit, claim, investigation or proceeding
pending or threatened against the Company which questions the validity of the Purchase
Agreement or the transactions contemplated thereby or any action taken or to be
taken pursuant thereto. There is no action, suit, claim, investigation or
proceeding pending, or to our knowledge, threatened, against or involving the
Company or any of its properties or assets and which, if adversely determined,
is reasonably likely to result in a Material Adverse Effect. To our knowledge,
there are no outstanding orders, judgments, injunctions, awards or decrees of
any court, arbitrator or governmental or regulatory body against the Company or
any officers or directors of the Company in their capacities as such.

 

7.                                       Assuming
that all of the Purchasers’ representations and warranties in the Purchase
Agreement are complete and accurate, the offer, issuance and sale of the Notes and
the Warrants and the offer, issuance and sale of the Common Stock issuable upon
conversion of the Notes and exercise of the Warrants are exempt from the
registration requirements of the Securities Act of 1933, as amended.

 

8.                                       The Company is
not, and as a result of and immediately upon Closing will not be, an “investment
company” or a company “controlled” by an “investment company,” within the
meaning of the Investment Company Act of 1940, as amended.

 

9.                                       The
Security Agreement will create a valid security interest in favor of the
Purchasers in such assets of the Company that is subject to such Security
Agreement.

 

xiiiExhibit 4.1

 

Execution Copy

 

 

OVERLAND
STORAGE, INC.

 

SHAREHOLDER
RIGHTS PLAN

 

 

SHAREHOLDER RIGHTS AGREEMENT,

 

by and between

 

Overland Storage, Inc.

 

and

 

Wells Fargo Bank, N.A., as Rights Agent

 

 

August 22, 2005

 

 

TABLE
OF CONTENTS

 

	
  Section 1.

  	
  Certain Definitions

  	
   

  
	
  Section 2.

  	
  Appointment of Rights
  Agent

  	
   

  
	
  Section 3.

  	
  Issuance of Rights
  Certificates

  	
   

  
	
  Section 4.

  	
  Form of Rights
  Certificate

  	
   

  
	
  Section 5.

  	
  Countersignature and
  Registration

  	
   

  
	
  Section 6.

  	
  Transfer,
  Split-Up, Combination and Exchange of Certificates; Mutilated, Destroyed,
  Lost or Stolen Certificate; Null and Void Rights

  	
   

  
	
  Section 7.

  	
  Exercise
  of Rights; Purchase Price; Expiration Date of Rights

  	
   

  
	
  Section 8.

  	
  Cancellation
  and Destruction of Rights Certificates

  	
   

  
	
  Section 9.

  	
  Reservation
  and Availability of Capital Stock

  	
   

  
	
  Section 10.

  	
  Record
  Date for Securities Issued Upon Exercise

  	
   

  
	
  Section 11.

  	
  Adjustment
  of Purchase Price, Number and Kind of Shares or Number of Rights; Calculation
  of Price

  	
   

  
	
  Section 12.

  	
  Certificate
  of Adjusted Purchase Price or Number of Shares

  	
   

  
	
  Section 13.

  	
  Consolidation,
  Merger or Sale or Transfer of Assets or Earning Power

  	
   

  
	
  Section 14.

  	
  Fractional
  Rights and Fractional Shares

  	
   

  
	
  Section 15.

  	
  Rights of Action

  	
   

  
	
  Section 16.

  	
  Agreement of Rights Holders

  	
   

  
	
  Section 17.

  	
  Rights
  Certificate Holder Not Deemed a Shareholder

  	
   

  
	
  Section 18.

  	
  Concerning the Rights
  Agent

  	
   

  
	
  Section 19.

  	
  Merger
  or Consolidation or Change of Name of Rights Agent

  	
   

  
	
  Section 20.

  	
  Duties of Rights Agent

  	
   

  
	
  Section 21.

  	
  Change of Rights Agent

  	
   

  
	
  Section 22.

  	
  Issuance of New
  Rights Certificates

  	
   

  
	
  Section 23.

  	
  Redemption and Termination

  	
   

  
	
  Section 24.

  	
  Exchange

  	
   

  
	
  Section 25.

  	
  Notice of Certain Events

  	
   

  
	
  Section 26.

  	
  Notices

  	
   

  
	
  Section 27.

  	
  Supplements and Amendments

  	
   

  
	
  Section 28.

  	
  Determination
  and Actions by the Board of Directors, Etc

  	
   

  
	
  Section 29.

  	
  Successors

  	
   

  
	
  Section 30.

  	
  Benefits of this Agreement

  	
   

  
	
  Section 31.

  	
  Severability

  	
   

  
	
  Section 32.

  	
  Governing Law

  	
   

  
	
  Section 33.

  	
  Counterparts

  	
   

  
	
  Section 34.

  	
  Construction

  	
   

  
	
   

  	
   

  	
   

  
	
  Exhibit A.

  	
  Form of Rights Certificate

  	
   

  
	
  Exhibit B.

  	
  Summary of Rights to Purchase Common Shares

  	
   

  

 

i

 

Execution Copy

 

SHAREHOLDER
RIGHTS AGREEMENT

 

This SHAREHOLDER RIGHTS
AGREEMENT, made and entered into as of August 22, 2005 (as amended,
restated or otherwise modified from time to time in accordance herewith, this “Agreement”), by and between Overland
Storage, Inc., a California corporation (together with its successors, the
“Corporation”), and Well Fargo
Bank, N.A., a national banking association organized under the laws of the
United States of America, as Rights Agent (together with its permitted
successors in such capacity, the “Rights
Agent”).

 

R
E C I T A L S

 

WHEREAS, the Board of
Directors of the Corporation (the “Board”)
has authorized and declared a dividend distribution of a certain purchase right
(a “Right”) for each Common Share
of the Corporation outstanding at the Close of Business on August 25, 2005
(the “Record Date”), such
dividend distribution to occur at the Close of Business on the Record Date, and
has authorized the issuance of one Right (as such number may hereinafter be
adjusted pursuant to the provisions hereof) for each Common Share issued
(whether originally issued or delivered from the Corporation’s treasury) after
the Record Date and on or before the Distribution Date, each Right initially representing
the right to purchase one-third of a Common Share, upon the terms and subject
to the conditions herein set forth.

 

NOW, THEREFORE, in
consideration of the premises and the mutual agreements herein set forth, and
other good and valuable consideration, the receipt and sufficiency are hereby
expressly acknowledged, the parties hereto and the holders of Rights hereby
agree as follows:

 

Section 1.                                            Certain Definitions.  Unless
otherwise expressly provided herein, the following terms, whenever used in this
Agreement, shall have the meanings ascribed to them below or in the referenced
Sections of this Agreement:

 

(a)                                  “Acquiring Person” shall mean any Person
who on or after the date of this Agreement (i) becomes a Restricted Person
as a result of such Person or any of its Affiliates or Associates acquiring Beneficial
Ownership of one or more Common Shares other than pursuant to a Permitted
Acquisition, or (ii) is a Restricted Person at a time when such Person or
any of its Affiliates or Associates acquires Beneficial Ownership of one or
more Common Shares other than pursuant to a Permitted Acquisition; provided in each case that a Person who (A) within
eight calendar days after such Person would otherwise have become an Acquiring
Person (but for the operation of this proviso) notifies the Board in writing that
such Person or its Associates or Affiliates acquired Beneficial Ownership of
the acquired Common Shares without any intention of changing or influencing
control of the Corporation, (B) the Board determines within ten days in
good faith that such acquisition was inadvertent (including because such Person
was unaware that it was a Restricted Person or the consequences thereof under
this Agreement) and that such Person does not intend to change or influence
control of the Corporation, and (C) as promptly as reasonably practicable
after so notifying the Board, and in any event within fifteen calendar days (or
such longer period as determined by the Board in good faith to be reasonably
necessary to facilitate an orderly divestment), such Person divests itself of sufficient
Common Shares so that such Person is no longer a Restricted Person, shall be
deemed for all purposes hereof never to have been an Acquiring Person as a
result of such acquisition (and except as provided in this 

 

1

 

proviso
any Person who becomes an Acquiring Person shall forever remain an Acquiring Person
for all purposes hereof).

 

(b)                                 “Adjustment Number of Shares” shall have the meaning ascribed to such
term in Section 11(a)(iii).

 

(c)                                  “Affiliate” and “Associate” shall have the respective meanings ascribed to
such terms in Rule 12b-2 promulgated under the Exchange Act; provided that, for the purpose of
determining whether a Person is an Affiliate or Associate of an executive
officer of the Corporation, the definitions of Affiliate and Associate shall
not include any relative of such executive officer other than his or her
spouse, children or grandchildren.

 

(d)                                 “Agreement” shall have the meaning ascribed to such term in the preamble hereto.

 

(e)                                  “Arrangement” shall mean any oral or
written agreement, plan, arrangement or understanding.

 

(f)                                    “Articles” shall mean the Corporation’s
Amended and Restated Articles of Incorporation, as the same may be amended,
restated, supplemented, corrected or otherwise modified and in effect from time
to time.

 

(g)                                 “Available Common Shares” shall mean the
total Common Shares authorized by the Articles, less the Common Shares (i) issued
and outstanding, or (ii) reserved for issuance for purposes other than
upon exercise of the Rights.

 

(h)                                 A Person shall
be deemed the “Beneficial Owner”
of, and shall be deemed to “Beneficially Own”,
any securities:

 

(i)                                     which such
Person or any of such Person’s Affiliates or Associates beneficially owns,
directly or indirectly;

 

(ii)                                  which such
Person or any of such Person’s Affiliates or Associates, directly or
indirectly, has the right to acquire (whether such right is exercisable
immediately or only after the passage of time) beneficial ownership of (A) pursuant
to any Arrangement, or (B) upon the exercise of conversion, exchange or
other rights (other than the Rights), warrants or options, or otherwise; provided, however,
that a Person shall not be deemed the Beneficial Owner of, or to Beneficially Own,
(x) securities tendered pursuant to a tender or exchange offer made by or
on behalf of such Person or any of such Person’s Affiliates or Associates until
such tendered securities are accepted for purchase or exchange,
(y) securities issuable upon exercise of Rights at any time prior to the occurrence
of a Triggering Event, or (z) securities issuable upon exercise of Rights
from and after the occurrence of a Triggering Event which Rights were acquired
by such Person or any of such Person’s Affiliates or Associates prior to the
Distribution Date or pursuant to Section 3(a) or Section 22 (the
“Original Rights”) or pursuant to
Section 11(a) in connection with an adjustment made with respect to
any Original Rights;

 

(iii)                               which such
Person or any of such Person’s Affiliates or Associates, directly or
indirectly, has the right to vote or dispose of, or has “beneficial
ownership” of

 

2

 

(as determined pursuant to Rule 13d-3
promulgated under the Exchange Act), including pursuant to any Arrangement; provided, however,
that a Person shall not be deemed the Beneficial Owner of, or to Beneficially
Own, any security under this clause (iii) as the result of any Arrangement
to vote such security if such Arrangement (1) arises solely from a
revocable proxy or consent given in response to a public proxy or consent
solicitation made pursuant to, and in accordance with, the applicable rules and
regulations promulgated under the Exchange Act, and (2) is not also then
reportable on Schedule 13D under the Exchange Act (or any comparable or
successor report); or

 

(iv)                              which are Beneficially
Owned, directly or indirectly, by any other Person (or any Affiliate or
Associate thereof) with which such Person (or any of such Person’s Affiliates
or Associates) has any Arrangement relating to the acquisition, holding, voting
(except pursuant to a revocable proxy described in clause (1) of the
proviso in Section 1(h)(iii)) or disposing of such securities of the
Corporation (with a joint filing of a Schedule 13D under the Exchange Act
(or any comparable or successor report) being conclusive evidence of the
existence of such an Arrangement); provided,
however, that for purposes of
this Section 1(h)(iv), a Person engaged in business as an underwriter of
securities shall be deemed not be a Beneficial Owner of, and not to
Beneficially Own, any securities acquired through such Person’s participation
in good faith in a firm commitment underwriting until the expiration of forty
calendar days after the date of such acquisition.

 

Notwithstanding anything in
this definition of Beneficial Owner to the contrary, the phrase “then outstanding,” when used with
reference to a Person’s Beneficial Ownership of securities of the Corporation,
shall mean the number of such securities then issued and outstanding together
with the number of such securities not then actually issued and outstanding
which such Person would be deemed to Beneficially Own hereunder.

 

(i)                                     “Board” shall
mean the Board of Directors of the Corporation.

 

(j)                                     “Business Day” shall mean any day other
than a (i) Saturday, (ii) Sunday, or (iii) a day on which commercial
banks in the State of California are authorized or obligated by law or
executive order to close.

 

(k)                                  “Close of Business” shall mean (i) with
respect to any Business Day, 5:00 p.m., California time, on such day, and (ii) otherwise,
5:00 p.m., California time, on the next succeeding Business Day.

 

(l)                                     “Common Shares” shall mean (i) with
respect to the Corporation (for so long as a corporation), the voting shares of
common stock, no par value, of the Corporation or, in the event of a split,
subdivision, combination, consolidation or reclassification with respect to
such shares of common stock, the shares of common stock resulting from such split,
subdivision, combination, consolidation or reclassification, or (ii) with
respect to any other Person, the capital stock, equity securities or other
equity interests, as applicable, with the greatest voting power in, or having the
greatest power or right to control or direct the management, as applicable, of
such Person.  Unless the context requires
otherwise, any reference to Common Shares shall be deemed to be a reference to
the Common Shares of the Corporation.

 

3

 

(m)                               “Common Stock Equivalents” shall have the meaning ascribed to such
term in Section 11(a)(iii).

 

(n)                                 “Corporation” shall, subject to Section 13(a),
have the meaning ascribed to such term in the preamble hereto.

 

(o)                                 “Current Market Price” means, with respect
to any Security, the current market price thereof determined in accordance with
Section 11(d)(i)

 

(p)                                 “Closing Price” means, with respect to any
Security, the closing price thereof determined in accordance with Section 11(d)(ii).

 

(q)                                 “Current Value” shall have the meaning
ascribed to such term in Section 11(a)(iii).

 

(r)                                    “Distribution Date” shall have the meaning
ascribed to such term in Section 3(a).

 

(s)                                  “Equivalent Common Shares” shall have the
meaning ascribed to such term in Section 11(b).

 

(t)                                    “Exchange Act” shall mean the United States
Securities Exchange Act of 1934, as amended and as in effect on the date of
this Agreement.

 

(u)                                 “Exempt Person” shall mean any of (i) the
Corporation, (ii) any Subsidiary of the Corporation, (iii) any “employee
benefit plan” (as defined in Rule 405 promulgated under the Securities
Act) of the Corporation or of any Subsidiary of the Corporation, and (iv) any
Person organized, appointed or established by the Corporation for or pursuant
to the terms of any plan described in clause (iii) next preceding.

 

(v)                                 “Expiration Date” shall have the meaning
ascribed to such term in Section 7(a).

 

(w)                               “Final Expiration Date” shall mean August 21,
2015.

 

(x)                                   “Initial Purchase Price” shall mean US $12.331/3.

 

(y)                                 “Interested Person” shall mean (i) any
Acquiring Person, (ii) any Affiliate or Associate of an Acquiring Person, (iii) any
other Person in which any Interested Person described in clause (i) or (ii) next
preceding has a direct or indirect interest, or (iv) any other Person
acting directly or indirectly on behalf of or in concert with any Interested
Person described in clause (i), (ii) or (iii) next preceding.

 

(z)                                   “Issuable Securities” shall mean (i) before
a Triggering Event, Common Shares, and (ii) thereafter, Common Shares,
Common Stock Equivalents or other debt or equity securities or equivalents of
the Corporation for which a Right may be exercised.

 

(aa)                            “Issuable Shares” shall mean (i) before
a Triggering Event, Common Shares, and (ii) thereafter, Common Shares,
Common Stock Equivalents or other shares of capital stock of the Corporation for
which a Right may be exercised.

 

4

 

(bb)                          “NASDAQ” shall mean the electronic
inter-dealer quotation system owned and operated by NASDAQ, Inc., a
subsidiary of the National Association of Securities Dealers, Inc.

 

(cc)                            “Permitted Acquisition” shall mean the acquisition
of Common Shares (i) directly from the Corporation, including by way of a
dividend or distribution paid or made by the Corporation on the Common Shares
or pursuant to a split, subdivision or reclassification of the Common Shares,
or (ii) pursuant to a Permitted Offer.

 

(dd)                          “Permitted Offer” shall mean a tender or
exchange offer which is for all outstanding Common Shares at a price and on
terms determined, prior to the purchase of shares under such tender or exchange
offer, by at least a majority of the members of the Board who are not officers
of the Corporation and who are not Interested Persons or nominees, agents or
representatives of an Interested Person, to be adequate (taking into account
all factors that such directors deem relevant, including prices that could
reasonably be achieved if the Corporation or its assets were sold on an orderly
basis designed to realize maximum value) and otherwise in the best interests of
the Corporation and its shareholders (other than the Person or any Affiliate or
Associate thereof on whose basis the offer is being made) taking into account
all factors that such directors may deem relevant.

 

(ee)                            “Person” shall mean any individual, firm, limited
liability company, general or limited partnership, company, corporation, firm, trust,
business trust, association, joint venture or any other legally recognized
entity, whether domestic or foreign, and shall include any successor (by merger
or otherwise) of such entity.

 

(ff)                                “Principal Party” shall have the meaning
ascribed to such term in Section 13(b).

 

(gg)                          “Proration Factor” shall have the meaning ascribed to such
term in Section 11(a)(iii).

 

(hh)                          “Purchase Price” shall have the meaning ascribed to such term in Section 4(a).

