Document:

technest_8k-ex1001.htm

    Exhibit 10.1

     

    
      SECURITIES
PURCHASE AGREEMENT

       

      THIS
SECURITIES PURCHASE AGREEMENT is made as of the 31st day of October, 2008, by
and between Technest Holdings, Inc. (the “Company”), a Nevada
corporation, and each of the persons whose names are set forth on the Schedule
of Purchasers attached hereto as Exhibit A (the “Purchasers” and each
individually as a “Purchaser”).

       

      WHEREAS, each Purchaser wishes to
purchase from the Company, and the Company wishes to sell to each Purchaser,
certain shares (the “Shares”) of the
Company’s Series D 5% Convertible Preferred Stock, par value $0.0001 per share
(“Series D
Preferred”) a copy of whose certificate of designation is set forth below
in Exhibit B;

       

      NOW,
THEREFORE, in consideration of the mutual covenants contained in this Agreement,
the parties agree as follows:

       

      SECTION
1  Sale of
Securities.

       

      1.1  Authorization of Sale of the
Securities.  Subject to the terms and conditions of this
Agreement, the Company has authorized the sale and issuance to the Purchasers of
the number of Shares set forth next to each Purchaser’s name on Exhibit A
hereof.

       

      1.2  Agreement to Sell and
Purchase the Shares.  At the Closing (as defined below), the
Company will issue and sell the Shares to each Purchaser, severally and not
jointly, and each Purchaser will buy the Shares from the Company set forth
opposite such Purchaser’s name on Exhibit A, upon the
terms and conditions hereinafter set forth, at the purchase price set forth on
Exhibit
A.

       

      1.3  Several and not Joint
Obligations.  The representations, warranties, covenants,
agreements and obligations of the Purchasers under this Agreement are several
and not joint.

      

      1.4  Time of the
Essence.  Time is of the essence in this
Agreement.  If no Closing (as hereinafter defined) has take place by
October 31, 2008, the Company may unilaterally and in its sole discretion
terminate this Agreement as to any or all Purchasers, in which case no
terminated party shall have any liability to or claim against the Company under
or in connection with this Agreement or the transactions contemplated by this
Agreement.

      

      1.5  Closing.  Subject
to and in reliance upon all of the representations, warranties, covenants, terms
and conditions of this Agreement, the closing shall take place at the offices of
the Company located in Bethesda, Maryland at 10:00 a.m., local time, on October
31, 2008, or at such other location, date and time as many be agreed upon
between the applicable Purchasers and Company (such closing being called the
“Closing”).

      

      SECTION
2  Representations, Warranties
and Covenants of the Company.

       

      The Company hereby represents and
warrants to, and covenants with, the Purchasers as follows:

       

      3.1  Organization and
Qualification.  The Company is a corporation, validly existing
and in good standing under the laws of the State of Nevada; and the Company is
duly qualified to do business as a foreign corporation and is in good standing
in each other jurisdiction in which qualification is required, except where the
failure to be so qualified will not have a material adverse effect.

       

      
        
          
          

        

        
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      3.2  Issuance, Sale and Delivery
of the Shares.  Both the Shares being purchased hereunder, and
the underlying shares of the Company’s common stock into which the Shares may
convert are duly authorized and, when issued, delivered and paid for in the
manner set forth in this Agreement, will be duly authorized, validly issued,
fully paid and nonassessable, and will be free of any liens or encumbrances
other than liens or encumbrances created or imposed upon the
Purchasers.

       

      3.3  Due Execution, Delivery and
Performance of the Agreements.  The Company has full corporate
power and authority to enter into this Agreement, to issue and sell the Shares,
and perform the transactions contemplated by this Agreement.  The
execution, delivery and performance of this Agreement by the Company and the
consummation by the Company of the transactions therein contemplated will not
violate any provision of the Restated Articles of Incorporation or by-laws of
the Company.

       

      3.4  SEC
Filings.  Each report, schedule, registration statement and
definitive proxy statement filed by the Company with the Securities and Exchange
Commission (the “Commission”) under
the Securities Exchange Act of 1934, as amended (the “Exchange Act”), since
December 31, 2007 is available on EDGAR (as such documents have since the time
of their filing been amended, the “Information
Documents”), which are all the documents (other than preliminary
material) that the Company was required to file with the Commission since such
date.  Except as disclosed to the Purchasers, as of their respective
dates, the Information Documents complied in all material respects
with  the requirements of the Exchange Act and the rules and
regulations of the Commission thereunder applicable to the Information
Documents, and none of the Information Documents contained at the time they were
filed, any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not
misleading.

       

      3.5 Authorized
Shares.  The authorized
capital stock of the Company consists of (i) 495,000,000 shares of Common Stock,
$.001 par value per share, of which  20,676,739 shares have been
issued and are outstanding as of the date hereof and (ii) 5,000,000 of Preferred
Stock, of which 150 shares have been designated as Series A Preferred Stock,
64.631  shares of which have been issued and are
outstanding;  1,149,425 shares have been designated as Series B
Preferred Stock, none of which are outstanding;  1,149,425 shares have
been designated as Series C Preferred Stock,  402,294 shares of which
have been issued and are outstanding; 3,000 shares have been designated as
Series D Preferred Stock, 1,300 shares of which shall be issued and outstanding
as of the date hereof.  All issued and outstanding shares of Common
Stock and Preferred Stock have been duly authorized and validly issued and are
fully paid and nonassessable.

       

      3.6 Brokers, Finders.  The Company has
taken no action which would give rise to any claim by any person for brokerage
commission, finder's fees or similar payments by Investor relating to this
Agreement or the transactions contemplated hereby.  Investor shall
have no obligation with respect to such fees or with respect to any claims made
by or on behalf of other persons for fees of a type contemplated in this Section
that may be due in connection with the transactions contemplated
hereby.  The Company shall indemnify and hold harmless each of
Investor, its employees, officers, directors, agents, and partners, and their
respective affiliates, from and against all claims, losses, damages, costs
(including the costs of preparation and attorney's fees) and expenses suffered
in respect of any such claimed or existing fees, as and when
incurred.

       

      
        
          
          

        

        
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      3.7 Amendments, Modification or
Waivers.  The Company shall pay all reasonable fees and
expenses incurred by the Investor in connection with any amendments,
modifications or waivers of this Agreement incurred in connection with the
enforcement of this Agreement, including, without limitation, all reasonable
attorneys’ fees and expenses. The Company shall pay all stamp or other similar
taxes and duties levied in connection with issuance of the Shares pursuant
hereto.

      

       

      SECTION 4  Representations, Warranties
and Covenants of the Purchasers

       

      4.1  Experience; Accredited
Investor Status.  Each Purchaser, individually and not jointly,
represents and warrants to, and covenants with, the Company that: (i) he is an
“accredited investor” within the meaning of Rule 501 of Regulation D promulgated
under the Securities Act, (ii) he is knowledgeable, sophisticated and
experienced in making, and is qualified to make, decisions with respect to
investments in securities representing an investment decision like that involved
in the purchase of the Shares, including investments in securities issued by the
Company, and has requested, received, reviewed and understood all information he
deems relevant in making an informed decision to purchase the Shares; (iii) he
acknowledges that the offering of the Shares pursuant to this Agreement has not
been reviewed by the Securities and Exchange Commission or any state regulatory
authority; (iv) it is acquiring the Shares set forth next to his name on Exhibit A hereto, for
his own account for investment only and with no intention of effecting a
distribution any of such Shares or any arrangement or understanding with any
other persons regarding the distribution of such Shares; (v) he will not,
directly or indirectly, offer, sell, pledge, transfer or otherwise dispose of
(or solicit any offers to buy, purchase or otherwise acquire or take a pledge
of) any of the Shares except in compliance with the Securities Act of 1933, as
amended (the “Securities Act”),
rules and regulations promulgated under the Securities Act and any applicable
state securities or blue sky laws; (vi) he understands that the securities are
“restricted securities” as such term is defined in Rule 144(a)(3) promulgated
under the Securities Act, and that the Shares are illiquid in that they may not
readily be resold and that the Company has no obligation or plan to register the
resale of the Shares by the Purchaser under the Securities Act; (vii) he has, in
connection with his decision to purchase Shares, not relied upon any
representations or other information (whether oral or written) other than as set
forth in the representations and warranties of the Company contained herein;
(viii) he has had an opportunity to discuss this investment with representatives
of the Company and ask questions of them and such questions have been answered
to his full satisfaction.

