Document:

Exhibit
10.19

Execution Copy

SECURITIES PURCHASE AGREEMENT

SECURITIES PURCHASE AGREEMENT
(this “Agreement”), dated as of
February 6, 2007, by and between DIGITAL ANGEL CORPORATION, a Delaware
corporation (the “Company”), and each of the
entities whose names appear on the signature pages hereof.  Such entities are each referred to herein as
an “Investor” and, collectively, as the “Investors”.

A.            The Company wishes
to sell to each Investor, and each Investor wishes to purchase, upon the
terms and subject to the conditions set forth in this Agreement, (i) a 10.25%
Senior Secured Debenture in the form attached hereto as Exhibit
A (a “Debenture”
and, collectively with the other Debentures issued hereunder, the “Debentures”) and (ii) a warrant in
the form attached hereto as Exhibit B
(a “Warrant” and, collectively with the
other Warrants issued hereunder, the “Warrants”).
 The
Debentures may be repaid or redeemed upon the satisfaction of certain
conditions with shares of the Company’s common stock, $0.005 par value per
share (the “Common Stock”).  The shares of Common Stock with which the
Debentures may be repaid or redeemed are referred to herein as the “Stock Option Shares” and the shares
of Common Stock issuable upon exercise of the Warrants are referred to herein
as the “Warrant Shares”.  The Debentures, the Stock Option Shares, the
Warrants and the Warrant Shares are collectively referred to herein as the “Securities”.

B.            The Warrants will
(i) entitle the Investors to purchase an aggregate 699,600 Warrant Shares, (ii)
have an exercise price equal to $2.973, subject to adjustment as provided
therein, and (iii) expire on the fifth (5th) anniversary of the Closing Date,
subject to extension as provided therein.

C.            The Company’s
obligations under the Debentures, including without limitation its obligation
to make payments of principal thereof and interest thereon, are
guaranteed by certain of the Company’s subsidiaries pursuant to a Subsidiary
Guarantee in the form attached hereto as Exhibit C
(the “Subsidiary Guarantee”), and are secured pursuant to the terms of a Security
Agreement in the form attached hereto as Exhibit D
(the “U.S. Security Agreement”)
and, with respect to Signature, the terms of an additional security agreement
that comports with the laws of the United Kingdom (the “Signature
Security Agreement” and, together with the U.S. Security
Agreement, the “Security Agreement”).

D.            The Company
has agreed to effect the registration of the Stock Option Shares and the
Warrant Shares for resale by the holders thereof under the Securities Act of
1933, as amended (the “Securities
Act”), pursuant to a Registration Rights Agreement in the form
attached hereto as Exhibit E (the “Registration Rights Agreement”).

E.             The sale of the Debentures and the Warrants by the Company
to the Investors will be effected in reliance upon the exemption from
securities registration afforded by the provisions of Regulation D (“Regulation D”), as promulgated by
the Commission (as defined below) under the Securities Act.

In consideration of the mutual promises made herein,
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the Company and
each Investor hereby agree as follows:

1.             PURCHASE AND SALE
OF DEBENTURES AND WARRANTS.

1.1           Closing. 
Upon the terms and subject to the satisfaction or waiver of the
conditions set forth herein, the Company agrees to sell and each Investor
agrees to purchase (i) a Debenture (a “Debenture”) with a principal amount equal to
the amount set forth below such Investor’s name on the signature pages hereof
and (ii) a Warrant exercisable into the number of shares of Common Stock set
forth below such Investor’s name on the signature pages hereof.  The date on which the closing of such
purchase and sale occurs (the “Closing”)
is hereinafter referred to as the “Closing Date”.
The Closing will be deemed to occur at the offices of Mazzeo Song LLP, 708
Third Avenue, 19th Floor, New York, New York 10017 when (A) this
Agreement and the other Transaction Documents (as defined below) have been
executed and delivered by the Company and each Investor, (B) each of the
conditions to the Closing described in this Agreement has been satisfied or
waived as specified therein and (C) payment of each Investor’s Purchase Price
(as defined below) payable with respect to the Debenture and Warrant being
purchased by such Investor at the Closing has been made by wire transfer of
immediately available funds.  At the
Closing, the Company shall deliver to each Investor duly executed instruments
representing the Debenture and Warrant purchased by such Investor at the
Closing.

1.2
          Certain Definitions.  When used herein, the following terms shall
have the respective meanings indicated:

“Additional Debt”
means the Bank Facility and the St. Paul Facility.

“Affiliate”
means, as to any Person (the “subject Person”),
any other Person (a) that directly or indirectly through one or more
intermediaries controls or is controlled by, or is under direct or indirect
common control with, the subject Person, (b) that directly or indirectly
beneficially owns or holds ten percent (10%) or more of any class of voting
equity of the subject Person, or (c) ten percent (10%) or more of the
voting equity of which is directly or indirectly beneficially owned or held by
the subject Person. For the purposes of this definition, “control”
when used with respect to any Person means the power to direct the management
and policies of such Person, directly or indirectly, whether through the
ownership of voting securities, through representation on such Person’s board
of directors or other management committee or group, by contract or otherwise.

“Affiliate Transaction”
has the meaning specified in Section 4.5(a)
of this Agreement.

“Allocation Amount”
has the meaning specified in Section 4.16
of this Agreement.

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“Amendment”
means an amendment to, or an amendment and restatement of, the certificate of
incorporation, bylaws and any other applicable organizational documents of the
Company necessary to permit the Company to issue Common Stock, and/or
securities convertible into or exercisable for shares of Common Stock, for
non-cash consideration or cash consideration less than fair market value; in
each such case, without any stockholder consent or approval.

“Bank Facility”
means the credit facility to be obtained by the Company from Greater Bay
Business Funding or such other similar commercial lending institution; provided that (i) the maximum amount of Debt that the
Company is permitted to incur under such facility shall not exceed $8,000,000;
and (ii) such facility shall be secured only by the accounts receivable of the
Company and Outerlink Corporation, and the security interest granted to the
Investors under the U.S. Security Agreement with respect to the accounts
receivable of the Company and Outerlink Corporation shall be subordinated to
such security interest granted to such bank.

“Board of Directors”
means the Company’s board of directors.

“Business Day”
means any day other than a Saturday, a
Sunday or a day on which the Principal Market is closed or on which banks in
the City of New York are required or authorized by law to be closed.

“Cap Amount” means
19.99% of the aggregate number of shares of Common Stock outstanding
immediately prior to the Closing (subject to adjustment upon a stock split,
stock dividend, recapitalization, reorganization, reclassification or other
event that subdivides all of the outstanding shares of Common Stock).

