Document:

First Amendment to Business Loan Agreement

 Exhibit 10.29 
  
 FIRST AMENDMENT TO BUSINESS LOAN AGREEMENT 
  
 THIS FIRST AMENDMENT TO BUSINESS LOAN AGREEMENT (this “Amendment”), dated as of July 9, 2003, is entered into by and between BANK OF AMERICA,
N.A., a national banking association (the “Bank”), and CHARLOTTE RUSSE, INC., a California corporation (the “Borrower”), with reference to the following facts: 
  
 RECITALS 
  
 A. The Bank and the Borrower are parties to the Business Loan Agreement, dated as of February 28, 2003 (the “Loan Agreement”), pursuant to which
the Bank provided the Borrower with a revolving credit facility of $25,000,000. 
  
 B. The Bank and the Borrower wish to amend the Loan Agreement: (i) to reset the covenant levels for the Adjusted Debt to EBITDAR ratio and for the Fixed Charge Coverage Ratio set forth in Sections 7.3 and 7.4,
respectively; (ii) to delete the permitted allocations for annual cash dividends and distributions set forth in Section 7.7(a) and for annual repurchases of capital stock of the Parent set forth in Section 7.7(b); and (iii) to add a new negative
covenant limiting the Borrower’s annual capital expenditures, all as described more particularly below. 
  
 NOW, THEREFORE, the parties hereby agree as follows: 
  
 1. Defined Terms. All initially capitalized terms used in this Amendment (including, without limitation, in the recitals hereto) without definition
shall have the respective meanings assigned thereto in the Loan Agreement. 
  
 2. Amendment to Adjusted Debt to EBITDAR Ratio Covenant. Section 7.3 of the Loan Agreement is hereby amended such that the first sentence thereof shall read in full as follows: 
  
 “To cause the Parent to maintain on a consolidated basis a ratio of
Adjusted Debt to EBITDAR for the twelve-month period ended on the date of determination of such ratio of not greater than the correlative ratios specified below for the indicated dates: 
  

	 Last Day of the Fiscal Quarter
 Ended Closest to

	 	 Maximum Ratio of Adjusted
 Debt to EBITDAR

	 June 30, 2003
	 	5.50 to 1.00  
	 September 30, 2003
	 	5.85 to 1.00  
	 December 31, 2003
	 	5.85 to 1.00  
	 March 31, 2004
	 	5.75 to 1.00  
	 June 30, 2004
	 	5.75 to 1.00  
	 September 30, 2004
	 	5.75 to 1.00  
	 December 31, 2004 and
	 	 
	 each fiscal quarter of the
	 	 
	 Parent ending thereafter
	 	5.50 to 1.00”

  
 3. Amendment to
Fixed Charge Coverage Ratio Covenant. Section 7.4 of the Loan Agreement is hereby amended such that the first sentence thereof shall read in full as follows: 
  
 “To cause the Parent to maintain on a consolidated basis a Fixed Charge Coverage Ratio of not less than the correlative
ratios specified below for the indicated dates: 
  

	 Last Day of the Fiscal Quarter
 Ended Closest to

	 	 Minimum Fixed Charge
 Coverage Ratio

	 June 30, 2003
	 	1.05 to 1.00  
	 September 30, 2003
	 	0.95 to 1.00  
	 December 31, 2003
	 	0.95 to 1.00  
	 March 31, 2004
	 	0.95 to 1.00  
	 June 30, 2004
	 	1.00 to 1.00  
	 September 30, 2004 and
	 	 
	 each fiscal quarter of the
	 	 
	 Parent ending thereafter
	 	1.10 to 1.00”

  
 4. Deletion of
Annual Allocation for Cash Dividends and Distributions. Section 7.7(a) of the Loan Agreement is hereby amended to read in full as follows: 
  
 “(a) so long as no event of default has occurred and is continuing, or would occur after giving effect thereto, stock dividends and distributions in
an aggregate value of up to $5,000,000 in any fiscal year;”. 
  

 -2- 

 5. Deletion of Annual Allocation for Repurchases of Capital Stock of the Parent. Section 7.7(b) of
the Loan Agreement is hereby amended to read in full as follows: 
  
 “(b) intentionally deleted; and”. 
  
 6.
Addition of Annual Capital Expenditures Covenant. Section 7 of the Loan Agreement is hereby amended and supplemented by adding therein a new Section 7.23 as follows: 
  
 “7.23 Capital Expenditures. Not to permit the Parent on a consolidated basis to make Capital Expenditures (as
defined in Section 7.4) in the 2004 fiscal year of the Parent in an aggregate amount exceeding $28,000,000.” 
  
 7. Conditional Reinstatement of Original Covenants. With thirty (30) days’ prior written notice to the Bank, and subject to the Bank’s
approval, which shall not be unreasonably withheld, the Borrower may elect to terminate this Amendment. Following such termination, Sections 7.3, 7.4, 7.7(a) and 7.7(b) of the Loan Agreement shall be restored to their original terms as in effect
prior to the effective date of this Amendment and the maximum annual Capital Expenditures covenant added by this Amendment no longer shall apply. 
  
 8. Conditions Precedent. The effectiveness of this Amendment shall be subject to the prior satisfaction of each of the following conditions:

  

	 	(a)	 	Execution and Delivery of this Amendment. The Bank shall have received this Amendment, duly executed by the Borrower; 

  

	 	(b)	 	Execution and Delivery of Secretary’s Certificate. The Secretary of the Borrower shall have executed the Certificate of Resolution attached to this Amendment;

  

	 	(c)	 	Execution and Delivery of Work Fee Letter. The Bank shall have received a letter agreement, in form and substance reasonably satisfactory to the Bank, duly executed by an
authorized officer of the Borrower, providing for the Borrower’s payment to the Bank of a work fee of $15,000 for the Bank’s costs and expenses in approving and documenting the terms of this Amendment; and 

  

	 	(d)	 	Execution and Delivery of Reaffirmation of Guaranties. The Parent and each of the other guarantors of the 

  

 -3- 

	 	Borrower’s	 	obligations to the Bank shall have executed the Reaffirmation of Guaranties attached to this Amendment. 

  
 9. Governing Law. The validity of this Amendment, its construction, interpretation and enforcement, and the rights of
the parties hereunder, shall be governed by, and construed in accordance with, the internal laws (as opposed to the conflicts of law principles) of the State of California. 
  
 10. Counterparts. This Amendment may be executed in multiple counterparts and by different parties on separate
counterparts, each of which counterparts, when so executed and delivered, shall be deemed an original, and all of which, when taken together, shall constitute but one and the same instrument. 
  