       

      4.2  Acknowledgement of
Risk.  Each Purchaser, individually and not jointly, recognizes
that an investment in the Shares is speculative and involves a high degree of
risk, including a risk of total loss of the Purchaser’s
investment.  Each Purchaser, individually and not jointly,
acknowledges that they have been afforded an opportunity to ask questions and to
review any documents that might be necessary to evaluate the degree of risk
involved in the transactions contemplated by this Agreement.

       

      
        
          
          

        

        
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      4.3  Acknowledgement of Company’s
Reliance.  Each Purchaser, individually and not jointly,
represents and warrants that all of the information provided to the Company or
its agents or representatives concerning such Purchaser’s suitability to invest
in the Company and the representations and warranties contained herein, are
complete, true, and correct as of the date hereof, and understands that the
Company is relying on the statements contained herein to establish an exemption
from registration under U.S. federal and state securities laws.  Each
Purchaser, individually and not jointly, represents and warrants that the
address set forth in the signature page hereto is such Purchaser’s true and
correct domicile.

       

      4.4  Restrictions on
Transfer.  Each Purchaser agrees to not, without the prior
written consent of the Company, directly or indirectly, make any offer, sale,
assignment, transfer, encumbrance, contract to sell, grant of an option to
purchase or other disposition of any Shares beneficially owned (within the
meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended) by
the Purchaser on the date hereof or hereafter acquired for a period of six
months subsequent to the date hereof.  Each Purchaser agrees and
consents to the entry of stop transfer instructions with the Company’s transfer
agent against the transfer of Shares except in compliance with this
agreement.

      

      

      SECTION 5.  Certain Covenants of the
Company

      

      5.1 Filings.  (i)  The
Company undertakes and agrees to promptly and timely make all necessary filings
and other applications in connection with the sale of the Shares to the
Purchaser under any United States laws and regulations applicable to the
Company, or by any domestic securities exchange or trading market, and to
provide a copy thereof to the Investor promptly after such filing.

      

      5.2 Reporting
Status.  So long as the Purchaser beneficially owns any of the
Shares, the Company shall file all reports required to be filed with the SEC
pursuant to Section 13 or 15(d) of the 1934 Act, and the Company shall not
terminate its status as an issuer required to file reports under the 1934 Act
even if the 1934 Act or the rules and regulations thereunder would permit such
termination.  The Company will take all reasonable action under its
control to obtain and to continue the listing and trading of its Common Stock
(including, without limitation, all Converted Shares) on the principal exchange
where its common stock is traded.

      

      5.3 Available
Shares.  The Company shall have at all times hereafter
authorized and reserved for issuance, free from preemptive rights, shares of
Common Stock sufficient to issue one hundred percent (100%) of the number of
shares of Common Stock as may be required to satisfy the conversion rights of
the Purchaser pursuant to the terms and conditions of the Certificate of
Designation.

       

      
        
          
          

        

        
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      5.4 Negative
Covenants.  So long as any of
the Shares are outstanding, the Company shall not and shall not cause its
subsidiaries to, without the affirmative vote of seventy five percent (75%) of
the holders of the Shares then outstanding, (a) alter or adversely change the
powers, preferences or rights given to the Shares, (b) alter or amend the
Certificate of Designation associated with the Shares, (c) authorize or create
any class of stock ranking as to dividends or distribution of assets upon a
liquidation or otherwise senior to or pari passu with the Shares, (d) amend its
certificate of incorporation, bylaws or other charter documents so as to
adversely affect any rights of any holders of the Shares, (e) increase the
authorized or designated number of the Shares, (f) allow for the creation of a
corporate obligation other than in the ordinary course of business, (g) allow
the creation of any lien on any of its assets or the assets of any subsidiary,
(h) issue any additional Shares (including the reissuance of any Shares
previously converted into common stock) or (i) enter into any agreement with
respect to the foregoing.

      

      

      SECTION 6  Expenses.  Each
party hereto will pay its own expenses in connection with the transactions
contemplated hereby, whether or not such transactions shall be
consummated.

       

      SECTION 7  Notices.  All
notices, requests, consents, and other communications under this Agreement shall
be in writing and shall be delivered by hand, sent via overnight courier, sent
by facsimile, or mailed by first class certified or registered mail, return
receipt requested, postage prepaid:

       

      if to the
Company, to:

       

      Technest
Holdings, Inc.

      10411
Motor City Drive, Suite 650

      Bethesda,
MD 20817

      

      or to
such other person at such other place as the Company shall designate to the
Purchasers in writing; and if to the Purchasers, at the address as set forth on
Exhibit A, or
at such other address or addresses as may have been furnished to the Company in
writing pursuant to this Section
7.

       

      SECTION 8  Severability.  In
case any provision contained in this Agreement should be invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein shall not in any way be affected or
impaired thereby.

       

      SECTION 9  Governing
Law.  This Agreement shall be governed by and interpreted in
accordance with the laws of the State of New York for contracts to be wholly
performed in such state and without giving effect to the principles thereof
regarding the conflict of laws. Each of the parties consents to the exclusive
jurisdiction of the federal courts whose districts encompass any part of the
County of New York or the state courts of the State of New York sitting in the
County of New York in connection with any dispute arising under this Agreement
and hereby waives, to the maximum extent permitted by law, any objection,
including any objection based on forum non conveniens, to the
bringing of any such proceeding in such jurisdictions.  Each party
hereto agrees to waive its right to a trial by jury in any proceeding in
connection with any dispute associated with this Agreement.

      

      SECTION 10  Entire
Agreement.  This Agreement contains the entire agreement of the
parties with respect to the subject matter hereof and supersedes and is in full
substitution for any and all prior oral or written agreements and understandings
between them related to such subject matter, and neither party hereto shall be
liable or bound to the other party hereto in any manner with respect to such
subject matter by any representations, indemnities, covenants or agreements
except as specifically set forth herein.

       

      
        
          
          

        

        
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      IN
WITNESS WHEREOF, the parties hereto have caused this Securities Purchase
Agreement to be executed as of the date first above written by their duly
authorized representatives shown below:

       

      

       

      
      

      TECHNEST
HOLDINGS, INC.

       

      By:  /s/ Gino M. Pereira        

      Name:
Gino M. Pereira

      Title: CEO

       

       

      SOUTHRIDGE
PARTNERS LP

       

      By:  /s/ Stephen Hicks        

      Name:
Stephen Hicks

      Title: 

       

      
        
          
          

        

        
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       Exhibit
A

       

      Schedule
of Purchasers

       

      
        	
                Name and
      Address:

              	
                Shares:

              	
                Purchase
      Price:

              
	
                Southridge
      Partners LP

                90
      Grove Street,

                Ridgefield
      CT

              	
                1,300

              	
                $650,000

              
	 
      	 
      	 
      

      

      

       

      

      
        
          
          

        

        
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      Exhibit
B

       

      

       

      Certificate
of Designation

       

      
        
          
          

        

        
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      CERTIFICATE
OF DESIGNATION OF RIGHTS AND PREFERENCES

      FOR
SERIES D 5% CONVERTIBLE PREFERRED STOCK

      OF

      TECHNEST
HOLDINGS, INC.

