Document:

Exhibit 10.1

 

EXECUTION
COPY

 

SECURITIES
PURCHASE AGREEMENT

 

This Securities Purchase Agreement (this “Agreement”)
is dated as of February 18, 2005, among Vistula Communications Services, Inc.,
a Delaware corporation (the “Company”), and each purchaser identified on
the signature pages hereto (each, including its successors and assigns, a “Purchaser”
and collectively the “Purchasers”).

 

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

 

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

 

ARTICLE
I.

DEFINITIONS

 

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

 

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

 

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

 

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

“Closing Dates”
means, collectively, the dates of the First Closing and the Second Closing.

 

“Closings” means
collectively, the closings of the purchase and sale of the Securities pursuant
to Section 2.1, and any reference to “Closing” or “Closings” shall be

 

 

construed to include the First Closing and the Second
Closing unless only one such closing is expressly referred to.

 

“Commission” means
the Securities and Exchange Commission.

 

“Common Stock”
means the common stock of the Company, par value $0.001 per share, and any
securities into which such common stock shall hereinafter have been
reclassified into.

 

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

 

“Company Counsel”
means Foley Hoag LLP.

 

“Conversion Price”
shall have the meaning ascribed to such term in the Debentures.

 

“Debentures”
means, the 8% Senior Convertible Debentures, in the form of Exhibit A,
due, subject to the terms therein, three years from their date of issuance,
issued by the Company to the Purchasers hereunder.

 

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

 

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

 

“Escrow Agent”
shall have the meaning set forth in the Escrow Agreement.

 

“Escrow Agreement”
shall mean the Escrow Agreement in substantially the form of Exhibit E
hereto executed and delivered contemporaneously with this Agreement.

 

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

 

“Exchange Act”
means the Securities Exchange Act of 1934, as amended.

 

“Exempt Issuance”
means the issuance of (a) shares of Common Stock or options to employees,
consultants, officers or directors of the Company pursuant to any stock or
option plan duly adopted by a majority of the non-employee members of the Board
of Directors of the Company or a majority of the members of a committee of
non-employee directors established for such purpose, (b) securities issued
hereunder or upon the exercise of or conversion of any securities issued
hereunder, convertible securities, options or warrants issued and outstanding
on the date of this Agreement, provided that

 

2

 

such securities have not been amended since the date
of this Agreement to increase the number of such securities or to decrease the
exercise or conversion price of any such securities, (c) warrants issued to an
institutional lender licensed as such by a governmental agency in direct
connection to a loan for money borrowed or as otherwise permitted by this
Agreement and the Transaction Documents, provided such warrant is issued with a
strike price at least equal to the market price of the Common Stock on the date
of such issuance and is not subject to further price adjustment in respect of
subsequent issuances of Common Stock or Common Stock Equivalents at a price
below such strike price and the issuance of Common Stock upon exercise of such
warrants; (d) Common Stock issued in connection with the settlement of claims
or litigation first arising after the First Closing Date up to an aggregate
maximum of 500,000 shares; (e) securities issued pursuant to acquisitions,
joint ventures or other strategic transactions, including, without limitation,
technology transfer and licensing transactions, but shall not include a
transaction in which the Company is issuing securities primarily for the
purpose of raising capital or to an entity whose primary business is investing
in securities,  (f) securities issued
under agreements executed by the Company prior to the date of this Agreement
and disclosed in the SEC Reports; and (g) warrants to be issued to the
Placement Agent pursuant to an agreement, dated as of February   , 2005, between the Placement Agent and the
Company and any warrants to be issued to Persons that are disclosed in Schedule
3.1(s) to this Agreement and the issuance of Common Stock upon exercise of such
warrants.

 

“First Closing”
shall have the meaning ascribed to such term in Section 2.1 hereof.

 

“First Closing Date”
means the date of the First Closing.

 

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

 

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

 

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

 

“Liens” means a
lien, charge, security interest, encumbrance, right of first refusal,
preemptive right or other restriction other than rights of first refusal,
preemptive rights or restrictions arising under the Transaction Documents or
under applicable securities laws.

 

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

 

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

 

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

 

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

 

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

 

“Placement Agent”
shall mean Indigo Securities, LLC.

 

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

 

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

 

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

 

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

 

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

 

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

 

“Required Minimum”
means, as of any date, the maximum aggregate number of shares of Common Stock
then issued or potentially issuable in the future pursuant to the Transaction
Documents, including any Underlying Shares issuable upon exercise or conversion
in full of all Warrants and Debentures , ignoring any conversion or exercise
limits set forth therein, and assuming that the Conversion Price is at all
times on and after the date of determination 75% of the then Conversion Price
on the Business Day immediately prior to the date of determination.

 

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

 

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

 

“Second Closing”
shall have the meaning ascribed to such term in Section 2.1 hereof.

 

“Second Closing Date”
means the date of the Second Closing.

 

4

 

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

 

“Securities Act”
means the Securities Act of 1933, as amended.

 

“Subscription Amount”
means, as to each Purchaser, the amounts set forth below such Purchaser’s
signature block on the signature pages hereto and next to the headings “First
Closing Subscription Amount” and the “Second Closing Subscription Amount”, in
United States Dollars and in immediately available funds.

 

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

 

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

 

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

 

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

 

“Trading Market” means,
as applicable, the following markets or exchanges on which the Common Stock is
listed or quoted for trading on the date in question: the American Stock
Exchange, the New York Stock Exchange, the Nasdaq National Market, the Nasdaq
SmallCap Market, the OTC Bulletin Board or the “Pink Sheets” published by the
Pink Sheets LLC.

 

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

 

“Underlying Shares”
means the shares of Common Stock issuable upon conversion of the Debentures and
upon exercise of the Warrants .

 

“Warrants” means
collectively the Common Stock purchase warrants, in the form of Exhibit C
delivered to the Purchasers at the First Closing in accordance with Section 2.2
hereof and the warrants issued to Indigo Securities, LLC (“Indigo”)
pursuant to the terms of the Placement Agent Agreement entered into by the
Company and Indigo, which Warrants shall be exercisable immediately and have a
term of exercise equal to 5 years.

 

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

 

5

 

ARTICLE
II.

PURCHASE
AND SALE

 

2.1                                 Closings.  On each Closing Date, upon the terms and
subject to the conditions set forth herein, concurrent with the execution and
delivery of this Agreement by the parties hereto, the Company agrees to sell,
and each Purchaser agrees to purchase in the aggregate, severally and not
jointly, up to $10,000,000 principal amount of the Debentures and
Warrants.  The parties hereto agree that
for United States Federal income tax purposes, the issue price of each
Debenture shall be not less than 99.26% of its principal amount.  The Closings shall take place in two stages
as set forth below (respectively, the “First Closing” and the “Second
Closing”).   Upon satisfaction of the
conditions set forth in Sections 2.2 and 2.3, the Closings shall occur at the
offices of the Escrow Agent, or such other location as the parties shall
mutually agree.

 

a)                                      First
Closing.   The First Closing shall be
for an aggregate Subscription Amount of not less than  $3,000,000 and shall occur within 5 Trading Days
of the date hereof.

 

b)                                     Second
Closing.  The Second Closing shall be
for an aggregate Subscription Amount of up to the difference between
$10,000,000 and the aggregate principal amount of the Debentures sold at the
First Closing, and shall occur within 30 calendar days after the First Closing
Date.

 

2.2                                 Deliveries.

 

a)                                      At
or prior to each Closing, unless otherwise indicated below, the Company shall
deliver or cause to be delivered to the Escrow Agent with respect to each
Purchaser at such Closing the following:

 

(i)                                     this
Agreement duly executed by the Company;

 

(ii)                                  a
Debenture with a principal amount equal to such Purchaser’s Subscription
Amount, registered in the name of such Purchaser;

 

(iii)                               a
Warrant registered in the name of such Purchaser to purchase up to a number of
shares of Common Stock equal to 75% of such Purchaser’s Subscription Amount
divided by $0.75, with an exercise price equal to $1.00, subject to adjustment
therein;

 

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

 

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

 

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(vi)                              the
Escrow Agreement duly executed by the Company.

 

b)                                     At
or prior to each Closing, unless otherwise indicated below, each Purchaser at
such Closing shall deliver or cause to be delivered to the Escrow Agent the
following:

 

(i)                                     this
Agreement duly executed by such Purchaser;

 

(ii)                                  such
Purchaser’s Subscription Amount, for the applicable Closing, by wire transfer
to the account of the Escrow Agent;

 

(iii)                               the
Escrow Agreement duly executed by such Purchaser; and

 

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

 

2.3                                 Closing
Conditions.

 

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

 

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

 

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

 

(iii)                               the
Company shall have received executed Agreements from Purchasers with
Subscription Amounts aggregating at least $3,000,000; and

 

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

 

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

 

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

 

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

 

7

 

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

 

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

 

(v)                                 At
any time prior to each Closing Date, trading in securities generally as
reported by Bloomberg Financial Markets shall not have been suspended or
limited, or minimum prices shall not have been established on securities whose
trades are reported by such service, or on any Trading Market, nor shall a
banking moratorium have been declared either by the United States or New York
State authorities nor shall there have occurred any material outbreak or
escalation of hostilities or other national or international calamity of such
magnitude in its effect on, or any material adverse change in, any financial
market which, in each case, in the reasonable judgment of each Purchaser, makes
it impracticable or inadvisable to purchase the Debentures at each Closing.

 

ARTICLE
III.

REPRESENTATIONS
AND WARRANTIES

 

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

 

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

 

(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 or default of any
of the provisions of its respective certificate or articles of incorporation,
bylaws or other organizational or charter documents.  Each of the Company and the Subsidiaries is
duly qualified to conduct business and is in good standing as a foreign
corporation or other entity in each jurisdiction in which the nature of the
business conducted or property owned by it makes such qualification necessary,
except where the failure to be so qualified or in good standing, as the case
may be, could

 

8

 

not have or
reasonably be expected to result in (i) a material adverse effect on the
legality, validity or enforceability of any Transaction Document, (ii) a
material adverse effect on the results of operations, assets, business,
prospects or financial condition of the Company and the Subsidiaries, taken as
a whole, or (iii) a material adverse effect on the Company’s ability to perform
in any material respect on a timely basis its obligations under any Transaction
Document (any of (i), (ii) or (iii), a “Material Adverse Effect”) and no
Proceeding has been instituted in any such jurisdiction revoking, limiting or
curtailing or seeking to revoke, limit or curtail such power and authority or
qualification.

 

(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 other
than in connection with the Required Approvals. 
Each Transaction Documents has been (or upon delivery will have been)
duly executed by the Company and, when delivered in accordance with the terms
hereof, will constitute the valid and binding obligation of the Company
enforceable against the Company in accordance with its terms except (i) as
limited by applicable bankruptcy, insolvency, reorganization, moratorium and
other laws of general application affecting enforcement of creditors’ rights
generally, (ii) the exercise of judicial or administrative discretion in
accordance with general equitable principles or public policy, (iii) as limited
by laws relating to the availability of specific performance, injunctive relief
or other equitable remedies and (iv) insofar as indemnification and contribution
provisions may be limited by applicable law.

 

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

 

9

 

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

 

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

 

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

 

10

 

Company’s capital stock to which the Company is a
party or, to the knowledge of the Company, between or among any of the Company’s
stockholders.

 

(h)                                 SEC
Reports; Financial Statements.  Since
the date of the filing of its Form 10-SB with the Commission, 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 (the
foregoing materials and Form 10-SB, as amended to date, including the exhibits
to each thereof, being collectively referred to herein as the “SEC Reports”)
on a timely basis or has received a valid extension of such time of filing and
has filed any such SEC Reports prior to the expiration of any such
extension.  As of their respective dates,
the SEC Reports complied in all material respects with the requirements of the
Securities Act and the Exchange Act and the rules and regulations of the
Commission promulgated thereunder, 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 United States generally accepted accounting principles
applied on a consistent basis during the periods involved (“GAAP”),
except as may be otherwise specified in such financial statements or the notes
thereto and except that unaudited financial statements may not contain all
footnotes required by GAAP, and fairly present in all material respects the
financial position of the Company and its consolidated subsidiaries as of and
for the dates thereof and the results of operations and cash flows for the
periods then ended, subject, in the case of unaudited statements, to normal,
immaterial, year-end audit adjustments.

 

(i)                                     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 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, (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 or option
plans. The Company does not have pending before the Commission any request for
confidential treatment of information.

 

(j)                                     Litigation.  Except as set forth in the SEC Reports, there
is no action, suit, inquiry, notice of violation, proceeding or investigation
pending or, to the knowledge of

 

11

 

the Company,
threatened against or affecting the Company, any Subsidiary or any of their
respective properties before or by any court, arbitrator, governmental or
administrative agency or regulatory authority (federal, state, county, local or
foreign) (collectively, an “Action”) which (i) adversely affects or
challenges the legality, validity or enforceability of any of the Transaction
Documents or the Securities or (ii) could, if there were an unfavorable
decision, have or reasonably be expected to result in a Material Adverse
Effect.  Except as set forth in the SEC
Reports, neither the Company nor any Subsidiary, nor to the knowledge of the
Company, 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 or
reasonable expectation 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.

 

(k)                                  Labor
Relations.  No material labor dispute
exists or, to the knowledge of the Company, is threatened with respect to any
of the employees of the Company which could reasonably be expected to result in
a Material Adverse Effect. Neither the
Company nor any of its Subsidiaries is a party to a collective bargaining
agreement.

 

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

 

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

 

(n)                                 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 the business of the Company and the
Subsidiaries and good and marketable title in all personal property owned by
them that is material to the business of the Company and the Subsidiaries, in
each case free and clear of all Liens, except for Liens as do not materially

 

12

 

affect the value
of such property and do not materially interfere with the use made and proposed
to be made of such property by the Company and the Subsidiaries and Liens for
the payment of federal, state or other taxes, the payment of which is neither
delinquent nor subject to penalties.  To
the Company’s knowledge, 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.

 

(o)                                 Patents
and Trademarks.  The Company and the
Subsidiaries have, or have rights to use, all patents, patent applications,
trademarks, trademark applications, service marks, trade names, copyrights,
licenses and other similar rights necessary or material for use in connection
with their respective businesses as described in the SEC Reports and where the
failure to  have such rights could have 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.
To the knowledge and reasonable expectation 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.