 11. Otherwise Not Affected. In the event of any conflict or
inconsistency between the Loan Agreement and the provisions of this Amendment, the provisions of this Amendment shall govern. Except to the extent set forth herein, the Loan Agreement shall remain unaltered and in full force and effect. 

 

 -4- 

 IN WITNESS WHEREOF, the parties hereto have executed this Amendment by their respective duly authorized
officers as of the date first above written. 
  

	THE BANK:
	 
	BANK OF AMERICA, N.A.,
		
	 By:
	 	 /s/    KARIN S.
BARNES        

	 	 	 Karin S. Barnes
 Senior Vice President

  

		
	 By:
	 	 /s/    MARY
BEATTY        

	 	 	 Mary Beatty
 Vice President

  

	 THE BORROWER:

	 
	CHARLOTTE RUSSE, INC.
		
	 By:
	 	 /s/    DANIEL T.
CARTER        

	 	 	 Daniel T. Carter
 Treasurer

  

		
	 By:
	 	 /s/    BERNARD
ZEICHNER        

	 	 	 Bernard Zeichner
 President

  

 -5-<PAGE>
                                                                     EXHIBIT 4.1

                          SECURITIES PURCHASE AGREEMENT

     This Securities Purchase Agreement (this "Agreement") is dated as of July
11, 2003, among American Technology Corporation, a Delaware corporation (the
"Company"), and the purchasers identified on the signature pages hereto (each, a
"Purchaser" and collectively, the "Purchasers").

     WHEREAS, subject to the terms and conditions set forth in this Agreement
and pursuant to Section 4(2) of the Securities Act (as defined below) and Rule
506 promulgated thereunder, the Company desires to issue and sell to the
Purchasers, and the Purchasers, severally and not jointly, desire to purchase
from the Company certain securities of the Company, as more fully described in
this Agreement.

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

                                   ARTICLE I.
                                  DEFINITIONS

     1.1 Definitions. In addition to the terms defined elsewhere in this
         -----------
Agreement, for all purposes of this Agreement, the following terms shall have
the meanings indicated in this Section 1.1:

         "Action" means any action, suit, inquiry, notice of violation,
proceeding (including any partial proceeding such as a deposition) or
investigation pending or threatened in writing against or affecting the Company,
any Subsidiary or any of their respective properties before or by any court,
arbitrator, governmental or administrative agency, regulatory authority
(federal, state, county, local or foreign), stock market, stock exchange or
trading facility.

         "Affiliate" means any Person that, directly or indirectly through one
or more intermediaries, controls or is controlled by or is under common control
with a Person, as such terms are used in and construed under Rule 144.

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

         "Closing" means the closing of the purchase and sale of the Securities
pursuant to Section 2.

         "Closing Date" means the date of the Closing.

<PAGE>

         "Commission" means the Securities and Exchange Commission.

         "Common Stock" means the common stock of the Company, $.00001 par value
per share, and any securities into which such common stock may hereafter be
reclassified.

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

         "Company Counsel" means Procopio, Cory, Hargreaves & Savitch LLP.

         "Effective Date" means the date that the Registration Statement
required by the Registration Rights Agreement is first declared effective by the
Commission.

         "Exchange Act" means the Securities Exchange Act of 1934, as amended.

         "Investment Amount" means, with respect to each Purchaser, the
investment amount indicated below such Purchaser's name on the signature page of
this Agreement.

         "Lien" means any lien, charge, encumbrance, security interest, right of
first refusal or other restrictions of any kind.

         "Per Unit Purchase Price" equals $5.50.

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

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

         "Purchaser Percentage" means, with respect to a Purchaser, the
percentage equal to the product of (x) a fraction, the numerator of which shall
be the Investment Amount paid by such Purchaser on the Closing Date and the
denominator of which shall be the aggregate Investment Amount paid by all
Purchasers on the Closing Date times (y) 100.

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

                                       -2-

<PAGE>

         "Registration Rights Agreement" means the Registration Rights
Agreement, dated as of the date of this Agreement, among the Company and the
Purchasers, in the form of Exhibit B hereto.
                           ---------

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

         "Securities" means the Shares, the Warrants and the Warrant Shares.

         "Securities Act" means the Securities Act of 1933, as amended.

         "Shares" means the shares of Common Stock issued or issuable to the
Purchasers at the Closing pursuant to this Agreement.

         "Strategic Transaction" means a transaction or relationship in which
the Company issues shares of Common Stock or Common Stock Equivalents (i) to a
Person which is, itself or through its Subsidiaries, an operating company in a
business synergistic with the business of the Company and in which the Company
receives benefits in addition to the investment of funds, but shall not include
a transaction in which the Company is issuing securities primarily for the
purpose of raising working capital or to an entity whose primary business is
investing in securities, or (ii) to a Person in connection with any equipment
lease or other asset-based lending transaction approved by the Company's Board
of Directors in accordance with reasonable business practices.

         "Subsidiary" means any subsidiary of the Company that is required to be
listed in Schedule 3.1(a).
          ---------------

         "Trading Day" means (i) a day on which the Common Stock is traded on a
Trading Market, or (ii) if the Common Stock is not listed on a Trading Market, a
day on which the Common Stock is traded in the over-the-counter market, as
reported by the OTC Bulletin Board, or (iii) if the Common Stock is not quoted
on the OTC Bulletin Board, a day on which the Common Stock is quoted in the
over-the-counter market as reported by the National Quotation Bureau
Incorporated (or any similar organization or agency succeeding to its functions
of reporting prices); provided, that in the event that the Common Stock is not
listed or quoted as set forth in (i), (ii) and (iii) hereof, then Trading Day
shall mean a Business Day.

         "Trading Market" means whichever of the New York Stock Exchange, the
American Stock Exchange, the Nasdaq National Market or the Nasdaq SmallCap
Market on which the Common Stock is listed or quoted for trading on the date in
question.

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

                                       -3-

<PAGE>

         "Transfer Agent Instructions" means the Company's Transfer Agent
Instructions in the form of Exhibit C.
                            ---------

         "Warrants" means the Common Stock purchase warrants, each in the form
of Exhibit A, which are issuable to the Purchasers at the Closing.
   ---------

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

                                  ARTICLE II.
                                PURCHASE AND SALE

     2.1 Closing. Subject to the terms and conditions set forth in this
         -------
Agreement, at the Closing the Company shall issue and sell to each Purchaser,
and each Purchaser shall, severally and not jointly, purchase from the Company,
the Shares and the Warrants representing such Purchaser's Investment Amount. The
Closing shall take place at the offices of Bryan Cave LLP, 1290 Avenue of the
Americas, New York, NY 10104 on the date this Agreement is executed and
delivered by the parties or at such other location or time as the parties may
agree.