 

(ii)                                  “Record Date” shall have the meaning ascribed to such term in the recitals
hereto.

 

(jj)                                  “Redemption Date” shall have the meaning ascribed to such term in Section 7(a).

 

(kk)                            “Redemption Price” shall mean $0.001 per Right, as such
amount may be appropriately adjusted to reflect any Common Share dividend or
any split, subdivision, combination, consolidation or reclassification of
Common Shares after the date hereof.

 

(ll)                                  “Restricted Person” shall mean any Person,
other than an Exempt Person, who, together with all of its Associates and Affiliates,
Beneficially Owns 15% or more of the outstanding Common Shares.

 

(mm)                      “Right” shall have the meaning ascribed to
such term in the recitals hereto.

 

(nn)                          “Rights Agent” shall have the meaning
ascribed to such term in the preamble hereto.

 

5

 

(oo)                          “Rights Certificate” shall have the meaning ascribed to such
term in Section 3(a),

 

(pp)                          “Section 11(a)(ii) Event” shall
have the meaning ascribed to such term in Section 11(a)(ii).

 

(qq)                          “Section 11(a)(ii) Trigger Date”
shall have the meaning ascribed to such term in Section 11(a)(iii).

 

(rr)                                “Section 13 Event” shall mean any
event described in clause (x), (y) or (z) of Section 13(a).

 

(ss)                            “Security” shall have the meaning ascribed to such term in Section 11(d).

 

(tt)                                “Securities Act” shall mean the United
States Securities Act of 1933, as amended and as in effect on the date of this
Agreement.

 

(uu)                          “Shares Acquisition Date” shall mean the
first date of public announcement or disclosure (including in a report or
notice filed pursuant to the Exchange Act) by the Corporation or an Acquiring
Person that an Acquiring Person has become such; provided, that if such Person is determined not to have
become an Acquiring Person pursuant to the proviso in Section 1(a), any Shares
Acquisition Date resulting therefrom shall be deemed not to have occurred.

 

(vv)                          “Subsidiary” shall mean, with respect to
any Person, any corporation or other Person of which a majority of the Common
Shares is owned or controlled, directly or indirectly, by such first referenced
Person, or which is otherwise controlled by such first referenced Person.

 

(ww)                      “Substituted Value” shall have the meaning ascribed to such
term in Section 11(a)(iii).

 

(xx)                              “Substitution Period” shall have the meaning ascribed to such
term in Section 11(a)(iii).

 

(yy)                          “Summary of Rights” shall have the meaning ascribed to such
term in Section 3(b).

 

(zz)                              “then outstanding”  shall
have the meaning ascribed to such term in Section 1(h).

 

(aaa)                      “Trading Day” shall mean a day on which the principal national securities
exchange, trading market or automated quotation system on which the Security is
listed, admitted to trading or quoted is open for the transaction of business
or, if the Security is not listed, admitted to trading or quoted on any
national securities exchange, trading market or automated quotation system, a
Business Day.

 

(bbb)                   “Triggering Event” shall mean any Section 11(a)(ii) Event
or any Section 13 Event.

 

(ccc)                      “Voting Securities” shall have the meaning ascribed to such
term in Section 13(a).

 

6

 

Section 2.                                            Appointment of Rights Agent. 
The Corporation hereby appoints the Rights Agent to act as agent for the
Corporation in accordance with the terms and conditions hereof, and the Rights
Agent hereby accepts such appointment.  The
Corporation may from time to time appoint such co-Rights Agents as it may deem
necessary or desirable.

 

Section 3.                                            Issuance of Rights Certificates.

 

(a)                                  Until the
earlier of the Close of Business on the tenth day (or such later date as may be
determined by action of the Board) after (i) the Shares Acquisition Date,
and (ii) the date of the commencement by any Person (other than an Exempt
Person) of, or of the first public announcement or disclosure of the intention
of any Person (other than an Exempt Person) to commence (which intention to
commence remains in effect for five Business Days after such announcement), a
tender or exchange offer (other than a Permitted Offer) the consummation of
which would result in any Person becoming an Acquiring Person (including, in
the case of both clauses (i) and (ii) next preceding, any such date
which is after the date hereof but prior to the Record Date), the earlier of
such dates being herein referred to as the “Distribution
Date,” (x) the Rights will be represented (subject to the
provisions of Section 3(b)) by the certificates representing Common Shares
registered in the names of the holders thereof (which certificates shall until
the Distribution Date also be deemed to be certificates representing Rights)
and not by separate certificates, and (y) the Rights shall be transferable
only in connection with the transfer of, and shall automatically be transferred
with, the underlying Common Shares (including a transfer to the Corporation); provided, however,
that if a tender or exchange offer is terminated prior to the occurrence of a
Distribution Date, then no Distribution Date shall occur as a result of such
tender or exchange offer.  Subject to Section 6(c) and
the last sentence of Section 7(g), as soon as practicable after the
Distribution Date and upon the receipt of necessary information, the
Corporation shall prepare and execute, the Rights Agent shall countersign, and
the Corporation shall send or cause to be sent by first-class, postage-prepaid
mail, to each record holder of Common Shares as of the Close of Business on the
Distribution Date, at the address of such holder shown on the records of the
Corporation, one or more “Rights Certificates”, substantially in the form of Exhibit A
(a “Rights Certificate”), representing
one Right for each Common Share so held, subject to adjustment as provided
herein.  In the event that an adjustment
in the number of Rights per share of Common Stock has theretofore been made as
provided herein, at the time of distribution of the Rights Certificates, the
Corporation shall make the necessary and appropriate rounding adjustments so
that each Rights Certificates distributed represents a whole number of Rights
and shall distribute cash in lieu of any fractional Rights, all as provided in Section 14.  As of and after the Distribution Date, the
Rights shall be represented solely by such Rights Certificates.

 

(b)                                 As promptly as
practicable following the Record Date, the Corporation shall send or cause to
be sent a copy of a “Summary of Rights to Purchase Common Shares”, in
substantially the form of Exhibit B (the “Summary
of Rights”), by first-class, postage-prepaid mail, to each record
holder of Common Shares (other than any Acquiring Person or any of its
Associates and Affiliates) as of the Close of Business on the Record Date, at
the address of such holder shown on the records of the Corporation.  With respect to certificates representing Common
Shares outstanding as of the Record Date, until the Distribution Date, the Rights
will be represented by such certificates registered in the names of the holders
thereof together with a copy of the Summary of Rights and the registered
holders of the Common Shares shall also be the registered holders of the
associated Rights.  Until the
Distribution Date (or the earlier of the

 

7

 

Redemption
Date or the Final Expiration Date), the transfer of any certificate representing
Common Shares outstanding on the Record Date, with or without a copy of the
Summary of Rights, shall also constitute the transfer of the Rights associated
with such Common Shares.

 

(c)                                  Rights shall be
issued in respect of all Common Shares that are issued (whether originally or from
the Corporation’s treasury, including reacquired Common Shares referred to in
the last sentence of this Section 3(c)) after the Record Date but prior to
the earlier of the Distribution Date, the Redemption Date and the Final
Expiration Date.  Rights shall also be
issued to the extent provided in Section 22(b) in respect of all
Common Shares which are issued (whether originally or from the Corporation’s
treasury, including reacquired Common Shares referred to in the last sentence
of this Section 3(c)) after the Distribution Date but prior the earlier of
the Redemption Date and the Final Expiration Date.  Until the earlier of the Redemption Date and
the Final Expiration Date, certificates representing Common Shares which are
also deemed to be certificates representing Rights pursuant to Section 3(a) shall,
commencing as soon as reasonably practicable after the date hereof, bear the
following legend:

 

This certificate also represents
and entitles the holder hereof to certain rights (the “Rights”) as set forth in that certain Shareholder
Rights Agreement, made and entered into as of August 22, 2005 (as amended,
supplemented or otherwise modified from time to time, the “Rights Agreement”), by and between
Overland Storage, Inc., a California corporation (the “Corporation”), and Wells Fargo Bank, N.A.,
a national banking association organized under the laws of the United States of
America, as Rights Agent (together with its successors in such capacity, the “Rights Agent”), the terms of which, as in
effect from time to time, are hereby incorporated herein by reference and a
copy of which is on file at the principal executive offices of the Corporation.  Under certain circumstances, as set forth in
the Rights Agreement, such Rights may be redeemed, or will be represented by
separate certificates and will no longer be represented by this certificate.  The Corporation will mail to the holder of
this certificate a copy of the Rights Agreement, as in effect on the date of
its mailing, without charge after receipt of a written request therefor.

 

UNDER CERTAIN CIRCUMSTANCES
SET FORTH IN THE RIGHTS AGREEMENT, RIGHTS ISSUED TO, OR HELD BY, ANY HOLDER WHO
IS, WAS OR BECOMES AN ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE THEREOF (AS
EACH OF SUCH TERMS IS DEFINED IN THE RIGHTS AGREEMENT) AND CERTAIN RELATED
PERSONS, WHETHER CURRENTLY HELD BY OR ON BEHALF OF SUCH HOLDER OR BY ANY
SUBSEQUENT HOLDER, WILL BECOME NULL AND VOID. 
THE RIGHTS SHALL NOT BE EXERCISABLE BY A HOLDER IN ANY JURISDICTION
WHERE THE REQUISITE QUALIFICATION TO THE ISSUANCE TO SUCH HOLDER, OR THE
EXERCISE BY SUCH HOLDER, OF THE RIGHTS IN SUCH JURISDICTION SHALL NOT HAVE BEEN
OBTAINED OR BE OBTAINABLE.

 

With respect to such
certificates containing the foregoing legend, until the Distribution Date, the
Rights associated with the Common Shares represented by such certificates shall
be represented by such certificates alone, and the transfer of any Common
Shares represented by such certificate shall also constitute the transfer of
the Rights associated with such Common Shares.

 

8

 

Notwithstanding the foregoing,
the omission of the foregoing legend from a certificate shall not affect the
enforceability of any part hereof or the rights of any holder of Rights.

 

(d)                                 In the event
that the Corporation purchases or acquires any Common Shares after the Record
Date but prior to the Distribution Date, any Rights associated with such Common
Shares shall be deemed cancelled and retired so that the Corporation shall not
be entitled to exercise any Rights associated with the Common Shares which are
no longer outstanding.

 

Section 4.                                            Form of Rights Certificate.

 

(a)                                  The Rights
Certificates (and the “Form of Election to Purchase” and the “Form of
Assignment”, with associated Certificates, to be printed on the reverse
thereof) shall each be substantially in the form set forth in Exhibit A
and may have such marks of identification or designation and such legends,
summaries or endorsements printed thereon as the Corporation may deem appropriate
and as are not inconsistent with the provisions of this Agreement, or as may be
required to comply with any applicable law or with any rule or regulation
made pursuant thereto or with any rule or regulation of any stock exchange,
trading market or automated quotation system on which the Rights may from time
to time be listed, traded or quoted, or to conform to usage.  Subject to the provisions of Section 11
and Section 22, the Rights Certificates shall initially entitle the
holders thereof to purchase such number of Common Shares as shall be set forth
therein at the price per Common Share set forth therein (such price per share,
as adjusted from time to time as provided herein, the “Purchase Price”), but the amount and type
of securities purchasable upon the exercise of each Right and the Purchase
Price thereof shall be subject to adjustment as provided herein.

 

(b)                                 Any Rights
Certificate issued pursuant to Section 3(a) or Section 22 which
in represents Rights which are null and void pursuant to Section 7(g) or
Section 23 and any Rights Certificate issued pursuant to Section 6 or
Section 11 upon transfer, exchange, replacement or adjustment of any other
Rights Certificate referred to in this sentence, shall contain (to the extent
feasible) the following legend:

 

THE RIGHTS REPRESENTED BY
THIS RIGHTS CERTIFICATE ARE OR WERE BENEFICIALLY OWNED BY A PERSON WHO WAS OR
BECAME AN ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON
(AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT).  ACCORDINGLY, THIS RIGHTS CERTIFICATE AND THE
RIGHTS OTHERWISE REPRESENTED HEREBY ARE NULL AND VOID.

 

The terms and provisions of Section 7(g) shall
have full force and effect whether or not the foregoing legend is contained on
any such Rights Certificate.

 

Section 5.                                            Countersignature and Registration.

 

(a)                                  The Rights
Certificates shall be executed on behalf of the Corporation by its Chairman of
the Board, its Chief Executive Officer, its President, any of its Vice
Presidents or its Chief Financial Officer, either manually or by facsimile
signature, shall have affixed thereto the Corporation’s seal or a facsimile
thereof, and shall be attested by the Secretary or an Assistant Secretary of
the Corporation, either manually or by facsimile signature.  The Rights Certificates shall be
countersigned by the Rights Agent, either manually or by facsimile signature,
and shall not be valid for any purpose unless so countersigned.  In case any officer of the Corporation who

 

9

 

shall
have signed any of the Rights Certificates shall cease to be such officer of
the Corporation before countersignature by the Rights Agent and issuance and delivery
by the Corporation, such Rights Certificates may nevertheless be countersigned
by the Rights Agent and issued and delivered by the Corporation with the same
force and effect as though the individual who signed such Rights Certificates
had not ceased to be such officer of the Corporation; and any Rights
Certificate may be signed on behalf of the Corporation by any individual who,
at the actual date of the execution of such Rights Certificate, shall be a
proper officer of the Corporation to sign such Rights Certificate, although at
the date of the execution of this Agreement any such individual was not such an
officer.

 

(b)                                 Following the
Distribution Date and upon receipt of necessary information, the Rights Agent shall
keep or cause to be kept, at its principal office or offices designated as the
appropriate place for surrender of Rights Certificates upon exercise or for transfer,
books for registration and transfer of the Rights Certificates issued hereunder.  Such books shall show the names and addresses
of the respective holders of the Rights Certificates, and the date, certificate
number and number of Rights represented on the respective faces thereof.

 

Section 6.                                            Transfer, Split-Up, Combination and Exchange of Certificates; Mutilated,
Destroyed, Lost or Stolen Certificate; Null and Void Rights.

 

(a)                                  Subject to the
provisions of Section 4(b), Section 7(g), Section 11(a)(ii) and
Section 14, at any time after the Close of Business on the Distribution
Date, and at or prior to the Close of Business on the earlier of the Redemption
Date or the Final Expiration Date, any Rights Certificates may be transferred,
split-up, combined or exchanged for another Rights Certificate or other Rights
Certificates, entitling the registered holder to purchase a like number of Common
Shares (or, following a Triggering Event, other securities, cash or other
assets, as the case may be) as the Rights Certificates surrendered then
entitled such holder (or former holder in the case of a transfer) to purchase.  Any registered holder desiring to transfer,
split-up, combine or exchange any Rights Certificates shall make such request
in writing delivered to the Rights Agent, and shall surrender the Rights
Certificates to be transferred, split-up, combined or exchanged at the
principal office of the Rights Agent designated for such purpose.  Neither the Rights Agent nor the Corporation
shall be obligated to take any action whatsoever with respect to the transfer
of any such surrendered Rights Certificates until the registered holder shall
have properly completed and duly executed the Certificate set forth in the “Form of
Assignment” set forth on the reverse side of such Rights Certificates and shall
have provided such additional evidence of the identity of the Beneficial Owner
(or former Beneficial Owner) or Affiliates or Associates thereof as the
Corporation or the Rights Agent shall reasonably request.  Thereupon the Rights Agent shall, subject to Section 4(b),
Section 7(g) and Section 14, countersign and deliver to the
Person entitled thereto a Rights Certificate or Rights Certificates, as the
case may be, as so requested.  The
Corporation may require payment of a sum sufficient to cover any tax or
governmental charge that may be imposed in connection with any transfer, split-up,
combination or exchange of Rights Certificates. 
The Rights Agent shall have no duty or obligation to take any action
under this Agreement which requires the payment by a Rights holder of
applicable taxes and governmental charges unless and until the Rights Agent is
satisfied that all such taxes and charges have been paid.

 

10

 

(b)                                 Upon receipt by
the Corporation and the Rights Agent of evidence satisfactory to them of the
loss, theft, destruction or mutilation of a Rights Certificate, and, in case of
loss, theft or destruction, of indemnity or security satisfactory to them, and,
at the Corporation’s or the Right Agent’s request, reimbursement to the
Corporation and the Rights Agent of all reasonable expenses incidental thereto,
and upon surrender to the Rights Agent and cancellation of the Rights
Certificate if mutilated, the Corporation will execute and deliver a new Rights
Certificate of like tenor to the Rights Agent for countersignature and delivery
to the registered owner in lieu of the Rights Certificate so lost, stolen,
destroyed or mutilated.

 

(c)                                  If any Rights
Certificate to be issued under this Agreement represents any Rights which are
null and void pursuant to Section 7(g), the Rights Agent shall (i) if
all of such Rights are so null and void, not issue such Rights Certificate, and
(ii) otherwise, issue such Rights Certificate representing only the Rights
which are not so null and void.

 

Section 7.                                            Exercise of Rights; Purchase Price; Expiration Date of Rights.

 

(a)                                  Except as
otherwise provided herein, the registered holder of any Rights Certificate may
exercise the Rights represented thereby (other than Rights which are null and
void pursuant to Section 7(g)) in whole or in part at any time after the
Distribution Date upon surrender of the Rights Certificate, with the “Form of
Election to Purchase” and the Certificate set forth on the reverse side thereof
properly completed and duly executed, to the Rights Agent at the principal
office of the Rights Agent designated for such purpose, together with payment
of (A) the aggregate Purchase Price for the total number of Common Shares
(or other securities, cash or assets, as the case may be) as to which such
surrendered Rights are then being exercised, and (B) an amount equal to
any applicable taxes or governmental charge required to be paid by the holder
of such Rights Certificate in accordance with Section 6, at or prior to
the earliest of (i) the Close of Business on the Final Expiration Date, (ii) the
time at which the Rights are redeemed as provided in Section 23 (the “Redemption Date”), and (iii) the time
at which all Rights (other than Rights which are null and void pursuant to Section 7(g))
are exchanged as provided in Section 24 (such earliest time, the “Expiration Date”).