 

(p)                                 Insurance.  The Company and the Subsidiaries are insured
by insurers of recognized financial responsibility against such losses and
risks and in such amounts as are prudent and customary in the businesses in
which the Company and the Subsidiaries are engaged.  To the best of Company’s knowledge, such
insurance contracts and policies are accurate and complete.  Neither the Company nor any Subsidiary has
any reason to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business without a
significant increase in cost.

 

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

 

(r)                                    Sarbanes-Oxley;
Internal Accounting Controls.  The
Company is in material compliance with all provisions of the Sarbanes-Oxley Act
of 2002 which are

 

13

 

applicable to it as of each Closing Date.  The Company and the Subsidiaries maintain a
system of internal accounting controls sufficient to provide reasonable
assurance that (i) transactions are executed in accordance with management’s
general or specific authorizations, (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with GAAP and to
maintain asset accountability, (iii) access to assets is permitted only in
accordance with management’s general or specific authorization, and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences. The Company has established disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and
designed such disclosure controls and procedures to ensure that material
information relating to the Company, including its Subsidiaries, is made known
to the certifying officers by others within those entities, particularly during
the period in which the Company’s most recently filed periodic report under the
Exchange Act, as the case may be, is being prepared.  The Company’s certifying officers have
evaluated the effectiveness of the Company’s controls and procedures as of the
date prior to the filing date of the most recently filed periodic report under
the Exchange Act (such date, the “Evaluation Date”).  The Company presented in its most recently
filed periodic report under the Exchange Act the conclusions of the certifying
officers about the effectiveness of the disclosure controls and procedures
based on their evaluations as of the Evaluation Date.  Since the Evaluation Date, there have been no
significant changes in the Company’s internal controls (as such term is defined
in Item 307(b) of Regulation S-K under the Exchange Act) or, to the Company’s
knowledge, in other factors that could significantly affect the Company’s
internal controls.

 

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

 

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

 

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

 

14

 

(v)                                 Registration
Rights.  No Person has any right to
cause the Company to effect the registration under the Securities Act of any
securities of the Company prior to the execution of this Agreement.

 

(w)                               Listing
and Maintenance Requirements.  The
Company’s Common Stock is registered pursuant to Section 12(g) of the Exchange
Act, and the Company has taken no action designed to, or which to its knowledge
is likely to have the effect of, terminating the registration of the Common
Stock under the Exchange Act nor has the Company received any notification that
the Commission is contemplating terminating such registration.

 

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

 

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

 

(z)                                   No
Integrated Offering Assuming the accuracy of the Purchasers’
representations and warranties set forth in Section 3.2, neither the Company,
nor any of its affiliates, nor any Person acting on its or their behalf has,
directly or indirectly, made any offers or sales of any security or solicited
any offers to buy any security, under circumstances that would cause this
offering of the Securities to be integrated with prior offerings by the Company
for purposes of the Securities Act or would trigger any applicable shareholder
approval provisions, including, without limitation, under the rules and
regulations of any exchange or automated quotation system on which any of the
securities of the Company are listed or designated.

 

15

 

(aa)                            Solvency.  Based on the financial condition of the
Company as of each Closing Date after giving effect to the receipt by the
Company of the proceeds from the sale of the Securities hereunder, (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).  The Company has no knowledge of any facts or
circumstances which lead it to believe that it will file for reorganization or
liquidation under the bankruptcy or reorganization laws of any jurisdiction
within one year from each Closing Date. 
The SEC Reports set forth as of the dates thereof all outstanding
secured and unsecured Indebtedness of the Company or any Subsidiary, or for
which the Company or any Subsidiary has commitments.  For the purposes of this Agreement, “Indebtedness”
shall mean (a) any liabilities for borrowed money or amounts owed in excess of
$50,000 (other than trade accounts payable incurred in the ordinary course of
business), (b) all guaranties, endorsements and other contingent obligations in
respect of Indebtedness of others, whether or not the same are or should be
reflected in the Company’s balance sheet (or the notes thereto), except
guaranties by endorsement of negotiable instruments for deposit or collection
or similar transactions in the ordinary course of business; and (c) the present
value of any lease payments in excess of $50,000 due under leases required to
be capitalized in accordance with GAAP. 
Neither the Company nor any Subsidiary is in default with respect to any
Indebtedness.

 

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

 

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

 

16

 

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

 

(ee)                            Accountants.  The Company’s accountants are set forth on Schedule
3.1(ee) of the Disclosure Schedule. 
To the Company’s knowledge, such accountants, who the Company expects
will express their opinion with respect to the financial statements to be
included in the Company’s Annual Report on Form 10-KSB for the year ended
December 31, 2004, are a registered public accounting firm as required by the
Securities Act.

 

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

 

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

 

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

 

(ii)                                  Environmental Laws.  The Company and its Subsidiaries (i) are to
the Company’s knowledge in compliance with any and all applicable foreign,
federal, state

 

17

 

and local laws and regulations relating to the
protection of human health and safety, the environment or hazardous or toxic
substances or wastes, pollutants or contaminants (“Environmental Laws”), (ii) have received all permits, licenses
or other approvals required of them under applicable Environmental Laws to
conduct their respective businesses and (iii) are in compliance with all terms
and conditions of any such permit, license or approval; except where such
noncompliance or failure to receive permits, licenses or approvals referred to
in clauses (i), (ii) or (iii) above could not have, or reasonably be expected
to have, individually or in the aggregate, a Material Adverse Effect.

 

(jj)                                  Employee
Benefit Plans; ERISA.

 

(i)                                     Schedule
3.1(jj)(i) sets forth a true, correct and complete list of all employee benefit
plans, programs, policies and arrangements, whether written or unwritten (the “Company Plans”), that the Company,
any Subsidiary or any other corporation or business which is now or at the
relevant time was a member of a controlled group of companies or trades or
businesses including the Company or any Subsidiary, within the meaning of
Section 414 of the Internal Revenue Code of 1986, as amended (the “Code”), maintain or have
maintained on behalf of current or former members, partners, principals,
directors, officers, managers, employees, consultants or other personnel.

 

(ii)                                  There
has been no prohibited transaction within the meaning of Section 406 of the
Employee Retirement Income Security Act of 1974, as amended (“ERISA”), or Section 4975 of the
Code, with respect to any of the Company Plans; (ii) none of the Company Plans
is or was subject to Section 412 of the Code or Section 302 or Title IV of
ERISA; and (iv) each of the Company Plans has been operated and administered in
all material respects in accordance with all applicable laws, including
ERISA.  There are no actions, suits or
claims pending or threatened (other than routine claims for benefits), whether
by participants, the Internal Revenue Service, the Department of Labor or
otherwise, with respect to any Company Plan and no facts exist under which any
such actions, suits or claims are likely to be brought or under which the
Company or any Subsidiary could incur any liability with respect to a
Company  Plan other than in the ordinary
course.  None of the Company Plans is or
was a multiemployer plan within the meaning of Section 3(37) of ERISA.

 

(iii)                               Neither
the Company nor any Subsidiary has announced, proposed or agreed to any change
in benefits under any Company Plan or the establishment of any new Company
Plan.  There have been no changes in the
operation or interpretation of any Company Plan since the most recent annual
report, which would have any material effect on the cost of operating,
maintaining or providing benefits under such Company Plan.

 

(iv)                              Neither
the Company nor any Subsidiary has incurred any liability for the
misclassification of employees as leased employees or independent contractors.

 

18

 

(v)                                 Except
as provided for in this Agreement and in the Transaction Documents, the
consummation of the transactions contemplated by this Agreement, either alone
or in combination with another event, will not (i) result in any individual
becoming entitled to any increase in the amount of compensation or benefits or
any additional payment from the Company or any Subsidiary (including, without
limitation, severance, golden parachute or bonus payments or otherwise), or
(ii) accelerate the vesting or timing of payment of any benefits or
compensation payable in respect of any individual.

 

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

 

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

 

(b)                                 Own
Account.  Such Purchaser understands
that the Securities are “restricted securities” and have not been registered
under the Securities Act or any applicable state securities law and is
acquiring the Securities as principal for its own account and not with a view
to distributing or reselling such Securities or any part thereof, has no
present intention of distributing any of such Securities and has no arrangement
or understanding with any other persons regarding the distribution of such Securities
(this representation and warranty not limiting such Purchaser’s right to sell
the Securities pursuant to a Registration Statement or otherwise in compliance
with applicable federal and state securities laws).  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 any Warrants or converts any Debentures it will be
either: (i) an “accredited investor” as defined in

 

19

 

Rule 501(a)(1), (a)(2), (a)(3), (a)(7) or (a)(8) under
the Securities Act or (ii) a “qualified institutional buyer” as defined in Rule
144A(a) under the Securities Act.  Such
Purchaser is not required to be registered as a broker-dealer under Section 15
of the Exchange Act.

 

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

 

(e)                                  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.

 

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                                 Transfer
Restrictions.

 

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

 

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

 

[NEITHER] THESE SECURITIES [NOR THE SECURITIES INTO
WHICH THESE SECURITIES ARE EXERCISABLE] [CONVERTIBLE] HAVE BEEN REGISTERED WITH
THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY
STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE

 

20

 

“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 REASONABLY SATISFACTORY TO THE COMPANY 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 OR OTHER LOAN SECURED BY SUCH
SECURITIES.

 

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

 

(c)                                  Certificates
evidencing the Underlying Shares shall not contain any legend (including the
legend set forth in Section 4.1(b) hereof): (i) while a registration statement
(including the Registration Statement) covering the resale of such security is
effective under the Securities Act, or (ii) following any sale of such
Underlying Shares pursuant to Rule 144, or (iii) if such Underlying Shares are
eligible for sale under Rule 144(k), or (iv) if such legend is not required
under applicable requirements of the Securities Act (including judicial
interpretations and pronouncements issued by the staff of the Commission). The
Company shall cause its counsel to issue a legal opinion to the Company’s
transfer agent promptly after the Effective Date if required by the Company’s
transfer agent to effect the removal of the legend hereunder.  If all or any portion of a Debenture or
Warrant is converted or exercised (as applicable) at a time when there is an
effective registration statement to cover the resale of the Underlying Shares,
or if such Underlying Shares may be sold under Rule 144(k) or if such legend is
not otherwise required under applicable requirements of the Securities Act
(including judicial interpretations thereof) then such Underlying Shares shall
be issued free of all legends.

 

21

 

The Company agrees that following the Effective Date
or at such time as such legend is no longer required under this Section 4.1(c),
it will, no later than three Business Days following the delivery by a
Purchaser to the Company or the Company’s transfer agent of a certificate
representing Underlying Shares, as applicable, issued with a restrictive legend
(such third Business Day, the “Legend Removal Date”), deliver or cause
to be delivered to such Purchaser a certificate representing such shares that
is free from all restrictive and other legends. 
The Company may not make any notation on its records or give
instructions to any transfer agent of the Company that enlarge the restrictions
on transfer set forth in this Section. 
Certificates for Securities subject to legend removal hereunder shall be
transmitted by the transfer agent of the Company to the Purchasers by crediting
the account of the Purchaser’s prime broker with the Depository Trust Company
System.

 

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

 

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

 

(f)            Until the earlier of (i) the date
that each Purchaser holds less than 20% of the Debentures initially purchased
hereunder by such Purchaser or (ii) the one year anniversary of the Effective
Date, the Company shall not undertake a reverse or forward stock split or
reclassification of the Common Stock without the prior written consent of the
Purchasers holding a majority in principal amount outstanding of the
Debentures.

 

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

 

22

 

the dilutive
effect that such issuance may have on the ownership of the other stockholders
of the Company.

 

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

 

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

 

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

 

4.6           Securities Laws Disclosure;
Publicity.  The Company shall, by
5:30 p.m. Eastern time on the fourth Business Day following the date hereof,
issue a Current Report on Form 8-K, reasonably acceptable to each Purchaser
disclosing the material terms of the transactions contemplated hereby, and
shall attach the Transaction Documents thereto. 
The Company and the Placement Agent shall consult with each other in
issuing any other press releases with respect to the transactions contemplated
hereby, and neither the Company nor the Placement Agent shall issue any such
press release or otherwise make any such public statement in connection with
the transactions contemplated hereby without the prior consent of the Company,
with respect to any such press release of the Placement Agent, or without the
prior consent of each Purchaser, with respect to any such press release of the
Company, which consent shall not unreasonably be withheld, except if such
disclosure is required by law, in which case the disclosing party shall
promptly provide the other party with prior notice of such public statement or
communication.  Notwithstanding the
foregoing, the Company shall not publicly disclose the name of the Placement
Agent, or include the name of any Purchaser in any filing with the Commission
or any regulatory agency or Trading Market, without the prior written consent
of such Purchaser, except

 

23

 

(i) as required by
federal securities law in connection with the registration statement
contemplated by the Registration Rights Agreement and (ii) to the extent such
disclosure is required by law or Trading Market regulations, in which case the
Company shall provide the Purchasers with prior notice of such disclosure
permitted under subclause (i) or (ii).

 

4.7           Shareholders Rights Plan.  No claim will be made or enforced by the
Company or, to the knowledge of the Company, any other Person that any
Purchaser is an “Acquiring Person” under any shareholders rights plan or
similar plan or arrangement in effect or hereafter adopted by the Company, or that
any Purchaser could be deemed to trigger the provisions of any such plan or
arrangement, by virtue of receiving Securities under the Transaction Documents
or under any other agreement between the Company and the Purchasers. The
Company shall conduct its business in a manner so that it will not become
subject to the Investment Company Act.

 

4.8           Non-Public Information.  The Company covenants and agrees that it will
not and will instruct any other Person acting on its behalf to not 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.

 

4.9           Use of Proceeds.  The Company shall use the net proceeds from
the sale of the Securities hereunder substantially as set forth in Schedule 4.9
and not for the satisfaction of any portion of the Company’s debt (other than
payment of trade payables or accrued expenses in the ordinary course of the
Company’s business and prior practices), to redeem any Common Stock or Common
Stock Equivalents or to settle any outstanding litigation.

 

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

 

24

 

agents, employees or
controlling persons shall have any liability to the Company or any Person
asserting claims on behalf of or in right of the Company solely as a result of
acquiring the Securities under this Agreement except to the extent any covenant
or warranty owing to the Company is breached.