     2.2 Closing Deliveries. (a) At the Closing, the Company shall deliver or
         ------------------
cause to be delivered to each Purchaser the following:

             (i)   a certificate evidencing a number of Shares equal to such
Purchaser's Investment Amount divided by the Per Unit Purchase Price, registered
in the name of such Purchaser;

             (ii)  a Warrant, registered in the name of such Purchaser, pursuant
to which such Purchaser shall have the right to acquire the number of shares of
Common Stock equal to 25% of the quotient obtained by dividing such Purchaser's
Investment Amount by the Per Unit Purchase Price;

             (iii) the legal opinion of Company Counsel, in agreed form,
addressed to the Purchasers;

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

             (v)   the Transfer Agent Instructions executed by the Company and
delivered to and acknowledged by the Company's transfer agent.

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

                                       -4-

<PAGE>

             (i)  such Purchaser's Investment Amount, in United States dollars
and in immediately available funds, by wire transfer to an account designated in
writing by the Company for such purpose; and

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

                                  ARTICLE III.
                         REPRESENTATIONS AND WARRANTIES

     3.1 Representations and Warranties of the Company. The Company hereby makes
         ---------------------------------------------
the following representations and warranties to each Purchaser:

         (a) Subsidiaries. The Company has no direct or indirect Subsidiaries
             ------------
other than those listed in Schedule 3.1(a). Except as disclosed in Schedule
                           ---------------                         --------
3.1(a), the Company owns, directly or indirectly, all of the capital stock of
------
each Subsidiary free and clear of any and all Liens, and all the issued and
outstanding shares of capital stock of each Subsidiary are validly issued and
are fully paid, non-assessable and free of preemptive and similar rights.

         (b) Organization and Qualification. Each of the Company and each
             ------------------------------
Subsidiary is an entity duly incorporated or otherwise organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation or organization (as applicable), with the requisite power and
authority to own and use its properties and assets and to carry on its business
as currently conducted. Neither the Company nor any Subsidiary is in violation
of any of the provisions of its respective certificate or articles of
incorporation, bylaws or other organizational or charter documents. Each of the
Company and each Subsidiary is duly qualified to conduct business and is in good
standing as a foreign corporation or other entity in each jurisdiction in which
the nature of the business conducted or property owned by it makes such
qualification necessary, except where the failure to be so qualified or in good
standing, as the case may be, could not, individually or in the aggregate, have
or reasonably be expected to result in (i) an adverse effect on the legality,
validity or enforceability of any Transaction Document, (ii) a material and
adverse effect on the results of operations, assets, prospects, business or
condition (financial or otherwise) of the Company and the Subsidiaries, taken as
a whole, or (iii) an adverse impairment to the Company's ability to perform on a
timely basis its obligations under any Transaction Document (any of (i), (ii) or
(iii), a "Material Adverse Effect").

         (c) Authorization; Enforcement. The Company has the requisite corporate
             --------------------------
power and authority to enter into and to consummate the transactions
contemplated by each of the Transaction Documents and otherwise to carry out its
obligations thereunder. The execution and delivery of each of the Transaction
Documents by the Company and the consummation by it of the transactions
contemplated thereby have been duly authorized by all necessary action on the
part of the Company and no further action is required by the Company in
connection therewith. Each Transaction Document has been (or upon delivery will
have been) duly executed by the Company and, when delivered in accordance with
the terms hereof, will

                                       -5-

<PAGE>

constitute the valid and binding obligation of the Company enforceable against
the Company in accordance with its terms.

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

         (e) Filings, Consents and Approvals. The Company is not required to
             -------------------------------
obtain any consent, waiver, authorization or order of, give any notice to, or
make any filing or registration with, any court or other federal, state, local
or other governmental authority or other Person in connection with the
execution, delivery and performance by the Company of the Transaction Documents,
other than (i) the filing with the Commission of one or more Registration
Statements in accordance with the requirements Registration Rights Agreement and
(ii) the application(s) to the Nasdaq Stock Market for the listing of the Shares
and Warrant Shares for trading thereon if required under the rules of the Nasdaq
Stock Market.

         (f) Issuance of the Securities. The Securities have been duly
             --------------------------
authorized and, when issued and paid for in accordance with the Transaction
Documents, will be duly and validly issued, fully paid and nonassessable, free
and clear of all Liens. The Company has reserved from its duly authorized
capital stock the maximum number of shares of Common Stock issuable pursuant to
this Agreement and the Warrants in order to issue the full number of Warrant
Shares as are or may become issuable in accordance with the Warrants.

         (g) Capitalization. The number of shares and type of all authorized,
             --------------
issued and outstanding capital stock of the Company is set forth in Schedule
                                                                    --------
3.1(g). Except as set forth in Schedule 3.1(g), no securities of the Company are
------                         ---------------
entitled to preemptive or similar rights, and no Person has any right of first
refusal, preemptive right, right of participation, or any similar right to
participate in the transactions contemplated by the Transaction Documents.
Except as a result of the purchase and sale of the Securities and except as
disclosed in Schedule 3.1(g), there are no outstanding options, warrants, scrip
             ---------------
rights to subscribe to, calls or commitments of any character whatsoever
relating to, or securities, rights or obligations convertible into or

                                       -6-

<PAGE>

exchangeable for, or giving any Person any right to subscribe for or acquire,
any shares of Common Stock, or contracts, commitments, understandings or
arrangements by which the Company or any Subsidiary is or may become bound to
issue additional shares of Common Stock, or securities or rights convertible or
exchangeable into shares of Common Stock. Except as set forth in Schedule
                                                                 --------
3.1(g), the issue and sale of the Securities will not, immediately or with the
------
passage of time, obligate the Company to issue shares of Common Stock or other
securities to any Person (other than the Purchasers) and will not result in a
right of any holder of Company securities to adjust the exercise, conversion,
exchange or reset price under such securities.

         (h) SEC Reports; Financial Statements. The Company has filed all
             ---------------------------------
reports required to be filed by it under the Securities Act and the Exchange
Act, including pursuant to Section 13(a) or 15(d) thereof, for the twelve months
preceding the date hereof (or such shorter period as the Company was required by
law to file such reports) (the foregoing materials being collectively referred
to herein as the "SEC Reports" and, together with the Schedules to this
Agreement, the "Disclosure Materials") on a timely basis or has received a valid
extension of such time of filing and has filed any such SEC Reports prior to the
expiration of any such extension. The Company has delivered to the Purchasers a
copy of all SEC Reports filed within the 10 days preceding the date hereof. As
of their respective dates, the SEC Reports complied in all material respects
with the requirements of the Securities Act and the Exchange Act and the rules
and regulations of the Commission promulgated thereunder, and none of the SEC
Reports, when filed, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. The financial statements of the Company included
in the SEC Reports comply in all material respects with applicable accounting
requirements and the rules and regulations of the Commission with respect
thereto as in effect at the time of filing. Such financial statements have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis during the periods involved ("GAAP"), except as may be
otherwise specified in such financial statements or the notes thereto, or, in
the case of unaudited financial statements, as permitted by Rule 10-01 of
Regulation S-X promulgated under the Securities Act and the Exchange Act, and
fairly present in all material respects the financial position of the Company
and its consolidated Subsidiaries as of and for the dates thereof and the
results of operations and cash flows for the periods then ended, subject, in the
case of unaudited statements, to normal, immaterial, year-end audit adjustments.