      

      Pursuant
to Section 78.1955 of the Nevada Revised Statutes, Technest Holdings, Inc., a
Nevada corporation (the "Company"), does hereby certify:

      

      FIRST:
That pursuant to authority expressly vested in it by the Restated Articles of
Incorporation, as amended, of the Company, the Board of Directors of the Company
has adopted the following resolution establishing a new series of Preferred
Stock of the Company, consisting of Three Thousand (3,000) shares designated
"Series D 5% Convertible Preferred Stock," with such powers, designations,
preferences, and relative participating, optional, or other rights, if any, and
the qualifications, limitations, or restrictions thereof, as are set forth in
the resolutions:

      

      RESOLVED,
that the Company's Board of Directors hereby approves the designation and
issuance of the Series D 5% Convertible Preferred Stock according to the terms
and conditions as set forth in Exhibit A and authorizes and instructs the
Company's Executive Officers to proceed in filing the Certificate of Designation
with the State of Nevada and to take such other action as shall be appropriate
in connection with the issuance of the Series D 5% Convertible Preferred
Stock.

      

      SECOND:
That said resolutions of the directors of the Company were duly adopted in
accordance with the provisions of Sections 78.315 and 78.1955 of the Nevada
Revised Statutes.

      

      IN
WITNESS WHEREOF, the undersigned hereby affirms, under penalties of perjury,
that the foregoing instrument is the act and deed of the Company and that the
facts stated therein are true.  Dated as of the 1st day of October,
2008.

      

      TECHNEST
HOLDINGS, INC.,

      a
Nevada corporation,

       

       

      By: 
/s/ Gino Pereira        

      Name:  Gino
Pereira

      Title:    President

       

      
        
          
          

        

        
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      EXHIBIT
A

      

      SECTION
1. SERIES D
5% CONVERTIBLE PREFERRED STOCK TERMS

       

      

      

      Section
1.     Designation, Amount and Par
Value.  The series of preferred stock shall be designated as
the Series D 5% Convertible Preferred Stock (the "Preferred Stock"),
and the number of shares so designated and authorized shall be Three Thousand
(3,000).  Each share of Preferred Stock shall have a par value of
$0.0001 per share and a stated value of $1,000 per share (the "Stated
Value").

      

      Section
2.      Dividends.

      

      (a)   Holders
of Preferred Stock shall be entitled to receive, when and as declared by the
Board of Directors either out of funds legally available therefor or through the
issuance of shares of the Company’s common
stock, and the Company shall accrue, quarterly in arrears on March 31, June 30,
September 30, and December 31 of each year, commencing on the earlier of
December 31, 2008, or any Conversion Date (as defined below), cumulative
dividends on the Preferred Stock at the rate per share (as a percentage of the
Stated Value per share) equal to five percent (5%) per annum, payable in cash or
shares of Common Stock (as defined in Section 7) at the option of the
Holders.  The Company may pay, at its option, accrued dividends at any
time while the Preferred Stock remains outstanding.  The Company shall
pay all accrued and unpaid dividends within five (5) days following either (a)
the conversion of any or all of the Preferred Stock or (b) the redemption by the
Company of any or all of the remaining outstanding shares of Preferred
Stock.  The number of shares of Common Stock issuable as payment of
dividends hereunder shall equal the aggregate dollar amount of dividends then
being paid, divided by the Conversion Price (as defined in Section 5(c)) then in
effect.  Dividends on the Preferred Stock shall be calculated on the
basis of a 360-day year, shall accrue daily commencing the Issuance Date (as
defined in Section 7), and shall be deemed to accrue on such date whether or not
earned or declared and whether or not there are profits, surplus or other funds
of the Company legally available for the payment of dividends.  The
party that holds the Preferred Stock on an applicable record date for any
dividend payment will be entitled to receive such dividend payment and any other
accrued and unpaid dividends which accrued prior to such dividend payment date,
without regard to any sale or disposition of such Preferred Stock subsequent to
the applicable record date but prior to the applicable dividend payment
date.  Except as otherwise provided herein, if at any time the Company
pays less than the total amount of dividends then accrued on account of the
Preferred Stock, such payment shall be distributed ratably among the Holders of
the Preferred Stock based upon the number of shares then held by each Holder in
proportion to the total number of shares of Preferred Stock then
outstanding.  In order for the Holders to exercise the right to have
dividends paid in cash on any Conversion Date, the Holders must indicate such
intention in the Conversion Notice, which notice will remain in effect for
subsequent Conversion Notices until rescinded by the Holder in a written notice
to such effect that is addressed to the Company.

       

      
        
          
          

        

        
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      (b)  Notwithstanding
anything to the contrary contained herein, the Company may not issue shares of
Common Stock in payment of dividends on the Preferred Stock (and must deliver
cash in respect thereof) if:  (i)  the number of shares of
Common Stock at the time authorized, unissued and unreserved for all purposes,
or held as treasury stock, is either insufficient to issue such dividends in
shares of Common Stock or the Company has not duly reserved for issuance in
respect of such dividends a sufficient number of shares of Common Stock, (ii)
such shares are not listed for trading on the Nasdaq SmallCap Market or the OTC
Bulletin Board ("OTC BB")(and any other exchange, market or trading facility in
which the Common Stock is then listed for trading). Payment of dividends in
shares of Common Stock is further subject to the provisions of Section
5.

      

      (c)  So
long as any shares of Preferred Stock remain outstanding, neither the Company
nor any subsidiary thereof shall, without the consent of the Holders of seventy
five percent (75%) of the shares of Preferred Stock then outstanding, redeem,
repurchase or otherwise acquire directly or indirectly any Junior Securities (as
defined in Section 7), nor shall the Company directly or indirectly pay or
declare any dividend or make any distribution upon, nor shall any distribution
be made in respect of, any Junior Securities, nor shall any monies be set aside
for or applied to the purchase or redemption (through a sinking fund or
otherwise) of any Junior Securities.

      

      Section
3.   Voting Rights; Negative
Covenants.  The Preferred Stock shall have the right to vote on
an as converted basis on any matter that may from time to time be submitted to
the Company’s shareholders for a vote, either by written consent or by
proxy.  So long as any shares of Preferred Stock are outstanding, the
Company shall not and shall cause its subsidiaries not to, without the
affirmative vote of seventy five percent (75%) of the holders of the Preferred
Stock then outstanding, (a) alter or change adversely the powers, preferences or
rights given to the Preferred Stock, (b) alter or amend this Certificate of
Designation, (c) authorize or create any class of stock ranking as to dividends
or distribution of assets upon a Liquidation (as defined in Section 4) or
otherwise senior to or pari passu with the Preferred Stock, (d) amend its
certificate of incorporation, bylaws or other charter documents so as to affect
adversely any rights of any holders of the Preferred Stock, (e) increase the
authorized or designated number of shares of Preferred Stock, (f) allow for the
creation of a corporate obligation other than in the ordinary course of
business, (g) allow the creation of any lien on any of its assets or the assets
of any subsidiary, (h) issue any additional shares of Preferred Stock (including
the reissuance of any shares of Preferred Stock converted for Common Stock) or
(i) enter into any agreement with respect to the foregoing.