 

4.11         Indemnification of Purchasers.   Subject to the provisions of this Section
4.11, 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 that any such Purchaser Party may suffer or incur as a result of
or relating to (a) any breach of any of the representations, warranties,
covenants or agreements made by the Company in this Agreement or in the other
Transaction Documents or (b) any action instituted against a Purchaser, or any
of them or their respective Affiliates, by any stockholder of the Company who
is not an Affiliate of such Purchaser, with respect to any of the transactions
contemplated by the Transaction Documents (unless such action is based upon a
breach of such Purchaser’s representation, warranties or covenants under the
Transaction Documents or any agreements or understandings such Purchaser may
have with any such claimant stockholder or any violations by the Purchaser of
state or federal securities laws or any conduct by such Purchaser which
constitutes fraud, gross negligence, willful misconduct or malfeasance).  If any action shall be brought against any
Purchaser Party in respect of which indemnity may be sought pursuant to this
Agreement, such Purchaser Party shall promptly notify the Company in writing,
and the Company shall have the right to assume the defense thereof with counsel
of its own choosing.  Any Purchaser Party
shall have the right to employ separate counsel in any such action and
participate in the defense thereof, but the fees and expenses of such counsel
shall be at the expense of such Purchaser Party except to the extent that (i)
the employment thereof has been specifically authorized by the Company in
writing, (ii) the Company has failed after a reasonable period of time to
assume such defense and to employ counsel or (iii) in such action there is, in
the reasonable opinion of such separate counsel, a material conflict on any
material issue between the position of the Company and the position of such
Purchaser Party.  The Company will not be
liable to any Purchaser Party under this Agreement (i) for any settlement by a
Purchaser Party effected without the Company’s prior written consent, which
shall not be unreasonably withheld or delayed; or (ii) to the extent, but only
to the extent that a loss, claim, damage or liability is attributable to any
Purchaser Party’s breach of any of the representations, warranties, covenants
or agreements made by the Purchasers in this Agreement or in the other
Transaction Documents.

 

4.12         Reservation and Listing of
Securities.

 

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

 

(b)  If, on any
date, the number of authorized but unissued (and otherwise unreserved) shares
of Common Stock is less than the Required Minimum on such date, then the Board
of Directors of the Company shall use commercially reasonable efforts to

 

25

 

amend the Company’s certificate or articles of
incorporation to increase the number of authorized but unissued shares of
Common Stock to at least the Required Minimum at such time, as soon as possible
and in any event not later than the 90th day after such date.

 

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

 

4.13         Participation in Future Financing.
From the date hereof until the six month anniversary of the Effective Date,
upon any financing by the Company or any of its Subsidiaries of Common Stock or
Common Stock Equivalents (a “Subsequent Financing”), each Purchaser
shall have the right to participate in up to 100% of the Subsequent Financing
(the “Participation Maximum”).  At
least 5 Business Days prior to the closing of the Subsequent Financing, the
Company shall deliver to each Purchaser a written notice of its intention to
effect a Subsequent Financing (“Pre-Notice”), which Pre-Notice shall ask
such Purchaser if it wants to review the details of such financing (such
additional notice, a “Subsequent Financing Notice”).  Upon the request of a Purchaser, and only
upon a request by such Purchaser, for a Subsequent Financing Notice, the
Company shall promptly, but no later than 1 Business Day after such request,
deliver a Subsequent Financing Notice to such Purchaser.  The Subsequent Financing Notice shall describe
in reasonable detail the proposed terms of such Subsequent Financing, the
amount of proceeds intended to be raised thereunder, the Person with whom such
Subsequent Financing is proposed to be effected, and attached to which shall be
a term sheet or similar document relating thereto.    If by 5:30 p.m. (New York City time) on the
5th Business Day after all of the Purchasers have received the
Pre-Notice, notifications by the Purchasers of their willingness to participate
in the Subsequent Financing (or to cause their designees to participate) is, in
the aggregate, less than the total amount of the Subsequent Financing, then the
Company may effect the remaining portion of such Subsequent Financing on the
terms and to the Persons set forth in the Subsequent Financing Notice.  If the Company receives no notice from a
Purchaser as of such 5th Business Day, such Purchaser shall be
deemed to have notified the Company that it does not elect to participate.  The Company must provide the Purchasers with
a second Subsequent Financing Notice, and the Purchasers will again have the
right of participation set forth above in this Section 4.13, if the Subsequent
Financing subject to the initial Subsequent Financing Notice is not consummated
for any reason on the terms set forth in such Subsequent Financing Notice
within 20 Business Days after the date of the initial Subsequent Financing
Notice. In the event the Company receives responses to Subsequent Financing
Notices from Purchasers seeking to purchase more than the aggregate amount of
the Subsequent Financing, each such Purchaser shall have the right to purchase
their Pro Rata Portion (as defined below) of the Participation Maximum.  “Pro Rata Portion” is the ratio of (x)
the Subscription Amount of

 

26

 

Securities purchased by a participating Purchaser and (y) the sum of
the aggregate Subscription Amount of all participating Purchasers.  Notwithstanding the foregoing, this Section
4.13 shall not apply in respect of an Exempt Issuance.

 

4.14         Subsequent Equity Sales.  From the date hereof until 180 days after the
Effective Date, neither the Company nor any Subsidiary shall file a
registration statement with respect to any shares of Common Stock or Common
Stock Equivalents unless the Company provides each Purchaser with an
unconditional opinion of counsel that such other registration statement will
not cause the Securities to be integrated with such subsequent offering for
purposes of the Securities Act or the rules of any Trading Market; provided,
however, the 180 day period set forth in this Section 4.14 shall be
extended for the number of Business Days during such period in which (y)
trading in the Common Stock is suspended by any Trading Market, or (z)
following the Effective Date, the Registration Statement is not effective or
the prospectus included in the Registration Statement may not be used by the
Purchasers for the resale of the Underlying Shares.  In addition to the limitations set forth
herein, from the date hereof until the three year anniversary of the Effective
Date, the Company shall be prohibited from effecting or entering into an
agreement to effect any (i) equity line of credit financing (including any
accounts receivable financing created through the sale of Common Stock or with
any Common Stock or Common Stock Equivalent compensation to the lender) or (ii)
Subsequent Financing involving a “Variable Rate Transaction” or an “MFN
Transaction” (each as defined below). 
The term “Variable Rate Transaction” shall mean a transaction in
which the Company issues or sells (i) any debt or equity securities that are
convertible into, exchangeable or exercisable for, or include the right to
receive additional shares of Common Stock either (A) at a conversion, exercise
or exchange rate or other price that is based upon and/or varies with the
trading prices of or quotations for the shares of Common Stock at any time
after the initial issuance of such debt or equity securities, or (B) with a
conversion, exercise or exchange price that is subject to being reset at some future
date after the initial issuance of such debt or equity security or upon the
occurrence of specified or contingent events directly or indirectly related to
the business of the Company or the market for the Common Stock or (ii) enters
into any agreement, including, but not limited to, an equity line of credit,
whereby the Company may sell securities at a future determined price.  The term “MFN Transaction” shall mean
a transaction in which the Company issues or sells any securities in a capital
raising transaction or series of related transactions which grants to an
investor the right to receive additional shares based upon future transactions
of the Company on terms more favorable than those granted to such investor in
such offering. Any Purchaser shall be entitled to obtain injunctive relief
against the Company to preclude any such issuance, which remedy shall be in
addition to any right to collect damages. Notwithstanding the foregoing, this
Section 4.14 shall not apply in respect of an Exempt Issuance, except that no
Variable Rate Transaction or MFN Transaction shall be an Exempt Issuance.

 

4.15         Equal Treatment of Purchasers.  No consideration shall be offered or paid to
any person to amend or consent to a waiver or modification of any provision of
any of the Transaction Documents unless the same consideration is also offered
to all of the parties to the Transaction Documents. Further, the Company shall
not make any payment of principal or interest on the Debentures in amounts
which are disproportionate to the respective principal amounts outstanding on
the Debentures at any applicable time. 
For clarification purposes, this provision constitutes a separate right
granted to each Purchaser by the Company and negotiated separately by each
Purchaser, and is intended to treat for the Company the Debenture holders as

 

27

 

a class and shall not in any way be construed as the Purchasers acting
in concert or as a group with respect to the purchase, disposition or voting of
Securities or otherwise.

 

4.16         Most Favored Nation Provision.  From the date hereof until the earlier of (a)
the Securities are no longer outstanding or (b) the Effective Date, any time
the Company effects a Subsequent Financing, each Purchaser may elect, in its
sole discretion, to exchange all or some of the Debentures then held by it for
any securities issued in a Subsequent Financing based on the outstanding
principal amount of the Debenture plus accrued but unpaid interest and other
fees owed and the effective price at which such securities were sold in such
Subsequent Placement.

 

4.17         Insurance.  Within 45 calendar days of the First Closing,
the Company shall obtain a policy of directors and officers liability insurance
in an amount of at least $3,000,000 with a retention amount of not more than
$300,000.

 

ARTICLE
V.

MISCELLANEOUS

 

5.1           Termination.  This Agreement may be terminated by any
Purchaser, by written notice to the other parties, if the First Closing has not
been consummated on or before February      , 2005;
provided that no such termination will affect the right of any party to sue for
any breach by the other party (or parties).

 

5.2           Fees and Expenses.  Except as expressly set forth in the
Transaction Documents to the contrary, each party shall pay the fees and
expenses of its advisers, counsel, accountants and other experts, if any, and
all other expenses incurred by such party incident to the negotiation,
preparation, execution, delivery and performance of this Agreement.  The Company shall pay all transfer agent
fees, stamp taxes and other taxes and duties levied in connection with the
delivery of any Securities.

 

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

 

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

 

28

 

5.5           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 each Purchaser or, in the case of a waiver, by the party
against whom enforcement of any such waiver is sought.  No waiver of any default with respect to any
provision, condition or requirement of this Agreement shall be deemed to be a continuing
waiver in the future or a waiver of any subsequent default or a waiver of any
other provision, condition or requirement hereof, nor shall any delay or
omission of either party to exercise any right hereunder in any manner impair
the exercise of any such right.

 

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

 

5.7           Successors and Assigns.  This Agreement shall be binding upon and
inure to the benefit of the parties and their successors and permitted
assigns.  The Company may not assign this
Agreement or any rights or obligations hereunder without the prior written
consent of each Purchaser.  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”.

 

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

 

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

 

29

 

contained herein shall be deemed to limit in any way any right to serve
process in any manner permitted by law.  THE
PARTIES HERETO EACH WAIVE ALL RIGHTS TO A TRIAL BY JURY.  If either party shall commence an action or
proceeding to enforce any provisions of the Transaction Documents, then the
prevailing party in such action or proceeding shall be reimbursed by the other
party for its attorneys’ fees and other costs and expenses incurred with the
investigation, preparation and prosecution of such action or proceeding.

 

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

 

5.11         Execution.  This Agreement may be executed in two or more
counterparts, all of which when taken together shall be considered one and the
same agreement and shall become effective when counterparts have been signed by
each party and delivered to the other party, it being understood that both
parties need not sign the same counterpart. 
In the event that any signature is delivered by facsimile transmission,
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.

 

5.12         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.

 

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

 

5.14         Replacement of Securities.  If any certificate or instrument evidencing
any Securities is mutilated, lost, stolen or destroyed, the Company shall issue
or cause to be issued in exchange and substitution for and upon cancellation
thereof, 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.

 

5.15         Remedies.  In addition to being entitled to exercise all
rights provided herein or granted by law, including recovery of damages, each
of the Purchasers and the Company will be

 

30

 

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.

 

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

 

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

 

5.18         Independent Nature of Purchasers’
Obligations and Rights.  The
obligations of each Purchaser under any Transaction Documents are several and
not joint with the obligations of any other Purchaser, and no Purchaser shall
be responsible in any way for the performance of the obligations of any other
Purchaser under any Transaction Documents. 
Nothing contained herein or in any Transaction Documents, 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

 

31

 

concert or as a group with respect to such obligations or the
transactions contemplated by the Transaction Documents.  Each Purchaser shall be entitled to
independently protect and enforce its rights, including without limitation the
rights arising out of this Agreement or out of the other Transaction Documents,
and it shall not be necessary for any other Purchaser to be joined as an
additional party in any proceeding for such purpose.  Each Purchaser has been represented by its
own separate legal counsel in their review and negotiation of the Transaction
Documents.The Company has elected to provide all Purchasers with the same terms
and Transaction Documents for the convenience of the Company and not because it
was required or requested to do so by the Purchasers.

 

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

 

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

 

(Signature Pages Follow)

 

32

 

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.

 

 

	
  VISTULA COMMUNICATIONS
  SERVICES, INC.

  	
  Address for Notice:

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
  /s/

  	
   Rupert Galliers-Pratt

  	
   

  	
   

  
	
   

  	
  Name:

  	
   Rupert Galliers-Pratt

  	
   

  	
  40
  Portman Square, 4th Floor

  
	
   

  	
  Title:

  	
   Chairman

  	
   

  	
  London W1
  6LT

  United Kingdom

  ATTN: Chief Executive Officer

  Fax: +44 (0) 20 7487 4001

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

  	
   

  
	
   

  	
   

  
	
  Foley Hoag LLP

  155 Seaport Boulevard

  Boston, MA 02210

  Attn: Paul Bork, Esq.

  Fax: 617.832.7000

  	
   

  

 

[REMAINDER OF PAGE
INTENTIONALLY LEFT BLANK

SIGNATURE PAGE FOR
PURCHASER FOLLOWS]

 

33

 

[PURCHASER SIGNATURE
PAGES TO VISTULA SECURITIES PURCHASE AGREEMENT]

 

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

 

	
  Name of Purchaser:

  	
  Bushido Capital Master Fund, L.P.

  	
   

  
	
  Signature of Authorized Signatory of Purchaser:

  	
   /s/ Christopher Rossman

  	
   

  
	
  Name of Authorized Signatory:

  	
       Christopher Rossman

  	
   

  
	
  Title of Authorized Signatory: 

  	
          Managing
  Director

  	
   

  
	
  Email Address of Purchaser:

  	
               rossman@bushidocapital.com

  	
   

  
							

 

Address for Notice of Purchaser:

 

c/o Bushido Capital Partners, Ltd.

275 Seventh Avenue, Suite 2000

New York, NY  10001

 

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

 

 

 

First Closing Subscription Amount:  
$500,000

Second Closing Subscription Amount:

Warrant Shares:   500,000

 

EIN Number:  74-3119115

 

Blocker Provision Election: 
Please choose from one of the two options below:

 

(check one)

ý    My
Warrant and Debenture shall contain a 4.99% blocker provision.

o    My
Warrant and Debenture shall contain a 9.99% blocker provision.