 

(b)                                 The Purchase
Price for each one-third of a Common Share pursuant to the exercise of a Right
shall initially be the Initial Purchase Price, shall be subject to adjustment
from time to time as provided in Section 11 and Section 13(a),
and shall be payable in accordance with Section 7(c).

 

(c)                                  Upon receipt of
a Rights Certificate representing exercisable Rights, with the “Form of Election
to Purchase” and the Certificate set forth on the reverse side thereof properly
completed and duly executed, accompanied by payment, with respect to each Right
so exercised, of (A) the Purchase Price for the Common Shares (or other
securities, cash or assets, as the case may be) to be purchased as set forth
below, and (B) an amount equal to any applicable taxes or governmental
charge required to be paid by the holder of such Rights Certificate in
accordance with Section 6, the Rights Agent shall, subject to Section 20(k),
promptly (i) requisition from any transfer agent of the Common Shares certificates
representing the total number of Common Shares to be purchased (and the
Corporation hereby irrevocably authorizes its transfer agent to comply with all
such requests), (ii) when appropriate, requisition from the Corporation
the amount of cash, if any, to be paid in lieu of the issuance of fractional
shares in accordance with Section 14, (iii) after receipt of such certificates,
cause the same to be delivered to or upon the

 

11

 

order
of the registered holder of such Rights Certificate, registered in such name or
names as may be designated by such holder, and (iv) when appropriate,
after receipt thereof, deliver such cash, if any, to or upon the order of the
registered holder of such Rights Certificate. 
The payment of the Purchase Price (as such amount may be reduced
pursuant to Section 11(a)(iii)) shall be made in cash, by wire transfer to
an account designated therefor by the Corporation, or by certified check,
cashier’s check or bank draft payable to the order of the Corporation.  The Corporation reserves the right to require
prior to the occurrence of a Triggering Event that, upon any exercise of
Rights, such number of Rights be exercised so that only a whole number of Common
Shares would be issued.

 

(d)                                 In the event
that, immediately prior to the occurrence of a Distribution Date, the number of
Available Common Shares is insufficient to permit exercise in full of the
Rights as contemplated by this Section 7 in accordance with their terms,
the Corporation, acting by resolution of the Board, shall follow the same
procedures and may take any of the same actions in connection with the exercise
of Rights under Section 7(c) as are required or permitted to be
followed or taken pursuant to Section 11(a)(iii) with respect to
substitution of value in connection with the exercise of Rights under Section 11(a)(ii).  In the event that the Corporation is
obligated to issue Substituted Value of the Corporation pursuant to Section 11(a),
the Corporation shall make all arrangements necessary so that such Substituted
Value is available for distribution by the Rights Agent, if and when
appropriate.

 

(e)                                  In the case of
an exercise of the Rights by a holder pursuant to Section 11(a)(ii), the
Rights Agent shall return such Rights Certificate to the registered holder
thereof after imprinting, stamping or otherwise indicating thereon that the
rights represented by such Rights Certificate no longer include the rights
provided by Section 11(a)(ii) and if less than all the Rights
represented by such Rights Certificate were exercised, the Rights Agent shall
indicate on the Rights Certificate the number of Rights represented thereby
which continue to include the rights provided by Section 11(a)(ii).

 

(f)                                    In case the
registered holder of any Rights Certificate shall exercise less than all of the
Rights represented thereby, a new Rights Certificate representing the Rights
equivalent to the Rights remaining unexercised shall be issued by the Rights
Agent and delivered to or upon the order of the registered holder of such Rights
Certificate, registered in such name or names as may be designated by such holder,
subject to the provisions of Section 14, or the Rights Agent shall place
an appropriate notation on the Rights Certificate with respect to those Rights
exercised.

 

(g)                                 Notwithstanding
anything in this Agreement to the contrary, from and after the occurrence of a Section 11(a)(ii) Event,
any Rights that are Beneficially Owned by (i) an Acquiring Person (or any
Affiliate or Associate thereof), (ii) a transferee of any Acquiring Person
(or any Affiliate or Associate thereof) who becomes a transferee after the Section 11(a)(ii) Event,
or (iii) a transferee of an Acquiring Person (or any Affiliate or Associate
thereof) who becomes a transferee prior to or concurrently with the Section 11(a)(ii) Event
and receives such Rights pursuant to either (A) a transfer (whether or not
for consideration) from the Acquiring Person (or any Affiliate or Associate
thereof) to holders of equity interests in such Acquiring Person (or such
Affiliate or Associate thereof) or to any Person with whom such Acquiring
Person (or such Affiliate or Associate thereof) has any continuing Arrangement

 

12

 

regarding
the transferred Rights, or (B) a transfer which the Board has determined
is part of a Arrangement which has as a primary purpose or effect the avoidance
of this Section 7(g), and subsequent transferees of such Persons, shall
become null and void without any further action and no holder of such Rights
shall have any rights whatsoever with respect to such Rights under any
provision of this Agreement, the Rights Certificate or otherwise.  The Corporation shall use all reasonable
efforts to insure that the provisions of this Section 7(g) and Section 4(b) are
complied with, but shall have no liability to any holder of Rights Certificates
or other Person as a result of its failure to make any determinations with
respect to an Acquiring Person or its Affiliates, Associates, transferees or
other related Persons.  From and after
such Section 11(a)(ii) Event, to the extent provided in Section 6(c) and
the last sentence of Section 7(g), no Right Certificate shall be issued
pursuant to Section 3 or Section 6 that represents Rights that are or
have become void pursuant to the provisions of this Section 7(g), and any
Right Certificate delivered to the Rights Agent that represents Rights that are
or have become void pursuant to the provisions of this Section 7(g) shall
be canceled.

 

(h)                                 Notwithstanding
anything in this Agreement to the contrary, neither the Rights Agent nor the
Corporation shall be obligated to undertake any action with respect to a
registered holder of any Rights Certificate upon the occurrence of any
purported assignment or exercise as set forth in this Section 7 unless
such registered holder shall have (i) completed and signed the Certificate
set forth in the “Form of Assignment” or “Form of Election to Purchase”
set forth on the reverse side of the Rights Certificate surrendered for such assignment
or exercise, and (ii) provided such additional evidence of the identity of
the Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates
thereof as the Corporation shall reasonably request.

 

Section 8.                                            Cancellation and Destruction of Rights Certificates.  All Rights Certificates surrendered for the
purpose of exercise, transfer, split-up, combination or exchange shall, if
surrendered to the Corporation or to any of its agents, be delivered to the
Rights Agent for cancellation or in cancelled form, or, if surrendered to the
Rights Agent, shall be cancelled by it, and no Rights Certificates shall be
issued in lieu thereof except as expressly permitted by any of the provisions
of this Agreement.  The Corporation shall
deliver to the Rights Agent for cancellation and retirement, and the Rights
Agent shall so cancel and retire, any other Rights Certificate purchased or
acquired by the Corporation otherwise than upon the exercise thereof.  The Rights Agent shall deliver all cancelled
Rights Certificates, or such other evidence of cancellation or destruction as
shall be permitted by applicable law, to the Corporation.

 

Section 9.                                            Reservation and Availability of Capital Stock.

 

(a)                                  The Corporation
covenants and agrees that, (i) from and after the Distribution Date but
prior to a Trigger Event, it shall cause to be reserved and kept available out
of its Available Common Shares a reasonable number of Common Shares that would
permit the exercise of outstanding Rights, and (ii) following a Trigger
Event, with due regard to the ability to use Substitute Value under Section 11(a)(iii),
it shall cause to be reserved and kept available out of Issuable Shares which
are authorized and unissued or held in the Corporation’s treasury (or, to the
extent not so available, it shall use its reasonable efforts to make available
additional Issuable Shares), that would be sufficient to permit the exercise in
full of all outstanding Rights.

 

(b)                                 So long as the Common
Shares (and, following a Trigger Event, Issuable Securities) issuable and
deliverable upon the exercise of the Rights may be listed, admitted to

 

13

 

trade
or quoted on any national securities exchange, trading market or automated
quotation system, the Corporation shall use all reasonable efforts to cause all
Issuable Securities reserved for such issuance to be listed, traded or quoted on
such exchange, market or quotation system upon official notice of issuance upon
such exercise.

 

(c)                                  The Corporation
covenants and agrees that it will take all such action as may be necessary to
ensure that all Common Shares (or Common Stock Equivalents and other securities
of the Corporation, as the case may be) delivered upon exercise of Rights
shall, at the time of delivery of the certificates representing such shares or
other securities (subject to payment of the Purchase Price), be duly and
validly authorized and issued and fully paid and non-assessable shares or
securities.

 

(d)                                 The Corporation
covenants and agrees that, except as set forth in Section 6 and this Section 9(d),
it shall pay when due and payable any and all transfer taxes and governmental charges
which may be payable in respect of the issuance or delivery of the Rights
Certificates and of any certificates representing Common Shares (or following a
Trigger Event, Issuable Securities) upon the exercise of Rights.  The Corporation shall not, however, be
required to pay any such tax or charge which may be payable in respect of any
transfer or delivery of Rights Certificates to a Person other than, or the
issuance or delivery of any certificates representing the Common Shares (or following
a Trigger Event, Issuable Securities) in respect of a name other than that of,
the registered holder of the Rights Certificates representing Rights
surrendered for exercise, or to issue or deliver any certificates representing Common
Shares (or following a Trigger Event, Issuable Securities) in a name other than
that of the registered holder upon the exercise of any Rights, until such tax or
charge shall have been paid (any such tax or charge being payable by the holder
of such Rights Certificate at the time of surrender) or until it has been
established to the Corporation’s satisfaction that no such tax or charge is
due.

 

(e)                                  If then
necessary to permit the issuance of the Common Shares or other securities
issuable upon exercise of the Rights, the Corporation shall use all reasonable
efforts to (i) file, as soon as practicable following the earliest date
after the first occurrence of a Triggering Event in which the consideration to
be delivered by the Corporation upon exercise of the Rights has been determined
in accordance with this Agreement, a registration statement under the
Securities Act, and a qualification under any applicable state securities or “blue
sky” laws (to the extent exemptions therefrom are unavailable), with respect to
the Common Shares or other securities purchasable upon exercise of the Rights
on an appropriate form, (ii) cause such registration statement and any
qualifications to become effective as soon as practicable after such filing,
and (iii) cause such registration statement and any qualifications to
remain effective (with a prospectus at all times meeting the requirements of
the Securities Act) until the earlier of (A) the date as of which the
Rights are no longer exercisable for such securities, and (B) the
Expiration Date. The Corporation will also take such action as may be
appropriate under, or to ensure compliance with, the securities or “blue sky”
laws of the various states in connection with the exercisability of the Rights.

 

(f)                                    The Corporation
may temporarily suspend, for a period of time not to exceed ninety days after
the date set forth in clause (i) of the first sentence of Section 9(e) (the
“Cut-Off Date”), the
exercisability of the Rights in order to prepare and file a registration statement
and permit it to become effective.  In
addition, if the Corporation shall determine that a registration

 

14

 

statement
is required following the Distribution Date, the Corporation may temporarily
suspend the exercisability of the Rights until such time as a registration
statement has been declared effective or the Corporation stops using its
reasonable best efforts to have such registration statement declared effective,
but in any event not later than the Cut-Off Date.  Upon any suspension of the exercisability of
the Rights referred to in this Section 9(f), the Corporation shall issue a
public announcement stating that the exercisability of the Rights has been
temporarily suspended, as well as a public announcement at such time as the
suspension is no longer in effect.  The
Corporation shall promptly provide the Rights Agent with copies of such
announcements.  Any suspension permitted
by this Section 9(f) shall automatically terminate and end immediately
prior to the occurrence of a Section 13 Event.  Notwithstanding any provision of this
Agreement to the contrary, the Rights shall not be exercisable for securities (1) to
the extent held by a holder in any jurisdiction where the requisite
qualification to the issuance to such holder, or the exercise by such holder,
of the Rights in such jurisdiction shall not have been obtained or be
obtainable, (2) the exercise of the Rights shall not be permitted under
applicable law, or (3) a registration statement covering the Common Shares
or other securities for which such Rights shall be exercisable shall not have
been declared effective, unless the holder provides evidence reasonably satisfactory
to the Corporation that an exemption to such registration is available under
the Securities Act and applicable state securities and “blue sky” laws with
respect to such holder’s exercise of its Rights.

 

Section 10.                                      Record Date for Securities Issued Upon Exercise.  Each Person in whose name any certificate representing
Common Shares (or Common Stock Equivalents or other securities of the
Corporation, as the case may be) is issued upon the exercise of Rights shall
for all purposes be deemed to have become the holder of record of such Common
Shares (or Common Stock Equivalents or other securities of the Corporation, as
the case may be) represented thereby on, and such certificate shall be dated,
the date upon which the Rights Certificate representing such Rights was duly
surrendered and payment of the Purchase Price (and all applicable taxes and
governmental charges) was made; provided,
however, that if the date of such
surrender and payment is a date upon which the applicable transfer books of the
Corporation are closed, such Person shall be deemed to have become the record
holder of such securities on, and such certificate shall be dated, the next
succeeding Business Day on which the applicable transfer books of the Corporation
are open.  Prior to the exercise of the
Rights represented thereby, the holder of a Rights Certificate shall not be
entitled to any rights of a shareholder of the Corporation with respect to
shares for which the Rights shall be exercisable, including the right to vote,
to receive dividends or other distributions or to exercise any preemptive
rights, and shall not be entitled to receive any notice of any proceedings of
the Corporation, except as expressly provided herein.

 

Section 11.                                      Adjustment of Purchase Price, Number and Kind of Shares or Number of
Rights; Calculation of Price. 
The Purchase Price, the number and kind of securities covered by each
Right and the number of Rights outstanding are subject to adjustment from time
to time as provided in this Section 11.

 

(a)                                  (i)  In
the event the Corporation shall at any time after the date of this Agreement (A) declare
or pay a dividend on the Common Shares payable in Common Shares, (B) split
or subdivide the outstanding Common Shares, (C) combine or consolidate the
outstanding Common Shares into a smaller number of shares, or (D) issue
any shares of its capital stock in a reclassification of the Common Shares
(including any

 

15

 

such reclassification in
connection with a consolidation or merger in which the Corporation is the
continuing or surviving corporation), except as otherwise provided in this Section 11(a) and
Section 7(g), the Purchase Price in effect at the time of the record date
for such dividend or of the effective date of such split, subdivision,
combination, consolidation or reclassification, and the number and kind of
shares of capital stock issuable on such date, shall be proportionately
adjusted so that if a holder of any Right after such time were to exercise that
number of Rights (or fraction thereof) which would result in the aggregate amount
of the Purchase Price payable upon such exercise (at the Purchase Price then in
effect) being equal to the amount of the Purchase Price payable prior to such
time upon exercise of such Right, such holder would be entitled to receive the
aggregate number and kind of Common Shares (or Common Stock Equivalents or
other securities of the Corporation, as the case may be) which, if such Right
had been exercised immediately prior to such time and at a time when the Common
Shares (or Common Stock Equivalents or other securities of the Corporation, as
the case may be) transfer books of the Corporation were open, such holder would
have owned upon such exercise and been entitled to receive by virtue of such
dividend, split, subdivision, combination, consolidation or reclassification; provided, however,
that in no event shall the consideration to be paid upon the exercise of one
Right be less than the aggregate par value of the shares of capital stock of
the Corporation issuable upon the exercise thereof.  The adjustment provided for in the next
preceding sentence shall be made successively whenever such a dividend is
declared or paid or such a split, subdivision, combination, consolidation or
reclassification is effected.  If an
event occurs which would require an adjustment under both this Section 11(a) and
Section 11(a)(ii), the adjustment provided for in this Section 11(a) shall
be in addition to, and shall be made prior to, any adjustment required pursuant
to Section 11(a)(ii).

 

(ii)                                  Subject to Section 24,
in the event any Person becomes an Acquiring Person (the first occurrence of
such an event, a “Section 11(a)(ii) Event”),
then (A) the Purchase Price shall be adjusted to be the Purchase Price in
effect immediately prior to the Section 11(a)(ii) Event multiplied by
the number of one-thirds of a Common Share for which a Right was exercisable
immediately prior to such Section 11(a)(ii) Event, whether or not
such Right was then exercisable, and (B) each holder of a Right, except as
otherwise provided in this Section 11(a)(ii) and in Section 11(a)(iii),
shall thereafter have the right to receive, upon exercise thereof at a price
equal to the Purchase Price (as so adjusted), in accordance with the terms of
this Agreement, such number of Common Shares as shall equal the result obtained
by dividing the Purchase Price (as so adjusted) by 50% of the Current Market
Price per Common Share on the date of such Section 11(a)(ii) Event; provided, however,
that the Purchase Price (as so adjusted) and the number of Common Shares (or
Substituted Value, as the case may be) receivable upon exercise of any Right
shall, following the Section 11(a)(ii) Event, be subject to further
adjustment as appropriate in accordance with Section 11(f).