      

      Section
4.  Liquidation.  Upon
any liquidation, dissolution or winding-up of the Company, whether voluntary or
involuntary (a "Liquidation"), and
subject to the rights of the holders of the Company’s Series A Convertible
Preferred Stock and Series C Convertible Preferred Stock then outstanding, the
holders of the Preferred Stock shall be entitled to receive out of the assets of
the Company, whether such assets are capital or surplus, for each share of
Preferred Stock an amount equal to the Stated Value plus all accrued but unpaid
dividends per share, whether declared or not, and all other amounts in respect
thereof (including liquidated damages, if any) then due and payable prior to any
distribution or payment shall be made to the holders of any Junior Securities,
and if the assets of the Company shall be insufficient to pay in full such
amounts, then the entire assets to be distributed to the holders of Preferred
Stock shall be distributed among the holders of Preferred Stock ratably in
accordance with the respective amounts that would be payable on such shares if
all amounts payable thereon were paid in full.  The Company shall mail
written notice of any such Liquidation, not less than 45 days prior to the
payment date stated therein, to each record holder of Preferred
Stock.

      

      
        
          
          

        

        
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      Section
5.  Conversion.

      

      (a)  Conversions at Option of
Holder.  Each share of Preferred Stock shall be convertible
into shares of Common Stock at the Conversion Ratio (as defined in Section 7) at
the option of a Holder, at any time and from time to time, from and after the
issuance of the Preferred Stock.  A Holder shall effect conversions by
surrendering to the Company the certificate or certificates representing the
shares of Preferred Stock to be converted to the Company, together with a
completed form of conversion notice attached hereto as Exhibit A (the "Conversion
Notice").  Each Conversion Notice shall specify the number of
shares of Preferred Stock to be converted, the date on which such conversion is
to be effected, which date may not be prior to the date the holder delivers such
Conversion Notice by facsimile (the "Conversion Date") and
the Conversion Price determined as specified in Section 5(c)
hereof.  If no Conversion Date is specified in a Conversion Notice,
the Conversion Date shall be the date that the Conversion Notice is deemed
delivered pursuant to this Section 5(a).  Subject to Section 5(b)
hereof, each Conversion Notice, once given, shall be irrevocable.

      

      (b)   Not
later than five (5) Trading Days after a Conversion Date, the Company will
deliver to the holder (i) a certificate or certificates representing the number
of shares of Common Stock being issued upon the conversion of shares of
Preferred Stock, (ii) one or more certificates representing the number of shares
of Preferred Stock not converted, (iii) a bank check in the amount of accrued
and unpaid dividends (if the Holder has elected to pay accrued and unpaid
dividends in cash) and (iv) if the Holder has elected and is permitted hereunder
to pay accrued dividends in shares of Common Stock, certificates representing
such number of shares of Common Stock as are issuable on account of accrued
dividends in such number as determined in accordance with Section
2(a).  The Company shall, upon request of the Holder, use reasonable
efforts to deliver any certificate or certificates required to be delivered by
the Company under this Section electronically through the Depository Trust
Company or another established clearing corporation performing similar
functions.  If in the case of any Conversion Notice such certificate
or certificates, including for purposes hereof, any shares of Common Stock to be
issued on the Conversion Date on account of accrued but unpaid dividends
hereunder as specifically determined by the Company, are not delivered to or as
directed by the applicable holder by the third Trading Day after the Conversion
Date, the holder shall be entitled by written notice to the Company at any time
on or before its receipt of such certificate or certificates, to rescind such
conversion, in which event the Company shall immediately return the certificates
representing the shares of Preferred Stock tendered for conversion.

       

      
        
          
          

        

        
          12

          
            

          

        

        
          
          

        

      

      
 

      (c) The
conversion price for each share of Preferred Stock (the “Conversion Price”) on
any Conversion Date shall be twenty cents ($0.20), subject to Section 5(d) and
Section 6 below.  All calculations under this Section 5 shall be made
to the nearest whole share of common stock.

      

      (d)  If
at any time conditions shall arise by reason of action taken by the Company
which in the opinion of the Board of Directors are not adequately covered by the
other provisions hereof and which might materially and adversely affect the
rights of the holders of Preferred Stock (different than or distinguished from
the effect generally on rights of holders of any class of the Company's capital
stock) or if at any time any such conditions are expected to arise by reason of
any action contemplated by the Company, the Company shall mail a written notice
briefly describing the action contemplated and the material adverse effects of
such action on the rights of the holders of Preferred Stock at least 30 calendar
days prior to the effective date of such action, and an Appraiser selected by
the holders of majority in interest of the Preferred Stock shall give its
opinion as to the adjustment, if any (not inconsistent with the standards
established in this Section 5), of the Conversion Price (including, if
necessary, any adjustment as to the securities into which shares of Preferred
Stock may thereafter be convertible) and any distribution which is or would be
required to preserve without diluting the rights of the holders of shares of
Preferred Stock; provided, however, that the
Company, after receipt of the determination by such Appraiser, shall have the
right to select an additional Appraiser, in good faith, in which case the
adjustment shall be equal to the average of the adjustments recommended by each
such Appraiser.  The Board of Directors shall make the adjustment
recommended forthwith upon the receipt of such opinion or opinions or the taking
of any such action contemplated, as the case may be; provided, however, that no such
adjustment of the Conversion Price shall be made which in the opinion of the
Appraiser(s) giving the aforesaid opinion or opinions would result in an
increase of the Conversion Price to more than the Conversion Price then in
effect.

      

      (e)  The
Company covenants that it will at all times reserve and keep available out of
its authorized and unissued Common Stock solely for the purpose of issuance upon
conversion of Preferred Stock and payment of dividends on Preferred Stock, each
as herein provided, free from preemptive rights or any other actual or
contingent purchase rights of persons other than the holders of Preferred Stock,
not less than 150% of such number of shares of Common Stock as shall be issuable
(taking into account the adjustments and restrictions of Section 5(d)) upon the
conversion of all outstanding shares of Preferred Stock and payment of dividends
hereunder.  The Company covenants that all shares of Common Stock that
shall be so issuable shall, upon issue, be duly and validly authorized, issued
and fully paid and nonassessable.

      

      (f)  Upon
a conversion hereunder the Company shall not be required to issue stock
certificates representing fractions of shares of Common Stock, but may if
otherwise permitted and unless waived by the holder of the Preferred Stock, make
a cash payment in respect of any final fraction of a share based on the Per
Share Market Value at such time.  If the Company elects not, or is
unable, to make such a cash payment, the holder of a share of Preferred Stock
shall be entitled to receive, in lieu of the final fraction of a share, one
whole share of Common Stock.

       

      
        
          
          

        

        
          13

          
            

          

        

        
          
          

        

      

      
 

      (g)  The
issuance of certificates for shares of Common Stock on conversion of Preferred
Stock shall be made without charge to the Holders thereof for any documentary
stamp or similar taxes that may be payable in respect of the issue or delivery
of such certificate, provided that the
Company shall not be required to pay any tax that may be payable in respect of
any transfer involved in the issuance and delivery of any such certificate upon
conversion in a name other than that of the holder of such shares of Preferred
Stock so converted and the Company shall not be required to issue or deliver
such certificates unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been
paid.

      

      (h)  Shares
of Preferred Stock converted into Common Stock shall be canceled and shall have
the status of authorized but unissued shares of undesignated preferred
stock.