 

[SIGNATURE PAGES
CONTINUE]

 

34

 

[PURCHASER SIGNATURE
PAGES TO VISTULA SECURITIES PURCHASE AGREEMENT]

 

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

 

	
  Name of Purchaser:

  	
  Oxford Capital Management LLC

  	
   

  
	
  Signature of Authorized Signatory of Purchaser:

  	
   /s/ Joel T. Comiteau

  	
   

  
	
  Name of Authorized Signatory:

  	
       Joel T. Comiteau

  	
   

  
	
  Title of Authorized Signatory: 

  	
          President

  	
   

  
	
  Email Address of Purchaser:

  	
               mbfain@yahoo.com

  	
   

  
							

 

Address for Notice of Purchaser:

 

237 Park Ave., Suite 900

New York, NY  10017

 

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

 

 

 

First Closing Subscription Amount:

Second Closing Subscription Amount:

Warrant Shares:

 

EIN Number:  13-3843197

 

Blocker Provision Election: 
Please choose from one of the two options below:

 

(check one)

ý    My
Warrant and Debenture shall contain a 4.99% blocker provision.

o    My
Warrant and Debenture shall contain a 9.99% blocker provision.

 

[SIGNATURE PAGES
CONTINUE]

 

35

 

[PURCHASER SIGNATURE
PAGES TO VISTULA SECURITIES PURCHASE AGREEMENT]

 

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

 

	
  Name of Purchaser:

  	
  Stratford Partners, L.P.

  	
   

  
	
  Signature of Authorized Signatory of Purchaser:

  	
   /s/ Mark Fain

  	
   

  
	
  Name of Authorized Signatory:

  	
       Mark Fain

  	
   

  
	
  Title of Authorized Signatory: 

  	
          General
  Partner

  	
   

  
	
  Email Address of Purchaser:

  	
               mbfain@yahoo.com

  	
   

  
							

 

Address for Notice of Purchaser:

 

237 Park Ave., Suite 900

New York, NY  10017

 

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

 

 

 

First Closing Subscription Amount:  
$600,000

Second Closing Subscription Amount:

Warrant Shares:

 

EIN Number:  36-4457433

 

Blocker Provision Election: 
Please choose from one of the two options below:

 

(check one)

ý    My
Warrant and Debenture shall contain a 4.99% blocker provision.

o    My
Warrant and Debenture shall contain a 9.99% blocker provision.

 

[SIGNATURE PAGES
CONTINUE]

 

36

 

[PURCHASER SIGNATURE
PAGES TO VISTULA SECURITIES PURCHASE AGREEMENT]

 

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

 

	
  Name of Purchaser:

  	
  Gryphon Master Fund, L.P.

  	
   

  
	
  Signature of Authorized Signatory of Purchaser:

  	
   /s/ E.B. Lyon IV

  	
   

  
	
  Name of Authorized Signatory:

  	
       E.B. Lyon IV

  	
   

  
	
  Title of Authorized Signatory: 

  	
          Authorized
  Agent

  	
   

  
	
  Email Address of Purchaser:

  	
               tim@gryphonlp.com

  	
   

  
							

 

Address for Notice of Purchaser:

 

100 Crescent Court

Suite 490

Dallas, TX  75201

 

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

 

 

 

First Closing Subscription Amount:  
$999,999.75

Second Closing Subscription Amount:

Warrant Shares:   1,000,000

 

EIN Number:  75-2900328

 

Blocker Provision Election: 
Please choose from one of the two options below:

 

(check one)

o    My
Warrant and Debenture shall contain a 4.99% blocker provision.

ý    My Warrant and Debenture shall contain a
9.99% blocker provision.

 

[SIGNATURE PAGES
CONTINUE]

 

37

 

[PURCHASER SIGNATURE
PAGES TO VISTULA SECURITIES PURCHASE AGREEMENT]

 

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

 

	
  Name of Purchaser:

  	
  GSSF Master Fund, LP

  	
   

  
	
  Signature of Authorized Signatory of Purchaser:

  	
   /s/ E.B. Lyon IV

  	
   

  
	
  Name of Authorized Signatory:

  	
       E.B. Lyon IV

  	
   

  
	
  Title of Authorized Signatory: 

  	
          Authorized
  Agent

  	
   

  
	
  Email Address of Purchaser:

  	
               tim@gryphonlp.com

  	
   

  
							

 

Address for Notice of Purchaser:

 

100 Crescent Court

Suite 490

Dallas, TX  75201

 

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

 

 

 

First Closing Subscription Amount:  
$499,999.50

Second Closing Subscription Amount:

Warrant Shares:   499,999

 

EIN Number:  98-0433969

 

Blocker Provision Election: 
Please choose from one of the two options below:

 

(check one)

o    My
Warrant and Debenture shall contain a 4.99% blocker provision.

ý    My Warrant and Debenture shall contain a
9.99% blocker provision.

 

[SIGNATURE PAGES
CONTINUE]

 

38

 

[PURCHASER SIGNATURE
PAGES TO VISTULA SECURITIES PURCHASE AGREEMENT]

 

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

 

	
  Name of Purchaser:

  	
  Little Wing LP

  	
   

  
	
  Signature of Authorized Signatory of Purchaser:

  	
   /s/ Parker L. Quillen

  	
   

  
	
  Name of Authorized Signatory:

  	
       Parker L. Quillen

  	
   

  
	
  Title of Authorized Signatory: 

  	
          President
  of Quilcap, Quilcap as General Partner

  	
   

  
	
  Email Address of Purchaser:

  	
               pquillen@littlewinglp.com

  	
   

  
							

 

Address for Notice of Purchaser:

 

Quilcap Corp./Little Wing LP

145 East 57th Street, 10th Floor

New York, NY  10022

 

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

 

 

 

First Closing Subscription Amount:  
$414,400.21

Second Closing Subscription Amount:

Warrant Shares:   414,400

 

EIN Number:  13-3778596

 

Blocker Provision Election: 
Please choose from one of the two options below:

 

(check one)

ý    My
Warrant and Debenture shall contain a 4.99% blocker provision.

o    My
Warrant and Debenture shall contain a 9.99% blocker provision.

 

[SIGNATURE PAGES
CONTINUE]

 

39

 

[PURCHASER SIGNATURE
PAGES TO VISTULA SECURITIES PURCHASE AGREEMENT]

 

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

 

	
  Name of Purchaser:

  	
  Gamma Opportunity Capital Partners, LP

  	
   

  
	
  Signature of Authorized Signatory of Purchaser:

  	
   /s/ Jonathan P. Knight

  	
   

  
	
  Name of Authorized Signatory:

  	
       Jonathan P. Knight

  	
   

  
	
  Title of Authorized Signatory: 

  	
          President/Director

  	
   

  
	
  Email Address of Purchaser:

  	
               jonathan@siamus.com

  	
   

  
							

 

Address for Notice of Purchaser:

 

605 Crescent Executive Ct., Ste. 416

Lake Mary, FL   32746

 

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

 

 

 

First Closing Subscription Amount:  
$250,000

Second Closing Subscription Amount:

Warrant Shares:   250,000

 

EIN Number:  N/A

 

Blocker Provision Election: 
Please choose from one of the two options below:

 

(check one)

o    My
Warrant and Debenture shall contain a 4.99% blocker provision.

ý    My Warrant and Debenture shall contain a
9.99% blocker provision.

 

[SIGNATURE PAGES
CONTINUE]

 

40

 

[PURCHASER SIGNATURE
PAGES TO VISTULA SECURITIES PURCHASE AGREEMENT]

 

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

 

	
  Name of Purchaser:

  	
  Tradewinds Fund Ltd.

  	
   

  
	
  Signature of Authorized Signatory of Purchaser:

  	
   /s/ Parker L. Quillen

  	
   

  
	
  Name of Authorized Signatory:

  	
       Parker L. Quillen

  	
   

  
	
  Title of Authorized Signatory: 

  	
          President
  of Quilcap, Quilcap as Investment Manager

  	
   

  
	
  Email Address of Purchaser:

  	
               pquillen@littlewinglp.com

  	
   

  
							

 

Address for Notice of Purchaser:

 

Quilcap Corp./Tradewinds Fund Ltd.

145 East 57th Street, 10th Floor

New York, NY  10022

 

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

 

 

 

First Closing Subscription Amount:  
$85,600.04

Second Closing Subscription Amount:

Warrant Shares:   85,600

 

EIN Number:  None (offshore fund)

 

Blocker Provision Election: 
Please choose from one of the two options below:

 

(check one)

ý    My Warrant and Debenture shall contain a
4.99% blocker provision.

o    My Warrant and Debenture shall contain a
9.99% blocker provision.

 

[SIGNATURE PAGES
CONTINUE]

 

41

 

[PURCHASER SIGNATURE
PAGES TO VISTULA SECURITIES PURCHASE AGREEMENT]

 

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

 

	
  Name of Purchaser:

  	
  Professional Traders Fund, LLC

  	
   

  
	
  Signature of Authorized Signatory of Purchaser:

  	
   /s/ Howard Berger

  	
   

  
	
  Name of Authorized Signatory:

  	
   Howard Berger

  	
   

  
	
  Title of Authorized Signatory: 

  	
     Manager

  	
   

  
	
  Email Address of Purchaser:

  	
         [illegible]

  	
   

  
							

 

Address for Notice of Purchaser:

 

1400 Old County Road, Ste. 1206

Westbury, NY 11590

 

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

 

 

 

First Closing Subscription Amount:  
$150,000.00

Second Closing Subscription Amount:

Warrant Shares:   150,000

 

EIN Number: 11-3615803

 

Blocker Provision Election: 
Please choose from one of the two options below:

 

(check one)

ý    My Warrant and Debenture shall contain a
4.99% blocker provision.

o    My Warrant and Debenture shall contain a
9.99% blocker provision.

 

 

42

 

Exhibit A

 

8% Senior
Convertible Debentures

 

[see
Exhibit 4.1 to this current report]

 

 

Exhibit B

 

Registration
Rights Agreement

 

[see
Exhibit 10.2 to this current report]

 

 

Exhibit C

 

Common
Stock Purchase Warrant

 

[see
Exhibit 4.2 to this current report]

 

 

Exhibit D

 

Legal
Opinion

 

February 18, 2005

 

 

TO:         Each of the Purchasers
under the Securities Purchase Agreement

 

Re:          Securities Purchase Agreement

 

Ladies and Gentlemen:

 

We
have acted as counsel for Vistula Communications Services, Inc., a Delaware
corporation (the “Company”), in connection with the negotiation of the
Securities Purchase Agreement by and among the purchasers signatory thereto
(the “Purchasers”) and the Company dated as of February 18, 2005 (the “Purchase
Agreement”), the Registration Rights Agreement between the Purchasers and
the Company dated February 18, 2005 (the “Registration Rights Agreement”),
and the Escrow Agreement between the Purchasers, the escrow agent and the
Company dated February 18, 2005 (the “Escrow Agreement”).  The Purchase Agreement provides for the
issuance and sale by the Company of up to $10,000,000 in aggregate principal
amount of convertible debentures (the “Debentures”) and warrants to
purchase up to 10,000,000 shares of the Common Stock, $.001 par value per share
(the “Common Stock”), of the Company (the “Warrants”) (the shares
of Common Stock issued or issuable pursuant to the exercise of the Warrants and
conversion of the Debentures are collectively referred to herein as the “Underlying
Shares”) (the Escrow Agreement, Purchase Agreement, Registration Rights
Agreement, Debentures and Warrants are collectively referred to herein as the “Agreements”).  All terms used herein have the meanings
defined for them in the Purchase Agreement unless otherwise defined herein.

 

This
opinion is furnished to you pursuant to the Purchase Agreement.  In rendering the opinions expressed below, we
have examined originals or copies of: (i) the Agreements, (ii) the Company’s
Certificate of Incorporation, as in effect on the date hereof (“Certificate
of Incorporation”), and (iii) the Company’s By-laws, as in effect on the
date hereof (the “By-laws”), and we have examined and considered such
corporate records, certificates and matters of law as we have deemed
appropriate as a basis for our opinions set forth below.  In rendering the opinions expressed below, we
have relied, as to factual matters, upon the representations and warranties of
the Company contained in the Agreements.

 

Based
upon and subject to the foregoing, we are of the opinion that:

 

1.             The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and has
all requisite corporate power and authority to carry on its business and to
own, lease and operate its properties and assets, in each case, as described in
the SEC Reports.  Vistula USA, Inc. is a
corporation duly organized, validly

 

 

existing and in good standing under the laws of the State of Delaware
and has all requisite corporate power and authority to carry on its business
and to own, lease and operate its properties and assets.

 

2.             The Company has the requisite corporate power and
authority to enter into and perform its obligations under the Agreements and to
issue the Debentures, the Warrants and the Underlying Shares.  The execution and delivery of the Agreements
by the Company and the consummation by it of the transactions contemplated
thereby have been duly authorized by all necessary corporate action and no
further consent or authorization of the Company or its Board of Directors or
stockholders is required.  Each of the
Agreements has been duly executed and delivered by the Company, and the
Debentures and Warrants have been duly executed, issued and delivered by the
Company and each of the Agreements constitutes valid and binding obligations of
the Company enforceable against the Company in accordance with their respective
terms.

 

3.             The execution, delivery and performance of the
Agreements by the Company and the consummation by the Company of the
transactions contemplated thereby, including, without limitation, the issuance
of the Debentures, the Warrants and the Underlying Shares, do not and will not
(i) result in a violation of the Company’s Certificate of Incorporation or
By-Laws; (ii) except as disclosed in the Disclosure Schedules, conflict with,
or constitute a material default (or an event that with notice or lapse of time
or both would become a material default) under, any material agreement,
indenture or instrument listed as exhibits in the SEC Reports to which the
Company is a party, except for such conflicts and defaults, as would not, individually
or in the aggregate, have a Material Adverse Effect or for which a consent and
waiver have been obtained; or (iii) result in a violation of the Delaware
General Corporation Law or any federal or Massachusetts law, rule or regulation
applicable to the Company or by which any property or asset of the Company is
bound or affected, except for such violations as would not, individually or in
the aggregate, have a Material Adverse Effect. 
To our knowledge, the Company is not in violation of any terms of its
Certificate of Incorporation or By-laws.

 

4.             The issuance of the Debentures, the Warrants, and the
Underlying Shares in accordance with the Purchase Agreement will be exempt from
registration under the Securities Act of 1933, as amended.  When so issued and paid for, the Debentures,
the Warrants and, upon conversion of the Debentures or exercise of the Warrants
in accordance with their respective terms, the Underlying Shares, will be duly
and validly issued, fully paid and nonassessable, and free of any liens,
encumbrances and preemptive or similar rights contained in the Company’s
Certificate of Incorporation or By-laws or, to our knowledge, in any agreement
to which the Company is a party.