“Closing”
and “Closing Date” have the respective
meanings specified in Section 1.1
of this Agreement.

“Commission”
means the Securities and Exchange Commission, and any successor regulatory
agency.

“Common
Stock” has the meaning specified in the recitals to this
Agreement.

“Company
Subsidiaries” means the Subsidiaries of the Company set forth on
Schedule 1.2(a) and such other
Subsidiaries of the Company that become party to the Subsidiary Guarantee
and/or the Security Agreement.

“Debt”
means, as to any Person at any time, without duplication: (a) all indebtedness,
liabilities and obligations of such Person for borrowed money; (b) all
indebtedness, liabilities and obligations of such Person to pay the deferred
purchase price of Property or services (except trade accounts payable of such
Person arising in the ordinary course of business that are (i) not past due by
more than 90 days or (ii) being contested in good faith by such Person); (c)
all capital lease obligations of such Person; (d) all Debt of others guaranteed
by such Person; (e) all indebtedness, liabilities and obligations secured by a
Lien existing on Property owned by such Person, whether or not 

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the indebtedness, liabilities or obligations secured thereby have been
assumed by such Person or are non-recourse to such Person; (f) all
reimbursement obligations of such Person (whether contingent or otherwise) in
respect of letters of credit, bankers’ acceptances, surety or other bonds and
similar instruments; and (g) all liabilities and obligations of such Person to
redeem or retire shares of capital stock of such Person .

“Disclosure
Documents” means all SEC Documents filed with the Commission at
least five (5) Business Days prior to the Execution Date.

“Dollars”
or “$” means U.S. Dollars.

“DTC” means
The Depositary Trust Company (and any successor entity).

“Effective Date”
has the meaning specified in the Registration Rights Agreement.

“Environmental Law”
means any federal, state, provincial, local or foreign law, statute, code or
ordinance, principle of common law, rule or regulation, as well as any Permit,
order, decree, judgment or injunction issued, promulgated, approved or entered
thereunder, relating to pollution or the protection, cleanup or restoration of
the environment or natural resources, or to the public health or safety, or
otherwise governing the generation, use, handling, collection, treatment,
storage, transportation, recovery, recycling, discharge or disposal of
hazardous materials.

“ERISA”
means the Employee Retirement Income Security Act of 1974, as amended, and the
regulations and published interpretations thereunder.

“Event of Default”
has the meaning specified in the Debentures.

“Exchange Act”
means the Securities Exchange Act of 1934, as amended (or any successor act),
and the rules and regulations promulgated thereunder (or respective successors
thereto).

“Excluded Securities”
means (i) the Debentures and Warrants; (ii) the Stock Option Shares, Warrant
Shares and any other securities issued upon the conversion or exercise of any
other options, warrants, convertible securities or any other agreements
outstanding as of the Issue Date and disclosed on Schedule
3.5(i) hereto; (iii) shares of Common Stock issuable or issued
to employees from time to time upon the exercise of options or other awards or
purchase rights granted or to be granted in the discretion of the Board of
Directors pursuant to one or more employee stock option plans or restricted
stock plans in effect as of the Issue Date or new plans or amendments to
existing plans adopted after the Issue Date by the independent members of the
Board of Directors; and (iv) shares of Common Stock issued in connection with
any stock split, stock dividend or recapitalization of the Company.

“Execution Date”
means the date of this Agreement.

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“GAAP” means
U.S. generally accepted accounting principles, applied on a consistent
basis.  Accounting principles are applied
on a “consistent basis” when the accounting principles applied in a current
period are comparable in all material respects to those accounting principles
applied in a preceding period.

“Governmental Authority”
means any nation or government, any state, provincial or political subdivision
thereof and any entity exercising executive, legislative, judicial, regulatory
or administrative functions of or pertaining to government, including, without
limitation, any stock exchange, securities market or self-regulatory
organization.

“Governmental Requirement”
means any law, statute, code, ordinance, order, rule, regulation, judgment,
decree, injunction, franchise, license or other directive or requirement of any
federal, state, county, municipal, parish, provincial or other Governmental
Authority or any department, commission, board, court, agency or any other
instrumentality of any of them.

“Intellectual Property”
means the collective reference to all existing rights, priorities and privileges
relating to intellectual property, whether arising under United States,
multinational or foreign laws or otherwise, including, without limitation, (i)
all copyrights arising under the laws of the United States, any other country
or any political subdivision thereof, whether registered or unregistered and
whether published or unpublished, all registrations and recordings thereof, and
all applications in connection therewith, including, without limitation, all
registrations, recordings and applications in the United States Copyright
Office, (ii) all letters patent of the United States, any other country or any
political subdivision thereof, all reissues and extensions thereof, and all
applications for letters patent of the United States or any other country and
all divisions, continuations and continuations-in-part thereof, (iii) all
trademarks, trade names, corporate names, company names, business names,
fictitious business names, trade dress, service marks, logos, domain names and
other source or business identifiers, and all goodwill associated therewith,
now existing or hereafter adopted or acquired, all registrations and recordings
thereof, and all applications in connection therewith, whether in the United
States Patent and Trademark Office or in any similar office or agency of the
United States, any State thereof or any other country or any political
subdivision thereof, or otherwise, and all common law rights related thereto,
(iv) all trade secrets arising under the laws of the United States, any other
country or any political subdivision thereof, (v) all rights to obtain any
reissues, renewals or extensions of the foregoing, (vi) all licenses for any of
the foregoing, and (vii) all causes of action for infringement of the
foregoing.

“Investment Company Act”
has the meaning specified in Section 3.25
of this Agreement.

“Investor Party”
has the meaning specified in Section 4.9
of this Agreement.

“Key Employee”
has the meaning specified in Section 3.16
of this Agreement.

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“Lien”
means, with respect to any Property, any mortgage, pledge, hypothecation,
assignment, deposit arrangement, security interest, tax lien, financing
statement, pledge, charge, or other lien, charge, easement, encumbrance,
preference, priority or other security agreement or preferential arrangement of
any kind or nature whatsoever on or with respect to such Property (including,
without limitation, any conditional sale or other title retention agreement
having substantially the same economic effect as any of the foregoing).

“Listing Deadline Date” has the
meaning specified in Section 4.20
of this Agreement.