      

      (i)  Any
and all notices or other communications or deliveries to be provided by the
Holders of the Preferred Stock hereunder, including, without limitation, any
Conversion Notice, shall be in writing and delivered by facsimile, sent by a
nationally recognized overnight courier service, or sent by certified or
registered mail, postage prepaid, addressed to the attention of the President of
the Company at the facsimile telephone number or address of the principal place
of business of the Company.  Any and all notices or other
communications or deliveries to be provided by the Company hereunder shall be in
writing and delivered by facsimile, sent by a nationally recognized overnight
courier service or sent by certified or registered mail, postage prepaid,
addressed to each holder of Preferred Stock at the facsimile telephone number or
address of such holder appearing on the books of the Company, or if no such
facsimile telephone number or address appears, at the principal place of
business of the Holder.  Any notice or other communication or
deliveries hereunder shall be deemed given and effective on the earliest of (i)
the date of transmission, if such notice or communication is delivered via
facsimile at the facsimile telephone number specified in this Section prior to
5:00 p.m. (New York time), (ii) the date after the date of transmission, if such
notice or communication is delivered via facsimile at the facsimile telephone
number specified in this Section later than 5:00 p.m. (New York time) on any
date and earlier than 11:59 p.m. (New York time) on such date, (iii) four days
after deposit in the United States mails, (iv) the Business Day following the
date of mailing, if send by nationally recognized overnight courier service, or
(v) upon actual receipt by the party to whom such notice is required to be
given.

      

      Section
6.  Redemption; Adjustments to
Conversion Price.

      

      (a)           Redemption.

      

      
        	
                 
      

              	
                (i)

              	
                The
      Company shall have the obligation, subject to the Holder’s right of
      conversion under Section 5, to redeem from funds legally available
      therefor all or any portion of the then-outstanding and unconverted shares
      of the Preferred Stock at a price equal to the Redemption Price (defined
      below), at such time as the Company has received proceeds from the sale of
      EOIR, or if no such proceeds become available, as such time as the Company
      has funds legally available for redemption.  Any redemption
      pursuant to this Section 6(a)(i) shall be effected by the delivery of a
      notice to each holder of Preferred Stock to be redeemed, which notice
      shall indicate the number of shares of Preferred Stock of each holder to
      be redeemed and the date that such redemption is to be effected, which
      shall be the tenth (10th)
      day after the date such notice is deemed delivered (the "Redemption
      Date").  All redeemed shares of Preferred Stock shall
      cease to be outstanding and shall have the status of authorized but
      unissued preferred stock.

              

      

       

      
        
          
          

        

        
          14

          
            

          

        

        
          
          

        

      

      
 

      

      (b)  The Conversion Price
shall be subject to adjustment from time to time as follows:

      

      (i).           Sale.   If,
for as long as any shares of Preferred Stock remain outstanding, the Company
enters into a merger (other than where the Company is the surviving entity) or
consolidation with another corporation or other entity (collectively, a “Sale”),
the Company will require, in the agreements reflecting such transaction, that
the surviving entity and, if an entity different from the successor or surviving
entity, the entity whose capital stock or assets the holders of Common Stock of
the Company are entitled to receive as a result of such
transaction,  expressly assume the obligations of the Company
hereunder.  Notwithstanding the foregoing, if the Company enters into
a Sale and the holders of the Common Stock are entitled to receive stock,
securities or property in respect of or in exchange for Common Stock, then as a
condition of such Sale, the Company and any such successor, purchaser or
transferee will agree that the  Preferred Stock may thereafter be
converted on the terms and subject to the conditions set forth above into the
kind and amount of stock, securities or property receivable upon such merger,
consolidation or transfer by a Holder of the number of shares of Common Stock
into which then outstanding shares of Preferred Stock might have been converted
immediately before such merger, consolidation or transfer, subject to
adjustments which shall be as nearly equivalent as may be
practicable.  In the event of any such proposed Sale, the Holder
hereof shall have the right to either (i) convert all of any of the outstanding
Preferred Stock by delivering a Notice of Conversion to the Company within 10
days of receipt of notice of such Sale from the Company or (ii) if the surviving
entity in the transaction is not a publicly traded entity listed on a Principal
Trading Market, demand a redemption of all or any of the
outstanding  Preferred Stock at the  Redemption Price by
delivering a notice to such effect  to the Company within ten (10)
days of receipt of notice of such Sale from the Company.

      

      (ii).           Spin
Off.  If, for as long as any shares of Preferred Stock remain
outstanding  the Company consummates a  spin off or
otherwise divests itself of a part of its business or operations or disposes of
all or of a part of its assets in a transaction (the “Spin Off”) in which the
Company, in addition to or in lieu of any other compensation received by the
Company  for such business, operations or assets, causes securities of
another entity (the “Spin Off Securities”) to be issued to security holders of
the Company, then the Company shall cause (i) to be reserved Spin Off Securities
equal to the number thereof which would have been issued to the Holder had all
of the Holder’s shares of Preferred Stock outstanding on the record date (the
“Record Date”) for determining the amount and number of Spin Off Securities to
be issued to security holders of the Company (the “Outstanding Preferred Stock”)
been converted as of the close of business on the Trading Day immediately before
the Record Date (the “Reserved Spin Off Securities”), and (ii) to be issued to
the Holder upon the conversion of all or any of the Outstanding Preferred Stock,
such amount of the Reserved Spin Off Securities equal to (x) the Reserved Spin
Off Securities multiplied by (y) a fraction, of which (a) the numerator is the
principal amount of the Outstanding Preferred Stock  then being
converted, and (b) the denominator is the principal amount of the Outstanding
Preferred Stock.

       

      
        
          
          

        

        
          15

          
            

          

        

        
          
          

        

      

      
 

      (iii).           Stock
Splits, etc.  If, at any time while any shares of Preferred Stock
remain outstanding, the Company effectuates a stock split or reverse stock split
of its Common Stock or issues a dividend on its Common Stock consisting of
shares of Common Stock, the Conversion Price and any other amounts calculated as
contemplated by this Certificate of Designations shall be equitably adjusted to
reflect such action.  By way of illustration, and not in limitation,
of the foregoing (i) if the Company effectuates a 2:1 split of its Common Stock,
thereafter, with respect to any conversion for which the Company issues shares
after the record date of such split, the Conversion Price shall be deemed to be
one-half of what it had been calculated to be immediately prior to such split;
(ii) if the Company effectuates a 1:10 reverse split of its Common Stock,
thereafter, with respect to any conversion for which the Company issues shares
after the record date of such reverse split, the Conversion Price shall be
deemed to be ten times what it had been calculated to be immediately prior to
such split; and (iii) if the Company declares a stock dividend of one share of
Common Stock for every 10 shares outstanding, thereafter, with respect to any
conversion for which the Company issues shares after the record date of such
dividend, the Conversion Price shall be deemed to be such amount multiplied by a
fraction, of which the numerator is the number of shares (10 in the example) for
which a dividend share will be issued and the denominator is such number of
shares plus the dividend share(s) issuable or issued thereon (11 in the
example).

      

      (iv).           Notice
of Adjustments.  Upon the occurrence of each adjustment or
readjustment of the Conversion Price pursuant to this Article 6, the Company, at
its expense, shall promptly compute such adjustment or readjustment and prepare
and furnish to each Holder of Preferred Stock a certificate setting forth such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based.  The Company shall, upon the
written request at any time of any Holder of Preferred Stock, furnish to such
Holder a like certificate setting forth (i) such adjustment or readjustment,
(ii) the Conversion Price in effect at the time and (iii) the number of shares
of Common Stock and the amount, if any, of other securities or property which at
the time would be received upon conversion of a share of Designated Preferred
Stock.