 

5.             We have not been engaged to devote substantive attention
to any actions, suits, proceedings or investigations that are pending against
the Company or its properties.  To our
knowledge, except as disclosed in the SEC Reports, the Company is not a party
to or subject to the provisions of any order, writ, injunction, judgment or
decree of any court or government agency or instrumentality.

 

6.             The Company and its Board of Directors have taken all
necessary action, if any, in order to render inapplicable any control share
acquisition, business combination, poison pill (including any distribution
under a rights agreement) or other similar anti-takeover provision

 

 

under the Certificate of Incorporation or the Delaware General
Corporation Law that is applicable to the Purchasers solely as a result of the
Purchasers and the Company fulfilling their obligations or exercising their
rights under the Transaction Documents, including without limitation as a
result of the Company’s issuance of the Securities and the Purchasers’
ownership of the Securities.

 

7.             As of the date hereof, the authorized capital stock of
the Company consists of 100,000,000 shares of Common Stock of which shares
24,454,406 are outstanding and 10,000,000 shares of undesignated Preferred
Stock of which none are outstanding.

 

These opinions are
limited to the matters expressly stated herein and are rendered solely for your
benefit and may not be quoted or relied upon for any other purpose or by any
other person, except that the opinions expressed in paragraph (4) above may be
relied upon by Continental Stock Transfer & Trust Company as Transfer
Agent.

 

The opinions expressed
herein are subject to the following assumptions, limitations, qualifications
and exceptions:

 

(a)           We have made such legal and factual
examinations and inquiries as we have deemed advisable or necessary for the
purpose of rendering this opinion.

 

(b)           We have examined, among other things,
originals or copies of such corporate records of the Company, certificates of
public officials and such other documents and questions of law that we consider
necessary or advisable for the purpose of rendering this opinion.  In such examination we have assumed the
genuineness of all signatures or original documents, the authenticity and
completeness of all documents submitted to us as originals, the conformity to
original documents of all copies submitted to us as copies thereof, the legal
capacity of natural persons, and the due execution and delivery of all
documents (except as to due execution and delivery by the Company) where due
execution and delivery are a prerequisite to the effectiveness thereof.

 

(c)           As
used in this opinion, the expression “to our knowledge” refers to the current
actual knowledge of the attorneys of this firm who have worked on matters for
the Company solely in connection with the Agreements and the transactions
contemplated thereby.

 

(d)           For
purposes of this opinion, we have assumed that you have all requisite power and
authority, and have taken any and all necessary corporate action, to execute
and deliver the Agreements, and we are assuming that the representations and
warranties made by the Purchasers in the Agreements and pursuant thereto are
true and correct.

 

(e)           Our
opinion is based upon our knowledge of the facts as of the date hereof and
assumes no event will take place in the future which would affect the opinions
set forth herein other than future events contemplated by the Agreements.  We assume no duty to communicate with you
with respect to any change in law or facts which comes to our attention
hereafter.

 

(f)            In
rendering the opinion in paragraph 1 with respect to legal existence and good
standing of the Company in the State of Delaware, we have relied solely upon a
certificate of the Secretary of State of Delaware and we express such opinion
as of the date of such certificate.  In

 

 

rendering the opinion in paragraph 1 with respect to legal existence
and good standing of Vistula USA, Inc. in the State of Delaware, we have relied
solely upon a certificate of the Secretary of State of Delaware and we express
such opinion as of the date of such certificate.  We express no opinion as to the tax good
standing of the Company or any of its subsidiaries.

 

(g)           In
rendering the opinion in paragraph 5 with respect to litigation and related
proceedings, we have relied upon a certificate of the Chief Financial Officer
and Chairman of the Board of the Company (the “Certificate”) without further
investigation.  In particular, we have
not searched the dockets of the courts or government agencies or
instrumentalities of any jurisdictions.

 

(h)           In
rendering the opinion expressed in paragraph 7 with respect to capitalization,
we have relied upon the Certificate without further investigation.

 

We have made such examination of
Massachusetts law, federal law, and the Delaware General Corporation Law as we
have deemed necessary for the purpose of this opinion.  In rendering opinions concerning the Delaware
General Corporation Law, we have, with your consent, relied exclusively upon a
review of published statutes.  In
rendering opinions respecting the enforceability of the Agreements, we have
assumed, with your consent and without any research or other confirmation, that
the laws of the State of New York are identical in all respects to the laws of
The Commonwealth of Massachusetts.  We
express no opinion herein as to the laws of any jurisdiction other than The
Commonwealth of Massachusetts, the federal laws of the United States of America
and the Delaware General Corporation Law.

 

The opinions expressed herein are qualified
to the extent that (1) the enforceability of any provisions of the Agreements
or any instrument or of any right granted thereunder may be subject to or
affected by any bankruptcy, reorganization, insolvency, fraudulent conveyance,
moratorium or other similar law of general application relating to or affecting
the rights or remedies of creditors generally, which law may be in effect from
time to time, (2) the remedy of specific performance or any other equitable
remedy may be unavailable or may be withheld as a matter of judicial
discretion, (3) equitable principles and principles of public policy may be
applied in construing or enforcing the provisions of the Agreements or of any
other agreement, instrument or document, and (4) the enforceability, validity
or binding effect of any remedial provision of the Agreements may be limited by
applicable law which may limit particular rights and remedies but not so as to
interfere materially with the practical realization of the benefits intended to
be provided to you by the Agreements.  In
addition, the opinions expressed herein are subject to the qualification that
the enforcement of any of your rights are in all cases subject to the your
implied duty of good faith and fair dealing.

 

We express no opinion herein as to the
validity or enforceability of any provision of the Agreements or any other
instrument or document to the extent that such provision purports to (1)
constitute a waiver by the Company of any statutory right except where advance
waiver is expressly permitted by the relevant statute; (2) require the Company
to indemnify or to hold harmless you or any other person or entity from the
consequences of any negligent or other wrongful act or omission of you or such
other person or entity; (3) provide for indemnification or contribution by the
Company in connection with the Agreements, the transactions contemplated
thereby or otherwise to the extent such indemnification or contribution may be
limited by

 

 

applicable laws or as a matter of public policy; or (4) constitute a
waiver of any right to a hearing on or adjudication of any issue or the right
to trial by jury.  We express no opinion
with respect to whether any of the provisions of the Agreements or the
transactions contemplated by the Agreements comply with the usury laws of any
jurisdiction.

 

This opinion is furnished to the Purchasers
solely for their benefit in connection with the transactions described above
and, except as otherwise expressly set forth herein, may not be relied upon by
any other person or for any other purpose without our prior written consent.

 

Very truly yours,

 

 

 

 

Exhibit E

 

Escrow
Agreement

 

[see
Exhibit 10.4 to this current report]Exhibit 10.2

 

EXECUTION
COPY

 

REGISTRATION RIGHTS AGREEMENT

 

This Registration Rights Agreement (this “Agreement”) is made
and entered into as of February 18, 2005, among Vistula Communications
Services, Inc., a Delaware corporation (the “Company”), and the
purchasers signatory hereto (each such purchaser is a “Purchaser” and
collectively, the “Purchasers”).

 

This Agreement
is made pursuant to the Securities Purchase Agreement, dated as of the date
hereof among the Company and the Purchasers (the “Purchase Agreement”).

 

The Company
and the Purchasers hereby agree as follows:

 

1. Definitions

 

Capitalized terms used and not otherwise
defined herein that are defined in the Purchase Agreement shall have the
meanings given such terms in the Purchase Agreement.
As used in this Agreement, the following terms shall have the following
meanings:

 

“Advice” shall have the meaning set
forth in Section 6(d).

 

“Effectiveness Date” means, with
respect to the initial Registration Statement required to be filed hereunder,
the 120th calendar day following the date hereof and, with respect
to any additional Registration Statements which may be required pursuant to
Section 3(c), the 75th calendar day following the date on which the
Company first knows, or reasonably should have known, that such additional
Registration Statement is required hereunder; provided, however,
in the event the Company is notified by the Commission that one of the above
Registration Statements will not be reviewed or is no longer subject to further
review and comments, the Effectiveness Date as to such Registration Statement
shall be the fifth Trading Day following the date on which the Company is so
notified if such date precedes the dates required above.

 

“Effectiveness Period” shall have the
meaning set forth in Section 2(a).

 

“Event” shall have the meaning set
forth in Section 2(b).

 

“Event Date” shall have the meaning
set forth in Section 2(b).

 

“Filing Date” means, with respect to
the initial Registration Statement required hereunder, the 45th calendar
day following the date hereof and, with respect to any additional Registration
Statements which may be required pursuant to Section 3(c), the 30th
day following the date on which the Company first knows, or reasonably should
have known that such additional Registration Statement is required hereunder.

 

1

 

“Holder” or “Holders” means the
holder or holders, as the case may be, from time to time of Registrable
Securities.

 

“Indemnified Party” shall have the
meaning set forth in Section 5(c).

 

“Indemnifying Party” shall have the
meaning set forth in Section 5(c).

 

“Losses” shall have the meaning set
forth in Section 5(a).

 

“Placement Agent” shall mean Indigo
Securities, LLC.

 

“Plan of Distribution” shall have the
meaning set forth in Section 2(a).

 

“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.

 

“Prospectus” means the prospectus
included in a Registration Statement (including, without limitation, a
prospectus that includes any information previously omitted from a prospectus
filed as part of an effective registration statement in reliance upon Rule 430A
promulgated under the Securities Act), as amended or supplemented by any
prospectus supplement, with respect to the terms of the offering of any portion
of the Registrable Securities covered by a Registration Statement, and all
other amendments and supplements to the Prospectus, including post-effective
amendments, and all material incorporated by reference or deemed to be
incorporated by reference in such Prospectus.

 

“Registrable Securities” means (i) all
of the shares of Common Stock issuable upon conversion in full of the
Debentures, (ii) all Warrant Shares, (iii) any securities issued or issuable
upon any stock split, dividend or other distribution, recapitalization or
similar event with respect to the foregoing and (iv) any additional shares
issuable in connection with any anti-dilution provisions in the Debentures or the
Warrants.

 

“Registration Statement” means the
registration statements required to be filed hereunder and any additional
registration statements contemplated by Section 3(c), including (in each case)
the Prospectus, amendments and supplements to such registration statement or
Prospectus, including pre-effective and post-effective amendments, all exhibits
thereto, and all material incorporated by reference or deemed to be
incorporated by reference in such registration statement.

 

“Rule 415” means Rule 415 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 purpose and effect as such Rule.

 

“Rule 424” means Rule 424 promulgated
by the Commission pursuant to the Securities Act, as such Rule may be amended
from time to time, or any similar rule or

 

2

 

regulation hereafter adopted by the Commission having substantially the
same purpose and effect as such Rule.

 

“Selling Shareholder Questionnaire”
shall have the meaning set forth in Section 3(a).

 

2.             Shelf Registration

 

(a)  On or prior to each Filing Date, the Company
shall prepare and file with the Commission a “Shelf” Registration Statement
covering the resale of 125% of the Registrable Securities on such Filing Date
for an offering to be made on a continuous basis pursuant to Rule 415.  The Registration Statement shall be on Form
S-3 (except if the Company is not then eligible to register for resale the
Registrable Securities on Form S-3, in which case such registration shall be on
another appropriate form in accordance herewith) and shall contain (unless otherwise
directed by the Holders) substantially the “Plan of Distribution”
attached hereto as Annex A. 
Subject to the terms of this Agreement, the Company shall use its best
efforts to cause the Registration Statement to be declared effective under the
Securities Act as promptly as possible after the filing thereof, but in any
event prior to the applicable Effectiveness Date, and shall use its best
efforts to keep such Registration Statement continuously effective under the
Securities Act until all Registrable Securities covered by such Registration
Statement have been sold or may be sold without volume restrictions pursuant to
Rule 144(k) as determined by the counsel to the Company pursuant to a written
opinion letter to such effect, addressed and acceptable to the Company’s
transfer agent and the affected Holders (the “Effectiveness Period”).  The Company shall immediately notify the
Holders via facsimile of the effectiveness of the Registration Statement on the
same day that the Company receives notification of the effectiveness from the
Commission.  Failure to so notify the
Holders within one (1) Trading Day of such notification shall be deemed an
Event under Section 2(b).

 

(b) If: (i)
the Company fails to file with the Commission a request for acceleration in
accordance with Rule 461 promulgated under the Securities Act, within five (5) Trading
Days of the date that the Company is notified (orally or in writing, whichever
is earlier) by the Commission that a Registration Statement will not be “reviewed,”
or will not be subject to further review, or (ii) a Registration Statement
filed or required to be filed hereunder is not declared effective by the
Commission by its Effectiveness Date, or (iii) after the Effectiveness Date, a
Registration Statement ceases for any reason to remain continuously effective
as to all Registrable Securities for which it is required to be effective, or
the Holders are not permitted to utilize the Prospectus therein to resell such
Registrable Securities for 15 consecutive calendar days or more than an
aggregate of 25 calendar days during any 12-month period (which need not be
consecutive Trading Days) provided; that in the event the Registration
Statement is declared effective prior to the date on which the Company files
its Form 10-KSB for the fiscal year ended December 31, 2004 with the
Commission, it shall not be an Event hereunder if the effectiveness of such
Registration Statement is suspended while the Commission reviews the
post-effective amendment to the Registration Statement required in connection
therewith so long as the Company is otherwise in compliance with the
requirements of this Registration Rights Agreement (and the calendar days
during which the Registration Statement is so suspended shall not count towards
the number of calendar days during which the Registration Statement is not

 

3

 

effective for the purposes of
the Section 2(b)) (any such failure or breach being referred to as an “Event”, and for purposes of
clause (ii) the date on which such Event occurs, or for purposes of clause (i)
the date on which such five Trading Day period is exceeded, or for purposes of
clause (iii) the date on which such 15 or 25 calendar day period, as
applicable, is exceeded being referred to as “Event Date”), then in addition to any other rights the
Holders may have hereunder or under applicable law, on each such Event Date and
on each monthly anniversary of each such Event Date (if the applicable Event
shall not have been cured by such date) until the applicable Event is cured,
the Company shall pay to each Holder an amount in cash, as partial liquidated
damages and not as a penalty, equal to 1.0% per month, pro rata on a daily
basis, of the aggregate purchase price paid by such Holder pursuant to the
Purchase Agreement for any Registrable Securities then held by such
Holder.  If the Company fails to pay any partial
liquidated damages pursuant to this Section in full within seven days after the
date payable, the Company will pay interest thereon at a rate of 18% per annum
(or such lesser maximum amount that is permitted to be paid by applicable law)
to the Holder, accruing daily from the date such partial liquidated damages are
due until such amounts, plus all such interest thereon, are paid in full. The partial
liquidated damages pursuant to the terms hereof shall apply on a daily pro-rata
basis for any portion of a month prior to the cure of an Event.