 

(iii)                               In the event
that the number of Available Common Shares is insufficient to permit the
exercise in full of the Rights in accordance with Section 11(a)(ii), the
Corporation shall (A) determine the Current Market Price of the Common
Shares issuable upon the exercise of a Right (the “Current Value”), and (B) make adequate provision with
respect to each Right (other than Rights which are null and void pursuant to Section

 

16

 

7(g)) to substitute, upon
the exercise of a Right and payment of the applicable Purchase Price, (1) a
number of (or fractions of) Common Shares, (2) a number of (or fractions
of) preferred stock or other equity securities, if any, of the Corporation
(including shares, or units of shares, which by virtue of having dividend,
voting and liquidation rights substantially comparable to those of the Common
Shares, the Board has deemed in good faith to have substantially the same value
as Common Shares (such shares being referred to herein as “Common Stock Equivalents”)), (3) debt
securities of the Corporation, (4) cash, (5) other assets of the
Corporation, (6) a reduction in the Purchase Price, or (7) any
combination of the foregoing, having an aggregate value equal to the Current
Value (less the amount of the aggregate reduction, if any, of the Purchase
Price under clause (6) next above), where such aggregate value has been
determined by the Board based upon the advice of a nationally recognized
investment banking firm selected by the Board (such substituted Common Shares,
equity securities, debt securities, cash or other assets, the “Substituted Value”); provided, however,
if the Corporation shall not have made adequate provision to deliver Substituted
Value pursuant to this clause (B) within thirty days following the first
occurrence of a Section 11(a)(ii) Event (the “Section 11(a)(ii) Trigger Date”),
then the Corporation shall be obligated to deliver, to the extent necessary and
permitted by applicable law and any material agreements or instruments in
effect on the date hereof to which it is a party or by which it is bound, upon
the surrender for exercise of a Right and without requiring payment of the
Purchase Price, Common Shares (to the extent available) and then, if necessary,
cash, which Common Shares and cash shall have an aggregate value equal to the
excess of the Current Value over the Purchase Price.  If the number of Available Common Shares are insufficient
to permit the exercise in full of any Rights and the Board determines in good
faith that it is reasonably likely that sufficient additional Common Shares could
be authorized for issuance upon exercise in full of the Rights, the thirty day
period set forth above in the proviso to the sentence next preceding may be
extended to the extent necessary, but not more than ninety days after the Section 11(a)(ii) Trigger
Date, in order that the Corporation may seek shareholder approval for the
authorization of such additional Common Shares (such thirty day period, as it
may be extended, the “Substitution Period”);
provided, however, that any Substitution Period
shall automatically terminate and end immediately prior to the occurrence of a Section 13
Event.  To the extent that the
Corporation determines to take action pursuant to the preceding provisions of
this Section 11(a)(iii), the Corporation (x) shall provide that such
action shall apply uniformly to all outstanding Rights (other than Rights which
are null and void pursuant to Section 7(g)), and (y) may suspend the
exercisability of the Rights until the end of the Substitution Period in order
to seek any authorization of additional Common Shares or to decide the
appropriate form of distribution to be made pursuant to such provisions and to
determine the value thereof.  In the
event of any such suspension, the Corporation shall issue a public announcement
stating that the exercisability of the Rights has been temporarily suspended,
as well as a public announcement at such time as the suspension is no longer in
effect, and the Corporation shall promptly provide the Rights Agent copies of
such announcements.  For purposes of this
Section 11(a)(iii), the value of each share of Common Stock shall be the
Current Market Price of a Common Share on the Section 11(a)(iii) Trigger
Date, and the per share or per unit value of any Common Stock Equivalent shall
be deemed to equal the Current Market Price of a Common Share on such date.

 

17

 

(b)                                 In case the
Corporation shall fix a record date for the issuance of rights (other than the
Rights), options or warrants to all holders of Common Shares entitling them
(for a period expiring within 45 calendar days after such record date) to
subscribe for or purchase Common Shares, or Common Stock Equivalents or other shares
having the same rights, privileges and preferences as the Common Shares (“Equivalent Common Shares”), or securities
convertible into Common Shares or Equivalent Common Shares at a price per Common
Share or Equivalent Common Share (or having a conversion price per share, if a
security convertible into Common Shares and Equivalent Common Shares) less than
the Current Market Price of the Common Shares on such record date except as
otherwise provided in Section 11(a), the Purchase Price to be in effect
after such record date shall be determined by multiplying the Purchase Price in
effect immediately prior to such record date by a fraction, the numerator of which
equals the sum of (i) the number of Common Shares and Equivalent Common
Shares outstanding on such record date, (ii) the number of Common Shares
and Equivalent Common Shares underlying securities outstanding on such record
date which are convertible into Common Shares or Equivalent Common Shares, plus
(iii) the number of Common Shares which the aggregate subscription or
purchase price of the total number of Common Shares and Equivalent Common Shares
so to be offered (or the aggregate initial conversion price of the convertible
securities so to be offered) would purchase at such Current Market Price, and
the denominator of which shall equal the sum of (x) the number of Common
Shares and Equivalent Common Shares outstanding on such record date,
(y) the number of Common Shares and Equivalent Common Shares underlying
securities outstanding on such record date which are convertible into Common
Shares or Equivalent Common Shares, plus (z) the number of additional Common
Shares and Equivalent Common Shares to be offered for subscription or purchase
(or into which the convertible securities so to be offered are initially
convertible); provided, however, that in no event shall the
consideration to be paid upon the exercise of one Right be less than the aggregate
par value of the shares of capital stock of the Corporation issuable upon
exercise of one Right.  In case such
subscription price may be paid by delivery of consideration part or all of which
may be in a form other than cash, the value of such consideration shall be as determined
in good faith by the Board, which determination shall be described in a
statement filed with the Rights Agent and shall be conclusive for all purposes.  Common Shares owned by or held for the
account of the Corporation shall not be deemed outstanding for the purpose of
any such computation.  Such adjustment
shall be made successively whenever such a record date is fixed, and in the
event that such rights, options or warrants are not so issued, the Purchase
Price shall be adjusted to be the Purchase Price which would then be in effect
if such record date had not been fixed.

 

(c)                                  In case the
Corporation shall fix a record date for a dividend or distribution to all holders
of the Common Shares (including any such distribution made in connection with a
consolidation or merger in which the Corporation is the continuing or surviving
corporation) of evidences of indebtedness, cash (other than a regular quarterly
or other periodic cash dividend out of the earnings or retained earnings of the
Corporation), assets (other than a dividend payable in Common Shares, but
including any dividend payable in shares of capital stock other than Common
Shares) or subscription rights or warrants (excluding those referred to in Section 11(b)),
the Purchase Price to be in effect after such record date shall be determined
by multiplying the Purchase Price in effect immediately prior to such record
date by a fraction, the numerator of which equals the Current Market Price of a
Common Share on such record date, less the fair market value (as determined in
good faith by the Board, which determination shall be described in a statement
filed with the Rights Agent and shall be conclusive for all purposes)

 

18

 

of
the portion of the evidences of indebtedness, cash or assets so to be
distributed or of such subscription rights or warrants applicable to one Common
Share, and the denominator of which equals such Current Market Price of a Common
Share; provided, however, that in no event shall the
consideration to be paid upon the exercise of one Right be less than the
aggregate par value of the shares of capital stock of the Corporation to be
issued upon exercise of one Right.  Such
adjustments shall be made successively whenever such a record date is fixed,
and in the event that such distribution is not so made, the Purchase Price
shall again be adjusted to be the Purchase Price which would have been in
effect if such record date had not been fixed.

 

(d)                                 (i)                                     For the purpose
of any computation hereunder other than computations made pursuant to Section 11(a)(iii),
the current market price of any security (a “Security”
for the purpose of this Section 11(d)) on any date of determination shall
be deemed to be the arithmetic mean of the daily closing prices per share of
such Security for the thirty consecutive Trading Days immediately preceding but
not including such date, and for any computation made pursuant to Section 11(a)(iii),
the current market price of any Security on any date of determination shall be
deemed to be the arithmetic mean of the daily closing prices per share of such
Security for the ten consecutive Trading Days immediately succeeding but not
including such date; provided, however, that in the event that the Current
Market Price of the Security is determined during a period following the
announcement by the issuer of such Security of (A) any dividend or
distribution on such Security payable in shares of such Security or securities
convertible into such shares (other than, in the case of the Common Shares, the
Rights), or (B) any split, subdivision, combination, consolidation or
reclassification of such Security and prior to the expiration of the requisite thirty
or ten Trading Day period, as set forth above, after the ex-dividend date for
such dividend or distribution, or the record date for such split, subdivision,
combination, consolidation or reclassification, then, and in each such case,
the Current Market Price shall be appropriately adjusted to take into account
ex-dividend trading.

 

(ii)                                  The closing
price of a Security on a given date of determination shall be determined in the
following order of preference (unless the Board reasonably determines that a
different order would yield more accurate results):  (i) if such Security is listed or
admitted to trading on a national securities exchange or trading market, the
last sale price, regular way, or, in case no such sale takes place on such date,
the arithmetic mean of the closing bid and asked prices, regular way, in either
case as reported in the principal consolidated transaction reporting system for
such securities exchange or trading market, (ii) if such Security is
quoted on a national automated quotation system or in the over-the-counter
market, the last quoted price or, if not so quoted, the arithmetic mean of the
high bid and low asked prices, as reported by NASDAQ or such other system then
in use, (iii) if one or more professional market-makers is making a market
in such Security on such date, the arithmetic mean of the closing bid and asked
prices as furnished by such a professional market-maker selected by the Board,
or (iv) otherwise, the fair value of the Security at the Close of Business
on such date as determined in good faith by the Board (which determination
shall be described in a statement filed with the Rights Agent and shall be
conclusive for all purposes).

 

19

 

(e)                                  Anything herein
to the contrary notwithstanding, no adjustment in the Purchase Price shall be
required unless such adjustment would require an increase or decrease of at least
1% in the Purchase Price; provided,
however, that any adjustments
which by reason of this Section 11(e) are not required to be made
shall be carried forward and taken into account in any subsequent adjustment.  All calculations under this Section 11
shall be made to the nearest cent or to the nearest one-third of a Common Share
or one ten-thousandth of any other share or security, as the case may be.  Notwithstanding the first sentence of this Section 11(e),
any adjustment required by this Section 11 shall be made no later than the
earlier of (i) three years from the date of the transaction which mandates
such adjustment, and (ii) the Expiration Date.

 

(f)                                    If as a result
of an adjustment made pursuant to Section 11(a)(ii) or Section 13(a),
the holder of any Right thereafter exercised shall become entitled to receive
any Issuable Shares other than Common Shares, thereafter the number of such other
Issuable Shares so receivable upon exercise of any Right shall be subject to
adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Common Shares contained in Section 11(a) through
Section 11(e), inclusive, Section 11(g) through Section 11(k),
inclusive, and Section 11(m), and the provisions of Section 7, Section 9,
Section 10, Section 13 and Section 14 with respect to the Common
Shares shall apply mutatis mutandis to
any such other Issuable Shares.

 

(g)                                 All Rights
originally issued by the Corporation subsequent to any adjustment made to the
Purchase Price hereunder shall constitute the right to purchase, at the
adjusted Purchase Price, the number of Common Shares purchasable from time to
time hereunder upon exercise of the Rights, all subject to further adjustment
as provided herein.

 

(h)                                 Unless the
Corporation shall have exercised its election as provided in Section 11(i),
upon each adjustment of the Purchase Price as a result of the calculations made
in Section 11(b) and Section 11(c), each Right outstanding
immediately prior to such adjustment shall thereafter constitute the right to
purchase, at such adjusted Purchase Price, that number of Common Shares equal
to the quotient of (i) the product of (x) the number of Common Shares
covered by a Right immediately prior to such adjustment, times (y) the Purchase
Price in effect immediately prior to such adjustment, divided by (ii) the
Purchase Price in effect immediately after such adjustment.

 

(i)                                     The Corporation
may elect on or after the date of any adjustment of the Purchase Price to
adjust the number of Rights, in lieu of any adjustment in the number of Common
Shares purchasable upon the exercise of a Right.  Each of the Rights outstanding after such
adjustment in the number of Rights shall be exercisable for the number of Common
Shares for which a Right was exercisable immediately prior to such adjustment.  Each Right held of record prior to such
adjustment in the number of Rights shall become that number of Rights
(calculated to the nearest one thousandth) obtained by dividing the Purchase
Price in effect immediately prior to such Purchase Price adjustment by the
Purchase Price in effect immediately thereafter.  The Corporation shall make a public
announcement and notify the Rights Agent of its election to adjust the number
of Rights, indicating the record date for the adjustment, and, if known at the
time, the amount of the adjustment to be made. 
This record date may be the date on which the Purchase Price is adjusted
or any day thereafter, but, if the Rights Certificates shall have been issued,
shall be at least ten days later than the date of such public announcement.  If Rights

 

20

 

Certificates
shall have been issued, upon each adjustment of the number of Rights pursuant
to this Section 11(i), the Corporation shall, as promptly as practicable,
cause to be distributed to holders of record of Rights Certificates on such
record date Rights Certificates representing, subject to Section 14, the
additional Rights to which such holders shall be entitled as a result of such
adjustment, or, at the option of the Corporation, shall cause to be distributed
to such holders of record in substitution and replacement for the Rights
Certificates held by such holders prior to the date of such adjustment, and
upon surrender thereof, if required by the Corporation, new Rights Certificates
representing all the Rights to which such holders shall be entitled after such
adjustment.  Rights Certificates so to be
distributed may, at the Corporation’s option, bear an adjusted Purchase Price,
and shall be issued, executed and countersigned in the manner provided for
herein and shall be registered in the names of the holders of record of Rights
Certificates on the record date specified in the public announcement.

 

(j)                                     Irrespective of
any adjustment or change in the Purchase Price or the number of Common Shares
issuable upon the exercise of the Rights, the Rights Certificates theretofore
and thereafter issued may continue to express the Purchase Price per Common
Share which were expressed in the initial Rights Certificates issued hereunder.

 

(k)                                  Before taking
any action that would cause an adjustment reducing the Purchase Price below the
then par value, if any, of the number of a Common Share or other securities
issuable upon exercise of the Rights, the Corporation shall take any corporate
action which may, in the opinion of its counsel, be necessary in order that the
Corporation may validly and legally issue such number of fully paid and
non-assessable Common Shares or other securities at such adjusted Purchase
Price.

 

(l)                                     In any case in
which this Section 11 shall require that an adjustment in the Purchase
Price be made effective as of a record date for a specified event, the
Corporation may elect to defer (in which case the Corporation shall promptly
notify the Rights Agent of such deferment) until the occurrence of such event
the issuance to the holder of any Right exercised after such record date the Common
Shares or other Issuable Securities, if any, issuable upon such exercise over
and above the Common Shares or other Issuable Securities, if any, issuable upon
such exercise on the basis of the Purchase Price in effect prior to such
adjustment; provided, however, that the Corporation shall
deliver to such holder a due bill or other appropriate instrument evidencing
such holder’s right to receive such additional Issuable Securities upon the
occurrence of the event requiring such adjustment.

 

(m)                               Anything in
this Section 11 to the contrary notwithstanding, the Corporation shall be
entitled to make such reductions in the Purchase Price, in addition to those adjustments
expressly required by this Section 11, as and to the extent that the Board
in good faith shall determine to be advisable in order that any (i) consolidation
or subdivision of the Common Shares, (ii) issuance wholly for cash of Common
Shares at less than the Current Market Price, (iii) issuance wholly for
cash of any debt or equity securities which by their terms are convertible into
or exchangeable for Common Shares, (iv) stock dividends, or (v) issuance
of rights, options or warrants referred to in this Section 11, hereafter
made by the Corporation to holders of its Common Shares shall not be taxable to
such shareholders.

 

21

 

(n)                                 The Corporation
covenants and agrees that it shall not, at any time after a Section 11(a)(ii) Event,
(i) consolidate with any other Person (other than a Subsidiary of the Corporation
in a transaction which does not violate Section 11(o)), (ii) merge
with or into any other Person (other than a Subsidiary of the Corporation in a
transaction which does not violate Section 11(o)), or (iii) sell or
transfer (or permit any of its Subsidiaries to sell or transfer), in one
transaction or a series of related transactions, assets or earning power
aggregating 50% or more of the assets or earning power of the Corporation and
its Subsidiaries (taken as a whole) to any other Person or Persons (other than
the Corporation or any of its Subsidiaries in one transaction or a series of
related transactions each of which, and all of which considered together, does
not violate Section 11(o)), if (x) at the time of or immediately
after such consolidation, merger, sale or transfer there are any charter or by-law
provisions or any rights, warrants or other instruments or securities
outstanding or agreements in effect or other actions taken, which would
materially diminish or otherwise eliminate the benefits intended to be afforded
by the Rights (other than Rights which are null and void pursuant to Section 7(g)),
or (y) prior to, simultaneously with or immediately after such
consolidation, merger or sale, the shareholders of the Person who constitutes,
or would constitute, the “Principal Party” for purposes of Section 13(a) shall
have received a distribution of Rights previously owned by such Person or any
of its Affiliates and Associates.  The
Corporation shall not consummate any such consolidation, merger, sale or
transfer unless prior thereto the Corporation and such other Person shall have
executed and delivered to the Rights Agent a supplemental agreement evidencing
compliance with this Section 11(n).

 

(o)                                 The Corporation
covenants and agrees that, after the earlier of a Shares Acquisition Date and
the Distribution Date, it will not, except as permitted by Section 23, Section 24
or Section 27, take (or permit any of its Subsidiaries to take) any action
the purpose of which is, or if at the time such action is taken it is reasonably
foreseeable that the effect of such action would be, materially to diminish or
otherwise eliminate the benefits intended to be afforded by the Rights (other
than Rights which are null and void pursuant to Section 7(g)).