“Material Adverse Effect” means an
effect that is material and adverse to (i) the consolidated business,
properties, assets, operations, results of operations, financial condition,
credit worthiness or prospects of the Company and the Company Subsidiaries
taken as a whole, (ii) the ability of the Company or any Company Subsidiary to
perform its material obligations under this Agreement or the other Transaction
Documents or (iii) the rights and benefits to which an Investor is entitled
under this Agreement or any of the other Transaction Documents.

“Material Contracts”
means, as to the Company and the Company Subsidiaries, any agreement required
pursuant to Item 601 of Regulation S-B or Item 601 of Regulation S-K, as
applicable, promulgated under the Securities Act to be filed as an exhibit to
any report, schedule, registration
statement or definitive proxy statement filed or required to be filed by the
Company with the Commission under the Exchange Act or any rule or regulation
promulgated thereunder, and any and all material amendments,
modifications, supplements, renewals or restatements thereof.

“McMurdo
Transaction” means the contemplated acquisition of certain
assets of McMurdo Limited’s marine electronics business pursuant to the Asset
Sale and Purchase Agreement, dated December as of 14, 2006, between Signature
Industries Limited and McMurdo Limited.

“Pension Plan”
means an employee pension benefit plan (as defined in ERISA) maintained by the
Company for employees of the Company or any of its Affiliates.

“Permitted Debt”
means the following:

(a)           the
Debentures;

(b)           Debt
outstanding on the Execution Date and disclosed on Schedule 3.5(iv) hereto;

(c)           Subordinated
Debt;

(d)           Debt consisting of capitalized lease
obligations and purchase money indebtedness incurred in connection with
acquisition of capital assets and obligations under sale-leaseback or similar
arrangements provided in each case that such 

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obligations are not secured by Liens on any assets of the Company or
the Company Subsidiaries other than the assets so leased; and

(e)           the
Additional Debt.

“Permitted Liens”
means each of the following:

(a)           Liens
in existence on the Execution Date and disclosed on Schedule
3.5(v) hereto;

(b)           encumbrances
consisting of easements, rights-of-way, zoning restrictions or
other restrictions on the use of real Property or imperfections to title that
do not (individually or in the aggregate) materially impair the ability of the
Company or any Company Subsidiary to use such Property in its businesses, and
none of which is violated in any material respect by existing or proposed
structures or land use;

(c)           Liens
for taxes, assessments or other governmental charges (including without
limitation in connection with workers’ compensation and unemployment insurance)
that are not delinquent or which are being contested in good faith by
appropriate proceedings, which proceedings have the effect of preventing the
forfeiture or sale of the Property subject to such Liens, and for which
adequate reserves (as determined in accordance with GAAP) have been
established;

(d)           Liens
of mechanics, materialmen, warehousemen, carriers, landlords or other similar
statutory Liens securing obligations that are not yet due and are incurred in
the ordinary course of business or which are being contested in good faith by
appropriate proceedings, which proceedings have the effect of preventing the
forfeiture or sale of the Property subject to such Liens, for which adequate reserves
(as determined in accordance with GAAP) have been established;

(e)           mortgages
on real Property in existence on the Execution Date and disclosed on Schedule 3.22 hereto, and any
replacements thereof, securing amounts not greater than the amounts secured
thereby on the Execution Date; and.

(f)            Liens
on the accounts receivable of the Company and Outerlink Corporation securing
solely the Company’s obligations under the Bank Facility.

“Person”
means any individual, corporation, trust, association, company, partnership,
joint venture, limited liability company, joint stock company, Governmental
Authority or other entity.

“Principal Market”
means the American Stock Exchange or such other principal exchange, market or
quotation system on which the Common Stock is listed, traded or quoted.

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“Property”
means property and/or assets of all kinds, whether real, personal or mixed,
tangible or intangible (including, without limitation, all rights relating
thereto).

“Pro Rata Share”
means, with respect to an Investor, the ratio determined by dividing (i) the
principal amount of the Debenture purchased hereunder by such Investor at the
Closing by (ii) the aggregate principal amount of all Debentures purchased
hereunder by all of the Investors at the Closing.

“Purchase Price”
means, with respect to Securities purchased at the Closing, the original
principal amount of the Debenture purchased at the Closing.

“Registration Rights
Agreement” has the meaning specified in the recitals to this
Agreement.

“Registration Statement”
has the meaning specified in the Registration Rights Agreement.

“Registrable Securities”
has the meaning specified in the Registration Rights Agreement.

“Regulation D”
has the meaning specified in the recitals to this Agreement.

“Reserved Amount”
has the meaning specified in Section 4.3
of this Agreement.

“Restricted Payment”
means (a) any dividend or other distribution (whether in cash, Property or
obligations), direct or indirect, on account of (or the setting apart of money
for a sinking or other analogous fund for the benefit of) any shares of any
class of capital stock of the Company or the Company Subsidiaries now or
hereafter outstanding, except a dividend payable solely in shares of that class
of stock to all of the holders of that class; (b) any redemption, exchange,
retirement, sinking fund or similar payment, purchase or other acquisition for
value, direct or indirect, of any shares of any class of capital stock of the
Company or any of its Affiliates now or hereafter outstanding, except the
Securities; (c) any prepayment of principal of, premium, if any, or interest
on, or any redemption, conversion, exchange, purchase, retirement, sinking fund
or defeasance of, any Debt (whether upon acceleration of such Debt or
otherwise) other than the Securities (it being understood that regularly
scheduled payments of principal and interest shall not be deemed a Restricted
Payment); and (d) any loan, advance or payment to any officer, director or
stockholder of the Company or any of its Affiliates, exclusive of reasonable
compensation and reimbursements paid to officers or directors in the ordinary
course of business or pursuant to any contract in existence on the date of this
Agreement or approved by the independent members of the Board of Directors.

“Rule 144” means Rule 144 under the
Securities Act or any successor provision.

“SEC
Documents” means all reports, schedules, registration statements
and definitive proxy statements filed (or required to be filed) by the Company
with the Commission from and after December 31, 2005.

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

“Securities Act”
has the meaning specified in the recitals of this Agreement.

“Short Sales”
means all “short sales” as defined in Rule 200 promulgated under Regulation SHO
under the Exchange Act and all types of direct and indirect stock pledges,
forward sale contracts, options, puts, calls, swaps and similar arrangements
(including on a total return basis), and sales and other transactions through
non-US broker dealers or foreign regulated brokers.

“Signature”
means Signature Industries Limited, a
Company Subsidiary.