 

3. Registration
Procedures

 

In connection
with the Company’s registration obligations hereunder, the Company shall:

 

(a)           Not less than five Trading Days prior
to the filing of each Registration Statement or any related Prospectus or any
amendment or supplement thereto (including any document that would be
incorporated or deemed to be incorporated therein by reference), the Company
shall, (i) furnish to each Holder copies of all such documents proposed to be
filed, which documents (other than those incorporated or deemed to be
incorporated by reference) will be subject to the review of such Holders, and
(ii) cause its officers and directors, counsel and independent certified public
accountants to respond to such inquiries as shall be necessary, in the
reasonable opinion of respective counsel to conduct a reasonable investigation
within the meaning of the Securities Act. The Company shall not file the
Registration Statement or any such Prospectus or any amendments or supplements
thereto to which the Holders of a majority of the Registrable Securities shall
reasonably object in good faith, provided that, the Company is notified of such
objection in writing no later than 5 Trading Days after the Holders have been
so furnished copies of such documents. Each Holder agrees to furnish to the
Company a completed Questionnaire in the form attached to this Agreement as
Annex B (a “Selling Shareholder Questionnaire”) not less than two
Trading Days prior to the Filing Date or by the end of the fourth Trading Day
following the date on which such Holder receives draft materials in accordance
with this Section.

 

(b)           (i) Prepare and file
with the Commission such amendments, including post-effective amendments, to a
Registration Statement and the Prospectus used in connection therewith as may
be necessary to keep a Registration Statement continuously effective as to the
applicable Registrable Securities for the Effectiveness Period and prepare and
file with the Commission such additional Registration Statements in order to
register for resale under the Securities Act all of the Registrable Securities;
(ii) cause the related Prospectus to be amended or

 

4

 

supplemented by any required
Prospectus supplement (subject to the terms of this Agreement), and as so
supplemented or amended to be filed pursuant to Rule 424; (iii) respond as promptly
as reasonably possible to any comments received from the Commission with
respect to a Registration Statement or any amendment thereto and as promptly as
reasonably possible provide the Holders true and complete copies of all
correspondence from and to the Commission relating to a Registration Statement;
and (iv) comply in all material respects with the provisions of the Securities
Act and the Exchange Act with respect to the disposition of all Registrable
Securities covered by a Registration Statement during the applicable period in
accordance (subject to the terms of this Agreement) with the intended methods
of disposition by the Holders thereof set forth in such Registration Statement
as so amended or in such Prospectus as so supplemented.

 

(c)           If during the
Effectiveness Period, the number of Registrable Securities at any time exceeds
90% of the number of shares of Common Stock then registered in a Registration
Statement, then the Company shall file as soon as reasonably practicable but in
any case prior to the applicable Filing Date, an additional Registration
Statement covering the resale by the Holders of not less than 125% of the
number of such Registrable Securities.

 

(d)           Notify the Holders
of Registrable Securities to be sold (which notice shall, pursuant to clauses
(ii) through (vi) hereof, be accompanied by an instruction to suspend the use
of the Prospectus until the requisite changes have been made) as promptly as
reasonably possible (and, in the case of (i)(A) below, not less than five
Trading Days prior to such filing) and (if requested by any such Person)
confirm such notice in writing no later than one Trading Day following the day
(i)(A) when a Prospectus or any Prospectus supplement or post-effective
amendment to a Registration Statement is proposed to be filed; (B) when the
Commission notifies the Company whether there will be a “review” of such
Registration Statement and whenever the Commission comments in writing on such
Registration Statement (the Company shall provide true and complete copies
thereof and all written responses thereto to each of the Holders); and (C) with
respect to a Registration Statement or any post-effective amendment, when the
same has become effective; (ii) of any request by the Commission or any other
Federal or state governmental authority for amendments or supplements to a
Registration Statement or Prospectus or for additional information; (iii) of
the issuance by the Commission or any other federal or state governmental
authority of any stop order suspending the effectiveness of a Registration
Statement covering any or all of the Registrable Securities or the initiation
of any Proceedings for that purpose; (iv) of the receipt by the Company of any
notification with respect to the suspension of the qualification or exemption
from qualification of any of the Registrable Securities for sale in any
jurisdiction, or the initiation or threatening of any Proceeding for such
purpose; (v) of the occurrence of any event or passage of time that makes the
financial statements included in a Registration Statement ineligible for
inclusion therein or any statement made in a Registration Statement or
Prospectus or any document incorporated or deemed to be incorporated therein by
reference untrue in any material respect or that requires any revisions to a
Registration Statement, Prospectus or other documents so that, in the case of a
Registration Statement or the Prospectus, as the case may be, it will not
contain any untrue statement of a material fact or omit to state any 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; and
(vi) the occurrence or existence of any pending corporate development with

 

5

 

respect to the Company that the
Company believes may be material and that, in the determination of the Company,
makes it not in the best interest of the Company to allow continued
availability of the Registration Statement or Prospectus; provided that any and
all of such information shall remain confidential to each Holder until such
information otherwise becomes public, unless disclosure by a Holder is required
by law; provided, further, notwithstanding each Holder’s
agreement to keep such information confidential, the Holders make no
acknowledgement that any such information is material, non-public information.

 

(e)           Use its best efforts
to avoid the issuance of, or, if issued, obtain the withdrawal of (i) any order
suspending the effectiveness of a Registration Statement, or (ii) any
suspension of the qualification (or exemption from qualification) of any of the
Registrable Securities for sale in any jurisdiction, at the earliest
practicable moment.

 

(f)            Furnish to each
Holder, without charge, at least one conformed copy of each such Registration
Statement and each amendment thereto, including financial statements and
schedules, all documents incorporated or deemed to be incorporated therein by
reference to the extent requested by such Person, and all exhibits to the
extent requested by such Person (including those previously furnished or
incorporated by reference) promptly after the filing of such documents with the
Commission.

 

(g)           Promptly deliver to
each Holder, without charge, as many copies of the Prospectus or Prospectuses
(including each form of prospectus) and each amendment or supplement thereto as
such Persons may reasonably request in connection with resales by the Holder of
Registrable Securities.  Subject to the
terms of this Agreement, the Company hereby consents to the use of such
Prospectus and each amendment or supplement thereto by each of the selling
Holders in connection with the offering and sale of the Registrable Securities
covered by such Prospectus and any amendment or supplement thereto, except
after the giving on any notice pursuant to Section 3(d).

 

(h)           If NASDR Rule 2710
requires any broker-dealer to make a filing prior to executing a sale by a
Holder, make an Issuer Filing with the NASDR, Inc. Corporate Financing
Department pursuant to NASDR Rule 2710(b)(10)(A)(i) and respond within five
Trading Days to any comments received from NASDR in connection therewith, and
pay the filing fee required in connection therewith.

 

(i)            Prior to any resale
of Registrable Securities by a Holder, use its commercially reasonable efforts
to register or qualify or cooperate with the selling Holders in connection with
the registration or qualification (or exemption from the Registration or
qualification) of such Registrable Securities for the resale by the Holder
under the securities or Blue Sky laws of such jurisdictions within the United
States as any Holder reasonably requests in writing, to keep each registration
or qualification (or exemption therefrom) effective during the Effectiveness
Period and to do any and all other acts or things reasonably necessary to
enable the disposition in such jurisdictions of the Registrable Securities
covered by each Registration Statement; provided, that the Company shall not be
required to qualify generally to do business in any jurisdiction where it is
not then so qualified, subject the Company to any material tax in any such
jurisdiction where it is not then so subject or file a general consent to
service of process in any such jurisdiction.

 

6

 

(j)            If requested by the
Holders, cooperate with the Holders to facilitate the timely preparation and
delivery of certificates representing Registrable Securities to be delivered to
a transferee pursuant to a Registration Statement, which certificates shall be
free, to the extent permitted by the Purchase Agreement, of all restrictive
legends, and to enable such Registrable Securities to be in such denominations
and registered in such names as any such Holders may request.

 

(k)           Upon the occurrence of any event
contemplated by this Section 3, as promptly as reasonably possible under the
circumstances taking into account the Company’s good faith assessment of any
adverse consequences to the Company and its stockholders of the premature
disclosure of such event, prepare a supplement or amendment, including a
post-effective amendment, to a Registration Statement or a supplement to the
related Prospectus or any document incorporated or deemed to be incorporated
therein by reference, and file any other required document so that, as
thereafter delivered, neither a Registration Statement nor such Prospectus will
contain an untrue statement of a material fact or omit 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.  If the Company notifies the Holders in
accordance with clauses (ii) through (vi) of Section 3(d) above to suspend the
use of any Prospectus until the requisite changes to such Prospectus have been
made, then the Holders shall suspend use of such Prospectus.  The Company will use its best efforts to
ensure that the use of the Prospectus may be resumed as promptly as is
practicable.  The Company shall be
entitled to exercise its right under this Section 3(k) to suspend the
availability of a Registration Statement and Prospectus, subject to the payment
of partial liquidated damages pursuant to Section 2(b), for a period not to
exceed 60 days (which need not be consecutive days) in any 12 month period.

 

(l)            Comply with all
applicable rules and regulations of the Commission.

 

(m)          The Company may
require each selling Holder to furnish to the Company a certified statement as
to the number of shares of Common Stock beneficially owned by such Holder and,
if required by the Commission, the person thereof that has voting and
dispositive control over the Shares. During any periods that the Company is
unable to meet its obligations hereunder with respect to the registration of
the Registrable Securities solely because any Holder fails to furnish such
information within three Trading Days of the Company’s request, any liquidated
damages that are accruing at such time as to such Holder only shall be tolled
and any Event that may otherwise occur solely because of such delay shall be
suspended as to such Holder only, until such information is delivered to the
Company.

 

4. Registration
Expenses. All fees and expenses incident to the performance of or
compliance with this Agreement by the Company shall be borne by the Company
whether or not any Registrable Securities are sold pursuant to the Registration
Statement. The fees and expenses referred to in the foregoing sentence shall
include, without limitation, (i) all registration and filing fees (including,
without limitation, fees and expenses (A) with respect to filings required to
be made with the Trading Market on which the Common Stock is then listed for
trading, (B) in compliance with applicable state securities or Blue Sky laws
reasonably agreed to by the

 

7

 

Company in writing (including,
without limitation, fees and disbursements of counsel for the Company in
connection with Blue Sky qualifications or exemptions of the Registrable
Securities and determination of the eligibility of the Registrable Securities
for investment under the laws of such jurisdictions as requested by the
Holders) and (C) if not previously paid by the Company in connection with an
Issuer Filing, with respect to any filing that may be required to be made by
any broker through which a Holder intends to make sales of Registrable
Securities with NASD Regulation, Inc. pursuant to the NASD Rule 2710, so long
as the broker is receiving no more than a customary brokerage commission in
connection with such sale, (ii) printing expenses (including, without
limitation, expenses of printing certificates for Registrable Securities and of
printing prospectuses if the printing of prospectuses is reasonably requested
by the holders of a majority of the Registrable Securities included in a
Registration Statement), (iii) messenger, telephone and delivery expenses, (iv)
fees and disbursements of counsel for the Company, (v) Securities Act liability
insurance, if the Company so desires such insurance, and (vi) fees and expenses
of all other Persons retained by the Company in connection with the
consummation of the transactions contemplated by this Agreement.  In addition, the Company shall be responsible
for all of its internal expenses incurred in connection with the consummation
of the transactions contemplated by this Agreement (including, without
limitation, all salaries and expenses of its officers and employees performing
legal or accounting duties), the expense of any annual audit and the fees and
expenses incurred in connection with the listing of the Registrable Securities
on any securities exchange as required hereunder.  In no event shall the Company be responsible
for any broker or similar commissions or, except to the extent provided for in
the Transaction Documents, any legal fees or other costs of the Holders.

 

5. Indemnification

 

(a) Indemnification by the Company. The
Company shall, notwithstanding any termination of this Agreement, indemnify and
hold harmless each Holder, the officers, directors, agents, brokers (including
brokers who offer and sell Registrable Securities as principal as a result of a
pledge or any failure to perform under a margin call of Common Stock), investment
advisors and employees of each of them, each Person who controls any such
Holder (within the meaning of Section 15 of the Securities Act or Section 20 of
the Exchange Act) and the officers, directors, agents and employees of each
such controlling Person, to the fullest extent permitted by applicable law,
from and against any and all losses, claims, damages, liabilities, costs
(including, without limitation, reasonable attorneys’ fees) and expenses
(collectively, “Losses”), as incurred, arising out of or relating to any
untrue or alleged untrue statement of a material fact contained in a
Registration Statement, any Prospectus or any form of prospectus or in any
amendment or supplement thereto or in any preliminary prospectus, or arising
out of or relating to any omission or alleged omission of a material fact
required to be stated therein or necessary to make the statements therein (in
the case of any Prospectus or form of prospectus or supplement thereto, in
light of the circumstances under which they were made) not misleading, except
to the extent, but only to the extent, that (i) such untrue statements or
omissions are based upon information regarding such Holder furnished in writing
to the Company by such Holder expressly for use therein, or to the extent that
such information relates to such Holder or such Holder’s proposed method of
distribution of Registrable Securities and was reviewed and expressly approved
in writing by such Holder expressly for use in a Registration Statement, such
Prospectus or such form of Prospectus or in any amendment or supplement thereto
(it being

 

8

 

understood that the Holder has
approved Annex A hereto for this purpose) or (ii) in the case of an occurrence
of an event of the type specified in Section 3(d)(ii)-(vi), the use by such
Holder of an outdated or defective Prospectus after the Company has notified
such Holder in writing that the Prospectus is outdated or defective and prior
to the receipt by such Holder of the Advice contemplated in Section 6(d).  The Company shall notify the Holders promptly
of the institution, threat or assertion of any Proceeding arising from or in
connection with the transactions contemplated by this Agreement of which the
Company is aware.