 

Section 12.                                      Certificate of Adjusted Purchase Price or Number of Shares.  Whenever an adjustment is made as provided in
Section 11 or Section 13, the Corporation shall promptly (a) prepare
a certificate setting forth such adjustment, and a brief statement of the computations
and facts accounting for such adjustment, (b) file with the Rights Agent
and with each transfer agent for the Common Shares a copy of such certificate
and (c) mail a brief summary thereof to each holder of a Rights
Certificate (or, prior to the Distribution Date, to each holder of Common
Shares).  Notwithstanding the next
preceding sentence, the failure of the Corporation to prepare such certificate
or statement or make such filings or mailings shall not affect the validity, or
the force or effect, of the requirement for such adjustment.  The Rights Agent shall be fully protected in
relying on any such certificate and on any adjustment therein contained and
shall not be deemed to have any knowledge of such adjustment unless and until
it shall have received such certificate.

 

Section 13.                                      Consolidation, Merger or Sale or Transfer of Assets or Earning Power.

 

(a)                                  In the event
that, on or following any Section 11(a)(ii) Event, directly or
indirectly, (x) the Corporation shall consolidate with, or merge with and
into, (i) any Interested Person, or (ii) if in such merger or
consolidation all holders of Common Shares are not treated alike, any other Person,
(y) the Corporation shall consolidate with, or merge with, (i) any

 

22

 

Interested
Person, or (ii) if in such merger or consolidation all holders of Common Shares
are not treated alike, any other Person; and the Corporation shall be the
continuing or surviving corporation of such consolidation or merger (other
than, in a case of any transaction described in (x) or (y), a merger or
consolidation which would result in all of the securities generally entitled to
vote in the election of directors (“Voting Securities”)
of the Corporation outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into
securities of the surviving entity) all of the Voting Securities of the
Corporation or such surviving entity outstanding immediately after such merger
or consolidation and the holders of such securities and their respective
proportionate holdings not having changed as a result of such merger or
consolidation), or (z) the Corporation shall sell or otherwise transfer
(or one or more of its Subsidiaries shall sell or otherwise transfer), in one
transaction or a series of related transactions, assets or earning power
aggregating 50% or more of the assets or earning power of the Corporation and
its Subsidiaries (taken as a whole) to any Interested Persons or, if in such
transaction all holders of Common Shares are not treated alike, any other
Person (other than the Corporation or one or more wholly-owned Subsidiaries of
the Corporation in one transaction or a series of related transactions each of
which does not violate Section 11(o)), then, and in each such case (except
as provided in Section 13(f)), proper provision shall be made so that (i) each
holder of a Right (other than Rights which are null and void pursuant to Section 7(g))
shall thereafter have the right to receive, upon the exercise thereof at the then
current Purchase Price (as theretofore adjusted), in accordance with the terms
of this Agreement and in lieu of Common Shares, such number of validly
authorized and issued, fully paid, non-assessable and freely tradable Common
Shares of the Principal Party, free and clear of any liens, encumbrances,
rights of first refusal or other adverse claims, as shall equal the result
obtained by dividing such Purchase Price by 50% of the Current Market Price of
the Common Shares of such Principal Party on the date of consummation of such Section 13
Event, provided, however, that the Purchase Price (as so
adjusted) and the number of Common Shares of such Principal Party so receivable
upon exercise of a Right shall be subject to further adjustment as appropriate
in accordance with Section 11(f) to reflect any events occurring in
respect of the Common Shares of such Principal Party after the occurrence of
such Section 13 Event; (ii) such Principal Party shall thereafter be
liable for, and shall assume, by virtue of such Section 13 Event, all the
obligations and duties of the Corporation pursuant to this Agreement; (iii) the
Principal Party shall thereafter constitute the Corporation for all purposes
hereof, it being specifically intended that the provisions of Section 11
shall apply only to such Principal Party following the first occurrence of a Section 13
Event; and (iv) such Principal Party shall take such steps (including the
reservation of a sufficient number of its Common Shares in accordance with Section 9)
in connection with the consummation of any such transaction as may be necessary
to assure that the provisions hereof shall thereafter be applicable, as nearly
as reasonably may be, in relation to the Common Shares thereafter deliverable
upon the exercise of the Rights; provided,
further, that upon the subsequent
occurrence of any consolidation, merger, sale or transfer of assets or other
extraordinary transaction in respect of such Principal Party, each holder of a
Right shall thereupon be entitled to receive, upon exercise of a Right and
payment of the Purchase Price as provided in this Section 13(a), such
cash, debt and equity securities and other assets which such holder would have
been entitled to receive had such holder, at the time of such transaction,
owned the Common Shares of the Principal Party receivable upon the exercise of
a Right pursuant to this Section 13(a), and such Principal Party shall
take such steps (including the reservation of shares of capital stock) as may
be necessary or desirable to permit the subsequent

 

23

 

exercise
of the Rights in accordance with the terms hereof for such cash, debt and
equity securities and other assets.

 

(b)                                 “Principal Party” shall mean,

 

(i)                                     in the case of
any transaction described in clause (x) or (y) of the first sentence of Section 13(a),
(i) the Person that is the issuer of any securities into which the Common
Shares of the Corporation are converted in such merger or consolidation (or if
there is more than one such Person, the Person whose Common Shares have the
greatest aggregate market value), or (ii) if no securities are so issued,
or if a court of competent jurisdiction enters a judgment or order determining
that the holders of Rights cannot enforce this Agreement against the Person
described in clause (i) next preceding, the Person that is the continuing,
surviving or resulting Person (including the Corporation as the continuing or
surviving Person in a merger); and

 

(ii)                                  in the case of
any transaction described in clause (z) of the first sentence of Section 13(a),
the Person that is the party receiving the greatest portion of the assets or
earning power transferred pursuant to such transaction or transactions or, if
each Person that is a party to such transaction or transactions receives the
same portion of the assets or earning power cannot be determined, the Person
whose Common Shares have the greatest aggregate market value; provided, however,
that in any of the foregoing cases, (1) if the Common Shares of such
Person are not at such time and have not been continuously over the preceding
twelve (12) month period registered under Section 12 of the Exchange Act,
and such Person is a direct or indirect Subsidiary of another Person the Common
Shares of which are and have been so registered, unless a court of competent
jurisdiction enters a judgment or order determining that the holders of Rights
cannot enforce this Agreement against such other Person, “Principal Party”
shall refer to such other Person; (2) in case such Person is a Subsidiary,
directly or indirectly, of more than one Person, the Common Shares of two or more
of which are and have been so registered, unless a court of competent
jurisdiction enters a judgment or order determining that the holders of Rights
cannot enforce this Agreement against any of such other Persons, “Principal
Party” shall refer to whichever of such Persons is the issuer of the Common
Shares having the greatest aggregate market value; and (3) if the Common
Shares of such Person are not and have not been registered and such Person is
owned, directly or indirectly, by a joint venture formed by two or more Persons
that are not owned, directly or indirectly, by the same Person, the rules set
forth in (1) and (2) above shall apply to each of the chains of
ownership having an interest in such joint venture as if such party were a “Subsidiary”
of both or all of such joint venturers and the Principal Parties in each such
chain shall bear the obligations set forth in this Section 13 in the same ratio
as their direct or indirect interests in such Person bear to the total of such
interests.

 

(c)                                  The Corporation
shall not consummate any such consolidation, merger, sale or transfer unless (A) the
Principal Party shall have a sufficient number of its authorized Common Shares
which have not been issued or reserved for issuance to permit the exercise in
full of the Rights in accordance with this Section 13, and (B) prior
thereto the Corporation and such Principal Party shall have executed and
delivered to the Rights Agent a supplemental agreement hereto agreeing that (1) the
Principal Party shall assume the obligations of the Corporation

 

24

 

hereunder,
(2) the covenants set forth in Section 13(a) and Section 13(b) shall
promptly be performed in accordance with their terms, (3) such
consolidation, merger, sale or transfer of assets shall not result in a default
by the Principal Party under this Agreement as the same shall have been assumed
by the Principal Party pursuant to this Section 13(c), and (4) as
soon as practicable after the occurrence of any Section 13 Event, the
Principal Party, at its own expense, shall:

 

(i)                                     prepare and
file a registration statement under the Securities Act with respect to the
Rights and the securities purchasable upon exercise of the Rights on an appropriate
form, and will use its best efforts to cause such registration statement to (A) become
effective as soon as practicable after such filing and (B) remain
effective (with a prospectus at all times meeting the requirements of the
Securities Act) until the Final Expiration Date (and to comply similarly with
applicable state securities or “blue sky” laws);

 

(ii)                                  use its best
efforts to qualify or register the Rights and the securities purchasable upon
exercise of the Rights under the securities or “blue sky” laws of the various
states as may be necessary or appropriate;

 

(iii)                               deliver to
holders of the Rights historical financial statements for the Principal Party and
each of its Affiliates which comply in all respects with the requirements for
registration on Form 10 under the Exchange Act;

 

(iv)                              use its best
efforts to list, admit to trading or obtain quotation of (or continue the
listing, admission to trading or quotation of) the Rights and the securities
purchasable upon exercise of the Rights on a national securities exchange,
trading market or automated quotation services; and

 

(v)                                 use its best
efforts to list or obtain waivers of any rights of first refusal or preemptive
rights in respect of the Common Shares of the Principal Party subject to
purchase upon exercise of outstanding Rights.

 

The provisions of this Section 13
shall similarly apply to successive mergers or consolidations or sales or other
transfers.  The rights under this Section 13
shall be in addition the rights to exercise Rights and adjustments under Section 11(a)(ii) and
shall survive any exercise thereof.  In
the event that a Section 13 Event shall occur at any time after the
occurrence of a Section 11(a)(ii) Event, the Rights which have not
theretofore been exercised shall thereafter become exercisable in the manner
described in Section 13(a).

 

(d)                                 In case the
Principal Party has any provision in any of its authorized and outstanding
securities or in its certificate or articles of incorporation, formation or
organization or by-laws or other agreement or instrument governing its entity affairs,
which provision would have the effect of (i) causing such Principal Party
to issue (other than to holders of Rights pursuant to this Section 13), in
connection with, or as a consequence of, the consummation of a transaction referred
to in this Section 13, Common Shares or common stock equivalents of such
Principal Party at less than the then Current Market Price or securities
exercisable for, or convertible into, Common Shares or common stock equivalents
of such Principal Party at less than such Current Market Price (other than to
holders of Rights pursuant to this Section 13), or

 

25

 

(ii) providing
for any special payment, taxes or similar provision in connection with the
issuance of the Common Shares of such Principal Party pursuant to the provision
of this Section 13; then, in such event, the Corporation hereby agrees
with each holder of Rights that it shall not consummate any such transaction
unless prior thereto the Corporation and such Principal Party shall have
executed and delivered to the Rights Agent an additional supplemental agreement
providing that the provision in question of such Principal Party shall have
been canceled, waived or amended, or that the non-conforming authorized
securities shall have been redeemed, so that the applicable provision will have
no effect in connection with, or as a consequence of, the consummation of the
proposed transaction.

 

(e)                                  The Corporation
covenants and agrees that it shall not, at any time after the Trigger Event,
enter into any transaction of the type described in subparagraph (x), (y) and
(z) of Section 13(a), if (i) at the time of or immediately after such
consolidation, merger, sale or transfer of assets or other extraordinary transaction
there are any rights, warrants or other instruments or securities outstanding
or agreements or instruments in effect which would substantially diminish or
otherwise eliminate the benefits intended to be afforded by the Rights, (ii) prior
to, simultaneously with or immediately after such consolidation, merger, sale
or transfer of assets or other extraordinary transaction, the shareholders of
the Person who constitutes, or would constitute, the Principal Party shall have
received a distribution of Rights previously owned by such Person or any of its
Affiliates or Associates, (iii) the form or nature of organization of the
Principal Party would preclude or limit the exercisability of the Rights, or (iv) such
consolidation, merger, sale or transfer of assets or other extraordinary
transaction violates Section 11(o). 
The provisions of this Section 13(e) shall similarly apply to
successive transactions of the type described in subparagraph (x), (y) and (z)
of Section 13(a).

 

(f)                                    Notwithstanding
anything in this Agreement to the contrary, Section 13 shall not be applicable
to a transaction described in subparagraphs (x) and (y) of Section 13(a) if:
(i) such transaction is consummated with Persons who acquired Common
Shares pursuant to a Permitted Offer (or any wholly-owned Subsidiaries of any
such Persons); (ii) the price per Common Share offered in such transaction
is not less than the price per Common Share paid to all holders of Common
Shares whose shares were purchased pursuant to such Permitted Offer; and (iii) the
form of consideration offered in such transaction is the same as the form of
consideration paid pursuant to such Permitted Offer.  Upon consummation of any such transaction
contemplated by this Section 13(f), all Rights hereunder call expire.

 

Section 14.                                      Fractional Rights and Fractional Shares.

 

(a)                                  The Corporation
shall not be required to issue fractions of Rights or, except prior to the
Distribution Date as provided in Section 11(j), to distribute Rights
Certificates which represent fractional Rights. 
If the Corporation determines not to issue fractional Rights, there
shall be paid to the registered holders of the Rights Certificates with regard
to which such fractional Rights would otherwise be issuable, an amount in cash
equal to the same fraction of the Closing Price of a whole Right on the Trading
Day immediately prior to the date on which such fractional Rights would have
been otherwise issuable.

 

(b)                                 The Corporation
shall not be required to issue fractional shares or units of Issuable Shares upon
exercise of the Rights or to distribute certificates which represent fractions
of such Issuable Shares.  In lieu of
fractional shares or units of Issuable Shares, the Corporation

 

26

 

shall
pay to the registered holders of Rights Certificates at the time such Rights
are exercised as herein provided an amount in cash equal to the same fraction
of the Closing Price of any Issuable Share on the Trading Day immediately prior
to the date of such exercise; provided
that for purposes of this Section 14(b), if any Common Stock Equivalents
are not publicly traded, the Closing Price of such Common Stock Equivalent
shall equal the Closing Price of a Common Share.

 

(c)                                  The holder of a
Right by the acceptance thereof expressly waives its right to receive any
fractional Rights or any fractional shares or units upon exercise of a Right.

 

(d)                                 Whenever a
payment for fractional Rights or fractional shares or units of Issuable Shares
is to be made as provided in this Section 14, the Corporation shall (i) promptly
prepare and deliver to the Rights Agent a certificate setting forth in
reasonable detail the facts related to such payment and the prices and formulas
utilized in calculating such payments, and (ii) provide sufficient monies
to the Rights Agent in the form of fully collected funds to make such
payments.  The Rights Agent shall be
fully protected in relying upon such a certificate and shall have no duty with
respect to, and shall not be deemed to have knowledge of, any payment for
fractional Rights or fractional shares or units under this Agreement relating
to the payment of fractional Rights or fractional shares or units unless and
until the Rights Agent shall have received such a certificate and sufficient
monies.

 

Section 15.                                      Rights of Action.  All
rights of action in respect of this Agreement, excepting the rights of action vested
in the Rights Agent under Section 18, are vested in the respective
registered holders of the Rights Certificates (and, prior to the Distribution Date,
the registered holders of the Common Shares); and any registered holder of any Rights
Certificate (or, prior to the Distribution Date, of the Common Shares), without
the consent of the Rights Agent or of the holder of any other Rights Certificate
(or, prior to the Distribution Date, of the Common Shares), may, in its own
behalf and for its own benefit, enforce, and may institute and maintain any
suit, action or proceeding against the Corporation to enforce, or otherwise act
in respect of, its right to exercise the Rights represented by such Rights
Certificate in the manner provided in such Rights Certificate and in this Agreement.  Without limiting the foregoing or any
remedies available to the holders of Rights, it is specifically acknowledged
that the holders of Rights would not have an adequate remedy at law for any
breach of this Agreement and shall be entitled to specific performance of the
obligations under, and injunctive relief against actual or threatened
violations of the obligations of any Person subject to, this Agreement.

 

Section 16.                                      Agreement of Rights Holders. 
Every holder of a Right, by accepting the same, consents and agrees with
the Corporation and the Rights Agent and with every other holder of a Right
that:

 

(a)                                  prior to the
Distribution Date, the Rights will be transferable only in connection with the
transfer of the Common Shares;

 

(b)                                 after the
Distribution Date, the Rights Certificates are transferable only on the registry
books of the Rights Agent if surrendered at the principal office of the Rights Agent
designated for such purpose, duly endorsed or accompanied by a proper
instrument of transfer and with the appropriate forms of assignment and
certificate properly completed and duly executed;

 

27

 

(c)                                  subject to Section 6(a) and
Section 7(h); the Corporation and the Rights Agent may deem and treat the Person
in whose name a Rights Certificate (or, prior to the Distribution Date, the
associated Common Shares certificate) is registered as the absolute owner
thereof and of the Rights represented thereby (notwithstanding any notations of
ownership or writing on such Rights Certificate or the associated Common Shares
certificate made by anyone other than the Corporation or the Rights Agent) for
all purposes whatsoever, and neither the Corporation nor the Rights Agent,
subject to the last sentence of Section 7(g), shall be required to be
affected by any notice to the contrary; and

 

(d)                                 notwithstanding
anything in this Agreement to the contrary, neither the Corporation nor the
Rights Agent shall have any liability to any holder or Beneficial Owner of a
Right, or any other Person, as a result of its inability to perform any of its
obligations under this Agreement by reason of any preliminary or permanent injunction
or other order, decree or ruling issued by a court of competent jurisdiction or
by a governmental, regulatory or administrative agency or commission, or any
statute, rule, regulation or executive order promulgated or enacted by any
governmental authority, prohibiting or otherwise restraining performance of
such obligation; provided, however, that the Corporation shall use
its reasonable efforts to have any such order, decree or ruling lifted or
otherwise overturned as soon as possible.