         (i) Press Releases. The press releases disseminated by the Company
             --------------
during the one (1) year preceding the date of this Agreement taken as a whole
(and in the context of other public disclosures by the Company available at the
time of each press release, including without limitation in the SEC Reports) do
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.

         (j) Material Changes. Since the date of the latest audited financial
             ----------------
statements included within the SEC Reports, except as specifically disclosed in
the SEC Reports, (i) there

                                       -7-

<PAGE>

has been no event, occurrence or development that has had or that could
reasonably be expected to result in a Material Adverse Effect, (ii) the Company
has not incurred any liabilities (contingent or otherwise) other than (A) trade
payables and accrued expenses incurred in the ordinary course of business
consistent with past practice and (B) liabilities not required to be reflected
in the Company's financial statements pursuant to GAAP or required to be
disclosed in filings made with the Commission, (iii) the Company has not altered
its method of accounting or the identity of its auditors, (iv) the Company has
not declared or made any dividend or distribution of cash or other property to
its stockholders or purchased, redeemed or made any agreements to purchase or
redeem any shares of its capital stock, and (v) the Company has not issued any
equity securities to any officer, director or Affiliate, except pursuant to
existing Company stock option plans. The Company does not have pending before
the Commission any request for confidential treatment of information.

         (k) Litigation. Except those matters disclosed in the Form 8-K filed by
             ----------
the Company with the Commission on May 28, 2003, there is no Action which (i)
adversely affects or challenges the legality, validity or enforceability of any
of the Transaction Documents or the Securities or (ii) could, if there were an
unfavorable decision, individually or in the aggregate, have or reasonably be
expected to result in a Material Adverse Effect. Neither the Company nor any
Subsidiary, nor any director or officer thereof, is or has been the subject of
any Action involving a claim of violation of or liability under federal or state
securities laws or a claim of breach of fiduciary duty. There has not been, and
to the knowledge of the Company, there is not pending or contemplated, any
investigation by the Commission involving the Company or any current or former
director or officer of the Company. The Commission has not issued any stop order
or other order suspending the effectiveness of any registration statement filed
by the Company or any Subsidiary under the Exchange Act or the Securities Act.

         (l) Labor Relations. No material labor dispute exists or, to the
             ---------------
knowledge of the Company, is imminent with respect to any of the employees of
the Company.

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

         (n) Regulatory Permits. The Company and the Subsidiaries possess all
             ------------------
certificates, authorizations and permits issued by the appropriate federal,
state, local or foreign

                                       -8-

<PAGE>

regulatory authorities necessary to conduct their respective businesses as
described in the SEC Reports, except where the failure to possess such permits
would not, individually or in the aggregate, have or reasonably be expected to
result in a Material Adverse Effect ("Material Permits"), and neither the
Company nor any Subsidiary has received any notice of proceedings relating to
the revocation or modification of any Material Permit.

         (o) Title to Assets. The Company and the Subsidiaries have good and
             ---------------
marketable title in fee simple to all real property owned by them that is
material to their respective businesses and good and marketable title in all
personal property owned by them that is material to their respective businesses,
in each case free and clear of all Liens, except for Liens as do not materially
affect the value of such property and do not materially interfere with the use
made and proposed to be made of such property by the Company and the
Subsidiaries. Any real property and facilities held under lease by the Company
and the Subsidiaries are held by them under valid, subsisting and enforceable
leases of which the Company and the Subsidiaries are in compliance.

         (p) Patents and Trademarks. The Company and the Subsidiaries have, or
             ----------------------
have rights to use, all patents, patent applications, trademarks, trademark
applications, service marks, trade names, copyrights, licenses and other similar
rights that are necessary or material for use in connection with their
respective businesses as described in the SEC Reports and which the failure to
so have could, individually or in the aggregate, have or reasonably be expected
to result in a Material Adverse Effect (collectively, the "Intellectual Property
Rights"). Neither the Company nor any Subsidiary has received a written notice
that the Intellectual Property Rights used by the Company or any Subsidiary
violates or infringes upon the rights of any Person. Except as set forth in the
SEC Reports, to the knowledge of the Company, all such Intellectual Property
Rights are enforceable and there is no existing infringement by another Person
of any of the Intellectual Property Rights.

         (q) Insurance. The Company and the Subsidiaries are insured by insurers
             ---------
of recognized financial responsibility against such losses and risks and in such
amounts as are prudent and customary in the businesses in which the Company and
the Subsidiaries are engaged. The Company has no reason to believe that it will
not be able to renew its existing insurance coverage as and when such coverage
expires or to obtain similar coverage from similar insurers as may be necessary
to continue its business without a significant increase in cost.

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

                                       -9-

<PAGE>

         (s) Internal Accounting Controls. The Company and the Subsidiaries
             ----------------------------
maintain a system of internal accounting controls sufficient to provide
reasonable assurance that (i) transactions are executed in accordance with
management's general or specific authorizations, (ii) transactions are recorded
as necessary to permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain asset accountability,
(iii) access to assets is permitted only in accordance with management's general
or specific authorization, and (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.

         (t) Solvency. Based on the financial condition of the Company giving
             --------
effect to the closing of the transactions contemplated herein: (i) the Company's
fair saleable value of its assets exceeds the amount that will be required to be
paid on or in respect of the Company's existing debts and other liabilities
(including known contingent liabilities) as they mature; (ii) the Company's
assets do not constitute unreasonably small capital to carry on its business for
the current fiscal year as now conducted and as proposed to be conducted
including its capital needs taking into account the particular capital
requirements of the business conducted by the Company, and projected capital
requirements and capital availability thereof; and (iii) the current cash flow
of the Company, together with the proceeds the Company would receive, were it to
liquidate all of its assets, after taking into account all anticipated uses of
the cash, would be sufficient to pay all amounts on or in respect of its debt
when such amounts are required to be paid. The Company does not intend to incur
debts beyond its ability to pay such debts as they mature (taking into account
the timing and amounts of cash to be payable on or in respect of its debt).