      

      

      Section
7.  Definitions.  For
the purposes hereof, the following terms shall have the following
meanings:

      

      

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

       

      
        
          
          

        

        
          16

          
            

          

        

        
          
          

        

      

      
 

      "Closing Bid Price"
shall mean the closing bid price (as reported by Bloomberg L.P.) of the Common
Stock on the OTC Bulletin Board or such other exchange or trading facility on
which the common stock is traded.

      

      "Common Stock" means
the common stock, $.001 par value per share, of the Company, and stock of any
other class into which such shares may hereafter have been reclassified or
changed.

      

      "Conversion Ratio"
means, at any time, a fraction, the numerator of which is Stated Value plus
accrued but unpaid dividends to the extent to be paid in shares of Common Stock
and the denominator of which is the Conversion Price at such time.

      

      “Issuance Date" means
the earliest date on which a Holder receives shares of the Preferred Stock,
regardless of the number of certificates which may be issued to evidence such
Preferred Stock.

      

      "Junior Securities"
means the Common Stock and all other equity securities of the Company except for
the Company’s Series A
Convertible Preferred Stock and Series C Convertible Preferred
Stock.

      

      "Per Share Market
Value" means on any particular date (a) the closing bid price per share
of the Common Stock on such date on the OTC BB or other principal stock exchange
or quotation system on which the Common Stock is then listed or quoted or if
there is no such price on such date, then the closing bid price on such exchange
or quotation system on the date nearest preceding such date, or (b) if the
Common Stock is not listed then on the OTC BB or any stock exchange or quotation
system, the closing bid price for a share of Common Stock in such other
over-the-counter market, as reported by the Nasdaq Stock Market or in the
National Quotation Bureau Incorporated or similar organization or agency
succeeding to its functions of reporting prices at the close of business on such
date, or (c) if the Common Stock is not then reported by the National Quotation
Bureau Incorporated or similar organization or agency succeeding to its
functions of reporting prices, then the average of the "Pink Sheet" quotes for
the relevant conversion period, as determined in good faith by the holder, or
(d) if the Common Stock is not then publicly traded the fair market value of a
share of Common Stock as determined by an Appraiser selected in good faith by
the holders of a majority in interest of the shares of the Preferred Stock;
provided, however, that the
Company, after receipt of the determination by such Appraiser, shall have the
right to select an additional Appraiser, in which case, the fair market value
shall be equal to the average of the determinations by each such
Appraiser.

      

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

      

      "Redemption Price"
shall be equal to the Stated Value of such shares of Preferred Stock plus all
accrued dividends thereon.

      

      "Trading Day" means
(a) a day on which the Common Stock is traded on the OTC BB or other stock
exchange or market on which the Common Stock has been listed, or (b) 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
its functions of reporting prices).

      

      

      
        
          
          

        

        
          17

          
            

          

        

        
          
          

        

      

      

      EXHIBIT
B

      

      NOTICE
OF CONVERSION

      

      (To be
executed by the registered holder

      to
convert shares of Preferred Stock)

      

      The
undersigned hereby elects to convert the number of shares of Series D 5%
Convertible Preferred Stock indicated below, into shares of Common Stock, par
value $.001 per share (the "Common Stock"), of Technest Holdings, Inc. (the
"Company") according to the conditions hereof, as of the date written
below.  If shares are to be issued in the name of a person other than
undersigned, the undersigned will pay all transfer taxes payable with respect
thereto and is delivering herewith such certificates and opinions as reasonably
requested by the Company in accordance therewith.  No fee will be
charged to the holder for any conversion, except for such transfer taxes, if
any.

      

      Conversion
calculations:

      ______________________________________________________

      Date to
effect conversion

      

      ______________________________________________________

      Number of
shares of Preferred Stock to be converted

      

      ______________________________________________________

      Number of
shares of Common Stock to be issued

      

      ______________________________________________________

      Applicable
conversion price

      

      ______________________________________________________

      Name of
Holder

      ______________________________________________________

      

      ______________________________________________________

      Address
of Holder

      

      __________________________________

      Authorized
Signature

       

       

       

       

      18Exhibit 4.2

 

SUBSCRIPTION AGREEMENT

 

This
Subscription Agreement (together with the Exhibits and Schedules hereto, this “Agreement”) is entered into as of January 4,  2006, by and among Rosetta Stone Inc., a Delaware corporation (“Parent”); ABS Capital Partners
IV, L.P., ABS Capital Partners
IV-A, L.P., ABS Capital Partners IV Offshore, L.P. and ABS Capital Partners IV
Special Offshore, L.P. (each an “ABS Fund”
and collectively, “ABS”); Norwest
Equity Partners VIII, L.P. (“Norwest”);
Madison Capital Funding LLC (“Madison”);
and Tom Adams (“Adams” and,
together with ABS, Norwest and Madison, individually, a “Purchaser” and collectively, the “Purchasers”).

 

WHEREAS, Parent desires to issue and sell, and ABS
desires to purchase, the number of shares of Parent’s Class A Common
Stock, par value $0.001 per share (the “Class A
Common Stock”), and the number of shares of Parent’s Series A-1
Convertible Preferred Stock, par value $0.001 per share (the “Series A-1 Preferred Stock”), set
forth opposite the name of each ABS Fund on Schedule A hereto, each for
the amount of $100.00 per share, respectively;

 

WHEREAS, Parent desires to issue and sell, and
Norwest desires to purchase, the number of shares of Parent’s Class B
Common Stock, par value $0.001 per share (the “Class B
Common Stock”), and the number of shares of Parent’s Series A-2
Convertible Preferred Stock, par value $0.001 per share (the “Series A-2 Preferred Stock”, and
together with the Class A Common Stock, Class B Common Stock and
Series A-1 Preferred Stock, the “Shares”),
set forth opposite the name of Norwest on Schedule A hereto, each for
the amount of $100.00 per share, respectively;

 

WHEREAS, Parent desires to issue and sell, and
Madison desires to purchase, the number of shares of Class A Common Stock,
the number of shares of Series A-1 Preferred Stock and the number of
shares of Series A-2 Preferred Stock set forth opposite the name of
Madison on Schedule A hereto, each for the amount of $100.00 per share, respectively; and

 

WHEREAS, Parent desires to issue and sell, and Adams
desires to purchase, the number of shares of Class A Common Stock, the number of shares of
Series A-1 Preferred Stock and the number of shares of Series A-2
Preferred Stock set forth opposite the name of Adams on Schedule A hereto, each for
the amount of $100.00 per share, respectively.

 

NOW, THEREFORE, in consideration of the foregoing
and for other good and valuable consideration, the parties hereto, intending to
be legally bound hereby, agree as follows:

 

1

 

ARTICLE I

PURCHASE AND SALE OF SHARES

 

Section 1.1                          Purchase and Sale.

 

(a)                        Parent hereby sells, assigns, transfers and
delivers to ABS the number of shares of Class A Common Stock and the
number of shares of Series A-1 Preferred Stock set forth opposite the name
of each ABS Fund on Schedule A, and ABS hereby purchases from Parent the
number of shares of Class A Common Stock and the number of shares of Series A-1
Preferred Stock set forth opposite the name of each ABS Fund on Schedule A
for the aggregate purchase price set forth opposite the name of each ABS Fund
under the heading “Total Purchase Price” on Schedule A.

 

(b)                       Parent hereby sells, assigns, transfers and
delivers to Norwest the number of shares of Class B Common Stock and the
number of shares of Series A-2 Preferred Stock set forth opposite the name
of Norwest on Schedule A, and Norwest hereby purchases from Parent the
number of shares of Class B Common Stock and the number of shares of Series A-2
Preferred Stock set forth opposite the name of Norwest on Schedule A for
the aggregate purchase price set forth opposite the name of Norwest under the
heading “Total Purchase Price” on Schedule A.