 

Section 17.                                      Rights Certificate Holder Not Deemed a Shareholder.  No holder, as such, of any Rights Certificate
shall be entitled to vote, receive dividends or be deemed for any purpose the
holder of any Issuable Shares or Substituted Value which may at any time be
issuable on the exercise of the Rights represented thereby, nor shall anything
contained herein or in any Rights Certificate be construed to confer upon the
holder or Beneficial Owner of any Rights Certificate, as such, any of the
rights of a shareholder of the Corporation or any right to vote for the
election of directors or upon any matter submitted to shareholders at any
meeting thereof, or to give or withhold consent to any corporate action, or to
receive notice of meetings or other actions affecting shareholders (except as
provided in Section 25), or to receive dividends or other distributions or
to exercise any preemptive or subscription rights, or otherwise, until the
Rights represented by such Rights Certificate shall have been exercised in
accordance with the provisions hereof.

 

Section 18.                                      Concerning the Rights Agent.

 

(a)                                  The Corporation
agrees to pay to the Rights Agent reasonable compensation for all services
rendered by it hereunder and, from time to time, on demand of the Rights Agent,
its reasonable expenses and counsel fees and other disbursements incurred in
the administration and execution of this Agreement and the exercise and
performance of its duties hereunder.  The
Corporation also agrees to indemnify the Rights Agent for, and to hold it harmless
against, any loss, liability or expense, incurred without negligence, bad faith
or willful misconduct on the part of the Rights Agent, for anything done or
omitted by the Rights Agent in connection with the acceptance and
administration of this Agreement, including the costs and expenses of defending
against any claim of liability in the premises. 
The provisions of Section 18 and Section 20 shall survive the exercise
or expiration of the Rights, the resignation or removal of the Rights Agent and
the termination of this Agreement.

 

(b)                                 The Rights
Agent shall be protected and shall incur no liability for, or in respect of,
any action taken, suffered or omitted by it in connection with, its
administration of this

 

28

 

Agreement
in reliance upon any Rights Certificate or certificate representing Common
Shares or other securities of the Corporation, instrument of assignment or
transfer, power of attorney, endorsement, affidavit, letter, notice, direction,
consent, certificate, statement or other paper or document believed by it to be
genuine and to be signed, executed and, where necessary, verified or
acknowledged, by the proper Persons.

 

Section 19.                                      Merger or Consolidation or Change of Name of Rights Agent.

 

(a)                                  Any Person into
which the Rights Agent may be merged or with which it may be consolidated, or
any Person resulting from any merger or consolidation to which the Rights Agent
shall be a party, or any Person succeeding to all or substantially all of the
stock transfer, corporate trust or transfer agent business of the Rights Agent,
shall be the successor to the Rights Agent under this Agreement without the
execution or filing of any paper or any further act on the part of any of the
parties hereto, provided that
such Person is eligible for appointment as a successor Rights Agent under the
provisions of Section 21.  In case
at the time such successor Rights Agent shall succeed to the agency created by
this Agreement, any of the Rights Certificates shall have been countersigned
but not delivered, any such successor Rights Agent may adopt the
countersignature of a predecessor Rights Agent and deliver such Rights
Certificates so countersigned; and in case at that time any of the Rights
Certificates shall not have been countersigned, any successor Rights Agent may
countersign such Rights Certificates in the name of either the predecessor or
the successor Rights Agent; and in all such cases such Rights Certificates
shall have the full force and effect provided in the Rights Certificates and in
this Agreement.

 

(b)                                 In case at any
time the name of the Rights Agent shall be changed and at such time any of the Rights
Certificates shall have been countersigned but not delivered, the Rights Agent
may adopt the countersignature under its prior name and deliver Rights
Certificates so countersigned; and in case at that time any of the Rights
Certificates shall not have been countersigned, the Rights Agent may
countersign such Rights Certificates either in its prior name or in its changed
name; and in all such cases such Rights Certificates shall have the full force
provided in the Rights Certificates and in this Agreement.

 

Section 20.                                      Duties of Rights Agent. 
The Rights Agent undertakes only the duties and obligations imposed by
this Agreement upon the following terms and conditions, by all of which the
Corporation and the holders of Rights Certificates, by their acceptance
thereof, shall be bound:

 

(a)                                  The Rights
Agent may consult with legal counsel (who may be legal counsel for the
Corporation), and the advice or opinion of such counsel shall be full and
complete authorization and protection to the Rights Agent as to any action
taken, suffered or omitted by it in good faith and accordance with such advice
or opinion.

 

(b)                                 Whenever in the
performance of its duties under this Agreement the Rights Agent shall deem it
necessary or desirable that any fact or matter (including the identity of any
Acquiring Person and the determination of the Closing Price or Current Market Price
any Security) be proved or established by the Corporation prior to taking,
suffering or omitting to take any action hereunder, such fact or matter (unless
other evidence in respect thereof be herein specifically prescribed) may be
deemed to be conclusively proved and established by a

 

29

 

certificate
signed by any one of the Chairman of the Board, the Chief Executive Officer,
the Chief Financial Officer, any Vice President or the Secretary of the
Corporation and delivered to the Rights Agent; and such certificate shall be
full authorization to the Rights Agent for any action taken, suffered or
omitted to be taken in good faith by it under the provisions of this Agreement in
reliance upon such certificate.

 

(c)                                  The Rights
Agent shall be liable hereunder only for its own negligence, bad faith or willful
misconduct.  Anything to the contrary
notwithstanding, in no event shall the Rights Agent be liable for special,
punitive, indirect, consequential or incidental loss or damage of any kind
whatsoever (including but not limited to lost profits), even if the Rights
Agent has been advised of the likelihood of such loss or damage.

 

(d)                                 The Rights
Agent shall not be liable for or by reason of any of the statements of fact or
recitals contained in this Agreement or in the Rights Certificates or be
required to verify the same (in each case, except its countersignature on such
Rights Certificates), but all such statements and recitals are and shall be
deemed to have been made by the Corporation only.

 

(e)                                  The Rights
Agent shall not be under any responsibility in respect of the validity of this
Agreement or the execution and delivery hereof (except the due execution and
delivery hereof by the Rights Agent) or in respect of the validity or execution
of any Rights Certificate (except its countersignature thereof); nor shall it
be responsible for any breach by the Corporation of any covenant or condition
contained in this Agreement or in any Rights Certificate; nor shall it be responsible
for any change in the exercisability of the Rights (including the Rights
becoming null and void pursuant to Section 7(g)) or any adjustment
required under the provisions of Section 11 or Section 13 or
responsible for the manner, method or amount of any such adjustment or the
ascertaining of the existence of facts that would require any such adjustment
(except with respect to the exercise of Rights represented by Rights
Certificates after receipt of a certificate described in Section 12); nor
shall it by any act hereunder be deemed to make any representation or warranty
as to the authorization or reservation of any Issuable Securities to be issued
pursuant to this Agreement or any Rights Certificate or as to whether any Issuable
Shares will, when issued, be duly authorized, validly issued, fully paid and
non-assessable.

 

(f)                                    The Corporation
agrees that it will perform, execute, acknowledge and deliver or cause to be
performed, executed, acknowledged and delivered all such further and other
acts, instruments and assurances as may reasonably be required by the Rights
Agent for the carrying out or performing by the Rights Agent of the provisions
of this Agreement.

 

(g)                                 The Rights
Agent is hereby authorized and directed to accept instructions with respect to
the performance of its duties hereunder from any one of the Chairman of the
Board, the Chief Executive Officer, the Chief Financial Officer, any Vice
President or the Secretary of the Corporation, and to apply to such officers
for advice or instructions in connection with its duties, and shall not be
liable for any action taken or suffered by it in good faith or lack of action
in accordance with instructions of any such officer or for any delay in acting
while waiting for such instructions.  Any
application by the Rights Agent for written instructions from the Corporation
may, at the option of the Rights Agent, set forth in writing any action
proposed to be taken or omitted by the Rights Agent under this Agreement and
the date on or after which such

 

30

 

action
shall be taken or such omission shall be effective.  The Rights Agent shall not be liable for any
action taken by, or omission of, the Rights Agent in accordance with a proposal
included in any such application on or after the date specified in such
application (which date shall not be less than five Business Days after the
date any officer of the Corporation actually receives such application, unless
any such officer shall have consented in writing to an earlier date) unless,
prior to taking any such action (or the effective date in the case of an
omission), the Rights Agent shall have received written instruction in response
to such application specifying the act to be taken or omitted.

 

(h)                                 The Rights
Agent and any shareholder, affiliate, director, officer or employee of the
Rights Agent may buy, sell or deal in any of the Rights or other securities of
the Corporation or become pecuniarily interested in any transaction in which
the Corporation may be interested, or contract with or lend money to the
Corporation or otherwise act as fully and freely as though it were not the Rights
Agent under this Agreement.  Nothing
herein shall preclude the Rights Agent from acting in any other capacity for
the Corporation or for any other Person.

 

(i)                                     The Rights
Agent may execute and exercise any of the rights or powers hereby vested in it
or perform any duty hereunder either itself or by or through its attorneys or
agents, and the Rights Agent shall not be answerable or accountable for any
act, default, neglect or misconduct of any such attorneys or agents or for any
loss to the Corporation resulting from any such act, default, neglect or
misconduct, provided reasonable care was exercised in the selection and continued
employment thereof.

 

(j)                                     No provision of
this Agreement shall require the Rights Agent to expend or risk its own funds
or otherwise incur any financial liability in the performance of any of its
duties hereunder or in the exercise of its rights if there shall be reasonable
grounds for believing that repayment of such funds or adequate indemnification
against such risk or liability is not reasonably assured to it.

 

(k)                                  If, with
respect to any Rights Certificate surrendered to the Rights Agent for exercise
or transfer, the Certificate set forth in the “Form of Assignment” or “Form of
Election to Purchase”, as the case may be, has either not been completed or
indicates an affirmative response to clause 1 or 2 thereof, the Rights Agent
shall not take any further action with respect to such requested exercise or
transfer without first consulting with the Corporation.

 

Section 21.                                      Change of Rights Agent. 
The Rights Agent may resign and be discharged from its duties under this
Agreement upon thirty days notice in writing mailed to the Corporation and to
each transfer agent of the Common Shares by registered or certified mail, and
to the holders of the Rights Certificates by first-class mail.  The Corporation may remove the Rights Agent
or any successor Rights Agent upon thirty days notice in writing, mailed to the
Rights Agent and to each transfer agent of the Common Shares (or, after a
Trigger Event, the transfer agent, indenture trustee or similar agent in
respect of Issuable Securities) by registered or certified mail, and to holders
of the Rights Certificates by first-class mail. 
If the Rights Agent shall resign or be removed or shall otherwise become
incapable of acting, the Corporation shall appoint a successor to the Rights Agent.  If the Corporation shall fail to make such
appointment within a period of sixty days after giving notice of such removal
or after it has been notified in writing of such resignation or incapacity by
the resigning or incapacitated Rights Agent or by

 

31

 

any registered holder of a Rights
Certificate (who, for such notice to be effective, must submit its Rights
Certificate therewith for inspection by the Corporation), then any registered
holder of any Rights Certificate may apply to any court of competent
jurisdiction for the appointment of a new Rights Agent.  Any Person to qualify as a successor Rights
Agent hereunder, whether appointed by the Corporation or by such a court, shall
(a) (i) be organized and doing business under the laws of the United
States or any State thereof, (ii) be in good standing under the laws of
its jurisdiction of incorporation, formation or organization, (iii) be authorized
under such laws to exercise corporate trust or stock transfer powers and subject
to supervision or examination by federal or state authority, and (iv) have
at the time of its appointment as Rights Agent a combined capital and surplus
of at least $50,000,000, or (b) be an affiliate of a Person described in
clause (a) next preceding.  After
appointment, the successor Rights Agent shall be vested with the same powers,
rights, duties and responsibilities as if it had been originally named as
Rights Agent without further act or deed and shall become the Rights Agent for
all purposes hereof; but the predecessor Rights Agent shall deliver and
transfer to the successor Rights Agent any property at the time held by it
hereunder, and execute and deliver any further assurance, conveyance, act or
deed necessary for the purpose.  Not
later than the effective date of any such appointment the Corporation shall
file notice thereof in writing with the predecessor Rights Agent and each transfer
agent of the Common Shares (or, after a Trigger Event, the transfer agent,
indenture trustee or similar agent in respect of Issuable Securities), and mail
a notice thereof in writing to the registered holders of the Rights Certificates.  Failure to give any notice provided for in
this Section 21, however, or any defect therein, shall not affect the
legality or validity of the resignation or removal of the Rights Agent or the
appointment of the successor Rights Agent, as the case may be.

 

Section 22.                                      Issuance of New Rights Certificates.

 

(a)                                  Notwithstanding
any of the provisions of this Agreement or of the Rights to the contrary, the
Corporation may, at its option, issue new Rights Certificates representing Rights
in such form as may be approved by the Board to reflect any adjustment or
change in the Purchase Price and the number or kind or class of shares or other
securities or property purchasable under the Rights Certificates made in
accordance with the provisions of this Agreement.

 

(b)                                 In addition, in
connection with the issuance or sale of Common Shares following the
Distribution Date and prior to the earlier of the Redemption Date and the Final
Expiration Date, the Corporation (a) shall with respect to Common Shares
so issued or sold pursuant to the exercise of stock options or under any
employee plan or arrangement, or upon the exercise, conversion or exchange of
securities (other than the Rights), notes or debentures issued by the
Corporation, and (b) may, in any other case, if deemed necessary or
appropriate by the Board; issue Rights Certificates representing the
appropriate number of Rights in connection with such issuance or sale; provided, however,
that (i) the Corporation shall not be obligated to issue any such Rights
Certificates if, and to the extent that, the Corporation shall be advised by
counsel that such issuance would create a significant risk of material adverse
tax consequences to the Corporation or the Person to whom such Rights
Certificate would be issued, (ii) no Rights Certificate shall be issued
if, and to the extent that, appropriate adjustment shall otherwise have been
made in lieu of the issuance thereof, and (iii) the Corporation shall not
issue any Rights in connection with any Common Shares issued or sold upon the
exercise of any Rights.

 

32

 

Section 23.                                      Redemption and Termination.

 

(a)                                  The Board may,
at its option at any time, act to redeem all but not less than all of the then
outstanding Rights at the Redemption Price at any time prior to the Final
Expiration Date.  Such a redemption of
the Rights may be made effective at such time, on such basis and with such
conditions as the Board in its sole discretion may establish.  The Corporation shall promptly file a
certificate with the Rights Agent setting forth the Board action, including the
relevant terms and conditions, effecting the redemption.

 

(b)                                 In any
redemption pursuant to this Section 23, the Corporation may, at its
option, pay the Redemption Price in Common Shares (based on the Current Market Price
of a Common Share at the time of redemption and subject to Section 14),
cash or other consideration deemed appropriate by the Board; provided that if the Corporation elects to
pay the Redemption Price in Common Shares, the Corporation shall not be
required to issue any fractional Common Shares and the number of Common Shares
issuable to each holder of Rights shall be rounded down to the next whole
share.

 

(c)                                  Immediately
upon the date for redemption and satisfaction of other conditions, if any, set
forth (or determined in the manner specified) in the action of the Board effecting
the redemption of the Rights pursuant to Section 23(a), and without any
further action and without any notice, the right to exercise the Rights shall terminate
and the only right thereafter of the holders of Rights shall be to receive the applicable
Redemption Price for the Rights held.  Within
ten days after such effective date for redemption, the Corporation shall mail a
notice of redemption to the Rights Agent and to all the holders of the then
outstanding Rights at their last addresses as they appear upon the registry
books of the Rights Agent or, prior to the Distribution Date, on the registry
books of the transfer agent for the Common Shares.  Any notice which is so mailed to a holder shall
be deemed given, whether or not the holder receives such notice.  Each such notice of redemption shall state
the method by which the payment of the Redemption Notice will be effected.  Neither the Corporation nor any of its
Affiliates or Associates may redeem, acquire or purchase for value any Rights
at any time in any manner other than (i) the manner specifically set forth
in this Section 23, or (ii) in connection with the purchase of Common
Shares prior to the Distribution Date.

 

(d)                                 The Corporation
may, at its option, discharge all of its obligations with respect to the Rights
by (i) issuing a press release announcing the manner of redemption of the rights
in accordance with this Agreement, and (ii) mailing payment of the
Redemption Prices to the registered holders of the Rights at their last
addresses as they appear upon the registry books of the Rights Agent or, prior
to the Distribution Date, on the registry books of the transfer agent of the
Common Shares, and upon such action, all outstanding Rights and Rights
Certificates shall terminate and be null and void without any further action by
the Corporation or the Rights Agent.

 

Section 24.                                      Exchange.

 

(a)                                  At any time
after a Section 11(a)(ii) Event, but prior to the occurrence of a
Exchange Termination Event (as defined below), the Board may in its discretion act
to exchange all or part of the then outstanding and exercisable Rights (other
than Rights which are null and void pursuant to Section 7(g)) for Common
Shares at an exchange ratio of one-third of a Common Share per Right, as appropriately
adjusted to reflect any Common Share dividend or a split, subdivision,
combination, consolidation or reclassification of the Common Shares (such

 

33

 

exchange
ratio as so adjusted, the “Exchange Ratio”).  Such an exchange of the Rights may be made effective
at such time, on such basis and with such conditions as the Board in its sole
discretion may establish.  Any partial
exchange shall be effected pro rata based
on the number of Rights (other than Rights which are null and void pursuant to Section 7(g))
held by each holder of Rights.  The
Corporation shall promptly file a certificate with the Rights Agent setting
forth the Board action, including the relevant terms and conditions, effecting
the redemption.  For purposes of this Section 24(a),
an “Exchange Termination Event”
shall mean (i) the acquisition by any Acquiring Person, together with all its
Affiliates and Associates, of Beneficial Ownership of 50% or more of the Common
Shares then outstanding, (ii) a Section 13 Event, or (iii) the
Final Expiration Date.