         (u) Certain Fees. Except as described in Schedule 3.1(u), no brokerage
             ------------                         --------------
or finder's fees or commissions are or will be payable by the Company to any
broker, financial advisor or consultant, finder, placement agent, investment
banker, bank or other Person with respect to the transactions contemplated by
this Agreement. The Purchasers shall have no obligation with respect to any fees
or with respect to any claims (other than such fees or commissions owed by a
Purchaser pursuant to written agreements executed by such Purchaser which fees
or commissions shall be the sole responsibility of such Purchaser) made by or on
behalf of other Persons for fees of a type contemplated in this Section that may
be due in connection with the transactions contemplated by this Agreement.

         (v) Certain Registration Matters. Assuming the accuracy of the
             ----------------------------
Purchasers' representations and warranties set forth in Section 3.2(b)-(e), no
registration under the Securities Act is required for the offer and sale of the
Shares and Warrant Shares by the Company to the Purchasers under the Transaction
Documents. The Company is eligible to register the resale of its Common Stock
for resale by the Purchasers under Form S-3 promulgated under the Securities
Act. Except as described in Schedule 3.1(v), the Company has not granted or
                            ---------------
agreed to grant to any Person any rights (including "piggy-back" registration
rights) to have any securities of the Company registered with the Commission or
any other governmental authority that have not been satisfied.

                                      -10-

<PAGE>

         (w) Listing and Maintenance Requirements. Except as to matters
             ------------------------------------
discussed in the Company's definitive proxy statement filed with the Commission
on August 22, 2002, the Company has not, in the two years preceding the date
hereof, received notice (written or oral) from the Nasdaq SmallCap Market to the
effect that the Company is not in compliance with the listing or maintenance
requirements thereof. The Company is, and has no reason to believe that it will
not in the foreseeable future continue to be, in compliance with the listing and
maintenance requirements for continued listing of the Common Stock on the Nasdaq
SmallCap Market. The issuance and sale of the Securities hereunder does not
contravene the rules and regulations of the Nasdaq Stock Market and no approval
of the shareholders of the Company is required for the Company to issue and
deliver to the Purchasers the maximum number of Securities contemplated by
Transaction Documents.

         (x) Investment Company. The Company is not, and is not an Affiliate of,
             ------------------
an "investment company" within the meaning of the Investment Company Act of
1940, as amended.

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

         (z) No Additional Agreements. The Company that does not have any
             ------------------------
agreement or understanding with any Purchaser with respect to the transactions
contemplated by the Transaction Documents other than as specified in this
Agreement.

         (aa) Disclosure. The Company confirms that neither it nor any Person
              ----------
acting on its behalf has provided any of the Purchasers or their agents or
counsel with any information that the Company believes constitutes material,
non-public information. The Company understands and confirms that the Purchasers
will rely on the foregoing representations and covenants in effecting
transactions in securities of the Company. All disclosure provided to the
Purchasers regarding the Company, its business and the transactions contemplated
hereby, furnished by or on behalf of the Company (including the Company's
representations and warranties set forth in this Agreement) are true and correct
and do not contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements made therein, in light
of the circumstances under which they were made, not misleading.

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

                                      -11-

<PAGE>

         (a) Organization; Authority. Such Purchaser is an entity duly
             -----------------------
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization with the requisite corporate or partnership
power and authority to enter into and to consummate the transactions
contemplated by the applicable Transaction Documents and otherwise to carry out
its obligations thereunder. The execution, delivery and performance by such
Purchaser of the transactions contemplated by this Agreement has been duly
authorized by all necessary corporate or, if such Purchaser is not a
corporation, such partnership, limited liability company or other applicable
like action, on the part of such Purchaser. Each of this Agreement and the
Registration Rights Agreement has been duly executed by such Purchaser, and when
delivered by such Purchaser in accordance with terms hereof, will constitute the
valid and legally binding obligation of such Purchaser, enforceable against it
in accordance with its terms.

         (b) Investment Intent. Such Purchaser is acquiring the Securities as
             -----------------
principal for its own account for investment purposes only and not with a view
to or for distributing or reselling such Securities or any part thereof, without
prejudice, however, to such Purchaser's right at all times to sell or otherwise
dispose of all or any part of such Securities in compliance with applicable
federal and state securities laws. Nothing contained herein shall be deemed a
representation or warranty by such Purchaser to hold the Securities for any
period of time. Such Purchaser is acquiring the Securities hereunder in the
ordinary course of its business. Such Purchaser does not have any agreement or
understanding, directly or indirectly, with any Person to distribute any of the
Securities.

         (c) Purchaser Status. At the time such Purchaser was offered the
             ----------------
Securities, it was, and at the date hereof it is, and on each date on which it
exercises the Warrants it will be, an "accredited investor" as defined in Rule
501(a) under the Securities Act. Such Purchaser is not a registered
broker-dealer under Section 15 of the Exchange Act.

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

         (e) Access to Information. Such Purchaser acknowledges that it has
             ---------------------
reviewed the Disclosure Materials and has been afforded (i) the opportunity to
ask such questions as it has deemed necessary of, and to receive answers from,
representatives of the Company concerning the terms and conditions of the
offering of the Shares and the merits and risks of investing in the Securities;
(ii) access to information about the Company and the Subsidiaries and their
respective financial condition, results of operations, business, properties,
management and prospects sufficient to enable it to evaluate its investment; and
(iii) the opportunity to obtain such additional information that the Company
possesses or can acquire without unreasonable effort or expense that is
necessary to make an informed investment decision with respect to the
investment. Neither such inquiries nor any other investigation conducted by or
on behalf of such Purchaser or its representatives or counsel shall modify,
amend or affect such Purchaser's right to

                                      -12-

<PAGE>

rely on the truth, accuracy and completeness of the Disclosure Materials and the
Company's representations and warranties contained in the Transaction Documents.

         (f) No Prior Short Selling. At no time during the 30 days prior to the
             ----------------------
Closing Date has such Purchaser engaged in or effected, in any manner
whatsoever, directly or indirectly, in any "short sale" (as such term is defined
in Rule 3b-3 of the Exchange Act) of the Common Stock (a "Short Sale").

The Company acknowledges and agrees that each Purchaser does not make or has not
made any representations or warranties with respect to the transactions
contemplated hereby other than those specifically set forth in this Section 3.2.

                                  ARTICLE IV.
                         OTHER AGREEMENTS OF THE PARTIES

     4.1 (a) Securities may only be disposed of in compliance with state and
federal securities laws. In connection with any transfer of the Securities other
than pursuant to an effective registration statement, to the Company, to an
Affiliate of a Purchaser or in connection with a pledge as contemplated in
Section 4.1(b), the Company may require the transferor thereof to provide to the
Company an opinion of counsel selected by the transferor, the form and substance
of which opinion shall be reasonably satisfactory to the Company, to the effect
that such transfer does not require registration of such transferred Securities
under the Securities Act.