 

(b) Indemnification by Holders. Each
Holder shall, severally and not jointly, indemnify and hold harmless the
Company, its directors, officers, agents and employees, each Person who
controls the Company (within the meaning of Section 15 of the Securities Act and
Section 20 of the Exchange Act), and the directors, officers, agents or
employees of such controlling Persons, to the fullest extent permitted by
applicable law, from and against all Losses, as incurred, to the extent arising
out of or based solely upon: (x) such Holder’s failure to comply with the
prospectus delivery requirements of the Securities Act provided that the
Company has complied with its requirements under Section 3(g) to furnish
current prospectuses to the Holder or (y) any untrue or alleged untrue
statement of a material fact contained in any Registration Statement, any
Prospectus, or any form of prospectus, or in any amendment or supplement
thereto or in any preliminary prospectus, or arising out of or relating to any
omission or alleged omission of a material fact required to be stated therein
or necessary to make the statements therein not misleading (i) to the extent,
but only to the extent, that such untrue statement or omission is contained in
any information so furnished in writing by such Holder to the Company
specifically for inclusion in such Registration Statement or such Prospectus or
(ii) to the extent that (1) such untrue statements or omissions are based
solely upon information regarding such Holder furnished in writing to the Company
by such Holder expressly for use therein, or to the extent that such
information relates to such Holder or such Holder’s proposed method of
distribution of Registrable Securities and was reviewed and expressly approved
in writing by such Holder expressly for use in the Registration Statement (it
being understood that the Holder has approved Annex A hereto for this purpose),
such Prospectus or such form of Prospectus or in any amendment or supplement
thereto or (2) in the case of an occurrence of an event of the type specified
in Section 3(d)(ii)-(vi), the use by such Holder of an outdated or defective
Prospectus after the Company has notified such Holder in writing that the
Prospectus is outdated or defective and prior to the receipt by such Holder of
the Advice contemplated in Section 6(d). In no event shall the liability of any
selling Holder hereunder be greater in amount than the dollar amount of the net
proceeds received by such Holder upon the sale of the Registrable Securities
giving rise to such indemnification obligation.

 

(c) Conduct of Indemnification Proceedings.
If any Proceeding shall be brought or asserted against any Person entitled to
indemnity hereunder (an “Indemnified Party”), such Indemnified Party
shall promptly notify the Person from whom indemnity is sought (the “Indemnifying
Party”) in writing, and the Indemnifying Party shall have the right to assume
the defense thereof, including the employment of counsel reasonably
satisfactory to the Indemnified Party and the payment of all fees and expenses
incurred in connection with defense thereof; provided, that the failure of any
Indemnified Party to give such notice shall not relieve the Indemnifying Party
of its obligations or liabilities pursuant to this Agreement, except (and only)
to the extent that it shall be finally determined by a court of competent
jurisdiction (which

 

9

 

determination is not subject to
appeal or further review) that such failure shall have prejudiced the Indemnifying
Party.

 

An Indemnified
Party shall have the right to employ separate counsel in any such Proceeding
and to participate in the defense thereof, but the fees and expenses of such
counsel shall be at the expense of such Indemnified Party or Parties unless:  (1) the Indemnifying Party has agreed in
writing to pay such fees and expenses; (2) the Indemnifying Party shall have
failed promptly to assume the defense of such Proceeding and to employ counsel
reasonably satisfactory to such Indemnified Party in any such Proceeding; or
(3) the named parties to any such Proceeding (including any impleaded parties)
include both such Indemnified Party and the Indemnifying Party, and such
Indemnified Party shall have been advised by counsel that a material conflict
of interest is likely to exist if the same counsel were to represent such
Indemnified Party and the Indemnifying Party (in which case, if such
Indemnified Party notifies the Indemnifying Party in writing that it elects to
employ separate counsel at the expense of the Indemnifying Party, the
Indemnifying Party shall not have the right to assume the defense thereof and
the reasonable fees and expenses of one separate counsel shall be at the
expense of the Indemnifying Party).  The
Indemnifying Party shall not be liable for any settlement of any such
Proceeding effected without its written consent, which consent shall not be
unreasonably withheld.  No Indemnifying
Party shall, without the prior written consent of the Indemnified Party, effect
any settlement of any pending Proceeding in respect of which any Indemnified
Party is a party, unless such settlement includes an unconditional release of
such Indemnified Party from all liability on claims that are the subject matter
of such Proceeding.

 

Subject to the
terms of this Agreement, all reasonable fees and expenses of the Indemnified
Party (including reasonable fees and expenses to the extent incurred in
connection with investigating or preparing to defend such Proceeding in a
manner not inconsistent with this Section) which are required to be paid by the
Indemnifying Party pursuant to this Agreement shall be paid to the Indemnified
Party, as incurred, within ten Trading Days of written notice thereof to the
Indemnifying Party; provided, that the Indemnified Party shall promptly
reimburse the Indemnifying Party for that portion of such fees and expenses
applicable to such actions for which such Indemnified Party is not entitled to
indemnification hereunder, determined based upon the relative faults of the
parties determined in accordance with Section 5(d).

 

(d) Contribution. If the
indemnification under Section 5(a) or 5(b) is unavailable to an Indemnified
Party, then each Indemnifying Party shall in lieu of indemnifying such
Indemnified party, contribute to the amount paid or payable by such Indemnified
Party, in such proportion as is appropriate to reflect the relative fault of
the Indemnifying Party and Indemnified Party in connection with the actions,
statements or omissions that resulted in such Losses as well as any other
relevant equitable considerations. The relative fault of such Indemnifying
Party and Indemnified Party shall be determined by reference to, among other
things, whether any action in question, including any untrue or alleged untrue
statement of a material fact or omission or alleged omission of a material
fact, has been taken or made by, or relates to information supplied by, such
Indemnifying Party or Indemnified Party, and the parties’ relative intent,
knowledge, access to information and opportunity to correct or prevent such
action, statement or omission.  The
amount paid or payable by a party as a result of any Losses shall be deemed to
include, subject to the limitations set forth in this Agreement, any reasonable
attorneys’ or other

 

10

 

reasonable fees or expenses
incurred by such party in connection with any Proceeding to the extent such
party would have been indemnified for such fees or expenses if the
indemnification provided for in this Section was available to such party in
accordance with its terms.

 

The parties
hereto agree that it would not be just and equitable if contribution pursuant
to this Section 5(d) were determined by pro rata allocation or by any other
method of allocation that does not take into account the equitable
considerations referred to in the immediately preceding paragraph.  Notwithstanding the provisions of this
Section 5(d), no Holder shall be required to contribute, in the aggregate, any
amount in excess of the amount by which the proceeds actually received by such
Holder from the sale of the Registrable Securities subject to the Proceeding
exceeds the amount of any damages that such Holder has otherwise been required
to pay by reason of such untrue or alleged untrue statement or omission or
alleged omission, except in the case of fraud by such Holder.

 

The indemnity
and contribution agreements contained in this Section are in addition to any
liability that the Indemnifying Parties may have to the Indemnified Parties.

 

6. Miscellaneous

 

(a)   Remedies.  In the event of a breach by the Company or by
a Holder, of any of their obligations under this Agreement, each Holder or the
Company, as the case may be, in addition to being entitled to exercise all
rights granted by law and under this Agreement, including recovery of damages,
will be entitled to specific performance of its rights under this
Agreement.  The Company and each Holder
agree that monetary damages would not provide adequate compensation for any
losses incurred by reason of a breach by it of any of the provisions of this
Agreement and hereby further agrees that, in the event of any action for
specific performance in respect of such breach, it shall waive the defense that
a remedy at law would be adequate.

 

(b)   No
Piggyback on Registrations. Except as set forth on Schedule 6(b)
attached hereto, neither the Company nor any of its security holders (other
than the Holders in such capacity pursuant hereto) may include securities of
the Company in the Registration Statement other than the Registrable
Securities.  The Company shall not file
any other registration statements until the initial Registration Statement
required hereunder is declared effective by the Commission, provided that this Section
6(b) shall not prohibit the Company from filing amendments to registration
statements already filed.

 

(c)   Compliance.
Each Holder covenants and agrees that it will comply with the prospectus
delivery requirements of the Securities Act as applicable to it in connection
with sales of Registrable Securities pursuant to the Registration Statement.

 

(d)   Discontinued
Disposition. Each Holder agrees by its acquisition of such
Registrable Securities that, upon receipt of a notice from the Company of the
occurrence of any event of the kind described in Section 3(d), such Holder will
forthwith discontinue disposition of such Registrable Securities under a
Registration Statement until such Holder’s receipt of the copies of the
supplemented Prospectus and/or amended Registration Statement, or until it is

 

11

 

advised in writing (the “Advice”)
by the Company that the use of the applicable Prospectus may be resumed, and,
in either case, has received copies of any additional or supplemental filings
that are incorporated or deemed to be incorporated by reference in such
Prospectus or Registration Statement.  The
Company will use its best efforts to ensure that the use of the Prospectus may
be resumed as promptly as it practicable. 
The Company agrees and acknowledges that any periods during which the
Holder is required to discontinue the disposition of the Registrable Securities
hereunder shall be subject to the provisions of Section 2(b).

 

(e)   Piggy-Back
Registrations. If at any time during the Effectiveness Period there
is not an effective Registration Statement covering all of the Registrable
Securities and the Company shall determine to prepare and file with the
Commission a registration statement relating to an offering for its own account
or the account of others under the Securities Act of any of its equity
securities, other than on Form S-4 or Form S-8 (each as promulgated under the
Securities Act) or their then equivalents relating to equity securities to be
issued solely in connection with any acquisition of any entity or business or
equity securities issuable in connection with the stock option or other
employee benefit plans, then the Company shall send to each Holder a written
notice of such determination and, if within fifteen days after the date of such
notice, any such Holder shall so request in writing, the Company shall include
in such registration statement all or any part of such Registrable Securities
such holder requests to be registered; provided, that, the Company shall not be
required to register any Registrable Securities pursuant to this Section 6(e)
that are eligible for resale pursuant to Rule 144(k) promulgated under the
Securities Act or that are the subject of a then effective Registration
Statement.

 

(f)    Amendments
and Waivers. The provisions of this Agreement, including the
provisions of this sentence, may not be amended, modified or supplemented, and
waivers or consents to departures from the provisions hereof may not be given,
unless the same shall be in writing and signed by the Company and each Holder
of the then outstanding Registrable Securities; provided, that the Agreement
may be amended to add new Holders to participate in the Offering without
obtaining the consent of the Company and each Holder.  Notwithstanding the foregoing, a waiver or
consent to depart from the provisions hereof with respect to a matter that
relates exclusively to the rights of Holders and that does not directly or
indirectly affect the rights of other Holders may be given by Holders of all of
the Registrable Securities to which such waiver or consent relates; provided,
however, that the provisions of this sentence may not be amended,
modified, or supplemented except in accordance with the provisions of the
immediately preceding sentence.

 

(g)   Notices.
Any and all notices or other communications or deliveries required or permitted
to be provided hereunder shall be delivered as set forth in the Purchase
Agreement.

 

(h)   Successors
and Assigns. This Agreement shall inure to the benefit of and be
binding upon the successors and permitted assigns of each of the parties and
shall inure to the benefit of each Holder. The Company may not assign its
rights or obligations hereunder without the prior written consent of all of the
Holders of the then-outstanding Registrable Securities. Each Holder may assign
their respective rights hereunder in the manner and to the Persons as permitted
under the Purchase Agreement.

 

12

 

(i)    No
Inconsistent Agreements. Neither the Company nor any of its
subsidiaries has entered, as of the date hereof, nor shall the Company or any
of its subsidiaries, on or after the date of this Agreement, enter into any
agreement with respect to its securities, that would have the effect of
impairing the rights granted to the Holders in this Agreement or otherwise
conflicts with the provisions hereof. 
Except as set forth on Schedule 6(i), neither the Company nor any
of its subsidiaries has previously entered into any agreement granting any
registration rights with respect to any of its securities to any Person that
have not been satisfied in full.

 

(j)    Execution
and Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original
and, all of which taken together shall constitute one and the same Agreement.
In the event that any signature is delivered by facsimile transmission
(including, without limitation, an executed .PDF version of this Agreement,
such signature shall create a valid binding obligation of the party executing
(or on whose behalf such signature is executed) the same with the same force
and effect as if such facsimile signature were the original thereof.

 

(k)   Governing
Law.  All questions concerning the construction,
validity, enforcement and interpretation of this Agreement shall be determined
in accordance with the provisions of the Purchase Agreement.

 

(l)    Cumulative
Remedies. The remedies provided herein are cumulative and not
exclusive of any remedies provided by law.

 

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

 

(n)   Headings.
The headings in this Agreement are for convenience of reference only and shall
not limit or otherwise affect the meaning hereof.

 

(o)   Independent
Nature of Holders’ Obligations and Rights. The obligations of each
Holder hereunder are several and not joint with the obligations of any other Holder
hereunder, and no Holder shall be responsible in any way for the performance of
the obligations of any other Holder hereunder. Nothing contained herein or in
any other agreement or document delivered at any closing, and no action taken
by any Holder pursuant hereto or thereto, shall be deemed to constitute the Holders
as a partnership, an association, a joint venture or any other kind of entity,
or create a presumption that the Holders are in any way acting in concert with
respect to such obligations or the transactions contemplated by this Agreement.
Each Holder shall be entitled to protect and enforce its rights, including
without limitation the rights arising

 

13

 

out of this Agreement, and it
shall not be necessary for any other Holder to be joined as an additional party
in any proceeding for such purpose.

 

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

 

14

 

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

 

 

	
   

  	
  VISTULA COMMUNICATIONS
  SERVICES, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
    /s/ Rupert Galliers-Pratt 

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Rupert Galliers-Pratt 

  	
   

  
	
   

  	
   

  	
  Title:

  	
  Chairman

  	
   

  

 

[SIGNATURE PAGE OF HOLDERS FOLLOWS]

 

15

 

[SIGNATURE PAGE OF HOLDERS TO VISTULA RRA]

 

	
  Name of Holder:

  	
  Bushido Capital Master Fund, L.P.

  	
   

  
	
  Signature of Authorized Signatory of Holder:
  

  	
   /s/ Christopher Rossman

  	
   

  
	
  Name of Authorized Signatory:

  	
          Christopher Rossman

  	
   

  
	
  Title of Authorized Signatory:

  	
             Managing
  Director

  	
   

  
						

 

[SIGNATURE PAGES CONTINUE]

 

16

 

[SIGNATURE PAGE OF HOLDERS TO VISTULA RRA]

 

	
  Name of Holder:

  	
  Oxford Capital Management LLC

  	
   

  
	
  Signature of Authorized Signatory of Holder:
  

  	
   /s/ Joel T. Comiteau

  	
   

  
	
  Name of Authorized Signatory:

  	
          Joel T. Comiteau

  	
   

  
	
  Title of Authorized Signatory:

  	
             President

  	
   

  
						

 

[SIGNATURE PAGES CONTINUE]

 

17

 

[SIGNATURE PAGE OF HOLDERS TO VISTULA RRA]

 

	
  Name of Holder:

  	
  Stratford Partners, L.P.