 

(b)                                 In any exchange
pursuant to this Section 24, the Corporation may, at its option,
substitute Equivalent Common Shares for some or all of the Common Shares
exchangeable for Rights, at the initial rate of one Equivalent Common Share for
each Common Share, as appropriately adjusted to reflect relative adjustments in
the economic and voting rights of the Equivalent Common Shares pursuant to the
terms thereof, so that the fraction of an Equivalent Common Share delivered in
lieu of each Common Share shall have the same economic and voting rights as one
Common Share.

 

(c)                                  Immediately
upon the date for exchange and satisfaction of other conditions, if any, set
forth (or determined in the manner specified) in the action of the Board effecting
the exchange of any or all Rights pursuant to Section 24(a), and without
any further action and without any notice, the right to exercise such Rights
shall terminate and the only right thereafter of the holders of such Rights
shall be to receive the applicable number of Common Shares or Equivalent Common
Shares, as the case may be, equal to the number of such Rights held by such
holder multiplied by the Exchange Ratio. 
Within ten days after such effective date for exchange, the Corporation
shall mail a notice of exchange to the Rights Agent and to all the holders of
such Rights at their last addresses as they appear upon the registry books of
the Rights Agent.  Any notice which is so
mailed to a holder shall be deemed given, whether or not the holder receives
such notice.  Each such notice of
exchange shall state the method by which the exchange of the Common Shares for
Rights will be effected and, in the event of a partial exchange, the number of
Rights which will be exchanged.

 

(d)                                 In the event
that the number of Available Common Shares and Equivalent Common Shares is
insufficient to permit an exchange of Rights as contemplated by this Section 24,
the Corporation shall use its reasonable best efforts to take all such action
as may be necessary to authorize additional Common Shares or Equivalent Common
Shares for issuance upon exchange of the Rights.

 

Section 25.                                      Notice of Certain Events.

 

(a)                                  In case the
Corporation shall at any time after the Distribution Date propose to (i) pay
any dividend payable in stock of any class to the holders of its Common Shares
or to make any other distribution to the holders of its Common Shares (other
than a regular quarterly cash dividend out of the earnings or retained earnings
of the Corporation), (ii) offer to the holders of its Common Shares rights
or warrants to subscribe for or to purchase any additional Common Shares or
shares of stock of any class or any other securities, rights or options, (iii) effect
any reclassification of its Common Shares (other than a reclassification involving
only

 

34

 

the
subdivision of outstanding Common Shares), (iv) effect any consolidation
or merger into or with any other Person (other than a Subsidiary of the
Corporation in a transaction or a series of transactions which does not violate
Section 11(o)), or to effect any sale or other transfer (or to permit one
or more of its Subsidiaries to effect any sale or other transfer) in one
transaction or a series of related transactions, of 50% or more of the assets
or earning power of the Corporation and its Subsidiaries (taken as a whole) to
any other Person or Persons (other than the Corporation or any of its
Subsidiaries in one transaction or a series of transactions each of which does
not violate Section 11(o)), or (v) effect the liquidation,
dissolution or winding up of the Corporation, then, in each such case; the Corporation
shall to the extent feasible give to each holder of a Rights Certificate a
notice of such proposed action and file a certificate with the Rights Agent to
that effect, which shall specify the record date for the purposes of such stock
dividend, or distribution of rights or warrants, or the date on which such
reclassification, consolidation, merger, sale, transfer, liquidation, dissolution
or winding up is to take place and the date of participation therein by the
holders of the Common Shares, if any such date is to be fixed, and such notice
shall be so given in the case of any action covered by clause (i) or (ii) next
preceding at least twenty days prior to the record date for determining holders
of the Common Shares for purposes of such action, and in the case of any such
other action in this Section 25(a), at least twenty days prior to the date
of the taking of such proposed action or the date of participation therein by
the holders of the Common Shares, whichever shall be earlier.

 

(b)                                 In case a Trigger
Event occurs, then (i) the Corporation shall as soon as practicable
thereafter give to each holder of a Rights Certificate and the Rights Agent a
notice of the occurrence of such event, which notice shall describe such event
and the consequences thereof to holders of Rights under Section 11(a)(ii) or
Section 13, as the case may be, and (ii) to the extent appropriate, references
in Section 25(a) to Common Shares shall thereafter also be deemed to refer
to any other class of Issuable Shares and other securities of the Corporation
and the Principal Party, as the case may be.

 

Section 26.                                      Notices.

 

(a)                                  Notices,
demands or other communications authorized or required by this Agreement to be
given or made by the Rights Agent or by the holder of any Rights Certificate to
or on the Corporation shall be sufficiently given or made if sent by
first-class mail, postage prepaid, addressed or, in the case of notices,
demands or other communications from the Rights Agent, by facsimile (effective
upon confirmation of receipt), as follows:

 

Overland
Storage, Inc.

4820
Overland Avenue

San
Diego, California 92123

Attention:
 Chief Financial Officer

Facsimile:  858.571.0982

 

(b)                                 Subject to the
provisions of Section 21, notices, demands or other communications authorized
or required by this Agreement to be given or made by the Corporation or by the
holder of any Rights Certificate to or on the Rights Agent shall be
sufficiently given or made if sent by first-class mail, postage prepaid, or by
reputable overnight

 

35

 

courier,
addressed or, in the case of notices, demands or other communications from the Corporation,
by facsimile (effective upon confirmation of receipt), as follows:

 

Wells
Fargo Bank, N.A.

Shareowner
Services

161
North Concord Exchange

South
St. Paul, Minnesota 55075

Attention:
Manager of Account Management

Facsimile:  651.450.4078

 

(c)                                  Notices, demands
or other communications authorized or required by this Agreement to be given or
made by the Corporation or the Rights Agent to the holder of any Rights
Certificate or, if prior to the Distribution Date, to the holder of any certificates
representing Common Shares shall be sufficiently given or made if sent by
first-class mail, postage prepaid, or by reputable overnight courier, addressed
to such holder at the address such holder as shown upon the registry books of
the Rights Agent.

 

(d)                                 The Corporation
may changes its address for notices by notice to the Rights Agent, and the
Rights Agent may changes its address by notice to the Corporation and, after
any Distribution Date, to each holder of any Rights Certificate.

 

Section 27.                                      Supplements and Amendments.

 

(a)                                  Prior to the
Distribution Date, the Corporation may, subject to Section 27(b),  supplement or amend any provision of this
Agreement without the approval of any holders of certificates representing
Common Shares.  From and after the
Distribution Date, the Corporation may, subject to Section 27(b), supplement
or amend this Agreement without the approval of any holders of Rights
Certificates (i) to cure any ambiguity, (ii) to correct or supplement
any provision contained herein which may be defective or inconsistent with any
other provisions herein, (iii) subject to the proviso to this sentence, to
shorten or lengthen any time period hereunder, or (iv) to change or
supplement the provisions hereunder in any manner which the Corporation may
deem necessary or desirable and which shall not adversely affect the interests
of the holders of Rights Certificates (other than the interests of any Acquiring
Persons and their respective Affiliates and Associates); provided, however,
that this Agreement may not be so supplemented or amended to lengthen any time
period pursuant to clause (iii) next preceding unless such
lengthening is for the purpose of protecting, enhancing or clarifying the
rights of, and the benefits to, the holders of Rights.  For purposes of this Section 27(a),
prior to the Distribution Date, the interests of the holders of Rights shall be
deemed coincident with the interests of the holders of Common Shares.

 

(b)                                 If the
Corporation delivers a certificate from an appropriate officer of the
Corporation stating that a proposed supplement or amendment is in compliance
with Section 27(a), and such supplement or amendment does not adversely
affect the rights or obligations of the Rights Agent under Section 18 or Section 20,
the Rights Agent shall execute such supplement or amendment; provided that any such amendment or
supplement shall become effective immediately upon the execution thereof by the
Corporation, whether or not also executed by the Rights Agent.

 

36

 

Section 28.                                      Determination and Actions by the Board of Directors, Etc.  The Board shall have the exclusive power and
authority to administer this Agreement and to exercise all rights and powers
specifically granted to the Board or the Corporation, or as may be necessary or
advisable in the administration of this Agreement, including the right and
power to (i) interpret the provisions of this Agreement, and (ii) make
all determinations deemed necessary or advisable for the administration of this
Agreement (including whether or not to redeem the Rights or to amend or
supplement this Agreement, and whether any proposed amendment or supplement adversely
affects the interests of the holders of Rights Certificates).  All such actions, calculations, interpretations
and determinations (including, for purposes of clause (y) next succeeding,
all omissions with respect to the foregoing) which are done or made by the
Board in good faith, shall (x) be final, conclusive and binding on the Corporation,
the Rights Agent, the holders and Beneficial Owners of the Rights and all other
Persons, and (y) not subject the Board to any liability to the holders of
the Rights Certificates.

 

Section 29.                                      Successors.  All the covenants and provisions of this
Agreement by or for the benefit of the Corporation or the Rights Agent shall
bind and inure to the benefit of their respective permitted successors and
assigns hereunder.

 

Section 30.                                      Benefits of this Agreement. 
Nothing in this Agreement shall be construed to give to any Person other
than the Corporation, the Rights Agent and the holders of the Rights
Certificates (and, prior to the Distribution Date, the holders of the Common
Shares) any legal or equitable right, remedy or claim under this Agreement; but
this Agreement shall be for the sole and exclusive benefit of the Corporation,
the Rights Agent and the registered holders of the Rights Certificates (and,
prior to the Distribution Date, the Common Shares).

 

Section 31.                                      Severability.  If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated.

 

Section 32.                                      Governing Law.  This Agreement, each Right and each Rights
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of California and for all purposes shall be governed by and
construed in accordance with the laws of such State applicable to contracts negotiated,
made and to be performed entirely within such State.

 

Section 33.                                      Counterparts.  This Agreement may be executed in any number
of counterparts and each of such counterparts shall for all purposes be deemed
to be an original, and all such counterparts shall together constitute but one
and the same instrument.

 

Section 34.                                      Construction.  For all purposes of this Agreement, except as
otherwise expressly provided or unless the context otherwise requires:

 

(a)                                  the words “this
Agreement,” “herein,” “hereof,” “hereby,” “hereunder,” and words of similar
import refer to this Agreement as a whole and not to any particular Article, Section or
other subdivision;

 

(b)                                 references in
this Agreement to designated “Articles,” “Sections” and other subdivisions, or
to designated “Exhibits”, “Schedules” or “Appendices”, are to the designated
Articles, Sections and other subdivisions of, or the designated Exhibits,
Schedules or Appendices to, this Agreement;

 

37

 

(c)                                  references to
any Person includes such Person’s successors and assigns but, if applicable,
only if such successors and assigns are not prohibited by this Agreement, and
reference to a Person in a particular capacity excludes such Person in any
other capacity or individually;

 

(d)                                 references to a
“holder” of any shares or securities shall refer to the registered holder
thereof, as shown upon the registry of the Rights Agent, applicable transfer
agent or the Corporation, as the case may be;

 

(e)                                  calculations of
the number of Common Shares or other securities outstanding at any particular
time, including for purposes of determining the particular percentage of such
outstanding Common Shares or any other securities of which any Person is the
Beneficial Owner, shall be made in accordance with the last sentence of Rule 13d-3(d)(1)(i) promulgated
under the Exchange Act. as in effect on the date of this Agreement;

 

(f)                                    reference to
any federal, state, local, or foreign law means such law as amended, modified,
restated, supplemented, codified, replaced or reenacted, in whole or in part,
and in effect from time to time, including rules and regulations
promulgated thereunder, and reference to any section or other provision of
any such law means that provision of such law from time to time in effect and
constituting the substantive amendment, modification, restatement,
supplementation, codification, replacement or reenactment of such section or
other provision;

 

(g)                                 references to
any agreement (including this Agreement), instrument, document, arrangement or
understanding means such agreement, instrument, document, arrangement or
understanding as amended, restated, supplemented or otherwise modified and in
effect from time to time, and shall be deemed to refer as well to the preamble
and recitals and all addenda, annexes, appendices, exhibits, schedules and
other attachments thereto;

 

(h)                                 with respect to
the determination of any period of time, “from” means “from and including” and “to”
means “to but excluding”;

 

(i)                                     the words “include,”
“includes,” and “including” shall be deemed to be followed by “without
limitation”;

 

(j)                                     the term “or”
shall not be exclusive;

 

(k)                                  pronouns in
masculine, feminine, and neuter genders shall be construed to include any other
gender;

 

(l)                                     words in the
singular form shall be construed to include the plural and vice versa, unless
the context otherwise requires; and

 

(m)                               whenever the
singular number is used, if required by the context, the same shall include the
plural, and vice versa.

 

[ THE REMAINDER OF THIS PAGE
HAS BEEN INTENTIONALLY LEFT BLANK ]

 

38

 

IN WITNESS WHEREOF, the
parties hereto have caused this Shareholder Rights Agreement to be duly
executed, and their respective corporate seals to be hereunto affixed and
attested, all as of the date and year first above written.

 

 

	
  [SEAL]

  	
   

  	
   

  
	
  ATTEST:

  	
   

  	
  OVERLAND STORAGE, INC.

  
	
   

  	
   

  	
   

  
	
  By:

  	
  /s/ Vernon A. LoForti

  	
   

  	
   

  	
  By:

  	
  /s/ Christopher Calisi

  	
   

  
	
   

  	
  Name:

  	
  Vernon A. LoForti

  	
   

  	
   

  	
  Name:

  	
  Christopher Calisi

  
	
   

  	
  Title:

  	
  Secretary

  	
   

  	
   

  	
  Title:

  	
  Chief Executive Officer

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  [SEAL]

  	
   

  	
   

  
	
  ATTEST:

  	
   

  	
  WELLS FARGO BANK, N.A., as
  Rights Agent

  
	
   

  	
   

  	
   

  
	
  By:

  	
  /s/ John D. Baker

  	
   

  	
   

  	
  By:

  	
  /s/ Darren Larson

  	
   

  
	
   

  	
  Name:

  	
  John D. Baker

  	
   

  	
   

  	
  Name:

  	
  Darren Larson

  
	
   

  	
  Title:

  	
  Vice President

  	
   

  	
   

  	
  Title:

  	
  Vice President

  
											

 

 

Exhibit A

 

FORM OF RIGHTS
CERTIFICATE

 

	
  Certificate
  No. R.

  	
   

  	
  Rights

  

 

NOT EXERCISABLE AFTER AUGUST 21,
2015, OR EARLIER IF REDEEMED BY THE CORPORATION.  THE RIGHTS REPRESENTED HEREBY ARE SUBJECT TO
REDEMPTION AT ANY TIME AT THE OPTION OF THE CORPORATION AT THE REDEMPTION PRICE
OF $0.001 PER RIGHT, ON THE TERMS SET FORTH IN THE SHAREHOLDER RIGHTS
AGREEMENT.

 

UNDER CERTAIN CIRCUMSTANCES SET
FORTH IN THE SHAREHOLDER RIGHTS AGREEMENT, RIGHTS ISSUED TO, OR HELD BY, ANY
HOLDER WHO IS, WAS OR BECOMES AN ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE
THEREOF (AS EACH OF SUCH TERMS IS DEFINED IN THE SHAREHOLDER RIGHTS AGREEMENT)
AND CERTAIN RELATED PERSONS, WHETHER CURRENTLY HELD BY OR ON BEHALF OF SUCH
HOLDER OR BY ANY SUBSEQUENT HOLDER, WILL BECOME NULL AND VOID.  THE RIGHTS SHALL NOT BE EXERCISABLE BY A
HOLDER IN ANY JURISDICTION WHERE THE REQUISITE QUALIFICATION TO THE ISSUANCE TO
SUCH HOLDER, OR THE EXERCISE BY SUCH HOLDER, OF THE RIGHTS IN SUCH JURISDICTION
SHALL NOT HAVE BEEN OBTAINED OR BE OBTAINABLE.

 

RIGHTS
CERTIFICATE

 

OVERLAND
STORAGE, INC.

 

This Rights Certificates certifies
that                   ,
or registered assigns, is the registered holder of the number of Rights set
forth above, each of which entitles the holder hereof, subject to the terms, provisions
and conditions of that certain Shareholder Rights Agreement, made and entered
into as of August 22, 2005 (as amended, supplemented or otherwise modified
from time to time, the “Rights Agreement”),
by and between Overland Storage, Inc., a California corporation (the “Corporation”), and Wells Fargo Bank, N.A.,
a national banking association organized under the laws of the United States of
America, as Rights Agent (together with its successors in such capacity, the “Rights Agent”), to purchase from the
Corporation after the Distribution Date (as such term is defined in the Rights
Agreement) and prior to the Expiration Date (as such term is defined in the
Rights Agreement), at the principal office of the Rights Agent designated for
such purpose, one-third of a fully paid, non-assessable share of common stock, no
par value (the “Common Shares”),
of the Corporation, at a purchase price of $37.00 in cash per full Common Share
(as adjusted in accordance with the Rights Agreement, the “Purchase Price”), upon presentation and
surrender of this Rights Certificate with the Form of Election to Purchase
and related Certificate properly completed and duly executed.  The number of Rights represented by this Rights
Certificate (and the number of one-thirds of a Common Share which may be initially
purchased upon exercise hereof) set forth above, and the Purchase Price set
forth above, are the number and Purchase Price as of August 22, 2005,
based on the Common Shares as constituted at such date.

 

1

 

Capitalized terms used but
not defined in this Rights Certificate shall have the respective meanings
ascribed to such terms in the Rights Agreement.