         (b) Certificates evidencing the Securities will contain the following
legend, so long as is required by this Section 4.1(b):
                                       --------------

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

                                      -13-

<PAGE>

         The Company acknowledges and agrees that a Purchaser may from time to
time pledge pursuant to a bona fide margin account and, if required under the
terms of such account, such Purchaser may transfer pledged or secured Securities
to the pledgees or secured parties. Such pledge or transfer would not be subject
to approval or consent of the Company and no legal opinion of legal counsel to
the pledgee, secured party or pledgor shall be required in connection with the
pledge, but the legend shall remain on the pledged Securities and such legal
opinion may be required in connection with a subsequent transfer following
default by the Purchaser transferee of the pledge. Further, no notice shall be
required of such pledge. At the appropriate Purchaser's expense, the Company
will execute and deliver such reasonable documentation as a pledgee or secured
party of Securities may reasonably request in connection with a pledge or
transfer of the Securities including the preparation and filing of any required
prospectus supplement under Rule 424(b)(3) of the Securities Act or other
applicable provision of the Securities Act to appropriately amend the list of
Selling Stockholders thereunder.

         (c) Certificates evidencing the Shares and Warrant Shares shall not
contain any legend (including the legend set forth in Section 4.1(b)): (i) while
a registration statement (including the Registration Statement) covering the
resale of such Shares and Warrant Shares is effective under the Securities Act,
or (ii) following any sale of such Shares or Warrant Shares pursuant to Rule
144, or (iii) if such Shares or Warrant Shares are eligible for sale under Rule
144(k), or (iv) if such legend is not required under applicable requirements of
the Securities Act (including judicial interpretations and pronouncements issued
by the Staff of the Commission). The Company shall cause its counsel to issue
the legal opinion included in the Transfer Agent Instructions to the Company's
transfer agent on the Effective Date. Following the Effective Date or at such
earlier time as a legend is no longer required for the Shares and Warrant Shares
under this Section 4.1(c), the Company will, no later than three Trading Days
following the delivery by a Purchaser to the Company or the Company's transfer
agent of a certificate representing Shares or Warrant Shares containing a
restrictive legend, deliver or cause to be delivered to such Purchaser a
certificate representing such Shares or Warrant Shares that is free from all
restrictive and other legends. The Company may not make any notation on its
records or give instructions to any transfer agent of the Company that enlarge
the restrictions on transfer set forth in this Section.

     4.2 Furnishing of Information. As long as any Purchaser owns the
         -------------------------
Securities, the Company covenants to timely file (or obtain extensions in
respect thereof and file within the applicable grace period) all reports
required to be filed by the Company after the date hereof pursuant to the
Exchange Act. As long as any Purchaser owns Securities, if the Company is no
longer subject to the periodic reporting requirements of the Exchange Act and
Rule 144(k) is not available to any Purchaser with respect to any Securities
held, the Company will prepare and furnish to the Purchasers and make publicly
available in accordance with Rule 144(c)(2) such information as is required for
the Purchasers to sell the Shares and Warrant Shares under Rule 144.

     4.3 Integration. The Company shall not, and shall use its best efforts to
         -----------
ensure that no Affiliate of the Company shall, sell, offer for sale or solicit
offers to buy or otherwise negotiate

                                      -14-

<PAGE>

in respect of any security (as defined in Section 2 of the Securities Act) that
would be integrated with the offer or sale of the Securities in a manner that
would require the registration under the Securities Act of the sale of the
Securities to the Purchasers, or that would be integrated with the offer or sale
of the Securities for purposes of the rules and regulations of any Trading
Market such that the transaction contemplated hereby would violate any such rule
or regulations.

     4.4  Subsequent Registrations; Subsequent Placements.
          -----------------------------------------------

         (a) Other than the Registration Statement, prior to the Effective Date,
the Company may not file any registration statement (other than on Form S-8)
with the Commission with respect to any securities of the Company.

         (b) Prior to the one year anniversary of the Effective Date, the
Company will not, directly or indirectly, offer, sell, grant any option to
purchase, or otherwise dispose of (or announce any offer, sale, grant or any
option to purchase or other disposition of any of Common Stock or Common Stock
Equivalents or any of its Subsidiaries' equity or Common Stock Equivalents
pursuant to a private placement or a shelf registration statement in accordance
with Rule 415 under the Securities Act, (such offer, sale, grant, disposition or
announcement being referred to as "Subsequent Placement"), unless: (i) the
Company delivers to each Purchaser a written notice (the "Subsequent Placement
Notice") of its intention to effect such Subsequent Placement, which specifies
in reasonable detail all of the material terms of such Subsequent Placement, the
amount of proceeds intended to be raised thereunder, the names of the investors
(including the investment manager of such investors, if any) and the investment
bankers with whom such Subsequent Placement is proposed to be effected, and
attached to which shall be a term sheet or similar document and (ii) Purchasers
shall not have notified the Company by 6:30 p.m. (New York City time) on the
fifth Trading Day after their respective receipt of the Subsequent Placement
Notice of the willingness to provide (or to cause any one their respective
designees to provide), subject to completion of mutually acceptable
documentation, all or part of such financing to the Company on the same terms
set forth in the Subsequent Placement Notice. If the Purchasers shall fail to so
notify the Company of their willingness to participate in full in the Subsequent
Placement, the Company may consummate the remaining portion of such Subsequent
Placement on the terms and to the Persons set forth in the Subsequent Placement
Notice. The Company shall provide each Purchaser with a second Subsequent
Placement Notice and each Purchaser will again have the right of first refusal
set forth in this Section 4.4(b), if the Subsequent Placement subject to the
initial Subsequent Placement Notice is not consummated for any reason on the
terms set forth in such Subsequent Notice within 30 Trading Days after the date
of the initial Subsequent Placement Notice with the Person(s) identified in the
Subsequent Placement Notice. If the Purchasers indicate in the aggregate a
willingness to provide financing in excess of the amount set forth in the
Subsequent Placement Notice, then each Purchaser will be entitled to provide
financing pursuant to such Subsequent Placement Notice up to an amount equal to
such Purchaser's Purchaser Percentage of the financing, but the Company shall
not be required to accept financing from the Purchasers in an amount in excess
of the amount set forth in the Subsequent Placement Notice.

                                      -15-

<PAGE>

         (c) The period set forth in the first sentence of Section 4.4(b) shall
be extended for the number of Trading Days during such period in which (i)
trading in the Common Stock is suspended by any Trading Market, or (ii)
following the Effective Date, the Registration Statement is not effective or the
prospectus included in the Registration Statement may not be used by the
Purchasers for the resale of the Common Stock and the Warrant Shares.