“St. Paul Facility”
means the contemplated refinancing of the Company’s St. Paul facility; provided that (i) the refinancing, including any additional
Debt that the Company incurs under such refinancing (collectively, the “Refinancing”) shall be supported by
a proper valuation of the facility; (ii) the assets securing the Refinancing
shall be limited to the same assets securing the existing Debt on the facility
on the date hereof; and (iii) the Company and the Company Subsidiaries shall be
in compliance with the terms of this Agreement, including Section
4.10(b), after giving effect to the Refinancing.

“Stock Option Shares”
has the meaning specified in the recitals to this Agreement.

“Stockholder Amendment Approval”means the
affirmative vote by the holders of sixty-six and two-thirds percent of the
votes cast (including sixty-six and two-thirds percent of the votes cast by
each class entitled to vote as a separate class) at a meeting of the Company’s
stockholders approving  the Amendment.

“Stockholder Cap Approval”means the
affirmative vote by the holders of a majority of the votes cast (including a
majority of the votes cast by each class entitled to vote as a separate class)
at a meeting of the Company’s stockholders approving the issuance of Common
Stock in excess of the Cap Amount.

“Stockholder Amendment
Approval Date” means the first date on which (i) the Stockholder
Amendment Approval has been duly obtained and (ii) the Amendment with respect
to the Company’s certificate of incorporation has been accepted for filing by
the Secretary of State of the State of Delaware and is in full force and
effect.

“Subordinated Debt”
means Debt of the Company which meets each of the following requirements:
(a) such Debt is wholly unsecured; (b) such Debt is contractually
subordinated, as to payment and liquidation, to the payment in full of the
Debentures on such terms and pursuant to written agreements in such form and
substance as are reasonably acceptable to the holders of a majority in
principal amount of the Debentures, that restrict the Company from pre-paying
any amounts in respect of the principal of such 

 9
 

Debt (upon acceleration or otherwise) prior to the scheduled maturity
thereof, and that restrict the subordinated creditor from commencing any
judicial or other collection efforts or exercising any other remedies prior to
the date that is ninety-one (91) days following the payment in full of the
Debentures; and (c) such Debt does not mature prior to the date that is
ninety-one (91) days following the latest Maturity Date (as defined in the
Debentures) of the Debentures then outstanding.

“Subsequent Placement” means any issuance, sale or exchange by the Company or any Company
Subsidiary at any time after the Closing Date, or any agreement or obligation
of the Company or any Company Subsidiary to issue, sell or exchange, at any
time after the Closing Date, (i) any shares of common stock of the Company or
any Company Subsidiary, (ii) any other equity security of the Company or any
Company Subsidiary, including without limitation preferred stock, (iii) any
other security of the Company or any Company Subsidiary which by its terms is
convertible into or exchangeable or exercisable for any equity security of the
Company or any Company Subsidiary, (iv) any option, warrant or other right to
subscribe for, purchase or otherwise acquire any such security described in the
foregoing clauses (i)
through (iii),
or (v) any debt instruments or securities, including promissory notes and
convertible debt instruments; provided,
however, that the term “Subsequent Placement” shall not be deemed to
include any issuance, sale or exchange of Excluded Securities.

“Subsidiary”
means, with respect to any Person, any corporation or other entity of which at
least a majority of the outstanding shares of stock or other ownership
interests having by the terms thereof ordinary voting power to elect a majority
of the board of directors (or Persons performing similar functions) of such
corporation or entity (regardless of whether or not at the time, in the case of
a corporation, stock of any other class or classes of such corporation shall
have or might have voting power by reason of the happening of any contingency)
is at the time directly or indirectly owned or controlled by such Person or one
or more of its Subsidiaries or by such Person and one or more of its
Subsidiaries.

“Termination Date” means the first
date on which there are no Debentures outstanding.

“Trading Day” means any day on which
shares of Common Stock are purchased and sold on the Principal Market.

“Transaction Documents” means (i)
this Agreement, (ii) the Debentures, (iii) the Warrants, (iv) the Registration
Rights Agreement, (v) the Security Agreement, (vi) the Subsidiary Guarantee and
(vi) all other agreements, documents and other instruments executed and
delivered by or on behalf of the Company or any of its officers at the Closing.

“Transfer Agent” has the meaning
specified in Section 2.5 of this
Agreement.

“U.S. Company Subsidiaries”
means the Company Subsidiaries that are domiciled in the United States.

 

 10

“VWAP” on a Trading Day means the
volume weighted average price of the Common Stock for such Trading Day on the
Principal Market as reported by Bloomberg Financial Markets or, if Bloomberg
Financial Markets is not then reporting such prices, by a comparable reporting
service of national reputation selected by the Investors and reasonably
satisfactory to the Company.  If the VWAP
cannot be calculated for the Common Stock on such Trading Day on any of the
foregoing bases, then the Company shall submit such calculation to an
independent investment banking firm of national reputation reasonably
acceptable to the Investors holding a majority of the Registrable Securities
then outstanding, and shall cause such investment banking firm to perform such
determination and notify the Company and the Investors of the results of
determination no later than two (2) Business Days from the time such
calculation was submitted to it by the Company. 
All such determinations shall be appropriately adjusted for any stock
dividend, stock split, reverse stock split or other similar transaction during
such period.

1.3           Other Definitional Provisions.  All definitions contained in this Agreement
are equally applicable to the singular and plural forms of the terms
defined.  The words “hereof”, “herein”
and “hereunder” and words of similar import contained in this Agreement refer
to this Agreement as a whole and not to any particular provision of this
Agreement.

2.             REPRESENTATIONS AND
WARRANTIES OF EACH INVESTOR.

Each
Investor (with respect to itself only) hereby represents and warrants to the
Company and agrees with the Company that, as of the Execution Date:

2.1           Authorization; Enforceability.  Such Investor is duly and validly organized,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation or organization as set forth below such Investor’s name on the
signature page hereof with the requisite corporate power and authority to
purchase the Debentures and Warrants to be purchased by it hereunder and to execute
and deliver this Agreement and the other Transaction Documents to which it is a
party.  This Agreement constitutes, and
upon execution and delivery thereof, each other Transaction Document to which
such Investor is a party will constitute, such Investor’s valid and legally
binding obligation, enforceable in accordance with its terms, subject to (i)
applicable bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium or other similar laws of general application relating to or
affecting the enforcement of creditors’ rights generally and (ii) general
principles of equity.