 

From and after the
occurrence of a Section 11(a)(ii) Event, any Rights represented by
this Rights Certificate that are Beneficially Owned by (i) an Acquiring
Person (or any Affiliate or Associate thereof), (ii) a transferee of any
Acquiring Person (or any Affiliate or Associate thereof) who becomes a
transferee after the Section 11(a)(ii) Event, or (iii) a
transferee of an Acquiring Person (or any Affiliate or Associate thereof) who
becomes a transferee prior to or concurrently with the Section 11(a)(ii) Event
and receives such Rights under certain circumstances specified in the Rights
Agreement; shall become null and void without any further action and no holder hereof
shall have any rights whatsoever with respect to such Rights under any
provision of the Rights Agreement, this Rights Certificate or otherwise.

 

As provided in the Rights
Agreement, the Purchase Price and the number and kind of Common Shares or other
debt or equity securities, cash or assets (Substituted Value) which may be
purchased upon the exercise of the Rights represented by this Rights
Certificate are subject to modification and adjustment upon the happening of
certain events, including Triggering Events.

 

This Rights Certificate is
subject to all of the terms, provisions and, conditions of the Rights
Agreement, which terms, provisions and conditions are hereby incorporated
herein by reference and made a part hereof and to which Rights Agreement
reference is hereby made for a full description of the rights, limitations of
rights, obligations, duties and immunities hereunder of the Rights Agent, the
Corporation and the holders of the Rights Certificates, which limitations of
rights include the temporary suspension of the exercisability of such Rights
under the specific circumstances set forth in the Rights Agreement.  Copies of the Rights Agreement are on file at
the principal executive offices of the Corporation and the principal office or
offices of the Rights Agent.

 

This Rights Certificate,
with or without other Rights Certificates, upon surrender at the principal
office of the Rights Agent designated for such purpose, may be exchanged for
another Rights Certificate or Rights Certificates of like tenor and date representing
Rights entitling the holder to purchase a like aggregate number of Common Shares
or Substituted Value as the Rights represented by the Rights Certificate or Rights
Certificates surrendered shall have entitled such holder to purchase, other
than Rights which are null and void as aforesaid.  If this Rights Certificate shall be exercised
in part, the holder shall be entitled to receive upon surrender hereof another Rights
Certificate or Rights Certificates for the number of whole Rights not
exercised.

 

Subject to the terms and
conditions of the Rights Agreement, the Corporation may redeem the Rights represented
by this Rights Certificate at a redemption price of $0.00l per Right (subject
to adjustment as provided in the Rights Agreement), payable either in Common
Shares, valued as provided in the Rights Agreement, or in cash.

 

Subject to the terms and
conditions of the Rights Agreement, the Corporation may exchange any or all of
the Rights represented by this Rights Certificate for Common Shares (or
Equivalent Common Shares) at an exchange ratio of one-third of a Common Share (or
an appropriate number of Equivalent Common Shares) per Right (subject to
adjustment as provided in the Rights Agreement).

 

A-2

 

No fractional Common Shares or
Equivalent Common Shares will be issued upon the exercise of any Right or
Rights represented hereby, but in lieu thereof a cash payment will be made, as
provided in the Rights Agreement.

 

No holder of this Rights
Certificate shall be entitled to vote or receive dividends or be deemed for any
purpose the holder of the Common Shares or other Issuable Securities of the
Corporation which may at any time be issuable on the exercise hereof, nor shall
anything contained in the Rights Agreement or herein be construed to confer
upon the holder hereof, as such, any of the rights of a shareholder of the
Corporation or any right to vote for the election of directors or upon any
matter submitted to shareholders at any meeting thereof, or to give or withhold
consent to any corporate action, or to receive notice of meetings or other
actions affecting shareholders (except as provided in the Rights Agreement), or
to receive dividends or other distributions or to exercise any preemptive or
subscription rights, or otherwise, until the Right or Rights represented by
this Rights Certificate shall have been exercised as provided in the Rights
Agreement.

 

This Rights Certificate
shall not be valid or obligatory for any purpose until it shall have been
countersigned by the Rights Agent.

 

WITNESS the facsimile
signature of the proper officers of the Corporation and its corporate seal.  Dated as of              ,
       .

 

 

	
  [SEAL]

  	
   

  	
  OVERLAND
  STORAGE, INC.

  
	
  ATTEST:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  By:

  	
   

  	
   

  	
   

  
	
  Name:

  	
   

  	
   

  	
   

  	
  Name:

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Countersigned:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  WELLS FARGO BANK, N.A.,

  	
   

  	
   

  
	
  as Rights Agent

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Name:

  	
   

  	
   

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  	
   

  	
   

  
										

 

A-3

 

[Form of Reverse Side
of Rights Certificate]

 

FORM OF ASSIGNMENT

 

(To be executed by the
registered holder if such

holder desires to transfer the Rights Certificate.)

 

FOR VALUE RECEIVED
_________________________ hereby sells, assigns and transfers unto
_________________________________________________________________ (please print
name and address of transferee) ________________________________________ this Rights
Certificate, together with all right, title and interest therein, and does
hereby irrevocably constitute and appoint Attorney, to transfer the within Rights
Certificate on the books of the within-named Corporation, with full power of
substitution.

 

Dated:                                                                                                                                                                                                             ,
                                          

 

 

	
   

  	
   

  	
   

  
	
   

  	
  Signature      

  

 

Signature Medallion Guaranteed:

 

Signatures must be medallion
guaranteed by a member firm of a registered national securities exchange, a
member of the National Association of Securities Dealers, Inc., or a
commercial bank or trust company having an office or correspondent in the
United States.

 

CERTIFICATE

 

The undersigned hereby
certifies by checking the appropriate boxes that:

 

(1) the Rights represented
by this Rights Certificate ois or o is not being sold,
assigned or transferred by or on behalf of a Person who is or was an Acquiring
Person (or an Affiliate or Associate thereof) (as such terms are defined in the
Rights Agreement), and

 

(2) after due inquiry
and to the best knowledge of the undersigned, the undersigned odid or o did not acquire the
Rights represented by this Rights Certificate from any Person who is, was or
subsequently became an Acquiring Person (or an Affiliate or Associate thereof).

 

Dated:                                                                                                                                                                                                             ,
                                          

 

	
   

  	
   

  	
   

  
	
   

  	
  Signature      

  

 

A-4

 

NOTICE

 

The signature on the
foregoing Form of Assignment and Certificate must conform to the name as
written upon the face of this Rights Certificate in every particular, without
alteration or enlargement or any change whatsoever.

 

In the event the Certificate
set forth above in the Form of Assignment is not properly completed or the
Form or Certificate are not duly executed, the Corporation and the Rights
Agent will deem the Beneficial Owner of the Rights represented by this Rights
Certificate to be an Acquiring Person (or an Affiliate or Associate thereof)
and such Assignment will not be honored.

 

A-5

 

 

 

FORM OF ELECTION TO
PURCHASE

 

(To be executed by the
registered holder

if such holder desires to exercise Rights

represented by the Rights Certificate.)

 

To Overland Storage, Inc.:

 

The undersigned hereby
irrevocably elects to exercise _____ Rights represented by this Rights
Certificate to purchase the Common Shares and other Issuable Securities
issuable upon the exercise of such Rights and requests that certificates representing
such shares or other securities be issued in the name of:

 

Please insert social security
or other identifying number _____________________________________________________________

______________________________________________________________________________________________________

(Please print name and address)

 

If such number of Rights shall
not be all the Rights represented by this Rights Certificate, a new Rights
Certificate for the balance remaining of such Rights shall be registered in the
name of and delivered to:

 

Please insert social security
or other identifying number ______________________________________________________________

______________________________________________________________________________________________________

(Please print name and address)

 

Dated:                                                                                                                                                                                                             ,
                                          

 

	
   

  	
   

  	
   

  
	
   

  	
  Signature      

  

 

Signature Medallion Guaranteed:

 

Signatures must be medallion
guaranteed by a member firm of a registered national securities exchange, a
member of the National Association of Securities Dealers, Inc., or a
commercial bank or trust company having an office or correspondent in the
United States.

 

CERTIFICATE

 

The undersigned hereby
certifies by checking the appropriate boxes that:

 

A-6

 

(1) the Rights
represented by this Rights Certificate o is or ois not being sold, assigned or
transferred by or on behalf of a Person who is or was an Acquiring Person (or
an Affiliate or Associate thereof) (as such terms are defined in the Rights
Agreement), and

 

(2) after due inquiry
and to the best knowledge of the undersigned, the undersigned o did or o did not acquire the
Rights represented by this Rights Certificate from any Person who is, was or
subsequently became an Acquiring Person (or an Affiliate or Associate thereof).

 

Dated:                                                                                                                                                                                                             ,
                                          

 

	
   

  	
   

  	
   

  
	
   

  	
  Signature      

  

 

NOTICE

 

The signature on the
foregoing Form of Election to Purchase and Certificate must conform to the
name as written upon the face of this Rights Certificate in every particular,
without alteration or enlargement or any change whatsoever.

 

In the event the Certificate
set forth above in the Form of Election to Purchase is not properly
completed or the Form or Certificate are not duly executed, the
Corporation and the Rights Agent will deem the Beneficial Owner of the Rights represented
by this Rights Certificate to be an Acquiring Person (or an Affiliate or
Associate thereof) and such Election to Purchase will not be honored.

 

 

A-7

 

Exhibit B

 

SUMMARY OF RIGHTS TO
PURCHASE COMMON SHARES

 

On August 22, 2005, the
Board of Directors (the “Board”)
of Overland Storage, Inc., a California corporation (the “Corporation”), declared a dividend
distribution of one common stock purchase right (a “Right”) for each outstanding share of the Corporation’s
voting common stock, no par value (the “Common
Stock”), to shareholders of record at the close of business on August 25,
2005 (the “Record Date”), and
with respect to shares of Common Stock (“Common
Shares”) issued thereafter until the Distribution Date (as defined
below) and, in certain circumstances (described below), with respect to Common
Shares issued after the Distribution Date. 
Except as set forth below, each Right, when it becomes exercisable,
entitles the registered holder to purchase from the Corporation one-third of a Common
Share, at a per-share purchase price of $37.00 in cash, subject to adjustment
(as so adjusted, the “Purchase Price”).  The description and terms of the Rights are as
set forth in that certain Shareholder Rights Agreement, made and entered into
as of August 22, 2005 (as amended, supplemented or otherwise modified from
time to time, the “Rights Agreement”),
by and between the Corporation and Wells Fargo Bank, N.A., a national banking
association organized under the laws of the United States of America, as Rights
Agent (together with its permitted successors in such capacity, the “Rights Agent”).

 

Initially, the Rights will
attach to all Common Stock certificates representing shares then outstanding,
and no separate certificates representing Rights will be distributed. The
Rights will separate from the Common Stock and a “Distribution Date” will occur ten days (or such longer time
as the Board may determine) following the earlier to occur of (i) a public
announcement or disclosure that a person or group of affiliated or associated
persons (an “Acquiring Person”),
other than certain exempt persons, has acquired, or obtained the right to
acquire, beneficial ownership of 15% or more of the outstanding shares of the Corporation’s
Common Stock (the “Stock Acquisition Date”),
except pursuant to a Permitted Acquisition (as defined below), or (ii) the
commencement of, or announcement of an intention to make, by any person other
than an exempt person, a tender offer or exchange offer (other than a Permitted
Offer) which upon consummation would result in a person or group beneficially owning
15% or more of the outstanding shares of the Corporation’s Common Stock.

 

A “Permitted Offer” is a tender or exchange
offer which is for all outstanding Common Shares at a price and on terms which
a majority of certain members of the Board determines to be adequate and in the
best interests of the Corporation and its shareholders (excluding the interests
of such Acquiring Person and its affiliates and associates).

 

A “Permitted Acquisition” is the acquisition
of Common Shares directly from the Corporation, including by way of a dividend
or distribution on the Common Shares, or pursuant to a Permitted Offer.

 

Until the Distribution Date
(or earlier redemption or expiration of the Rights), (i) the Rights will
be represented by the Common Stock certificates and will be transferred with
and only with such Common Stock certificates, (ii) new Common Stock
certificates issued after the Record Date upon transfer or new issuance of
Common Shares will contain a notation incorporating the Rights Agreement by
reference, and (iii) the surrender for transfer of any certificates representing
Common Stock outstanding, even without such notation, will also

 

1

 

constitute
the transfer of the Rights associated with the Common Stock represented by such
certificate.

 

The Rights are not
exercisable until the Distribution Date and will expire at the close of
business on August 21, 2015, unless earlier redeemed or exchanged by the Corporation
as described below.

 

As soon as practicable after
the Distribution Date, separate certificates representing the Rights (“Rights Certificates”) will be mailed to
holders of record of the Common Shares as of the close of business on the
Distribution Date (other than to any Acquiring Person or any associate or
affiliate thereof), and thereafter such separate Rights Certificates alone will
represent the Rights.  Except as
otherwise determined by the Corporation and except in connection with Common Shares
issued after the Distribution Date upon the exercise of employee stock options,
under other employee stock benefit plans, or upon the exercise, conversion or
exchange of warrants or convertible securities (other than Rights), only Common
Shares issued prior to the Distribution Date will be issued with Rights.

 

In the event any Person
becomes an Acquiring Person, except pursuant to a Permitted Offer, also known
as a “Section 11(a)(ii) Event”,
each holder of a Right will thereafter have the right to receive, upon
exercise, that number of Common Shares (or, in certain circumstances, other
shares, equity or debt securities, cash or other assets of the Corporation)
which equals the Purchase Price of the Right divided by one-half of the Current
Market Price (as defined in the Rights Agreement) of a Common Share at the date
of the occurrence of the event.  Notwithstanding
any of the foregoing, all Rights that are, or (under certain circumstances
specified in the Rights Agreement) were, beneficially owned by an Acquiring
Person (or an Affiliate or Associate thereof) would be null and void.

 

In the event that, at any
time following a Section 11(a)(ii) Event, (i) the Corporation
merges or combines into or with any Acquiring Person, or any of its Affiliates,
Associates or other related persons, or any other person if all shareholders of
the Corporation are not treated alike, other than certain restructurings not
resulting in any change of control of the Corporation, or (ii) 50% or more
of the Corporation’s assets or earning power is sold or transferred in one or a
series of related transactions, each holder of a Right (except Rights which
previously have been voided as set forth above) shall thereafter have the right
to receive, upon exercise at the initial exercise price of the Right, as
adjusted except as a result of a Section 11(a)(ii) Event, that number
of shares of common stock of the acquiring company which equals such exercise
price divided by one-half of the current market price (as defined in the Rights
Agreement) of such common stock at the date of the occurrence of the event. The
events set forth in this paragraph and in the preceding two paragraphs are
referred to as the “Triggering Events”.

 

The Corporation may at any
time redeem the Rights in whole but not in part, at a redemption price of
$0.001 per Right (payable in cash, Common Shares or other consideration deemed
appropriate by the Board).  Immediately
upon effectiveness of the redemption of the Rights, the Rights will terminate
and the only right of the holders of Rights will be to receive the redemption
price of the $0.001 per Right.

 

B-2

 

After the occurrence of a Section 11(a)(ii) Event,
the Corporation may at any time exchange the Rights (other than Rights owned by
an Acquiring Person, which would have become void), in whole or pro rata in part, at an exchange ratio of
one-third of a Common Share, or one-third of an Equivalent Common Shares (as
defined in the Rights Agreement), per Right (subject to adjustment).  Immediately upon effectiveness of the
exchange of the Rights, the Rights will terminate and the only right of the
holders of Rights will be to receive the appropriate number of Common Shares or
Equivalent Common Shares per Right.

 

The Purchase Price payable,
and the number of Common Shares or other securities or property issuable, upon
exercise of the Rights are subject to adjustment from time to time to prevent
dilution (i) in the event of a dividend of Common Shares on, or a split,
subdivision, combination, consolidation or reclassification of, the Common
Shares, (ii) if holders of the Common Shares are granted certain rights,
options or warrants to subscribe for or purchase Common Shares at, or
securities convertible into Common Shares or Equivalent Common Shares with a
conversion price, less than the then-current market price of the Common Shares,
or (iii) upon the distribution to holders of the Common Shares of
evidences of indebtedness, cash (excluding regular quarterly cash dividends),
assets or of subscription rights or warrants (other than those referred to
above).

 

With certain exceptions, no
adjustment in the Purchase Price will be required until cumulative adjustments
amount to at least 1% of the Purchase Price. No fractional Common Shares will
be issued and, in lieu thereof, an adjustment in cash will be made based on the
market price of the Common Shares on the last trading date prior to the date of
exercise.

 

All of the provisions of the
Rights Agreement may be amended by the Board prior to the Distribution
Date.  After the Distribution Date, the
provisions of the Rights Agreement may be amended by the Board in order to cure
any ambiguity, defect or inconsistency, to make changes which do not adversely
affect the interests of holders of Rights (excluding the interests of any
Acquiring Person and its affiliates and associates), or, subject to certain
limitations, to shorten or lengthen any time period under the Rights Agreement.

 

Until a Right is exercised,
the holder thereof, as such, will have no rights as a shareholder of the Corporation,
including the right to vote or to receive dividends.  While the distribution of the Rights will not
be taxable to shareholders or to the Corporation, shareholders may, depending
upon the circumstances, recognize taxable income in the event that the Rights
become exercisable for Common Shares (or other consideration) of the Corporation
or for shares of common stock of the acquiring company as set forth above.

 

A copy of the Rights
Agreement has been filed with the Securities and Exchange Commission as an
exhibit to the Corporation’s Current Report on Form 8-K filed on August 26,
2005.  A copy of the Rights Agreement is
available free of charge from the Corporation. 
This summary description of the Rights does not purport to be complete
and is qualified in its entirety by reference to the Rights Agreement, which is
incorporated herein by reference.

 

B-3

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