 

(c)                        Parent hereby sells, assigns, transfers and
delivers to Madison the number of shares of Class A Common Stock, the
number of shares of Series A-1 Preferred Stock and the number of shares of
Series A-2 Preferred Stock set forth opposite the name of Madison on Schedule
A, and Madison hereby purchases from Parent the number of shares of Class A
Common Stock, the number of shares of Series A-1 Preferred Stock and the
number of shares of Series A-2 Preferred Stock set forth opposite the name
of Madison on Schedule A for the aggregate purchase price set forth
opposite the name of Madison under the heading “Total Purchase Price” on Schedule
A.

 

(d)                       Parent hereby sells, assigns, transfers and
delivers to Adams the number of shares of Class A
Common Stock, the number of shares of Series A-1 Preferred Stock and the
number of shares of Series A-2 Preferred Stock set forth opposite the name
of Adams on Schedule A, and Adams hereby purchases from Parent the
number of shares of Class A Common Stock, the number of shares of Series A-1
Preferred Stock and the number of shares of Series A-2 Preferred Stock set
forth opposite the name of Adams on Schedule A for the aggregate
purchase price set forth opposite the name of Adams under the heading “Total
Purchase Price” on Schedule A.

 

Section 1.2                                                Deliveries on Behalf of Parent. Parent hereby delivers to each Purchaser; (i) one
or more certificates representing the number of Shares set forth opposite the
name of such entity or individual on Schedule A and (ii) cross-receipts,
in the form of Exhibit A hereto, duly executed by Parent.

 

Section 1.3                                                Deliveries by the Purchasers. Each Purchaser listed on Schedule A
hereby delivers to Parent (i) a check or wire transfer of immediately
available funds of the aggregate purchase price set forth opposite the name of
such Purchaser under the heading “Total Purchase Price” on Schedule A
hereto and (ii) a cross-receipt, in the form of Exhibit A
hereto, duly executed by such Purchaser.

 

2

 

ARTICLE II

REPRESENTATIONS AND WARRANTIES

 

Section 2.1                                                Each of the Purchasers, severally but not
jointly, represents and warrants, as to such Purchaser only, to Parent that
such Purchaser:

 

(a)                        has such knowledge and experience in
financial and business matters that it is capable of evaluating the merits and
risks of its investment in the Shares contemplated hereby, and the Purchaser’s
financial situation is such that the Purchaser is able to bear indefinitely the
economic risk of such investment;

 

(b)                       has had the opportunity to meet with certain
of Parent’s officers and representatives to discuss Parent’s business, assets,
liabilities and financial condition;

 

(c)                        is acquiring the Shares for its own account
for investment purposes only, and not with a view to, or for resale in
connection with, any distribution thereof within the meaning of the Securities
Act of 1933 as amended, and the regulations promulgated thereunder (the
“Securities Act”);

 

(d)                       understands that the Shares have not been
registered under the Securities Act and cannot be sold unless subsequently
registered under the Securities Act or pursuant to an exemption therefrom and
further understands that availability of an exemption may depend on factors
over which the Purchaser has no control;

 

(e)                        is an “accredited investor” within the
meaning of Rule 501 of Regulation D under the Securities Act;

 

(f)                          is not relying upon any information, other
than that contained in this Agreement and the results of the Purchaser’s own
independent investigation;

 

(g)                       if not a natural person, is a limited
liability company or limited partnership, as applicable, duly organized,
validly existing and in good standing under the laws of its state of
organization;

 

(h)                       has the power and authority to execute and
deliver this Agreement and to perform and consummate the transactions
contemplated hereby. The Purchaser has taken all actions necessary to authorize
the execution and delivery of this Agreement, the performance of its
obligations hereunder and the consummation of the transactions contemplated
hereby. This Agreement has been duly executed and delivered by the Purchaser.
This Agreement constitutes the legal, valid and binding obligation of the
Purchaser, enforceable against the Purchaser in accordance with its respective
terms, except as the enforceability thereof may be limited by general
principles of equity applicable to bankruptcy, insolvency, reorganization or
similar laws generally; and

 

Section 2.2                                                The Company hereby makes the following
representations and warranties to each Purchaser:

 

(a)                        The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware.
The Company has the corporate power and authority to carry on its business as
now conducted and presently

 

3

 

proposed
to be conducted and to carry out the transactions contemplated by this
Agreement.

 

(b)                       Immediately prior to the date hereof and
after giving effect to the incorporation of the Company (the “Company
Formation”), (i) the authorized capital stock of the Company consists of
3,561,958 shares, consisting of 3,000,000 shares of Common Stock, of which (A) 45,000
shares are designated as Class A Common Stock and (B) 1,000,000
shares are designated as Class B Common Stock, and 561,958 shares of
Preferred Stock, of which (A) 446,958 shares are designated as Class A
Preferred Stock and (B) 115,000 shares are designated as Class B
Preferred Stock, and of the Class A Preferred Stock, 268,758 shares are
further designated Series A-1 Preferred Stock, and 178,200 shares are
further designated Series A-2 Preferred Stock, and (ii) the Company
has issued and outstanding 0 shares of Series A-1 Preferred Stock, 0
shares of Series A-2 Preferred Stock, 0 shares of Class B Preferred
Stock, 0 shares of Class A Common Stock and 0 shares of Class B
Common Stock.

 

(c)                        Immediately prior to the date hereof and
after giving effect to the Company Formation, except as set forth in this
Agreement, the Company does not have outstanding any stock or securities
convertible or exchangeable for any shares of its capital stock, nor does it
have outstanding any rights or options to subscribe for or to purchase any
capital stock or any stock or securities convertible into or exchangeable for
any capital stock or any agreement related thereto.

 

(d)                       As of the date hereof and after giving effect
to the Company Formation, the outstanding capital stock of the Company will be
as set forth on Schedule 2.2(d).

 

(e)                             The Shares of the Company will be and all of
the outstanding shares of the Company’s capital stock have been duly
authorized, validly issued, fully paid and nonassessable.

 

(f)                          The Company has delivered to the Purchaser
true and complete copies of its certificate of incorporation and bylaws as in
effect on the date hereof.

 

(g)                       The execution, delivery and performance of
this Agreement and all other agreements and transactions contemplated hereby
and thereby have been duly authorized by the Company. This Agreement
constitutes a valid and binding obligation of the Company, enforceable in
accordance with its terms, subject to the availability of equitable remedies
and to the laws of bankruptcy and other similar laws affecting creditors’
rights generally. The execution and delivery by the Company of this Agreement
and all other agreements and instruments contemplated hereby to be executed by
the Company, the filing of the Company’s amended and restated certificate of
incorporation with the Secretary of the State of Delaware, and the offering,
sale and issuance of the Shares hereunder, does not and will not (i) conflict
with or result in a breach of the terms, conditions or provisions of, (ii) constitute
a default under, (iii) result in the creation of any lien, security
interest, charge or encumbrance upon the Company’s capital stock or assets
pursuant to, (iv) give any third party the right to accelerate any

 

4

 

obligation
under, (v) result in a violation of or (vi) require any
authorization, consent, approval, exemption or other action by or notice to any
court or administrative or governmental body (other than in connection with
certain state and federal securities laws) pursuant to, the certificate of
incorporation or the bylaws, or any law, statute, rule, regulation, instrument,
order, judgment or decree to which the Company is subject or any agreement or
instrument to which the Company is a party.