2.2           Accredited Investor.  Such Investor (i) is an “accredited investor”
as that term is defined in Rule 501 of Regulation D, (ii) was not formed or
organized for the specific purpose of making an investment in the Company, and
(iii) is acquiring the Securities solely for its own account and not with a
present view to the public resale or distribution of all or any part thereof,
except pursuant to sales that are registered under, or exempt from the
registration requirements of, the Securities Act; provided,
however, that in making such representation, such Investor does not
agree to hold the Securities for any minimum or specific term and reserves the
right to sell, transfer or otherwise dispose of the Securities at any time in
accordance with the provisions of this Agreement and with Federal and state
securities laws applicable to such sale, transfer or disposition. Such
Investor can bear the economic risk of a total loss of its investment in the
Securities and has 

 11
 

such
knowledge and experience in business and financial matters so as to enable it
to understand the risks of and form an investment decision with respect to its
investment in the Securities.

2.3           Information.  The Company has, prior to the Execution Date,
provided such Investor with information regarding the business, operations and
financial condition of the Company and
has, prior to the Execution Date, granted to such Investor the opportunity to
ask questions of and receive answers from representatives of the Company, its
officers, directors, employees and agents concerning the Company in order for
such Investor to make an informed decision with respect to its investment in
the Securities. Neither such information nor any other investigation conducted
by such Investor or any of its representatives shall modify, amend or otherwise
affect such Investor’s right to rely on the Company’s representations and
warranties contained in this Agreement.

2.4           Limitations on Disposition.  Such Investor acknowledges that, except as
provided in the Registration Rights Agreement, the Securities have not been and
are not being registered under the Securities Act and may not be transferred or
resold without registration under the Securities Act or unless pursuant to an
exemption therefrom.

2.5           Legend.  Such
Investor understands that the certificates representing the Securities may bear
at issuance a restrictive legend in substantially the following form:

“The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended (the “Securities Act”),
or any state securities laws, and may not be offered for sale or sold unless a
registration statement under the Securities Act and applicable state securities
laws shall have become effective with respect thereto, or an exemption from
registration under the Securities Act and applicable state securities laws is
available in connection with such offer or sale.  These securities [and the securities issuable
upon exercise hereof] (i) may be pledged or hypothecated in connection with a
bona fide margin account or other financing secured by such securities or (ii)
may be transferred or assigned to an affiliate of the holder hereof without the
necessity of an opinion of counsel or the consent of the issuer hereof.”

Notwithstanding the foregoing, it is agreed that, as
long as (A) the resale or transfer (including without limitation a pledge) of
any of the Securities is registered pursuant to an effective registration
statement, (B) such Securities have been sold pursuant to Rule 144, subject to
receipt by the Company of customary documentation reasonably acceptable to the
Company in connection therewith, or (C) such Securities are eligible for resale
under Rule 144(k) or any successor provision, such Securities shall be issued
without any legend or other restrictive language and, with respect to
Securities upon which such legend is stamped, the Company shall issue new
certificates without such legend to the holder upon request.  The Company shall execute and deliver written
instructions to the transfer agent for its Common Stock (the “Transfer Agent”) as may be necessary
to satisfy any request by an Investor for removal of such legends no later than
the close of business on the third (3rd) Business Day following the receipt of the
request from an Investor to the extent such legends may be removed in
accordance with this Section 2.5.

 12
 

2.6           Reliance on Exemptions.  Such Investor understands that the Securities
are being offered and sold to it in reliance upon specific exemptions from the
registration requirements of U.S. federal and state securities laws and that
the Company is relying upon the truth and accuracy of the representations and
warranties of such Investor set
forth in this Section 2 in order to
determine the availability of such exemptions and the eligibility of such Investor to acquire the Securities. Such Investor acknowledges that it did
not purchase the Securities based upon any advertisement in any publication of
general circulation. Such Investor is relying on the representations,
acknowledgements and agreements made by the Company in Section
3 and elsewhere in this Agreement in making investing, trading
and/or other decisions concerning the Company’s securities.

2.7           Non-Affiliate Status; Common Stock
Ownership.  Such Investor is not an
Affiliate of the Company or of any other Investor and is not acting in
association or concert with any other Person in regard to its purchase of the
Securities or otherwise in respect of the Company.  Such Investor’s investment in the Securities
is not for the purpose of acquiring, directly or indirectly, control of, and it
has no intent to acquire or exercise control of, the Company or to influence
the decisions or policies of the Board of Directors.

2.8           Fees. Such Investor has not agreed to pay any
compensation or other fee, cost or related expenditure to any underwriter,
broker, agent or other representative in connection with the transactions
contemplated hereby.

2.9           No
Conflicts.  The execution and
performance of this Agreement and the other Transaction Documents to which it
is a party do not conflict in any material respect with any agreement to which
such Investor is a party or is bound, any court order or judgment applicable to
such Investor, or the constituent documents of such Investor.

2.10         No Governmental Review.  Such Investor understands that no U.S.
federal or state agency or any other Governmental Authority has passed on or
made any recommendation or endorsement of the Securities or the fairness or
suitability of an investment in the Securities nor have such authorities passed
upon the accuracy of any information provided to such Investor or made any
findings or determinations as to the merits of the offering of the Securities.

2.11         Certain Trading Activities.  Such Investor has not, in violation of the
securities laws, directly or indirectly, nor has any Person acting on behalf of
or pursuant to any understanding with such Investor, engaged in any transactions
in the securities of the Company (including, without limitations, any Short
Sales involving the Company’s securities) since the time that such Investor was
first contacted by the Company or Kaufman Bros. L.P. regarding the investment
in the Company contemplated by the Transaction Documents.  Such Investor covenants that neither it nor
any Person acting on its behalf or pursuant to any understanding with it will
engage in any transactions in the securities of the Company (including Short
Sales) prior to the time that the transactions contemplated by this Agreement
are publicly disclosed pursuant to Section 4.1(c).

3.             REPRESENTATIONS AND WARRANTIES OF THE COMPANY.  The Company hereby represents and warrants to
each Investor and agrees with each Investor that, as of the Execution Date:

 13
 

3.1           Organization,
Good Standing and Qualification. 
Each of the Company and the Company Subsidiaries is duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation or organization
and has all requisite power and authority to carry on its business as now
conducted.  Each of the Company and the
Company Subsidiaries is duly qualified to transact business and is in good
standing in each jurisdiction in which it conducts business except where the
failure so to qualify has not had or would not reasonably be expected to have a
Material Adverse Effect.