  	
   

  
	
  Signature of Authorized Signatory of Holder:
  

  	
   /s/ Mark Fain

  	
   

  
	
  Name of Authorized Signatory:

  	
          Mark Fain

  	
   

  
	
  Title of Authorized Signatory:

  	
             General
  Partner

  	
   

  
						

 

[SIGNATURE PAGES CONTINUE]

 

18

 

[SIGNATURE PAGE OF HOLDERS TO VISTULA RRA]

 

	
  Name of Holder:

  	
  Gryphon Master Fund, L.P.

  	
   

  
	
  Signature of Authorized Signatory of Holder:
  

  	
   /s/ E.B. Lyon IV

  	
   

  
	
  Name of Authorized Signatory:

  	
          E.B. Lyon IV

  	
   

  
	
  Title of Authorized Signatory:

  	
             Authorized
  Agent

  	
   

  
						

 

[SIGNATURE PAGES CONTINUE]

 

19

 

[SIGNATURE PAGE OF HOLDERS TO VISTULA RRA]

 

	
  Name of Holder:

  	
  GSSF Master Fund, LP

  	
   

  
	
  Signature of Authorized Signatory of Holder:
  

  	
   /s/ E.B. Lyon IV

  	
   

  
	
  Name of Authorized Signatory:

  	
          E.B. Lyon IV

  	
   

  
	
  Title of Authorized Signatory:

  	
             Authorized
  Agent

  	
   

  
						

 

[SIGNATURE PAGES CONTINUE]

 

20

 

[SIGNATURE PAGE OF HOLDERS TO VISTULA RRA]

 

	
  Name of Holder:

  	
  Little Wing LP

  	
   

  
	
  Signature of Authorized Signatory of Holder:
  

  	
   /s/ Parker L. Quillen

  	
   

  
	
  Name of Authorized Signatory:

  	
          Parker L. Quillen

  	
   

  
	
  Title of Authorized Signatory:

  	
             President
  of Quilcap, Quilcap as General Partner

  	
   

  
						

 

[SIGNATURE PAGES CONTINUE]

 

21

 

[SIGNATURE PAGE OF HOLDERS TO VISTULA RRA]

 

	
  Name of Holder:

  	
  Gamma Opportunity Capital Partners, LP

  	
   

  
	
  Signature of Authorized Signatory of Holder:
  

  	
   /s/ Jonathan P. Knight

  	
   

  
	
  Name of Authorized Signatory:

  	
          Jonathan P. Knight

  	
   

  
	
  Title of Authorized Signatory:

  	
             President/Director

  	
   

  
						

 

[SIGNATURE PAGES CONTINUE]

 

22

 

[SIGNATURE PAGE OF HOLDERS TO VISTULA RRA]

 

	
  Name of Holder:

  	
  Tradewinds Fund Ltd.

  	
   

  
	
  Signature of Authorized Signatory of Holder:
  

  	
   /s/ Parker L. Quillen

  	
   

  
	
  Name of Authorized Signatory:

  	
          Parker L. Quillen

  	
   

  
	
  Title of Authorized Signatory:

  	
             President
  of Quilcap, Quilcap as Investment Manager

  	
   

  
						

 

[SIGNATURE PAGES CONTINUE]

 

23

 

[SIGNATURE PAGE OF HOLDERS TO VISTULA RRA]

 

	
  Name of Holder:

  	
  Professional Traders Fund, LLC

  	
   

  
	
  Signature of Authorized Signatory of Holder:
  

  	
   /s/ Howard Berger

  	
   

  
	
  Name of Authorized Signatory:

  	
     Howard Berger

  	
   

  
	
  Title of Authorized Signatory:

  	
        Manager

  	
   

  
						

 

24

 

ANNEX A

 

Plan of Distribution

 

Each Selling Stockholder (the “Selling Stockholders”)
of the common stock (“Common Stock”) of Vistula Communications Services,
Inc., a Delaware corporation (the “Company”) and any of their pledgees,
assignees and successors-in-interest may, from time to time, sell any or all of
their shares of Common Stock on the Trading Market or any other stock exchange,
market or trading facility on which the shares are traded or in private transactions.  These sales may be at fixed or negotiated
prices.  A Selling Stockholder may use
any one or more of the following methods when selling shares:

 

•                  ordinary
brokerage transactions and transactions in which the broker-dealer solicits
purchasers;

 

•                  block
trades in which the broker-dealer will attempt to sell the shares as agent but
may position and resell a portion of the block as principal to facilitate the
transaction;

 

•                  purchases
by a broker-dealer as principal and resale by the broker-dealer for its
account;

 

•                  an
exchange distribution in accordance with the rules of the applicable exchange;

 

•                  privately
negotiated transactions;

 

•                  settlement
of short sales entered into after the date of this prospectus;

 

•                  broker-dealers
may agree with the Selling Stockholders to sell a specified number of such
shares at a stipulated price per share;

 

•                  a
combination of any such methods of sale;

 

•                  through
the writing or settlement of options or other hedging transactions, whether
through an options exchange or otherwise; or

 

•                  any
other method permitted pursuant to applicable law.

 

The Selling Stockholders may also sell shares under
Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”),
if available, rather than under this prospectus.

 

Broker-dealers engaged by the Selling Stockholders may
arrange for other brokers-dealers to participate in sales.  Broker-dealers may receive commissions or
discounts from the Selling Stockholders (or, if any broker-dealer acts as agent
for the purchaser of shares, from the purchaser) in amounts to be negotiated,
but, except as set forth in a supplement to this Prospectus, in the case of an
agency transaction not in excess of a customary brokerage

 

25

 

commission in compliance with NADSR Rule 2440; and in the case of a
principal transaction a markup or markdown in compliance with NASDR IM-2440.

 

In connection with the sale of the Common Stock or
interests therein, the Selling Stockholders may enter into hedging transactions
with broker-dealers or other financial institutions, which may in turn engage
in short sales of the Common Stock in the course of hedging the positions they
assume.  The Selling Stockholders may
also sell shares of the Common Stock short and deliver these securities to
close out their short positions, or loan or pledge the Common Stock to
broker-dealers that in turn may sell these securities.  The Selling Stockholders may also enter into
option or other transactions with broker-dealers or other financial
institutions or the creation of one or more derivative securities which require
the delivery to such broker-dealer or other financial institution of shares
offered by this prospectus, which shares such broker-dealer or other financial
institution may resell pursuant to this prospectus (as supplemented or amended
to reflect such transaction).

 

The Selling Stockholders and any broker-dealers or
agents that are involved in selling the shares may be deemed to be “underwriters”
within the meaning of the Securities Act in connection with such sales.  In such event, any commissions received by
such broker-dealers or agents and any profit on the resale of the shares
purchased by them may be deemed to be underwriting commissions or discounts
under the Securities Act.  Each Selling
Stockholder has informed the Company that it does not have any written or oral
agreement or understanding, directly or indirectly, with any person to
distribute the Common Stock. In no event shall any broker-dealer receive fees,
commissions and markups which, in the aggregate, would exceed eight percent
(8%).

 

The Company is required to pay certain fees and
expenses incurred by the Company incident to the registration of the
shares.  The Company has agreed to
indemnify the Selling Stockholders against certain losses, claims, damages and
liabilities, including liabilities under the Securities Act.

 

Because Selling Stockholders may be deemed to be “underwriters”
within the meaning of the Securities Act, they will be subject to the prospectus
delivery requirements of the Securities Act. 
In addition, any securities covered by this prospectus which qualify for
sale pursuant to Rule 144 under the Securities Act may be sold under Rule 144
rather than under this prospectus.  Each
Selling Stockholder has advised us that they have not entered into any written
or oral agreements, understandings or arrangements with any underwriter or
broker-dealer regarding the sale of the resale shares.  There is no underwriter or coordinating
broker acting in connection with the proposed sale of the resale shares by the
Selling Stockholders.

 

We agreed to keep this prospectus effective until the
earlier of (i) the date on which the shares may be resold by the Selling
Stockholders without registration and without regard to any volume limitations
by reason of Rule 144(e) under the Securities Act or any other rule of similar
effect or (ii) all of the shares have been sold pursuant to the prospectus or
Rule 144 under the Securities Act or any other rule of similar effect.  The resale shares will be sold only through
registered or licensed brokers or dealers if required under applicable state
securities laws. In addition, in certain states, the resale shares may not be
sold unless they have been registered or

 

26

 

qualified for sale in the applicable state or an exemption from the
registration or qualification requirement is available and is complied with.

 

Under applicable rules and regulations under the
Exchange Act, any person engaged in the distribution of the resale shares may
not simultaneously engage in market making activities with respect to the Common
Stock for a period of two business days prior to the commencement of the
distribution.  In addition, the Selling Stockholders
will be subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder, including Regulation M, which may limit the timing of
purchases and sales of shares of the Common Stock by the Selling Stockholders
or any other person.  We will make copies
of this prospectus available to the Selling Stockholders and have informed them
of the need to deliver a copy of this prospectus to each purchaser at or prior
to the time of the sale.

 

27

 

Annex B

 

VISTULA
COMMUNICATIONS SERVICES, INC.

 

Selling
Securityholder Notice and Questionnaire

 

The undersigned beneficial
owner of common stock, par value $0.001 per share (the “Common Stock”),
of Vistula Communications Services, Inc., a Delaware corporation (the “Company”),
(the “Registrable Securities”) understands that the Company has filed or
intends to file with the Securities and Exchange Commission (the “Commission”)
a registration statement on Form SB-2 (the “Registration Statement”) for
the registration and resale under Rule 415 of the Securities Act of 1933, as
amended (the “Securities Act”), of the Registrable Securities, in
accordance with the terms of the Registration Rights Agreement, dated as of January
       , 2005 (the “Registration Rights
Agreement”), among the Company and the Purchasers named therein.  A copy of the Registration Rights Agreement
is available from the Company upon request at the address set forth below.  All capitalized terms not otherwise defined
herein shall have the meanings ascribed thereto in the Registration Rights
Agreement.

 

Certain legal consequences
arise from being named as a selling securityholder in the Registration
Statement and the related prospectus. 
Accordingly, holders and beneficial owners of Registrable Securities are
advised to consult their own securities law counsel regarding the consequences
of being named or not being named as a selling securityholder in the
Registration Statement and the related prospectus.

 

NOTICE

 

The undersigned beneficial
owner (the “Selling Securityholder”) of Registrable Securities hereby
elects to include the Registrable Securities owned by it and listed below in
Item 3 (unless otherwise specified under such Item 3) in the Registration
Statement.

 

28

 

The undersigned hereby
provides the following information to the Company and represents and warrants
that such information is accurate:

 

QUESTIONNAIRE

 

1. Name.

 

(a)                                  Full
Legal Name of Selling Securityholder

 

 

 

(b)                                 Full
Legal Name of Registered Holder (if not the same as (a) above) through which
Registrable Securities Listed in Item 3 below are held:

 

 

 

(c)                                  Full
Legal Name of Natural Control Person (which means a natural person who directly
you indirectly alone or with others has power to vote or dispose of the
securities covered by the questionnaire):

 

 

 

2.  Address for Notices to Selling
Securityholder:

 

 

 

	
  Telephone:

  
	
  Fax:

  
	
  Contact Person:

  

 

3.  Beneficial Ownership of Registrable
Securities:

 

(a)                                  Type
and Principal Amount of Registrable Securities beneficially owned:

 

 

 

 

29

 

4.  Broker-Dealer Status:

 

(a)                                  Are
you a broker-dealer?

 

	
  Yes

  	
  o

  	
  No

  	
  o

  

 

Note:                   If
yes, the Commission’s staff has indicated that you should be identified as an
underwriter in the Registration Statement.

 

(b)                                 Are
you an affiliate of a broker-dealer?

 

	
  Yes

  	
  o

  	
  No

  	
  o

  

 

(c)                                  If
you are an affiliate of a broker-dealer, do you certify that you bought the
Registrable Securities in the ordinary course of business, and at the time of
the purchase of the Registrable Securities to be resold, you had no agreements
or understandings, directly or indirectly, with any person to distribute the
Registrable Securities?

 

	
  Yes

  	
  o

  	
  No

  	
  o

  

 

Note:                   If
no, the Commission’s staff has indicated that you should be identified as an
underwriter in the Registration Statement.

 

5.  Beneficial Ownership of Other Securities of
the Company Owned by the Selling Securityholder.

 

Except as set forth below in this Item 5, the
undersigned is not the beneficial or registered owner of any securities of the
Company other than the Registrable Securities listed above in Item 3.

 

(a)                                  Type
and Amount of Other Securities beneficially owned by the Selling
Securityholder:

 

 

 

 

30

 

6.  Relationships with the Company:

 

Except as set forth below, neither the undersigned
nor any of its affiliates, officers, directors or principal equity holders
(owners of 5% of more of the equity securities of the undersigned) has held any
position or office or has had any other material relationship with the Company
(or its predecessors or affiliates) during the past three years.

 

State any exceptions here:

 

 

 

The undersigned agrees to
promptly notify the Company of any inaccuracies or changes in the information
provided herein that may occur subsequent to the date hereof at any time while
the Registration Statement remains effective.

 

By signing below, the
undersigned consents to the disclosure of the information contained herein in
its answers to Items 1 through 6 and the inclusion of such information in the
Registration Statement and the related prospectus and any amendments or
supplements thereto.  The undersigned
understands that such information will be relied upon by the Company in connection
with the preparation or amendment of the Registration Statement and the related
prospectus.

 

IN WITNESS WHEREOF the
undersigned, by authority duly given, has caused this Notice and Questionnaire
to be executed and delivered either in person or by its duly authorized agent.

 

	
  Dated:

  	
   

  	
   

  	
  Beneficial
  Owner:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  	
   

  
	
   

  	
   

  	
  Title:

  	
   

  
							

 

PLEASE FAX A COPY OF THE COMPLETED AND
EXECUTED NOTICE AND QUESTIONNAIRE, AND RETURN THE ORIGINAL BY OVERNIGHT MAIL,
TO:

 

31

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