 

(h)                       Neither the Company nor anyone acting on its
behalf has offered the Shares or any similar security or securities for sale to
or otherwise approached or negotiated in respect of such offer in a manner
constituting a general solicitation. Neither the Company nor anyone on its
behalf has taken or will take any action that would subject the issuance or
sale of any of the Company’s securities to the registration requirements of the
Securities Act. Assuming the truth and accuracy of the representations set
forth in Section 2.1 hereof, the offers and sales of the Shares pursuant
to the terms hereof are not required to be registered under the Securities Act
or any state securities laws.

 

(i)                           The Company is newly-formed as of December 23,
2005 for the purpose of acting as a holding company for Rosetta Stone Holdings
Inc. and has not conducted any business or incurred any material liabilities or
obligations except those in connection with the proposed acquisition.

 

(j)                           No representation, warranty or statement made
by the Company in this Agreement or pursuant to any agreement, certificate,
statement, financial disclosure or document furnished by or on behalf of the
Company in connection herewith or therewith contains any untrue statement of
material fact or omits to state a material fact necessary in order to make the
statements contained herein or therein, in light of the circumstances in which
they were made, not misleading.

 

ARTICLE III

MISCELLANEOUS

 

Section 3.1                                                Counterparts.
This Agreement may be executed in one or more counterparts, all of which shall
be considered one and the same Agreement, and shall become effective when one
or more such counterparts have been signed by each of the parties and delivered
to each party.

 

Section 3.2                                                Governing Law.
This Agreement shall be governed by and construed in accordance with the laws
of the State of Delaware.

 

[Signature Pages Follow]

 

5

 

	
   

  	
  ROSETTA STONE INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Tom Adams

  
	
   

  	
  Name:  Tom Adams

  
	
   

  	
  Title:    Chief Executive Officer
  and President

  

 

 

Signature Page to Subscription Agreement

 

 

	
   

  	
  ABS CAPITAL PARTNERS IV, L.P.

  
	
   

  	
  By:
  ABS Partners IV, L.L.C.,

  
	
   

  	
  Its
  General Partner

  
	
   

  	
   

  
	
   

  	
  By:

  	
    /s/
  Laura L. Witt

  
	
   

  	
   

  	
  Name: Laura
  L. Witt

  
	
   

  	
   

  	
  Title:   Managing
  Member

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  ABS CAPITAL PARTNERS IV-A, L.P.

  
	
   

  	
  By:
  ABS Partners IV, L.L.C.,

  
	
   

  	
  Its
  General Partner

  
	
   

  	
   

  
	
   

  	
  By:

  	
    /s/
  Laura L. Witt

  
	
   

  	
   

  	
  Name:
  Laura L. Witt

  
	
   

  	
   

  	
  Title:   Managing
  Member

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  ABS CAPITAL PARTNERS IV OFFSHORE FUND,

  
	
   

  	
  L.P.

  
	
   

  	
  By:
  ABS Partners IV, L.L.C.,

  
	
   

  	
  Its
  General Partner

  
	
   

  	
   

  
	
   

  	
  By:

  	
    /s/
  Laura L. Witt

  
	
   

  	
   

  	
  Name:
  Laura L. Witt

  
	
   

  	
   

  	
  Title:   Managing
  Member

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  ABS CAPITAL PARTNERS IV SPECIAL

  
	
   

  	
  OFFSHORE, L.P.

  
	
   

  	
  By:
  ABS Partners IV, L.L.C.,

  
	
   

  	
  Its
  General Partner

  
	
   

  	
   

  
	
   

  	
  By:

  	
    /s/
  Laura L. Witt

  
	
   

  	
   

  	
  Name:
  Laura L. Witt

  
	
   

  	
   

  	
  Title:   Managing
  Member

  

 

 

Signature Page to Subscription Agreement

 

 

	
   

  	
  NORWEST EQUITY PARTNERS VIII, LP

  
	
   

  	
   

  
	
   

  	
  By: Itasca Partners VIII, LLC

  
	
   

  	
  Its General Partner

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Steven M. Farsht

  
	
   

  	
  Name: Steven M. Farsht

  
	
   

  	
  Title:   Member

  

 

 

Signature Page to Subscription Agreement

 

 

	
   

  	
  MADISON CAPITAL FUNDING LLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ [ILLEGIBLE]

  
	
   

  	
  Title:

  	
    Managing Director

  
				

 

 

Signature Page to Subscription Agreement

 

 

	
   

  	
  TOM ADAMS

  
	
   

  	
   

  
	
   

  	
  /s/ Tom Adams

  

 

 

Signature Page to Subscription Agreement

 

 

Schedule A

 

 

SCHEDULE A

 

	
  Name of

  Purchaser

  	
   

  	
  Type of Stock

  Purchased

  	
   

  	
  Par Value

  Per Share

  	
   

  	
  Number of

  Shares Purchased

  	
   

  	
  Total Purchase

  Price

  	
   

  
	
  ABS Capital Partners IV, L.P.

  	
   

  	
  Class A
  Common Stock

  	
   

  	
  $

  	
  0.001

  	
   

  	
  25,717

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Series A-1
  Preferred Stock

  	
   

  	
  $

  	
  0.001

  	
   

  	
  231,452

  	
   

  	
  $

  	
  25,716,900.00

  	
   

  
	
  ABS Capital Partners IV-A, L.P.

  	
   

  	
  Class A
  Common Stock

  	
   

  	
  $

  	
  0.001

  	
   

  	
  861

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Series A-1 Preferred Stock

  	
   

  	
  $

  	
  0.001

  	
   

  	
  7,749

  	
   

  	
  $

  	
  861,000.00

  	
   

  
	
  ABS Capital Partners IV Offshore, L.P.

  	
   

  	
  Class A
  Common Stock

  Series A-1 Preferred Stock

  	
   

  	
  $

  $

  	
  0.001

  0.001

  	
   

  	
  1,477

  13,293

  	
   

  	
  $

  	
  1,477,000.00

  	
   

  
	
  ABS Capital Partners IV Special Offshore,
  L.P.

  	
   

  	
  Class A
  Common Stock

  Series A-1 Preferred Stock

  	
   

  	
  $

  $

  	
  0.001

  0.001

  	
   

  	
  1,007

  9,064

  	
   

  	
  $

  	
  1,007,100.00

  	
   

  
	
  Norwest Equity Partners VIII, L.P.

  	
   

  	
  Class B
  Common Stock

  	
   

  	
  $

  	
  0.001

  	
   

  	
  19,000

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Series A-2 Preferred Stock

  	
   

  	
  $

  	
  0.001

  	
   

  	
  171,000

  	
   

  	
  $

  	
  19,000,000.00

  	
   

  
	
  Madison Capital Funding LLC

  	
   

  	
  Class A
  Common Stock

  	
   

  	
  $

  	
  0.001

  	
   

  	
  1,000

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Series A-1 Preferred Stock

  	
   

  	
  $

  	
  0.001

  	
   

  	
  4,500

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Series A-2 Preferred Stock

  	
   

  	
  $

  	
  0.001

  	
   

  	
  4,500

  	
   

  	
  $

  	
  1,000,000.00

  	
   

  
	
  Tom Adams

  	
   

  	
  Class A
  Common Stock

  	
   

  	
  $

  	
  0.001

  	
   

  	
  600

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Series A-1 Preferred Stock

  	
   

  	
  $

  	
  0.001

  	
   

  	
  2,700

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Series A-2 Preferred Stock

  	
   

  	
  $

  	
  0.001

  	
   

  	
  2,700

  	
   

  	
  $

  	
  600,000.00

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00149-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00149-of-00352.parquet"}]]