3.2           Authorization; Consents.  The Company has the requisite corporate power
and authority to enter into and perform its obligations under the Transaction
Documents, to issue and sell the Debentures and the Warrants to the Investors
in accordance with the terms hereof and thereof, and to issue the Stock Option
Shares under the Debentures and the Warrant Shares upon exercise of the
Warrants. Each Company Subsidiary has the requisite power and authority to
enter into and perform its obligations under the Subsidiary Guarantee and the
Security Agreement. All corporate action on the part of the Company by its
officers, directors and stockholders necessary for the authorization, execution
and delivery of, and the performance by the Company of its obligations under,
the Transaction Documents has been taken, and no further consent or
authorization of the Company, its Board of Directors, stockholders, any
Governmental Authority or any other Person (other than (i) such approval as may
be required under the Securities Act and applicable state laws in respect of
the Registration Rights Agreement, (ii) the listing approval from the American
Stock Exchange for the issuance of the Warrant Shares and the Stock Option
Shares, (iii) the Stockholder Amendment Approval, and (iv) if 70% of the Cap
Amount is reached, the Stockholder Cap Approval) is required (pursuant to any
rule of the Principal Market or otherwise). All corporate action on the part of each Company Subsidiary by its
officers, directors, stockholders, members or governors necessary for the
authorization, execution and delivery of, and the performance by such Company
Subsidiary of its obligations under the Subsidiary Guarantee and the Security
Agreement has been taken.  The
Board of Directors has determined that the sale and issuance of the Securities,
and the consummation of the other transactions contemplated hereby and by the
other Transaction Documents, are in the best interests of the Company.

3.3           Enforcement. 
This Agreement has been duly executed and delivered by the Company, and
at the Closing, each of the Company and the Company Subsidiaries will have duly
executed and delivered each of the other Transaction Documents to which such
entity is a party.  This Agreement
constitutes, and at the Closing, each of the other Transaction Documents to
which the Company or any of the Company Subsidiaries is a party will
constitute, the valid and legally binding obligations of the Company and the
Company Subsidiaries, enforceable against the Company and the Company
Subsidiaries in accordance with their respective terms, subject to (i)
applicable bankruptcy, insolvency, fraudulent transfer, moratorium, reorganization
or other similar laws of general application relating to or affecting the
enforcement of creditors’ rights generally and (ii) general principles of
equity.

3.4           Disclosure Documents; Agreements; Financial Statements;
Other Information.  The Company is
subject to the reporting requirements of the Exchange Act and, except as
described on Schedule 3.4(i), the Company
has filed with the Commission all SEC Documents that the Company was required
to file with the Commission on or after December 31, 2005.  The Company is not 

 14
 

aware of any event occurring or expected to occur on or
prior to the Closing Date (other than the transactions effected hereby or
ongoing sales efforts that could result in a material contract) that would
require the filing of, or with respect to which the Company intends to file, a
Form 8-K after the Closing.  Each SEC
Document filed on or after December 31, 2005, as of the date of the filing
thereof with the Commission (or if amended or superseded by a filing prior to
the Execution Date, then on the date of such amending or superseding filing),
complied in all material respects with the requirements of the Securities Act
or Exchange Act, as applicable, and the rules and regulations promulgated
thereunder and, as of the date of such filing (or if amended or superseded by a
filing prior to the Execution Date, then on the date of such filing), such SEC
Document (including all exhibits and schedules thereto and documents
incorporated by reference therein) did not, contain an untrue statement of
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. 
All documents required to be filed as exhibits to the SEC Documents
filed on or after December 31, 2005 have been filed as required.  Except as set forth in the Disclosure
Documents, the Company has no liabilities, contingent or otherwise, other than
liabilities incurred in the ordinary course of business which, under GAAP, are
not required to be reflected in the financial statements included in the
Disclosure Documents and which, individually or in the aggregate, are not
material to the consolidated business or financial condition of the Company and
the Company Subsidiaries taken as a whole. 
As of their respective dates, the financial statements of the Company
included in the SEC Documents filed on or after December 31, 2005 complied as
to form in all material respects with applicable accounting requirements and
the published rules and regulations of the Commission with respect thereto.
Such financial statements have been prepared in accordance with GAAP
consistently applied at the times and during the periods involved (except (i)
as may be otherwise indicated in such financial statements or the notes
thereto, or (ii) in the case of unaudited interim statements, to the extent
they may exclude footnotes or may be condensed or summary statements) and
fairly present in all material respects the financial position of the Company
as of the dates thereof and the results of its operations and cash flows for
the periods then ended (subject, in the case of unaudited statements, to normal
year-end adjustments).  The Company will
prepare the financial statements to be included in any reports, schedules,
registration statements and definitive proxy statements that the Company is
required to file or files with the Commission after the date hereof in
accordance with GAAP (except in the case of unaudited interim statements, to the
extent they may exclude footnotes or may be condensed or summary statements).

3.5           Capitalization; Debt Schedule.  The
capitalization of the Company, including its authorized capital stock, the
number of shares issued and outstanding, the number of shares issuable and
reserved for issuance pursuant to the Company’s stock option plans and
agreements, the number of shares issuable and reserved for issuance pursuant to
securities (other than the Warrants) exercisable for, or convertible into or
exchangeable for any shares of Common Stock and the number of shares initially
to be reserved for issuance upon exercise of the Warrants, is set forth on Schedule 3.5(i) hereto.  All outstanding shares of capital stock of
the Company have been, or upon issuance will be, validly issued, fully paid and
non-assessable. Except as disclosed on Schedule 3.5(ii)
hereto, no Subsidiary of the Company other than the Company Subsidiaries
possesses or owns assets having a fair market value in excess of $50,000.
Except as disclosed on Schedule 3.5(iii)
hereto, the Company or a Company Subsidiary owns all of the capital stock of
each Company Subsidiary, which capital stock is validly issued, fully paid and
non-assessable, and no shares of the capital stock of the Company or any Company
Subsidiary are subject to preemptive 

 15
 

rights or any other similar rights of the stockholders
of the Company or any such Company Subsidiary or any Liens created by or
through the Company or any such Company Subsidiary.  Except as disclosed on Schedule
3.5(i) or as contemplated herein, there are no outstanding
options, warrants, scrip, rights to subscribe to, calls or commitments of any
character whatsoever relating to, or securities or rights convertible into or
exercisable or exchangeable for, any shares of capital stock of the Company or
any Company Subsidiary, or arrangements by which the Company or any Company
Subsidiary is or may become bound to issue additional shares of capital stock
of the Company or any Company Subsidiary (whether pursuant to anti-dilution,
“reset” or other similar provisions). Schedule 3.5(iv) identifies all
Liabilities (as defined in Section 4.10(b) hereof)
of the Company and/or the Company Subsidiaries currently outstanding in excess
of $50,000 as of the date hereof, and Schedule 3.5(v) identifies
all Liens encumbering any of the assets of the Company and/or the Company
Subsidiaries as of the date hereof.