         (d) The Company's obligations under Section 4.4(b) shall not apply to
any grant or issuance by the Company of any of the following: (i) the issuance
of securities upon the exercise or conversion of any Common Stock Equivalents
issued by the Company prior to the date of this Agreement (or to any amendments
or modifications thereof), (ii) the grant of options or warrants, or the
issuance of additional securities, under any duly authorized Company stock
option, restricted stock plan or stock purchase plan, including any inducement
grant to a new executive officer or director, (iii) the issuance of Common Stock
or Common Stock Equivalents pursuant to a Strategic Transaction or (iv) the
issuance of securities pursuant to a firm commitment underwriting (excluding an
equity line of credit and similar transactions) which results in net proceeds to
the Company in an amount equal to or in excess of $10,000,000.

     4.5 Securities Laws Disclosure; Publicity. During regular hours trading on
         -------------------------------------
the Trading Market on the Closing Date, the Company shall issue a press release
reasonably acceptable to the Purchasers disclosing the transactions contemplated
hereby and file a Current Report on Form 8-K disclosing the transactions
contemplated hereby. In addition, the Company will make such other filings and
notices in the manner and time required by the Commission and the Trading Market
on which the Common Stock is listed. Notwithstanding the foregoing, the Company
shall not publicly disclose the name of any Purchaser, or include the name of
any Purchaser in any filing with the Commission (other than the Registration
Statement and any exhibits to filings made in respect of this transaction in
accordance with periodic filing requirements under the Exchange Act) or any
regulatory agency or Trading Market, without the prior written consent of such
Purchaser, except to the extent such disclosure is required by law or Trading
Market regulations, in which case the Company shall provide the Purchasers with
prior notice of such disclosure.

     4.6 Indemnification of Purchasers. In addition to the indemnity provided in
         -----------------------------
the Registration Rights Agreement, the Company will indemnify and hold the
Purchasers and their directors, officers, shareholders, partners, employees and
agents (each, a "Purchaser Party") harmless from any and all losses,
liabilities, obligations, claims, contingencies, damages, costs and expenses,
including all judgments, amounts paid in settlements, court costs and reasonable
attorneys' fees and costs of investigation (collectively, "Losses") that any
such Purchaser Party may suffer or incur as a result of or relating to any
misrepresentation, breach or inaccuracy of any representation, warranty,
covenant or agreement made by the Company in any Transaction Document; provided,
that such indemnity (other than as to any indemnity called for under the
Registration Rights Agreement) does not exceed, in the aggregate, the Investment
Amount of such Purchaser together with its reasonable attorneys' fees and costs
of investigation subject to indemnification above. Except as set forth above,
the mechanics and procedures with respect to

                                      -16-

<PAGE>

the rights and obligations under this Section 4.6 will be the same as those set
forth in the Registration Rights Agreement.

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

     4.8 Use of Proceeds. The Company shall use the net proceeds from the sale
         ---------------
of the Securities hereunder for working capital purposes and to redeem the
Company's outstanding 8% Senior Secured Notes in the outstanding principal
amount of $318,155 in accordance with the terms thereof, and not to redeem any
Company equity or equity-equivalent securities or to settle any outstanding
Action with such proceeds.

     4.9  Certain Trading Restrictions.
          ----------------------------

         (a) Restrictions. So long as a Purchaser continues to hold any
             ------------
Securities acquired hereunder, such Purchaser will not, nor will it knowingly
through its Affiliates, engage in any Short Sales, except on those days (each a
"Permitted Day") on which the aggregate short position with respect to the
Common Stock of such Purchaser prior to giving effect to any Short Sales by such
Purchaser on such Permitted Day does not exceed such Purchaser's Permitted Share
Position (as defined below) on such Permitted Day; provided, however, that a
                                                   --------
Purchaser will only be entitled to engage in transactions that constitute Short
Sales on a Permitted Day to the extent that following such transaction, the
aggregate short position with respect to the Common Stock of such Purchaser does
not exceed such Purchaser's Permitted Share Position. For purposes of this
Section 4.9, a Purchaser's "Permitted Share Position" means, with respect to any
date of determination, the number of shares of Common Stock owned by such
Purchaser (including Shares) plus the maximum number of Warrant Shares then
issuable (including as to portions of Warrants not yet exercised and without
regard to any exercise caps or other exercise restrictions applicable to the
Warrants) to such Purchaser.

         (b) Other Transactions Permitted. Subject to Section 4.9(a) and
             ----------------------------
applicable securities laws, the Company acknowledges and agrees that nothing in
this Section 4.9 or elsewhere in any Transaction Document prohibits any
Purchaser from, and each Purchaser is permitted to, engage, directly or
indirectly, in hedging transactions involving the Securities and the Common
Stock (including, without limitation, by way of short sales, purchases and sales
of options, swap transactions and synthetic transactions) at any time.

                                   ARTICLE V.
                                 MISCELLANEOUS

     5.1 Fees and Expenses. Except as contemplated in the Registration Rights
         -----------------
Agreement, each party shall pay the fees and expenses of its
advisers, counsel, accountants and

                                      -17-

<PAGE>

other experts, if any, and all other expenses incurred by such party incident to
the negotiation, preparation, execution, delivery and performance of this
Agreement. The Company shall pay all stamp and other taxes and duties levied in
connection with the sale of the Securities.

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

     5.3 Notices. Any and all notices or other communications or deliveries
         -------
required or permitted to be provided hereunder shall be in writing and shall be
deemed given and effective on the earliest of (a) the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile number
specified in this Section prior to 6:30 p.m. (New York City time) on a Trading
Day, (b) the next Trading Day after the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile number specified in
this Section on a day that is not a Trading Day or later than 6:30 p.m. (New
York City time) on any Trading Day, (c) the Trading Day following the date of
mailing, if sent by U.S. nationally recognized overnight courier service, or (d)
upon actual receipt by the party to whom such notice is required to be given.
The address for such notices and communications shall be as follows:

     If to the Company:  American Technology Corporation
                         13114 Evening Creek Drive South
                         San Diego, CA  92128
                         Attn:  Chief Financial Officer
                         Facsimile No.:  858-486-3922

     With a copy to:     Procopio, Cory, Hargreaves & Savitch LLP
                         530 B Street, Suite 2100
                         San Diego, CA  92101
                         Attn:  John D. Tishler, Esq.
                         Facsimile No.: (619) 235-0398

     If to a Purchaser:  To the address set forth under such Purchaser's name
                         on the signature pages hereof;

or such other address as may be designated in writing hereafter, in the same
manner, by such Person.