3.6           Due Authorization; Valid Issuance.  The Debentures are duly authorized and, when
issued, sold and delivered in accordance with the terms of this Agreement, will
be duly and validly issued, free and clear of any Liens imposed by or through
the Company. The Warrants are duly authorized and, when issued, sold and
delivered in accordance with the terms of this Agreement, will be duly and
validly issued, free and clear of any Liens imposed by or through the Company.
The Stock Option Shares issuable under the Debentures and the Warrant Shares
issuable under the Warrants are duly authorized and reserved for issuance.  Assuming the accuracy of each Investor’s
representations contained herein, the issuance and sale of the Debentures and
Warrants under this Agreement will be effected in compliance with all
applicable Federal and state securities laws.

3.7           Form S-3. 
The Company is eligible to register the Stock Option Shares and Warrant
Shares for resale in a secondary offering by each Investor on a registration
statement on Form S-3 under the Securities Act. To the Company’s
knowledge, as of the date hereof and as of
the Closing Date, there exist no facts or circumstances (including
without limitation any required approvals or waivers of any circumstances that
may delay or prevent the obtaining of accountant’s consents) that could
reasonably be expected to prohibit or delay the preparation, filing or
effectiveness of such registration statement on Form S-3.

3.8           No Conflict. 
Neither the Company nor any Company Subsidiary is in violation of any
provisions of its charter, bylaws or any other governing document.  Except as set forth on Schedule
3.8, neither the Company nor any Company Subsidiary is in
violation of or in default (and no event has occurred which, with notice or
lapse of time or both, would constitute a default) under any provision of any
instrument or contract to which it is a party or by which it or any of its
Property is bound, or in violation of any provision of any Governmental
Requirement applicable to the Company or any Company Subsidiary, except for any
violation or default that has not had or would not reasonably be expected to
have a Material Adverse Effect.  (i) The
execution, delivery and performance of this Agreement and the other Transaction
Documents and (ii) (A) the consummation of the transactions contemplated hereby
and thereby (including without limitation, the issuance of the Debentures and
the Warrants, the reservation for issuance of the Stock Option Shares and the
Warrant Shares and, prior to the Stockholder Amendment Approval Date, the
issuance of the Warrant Shares in a manner consistent with Article 9 of the
Company’s certificate of incorporation as in effect as of the date hereof) and
(B) following the Stockholder Amendment Approval Date, the issuance of the
Stock Option Shares and the Warrant Shares, will not result in 

 16
 

any violation of any provisions of the Company’s or any
Company Subsidiary’s charter, bylaws or any other governing document or in a
default under any provision of any instrument or contract to which the Company
or Company Subsidiary is a party or by which it or any of its Property is bound,
or in violation of any provision of any Governmental Requirement applicable to
the Company or Company Subsidiary or be in conflict with or constitute, with or
without the passage of time and giving of notice, either a default under any
such provision, instrument or contract or an event which results in the
creation of any Lien upon any assets of the Company or of any Company
Subsidiary or the triggering of any preemptive or anti-dilution rights (including
without limitation pursuant to any “reset” or similar provisions) or rights of first refusal or first offer,
or any other rights that would allow or
permit the holders of the Company’s securities or any other Person to purchase
shares of Common Stock or other securities of the Company or Company Subsidiary
(whether pursuant to a stockholder rights plan provision or otherwise).

3.9           Financial Condition; Taxes; Litigation.

3.9.1  The financial condition of each of the
Company and each Company Subsidiary is, in all material respects, as described
in the Disclosure Documents, except for changes in the ordinary course of
business and normal year-end adjustments that are not, in the aggregate,
materially adverse to the consolidated business or financial condition of the
Company and the Company Subsidiaries taken as a whole.  There has been no (i) material adverse change
to the business, operations, properties, financial condition, prospects or
results of operations of the Company and the Company Subsidiaries taken as a
whole since the date of the Company’s most recent financial statements
contained in the Disclosure Documents or
(ii) change by the Company in its accounting principles, policies and methods
except as required by changes in GAAP.

3.9.2  Each of the Company and the Company
Subsidiaries has prepared in good faith and duly and timely filed all tax
returns required to be filed by it and such returns are complete and accurate
in all material respects and the Company and the Company Subsidiaries each has
paid all taxes required to have been paid by it, except for taxes which it
reasonably disputes in good faith or the failure of which to pay has not had or
would not reasonably be expected to have a Material Adverse Effect.  Neither the Company nor any Company
Subsidiary has any liability with respect to taxes that accrued on or before
the date of the most recent balance sheet of the Company included in the
Disclosure Documents in excess of the amounts accrued with respect thereto that
are reflected on such balance sheet.

3.9.3  Neither the Company nor any Company
Subsidiary is the subject of any pending or, to the Company’s knowledge,
threatened inquiry, investigation or administrative or legal proceeding of a
material nature by the Internal Revenue Service, the taxing authorities of any
state or local jurisdiction, the Commission, any state securities commission or
other Governmental Authority.

3.9.4  Except as set forth in the Disclosure
Documents (and if not set forth therein, except as set forth on Schedule 3.9.4), there is no
material claim, litigation or administrative proceeding pending, or, to the
Company’s knowledge, threatened or contemplated, against the Company or any
Company Subsidiary, or against any officer, director or employee of the Company
or any such Company Subsidiary in connection with such person’s employment
therewith.  Neither the Company nor any
Company Subsidiary is a party to or subject to the provisions of, any order, 

 17
 

writ, injunction, judgment or decree of any court or
Government Authority which has had or would reasonably be expected to have a
Material Adverse Effect.

3.10         Acknowledgement of Dilution.  The Company acknowledges that the issuance of
Stock Option Shares under the Debentures and the Warrant Shares upon exercise
of the Warrants 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
obligation to issue (i) Stock Option Shares in accordance with the terms of the
Debentures in stock and (ii) Warrant Shares in accordance with the terms of the
Warrants shall not be affected, regardless of the effect of any such
dilution.  The Company further
acknowledges that, to the extent not otherwise prohibited by the terms of this Agreement,
each Investor may enter into hedging transactions with respect to the Common
Stock and that such sales or transactions may have a downward effect on the
market price of the Common Stock.