     5.4 Amendments; Waivers. No provision of this Agreement may be waived or
         -------------------
amended except in a written instrument signed, in the case
of an amendment, by the Company and one or more Purchasers holding no less than
66 2/3% of the outstanding Shares or, in the case of a waiver, by the party
against whom enforcement of any such waiver is sought. No waiver of

                                      -18-

<PAGE>

any default with respect to any provision, condition or requirement of this
Agreement shall be deemed to be a continuing waiver in the future or a waiver of
any subsequent default or a waiver of any other provision, condition or
requirement hereof, nor shall any delay or omission of either party to exercise
any right hereunder in any manner impair the exercise of any such right.

     5.5 Construction. The headings herein are for convenience only, do not
         ------------
constitute a part of this Agreement and shall not be deemed to limit or affect
any of the provisions hereof. The language used in this Agreement will be deemed
to be the language chosen by the parties to express their mutual intent, and no
rules of strict construction will be applied against any party. This Agreement
shall be construed as if drafted jointly by the parties, and no presumption or
burden of proof shall arise favoring or disfavoring any party by virtue of the
authorship of any provisions of this Agreement or any of the Transaction
Documents.

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

     5.7 No Third-Party Beneficiaries. This Agreement is intended for the
         ----------------------------
benefit of the parties hereto and their respective successors and permitted
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other Person, except as otherwise set forth in Section 4.6.

     5.8 Governing Law. All questions concerning the construction, validity,
         -------------
enforcement and interpretation of this Agreement shall be governed by and
construed and enforced in accordance with the internal laws of the State of New
York, without regard to the principles of conflicts of law thereof. Each party
agrees that all Proceedings concerning the interpretations, enforcement and
defense of the transactions contemplated by this Agreement and any other
Transaction Documents (whether brought against a party hereto or its respective
Affiliates, employees or agents) shall be commenced exclusively in the state and
federal courts sitting in the City of New York, Borough of Manhattan (the "New
York Courts"). Each party hereto hereby irrevocably submits to the exclusive
jurisdiction of the New York Courts for the adjudication of any dispute
hereunder or in connection herewith or with any transaction contemplated hereby
or discussed herein (including with respect to the enforcement of the any of the
Transaction Documents), and hereby irrevocably waives, and agrees not to assert
in any Proceeding, any claim that it is not personally subject to the
jurisdiction of any such New York Court, or that such Proceeding has been
commenced in an improper or inconvenient forum. Each party hereto hereby
irrevocably waives personal service of process and consents to process being
served in any such Proceeding by mailing a copy thereof via registered or
certified mail or overnight delivery (with evidence of delivery) to such party
at the address in effect for notices to it under this Agreement and agrees that
such service shall constitute good and sufficient service of

                                      -19-

<PAGE>

process and notice thereof. Nothing contained herein shall be deemed to limit in
any way any right to serve process in any manner permitted by law. Each party
hereto hereby irrevocably waives, to the fullest extent permitted by applicable
law, any and all right to trial by jury in any legal proceeding arising out of
or relating to this Agreement or the transactions contemplated hereby. If either
party shall commence a Proceeding to enforce any provisions of a Transaction
Document, then the prevailing party in such Proceeding shall be reimbursed by
the other party for its attorney's fees and other costs and expenses incurred
with the investigation, preparation and prosecution of such Proceeding.

     5.9 Survival. The representations, warranties, agreements and covenants
         --------
contained herein shall survive the Closing and the delivery of the Shares and
Warrant Shares, as applicable.

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

     5.11 Severability. If any provision of this Agreement is held to be invalid
          ------------
or unenforceable in any respect, the validity and enforceability of the
remaining terms and provisions of this Agreement shall not in any way be
affected or impaired thereby and the parties will attempt to agree upon a valid
and enforceable provision that is a reasonable substitute therefor, and upon so
agreeing, shall incorporate such substitute provision in this Agreement.

     5.12 Rescission and Withdrawal Right. Notwithstanding anything to the
          -------------------------------
contrary contained in (and without limiting any similar provisions of) the
Transaction Documents, whenever any Purchaser exercises a right, election,
demand or option under a Transaction Document and the Company does not timely
perform its related obligations within the periods therein provided, then such
Purchaser may rescind or withdraw, in its sole discretion from time to time upon
written notice to the Company, any relevant notice, demand or election in whole
or in part without prejudice to its future actions and rights.

     5.13 Replacement of Securities. If any certificate or instrument evidencing
          -------------------------
any Securities is mutilated, lost, stolen or destroyed, the Company shall issue
or cause to be issued in exchange and substitution for and upon cancellation
thereof, or in lieu of and substitution therefor, a new certificate or
instrument, but only upon receipt of evidence reasonably satisfactory to the
Company of such loss, theft or destruction and customary and reasonable
indemnity, if requested. The applicants for a new certificate or instrument
under such circumstances shall also pay any reasonable third-party costs
associated with the issuance of such replacement Securities. If a replacement
certificate or instrument evidencing any Securities is requested due to a
mutilation thereof, the Company may require delivery of such mutilated
certificate or instrument as a condition precedent to any issuance of a
replacement.

                                      -20-

<PAGE>

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

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

     5.16 Independent Nature of Purchasers' Obligations and Rights. The
          --------------------------------------------------------
obligations of each Purchaser under any Transaction Document are several and not
joint with the obligations of any other Purchaser, and no Purchaser shall be
responsible in any way for the performance of the obligations of any other
Purchaser under any Transaction Document. Nothing contained herein or in any
Transaction Document, and no action taken by any Purchaser pursuant thereto,
shall be deemed to constitute the Purchasers as a partnership, an association, a
joint venture or any other kind of entity, or create a presumption that the
Purchasers are in any way acting in concert or as a group with respect to such
obligations or the transactions contemplated by the Transaction Document. Each
Purchaser shall be entitled to independently protect and enforce its rights,
including without limitation the rights arising out of this Agreement or out of
the other Transaction Documents, and it shall not be necessary for any other
Purchaser to be joined as an additional party in any proceeding for such
purpose.

                   [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
                             SIGNATURE PAGES FOLLOW]

                                      -21-

<PAGE>

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

                                            AMERICAN TECHNOLOGY CORPORATION

                                            ____________________________________
                                            Name:
                                            Title:

                   [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
                     SIGNATURE PAGES FOR PURCHASERS FOLLOW]

                                      -22-

<PAGE>

     IN WITNESS WHEREOF, the parties have executed this Securities Purchase
Agreement as of the date first written above.

                                        [ ]

                                        By:_____________________________________
                                           Name:
                                           Title:

                                        Investment Amount: $[ ]

                                        Address for Notice:
                                        [ ]
                                        Facsimile No.: [ ]
                                        Attn: [ ]

                                      -23-

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