3.11         Intellectual
Property.  Except as set forth in the
Disclosure Documents (and if not set forth therein, except as set forth on Schedule 3.11):

(a)           The Company and the Company Subsidiaries own, free and
clear of claims or rights or any other Person, with full right to use, sell,
license, sublicense, dispose of, and
bring actions for infringement of, or, to the knowledge of the Company, has
acquired licenses or other rights to use, all Intellectual Property necessary
for the conduct of its business as presently conducted (other than with respect
to software which is generally commercially available and not used or
incorporated into the Company’s products and open source software which may be
subject to one or more “general public” licenses).  All works that are used or incorporated into
the Company’s or any of the Company Subsidiaries’ services, products or
services or products actively under development and which is proprietary to the
Company or such Company Subsidiary was developed by or for the Company or the
Company Subsidiaries by the current or former employees, consultants or
independent contractors of the Company or the Company Subsidiaries or purchased
or licensed by the Company or one or more Company Subsidiaries.

(b)           The business of the Company and the Company Subsidiaries
as presently conducted and the production, marketing, licensing, use and
servicing of any products or services of the Company and the Company
Subsidiaries do not, to the knowledge of the Company, infringe or conflict with any patent, trademark,
copyright, or trade secret rights of any third parties or any other
Intellectual Property of any third parties in any material respect.  Neither the Company nor any Company
Subsidiary has received written notice from any third party asserting that any
Intellectual Property owned or licensed by the Company or the Company
Subsidiaries, or which the Company or any Company Subsidiary otherwise has the
right to use, is invalid or unenforceable by the Company or such Company
Subsidiary and, to the Company’s knowledge, there is no valid basis for any
such claim (whether or not pending or threatened).

(c)           No claim is pending or, to the Company’s knowledge,
threatened against the Company or any Company Subsidiary nor has the Company or
any Company Subsidiary received any written notice or other written claim from
any Person asserting that any of the Company’s or a Company Subsidiary’s
present or contemplated activities infringe or may infringe in any material
respect any Intellectual Property of such Person, and the Company is not aware
of any infringement 

 18
 

by any other Person of any material rights of the Company or any
Company Subsidiary under any Intellectual Property Rights.

(d)           All licenses or other agreements under which the Company
or any Company Subsidiary is granted Intellectual Property (excluding licenses
to use software utilized in the Company’s or such Company Subsidiary’s internal
operations and which is generally commercially available) are in full force and effect and, to the
Company’s knowledge, there is no material default by any party thereto.  The Company has no reason to believe that the
licensors under such licenses and other agreements do not have and did not have
all requisite power and authority to grant the rights to the Intellectual
Property purported to be granted thereby.

(e)           All licenses or other agreements under which the Company or any Company Subsidiary has granted rights to
Intellectual Property to others (including all end-user agreements) are in full
force and effect, there has been no material default by the Company or any
Company Subsidiary thereunder and, to the Company’s knowledge, there is no
material default of any provision thereof relating to Intellectual Property by
any other party thereto.

(f)            The Company and the Company Subsidiaries have taken all steps required in accordance with commercially
reasonable business practice to establish and preserve their ownership in their
owned Intellectual Property and to keep confidential all material technical
information developed by or belonging to the Company or the Company
Subsidiaries which has not been patented or copyrighted.  To the Company’s knowledge, neither the
Company nor any Company Subsidiary is making any unlawful use of any
Intellectual Property of any other Person, including, without limitation, any
former employer of any past or present employees of the Company or any Company
Subsidiary.  To the Company’s knowledge,
neither the Company, any Company Subsidiary nor any of their respective
employees has any agreements or arrangements with former employers of such
employees relating to any Intellectual Property of such employers, which
materially interfere or conflict with the performance of such employee’s duties
for the Company or any Company Subsidiary or result in any former employers of
such employees having any rights in, or claims on, the Company’s or any Company
Subsidiary’s Intellectual Property.  Each
employee of the Company and of each Company Subsidiary is subject to the
policies regarding confidentiality and proprietary information described in the
Company’s current employee handbook, which policies are reasonably sufficient
to protect the Intellectual Property interests of the Company or a Company
Subsidiary in inventions created by its employees.  The Company and each Company Subsidiary has
obtained executed assignment agreements from any current or former employees
with respect to the development by such employees of intellectual property that
have become the subject of registered patents or of outstanding applications
for registration.  The Company and each
Company Subsidiary has taken reasonable security measures to guard against
unauthorized disclosure or use of any of its Intellectual Property that is
confidential or proprietary; and the Company has no reason to believe that any
Person (including, without limitation, any former employee or consultant of the
Company or of any Company Subsidiary) has unauthorized possession of any of its
Intellectual Property, or any part thereof, or that any Person has obtained
unauthorized access to any of its Intellectual Property.  The Company and each Company Subsidiary has
complied in all material respects with its respective obligations pursuant to
all agreements relating to Intellectual Property rights that are the subject of
licenses granted by third 

 19
 

parties, except for any non-compliance that has not had or would not
reasonably be expected to have a Material Adverse Effect.

3.12         Registration Rights; Rights of Participation.  Except as set forth on Schedule
3.12, (A) the Company has not granted or agreed to grant to any
person or entity any rights (including “piggy-back” registration rights) to
have any securities of the Company registered with the Commission or any other
governmental authority which has not been satisfied in full, or are being
satisfied in full pursuant to existing registration statements or waived on or
prior to the date hereof, and (B) no person or entity, including, but not
limited to, current or former stockholders of the Company, underwriters,
brokers, agents or other third parties, has any right of first refusal,
preemptive right, right of participation, anti-dilutive right or any similar
right to participate in, or to receive securities or other assets of the
Company solely as a result of the transactions contemplated by this Agreement
or the other Transaction Documents.

3.13         Solicitation; Other Issuances of Securities.  Neither the Company nor any Company
Subsidiary or Affiliate, nor any Person acting on its or their behalf, (i) has
engaged in any form of general solicitation or general advertising (within the
meaning of Regulation D) in connection with the offer or sale of the
Securities, (ii) has, directly or indirectly, made any offers or sales of any
security or the right to purchase any security, or solicited any offers to buy
any security or any such right, under circumstances that would require
registration of the Securities under the Securities Act or (iii) has issued any
shares of Common Stock or shares of any series of preferred stock or other
securities or instruments convertible into, exchangeable for or otherwise
entitling the holder thereof to acquire shares of Common Stock which would be
integrated with the sale of the Securities to such Investor or the issuance of
the Warrant Shares for purposes of the Securities Act or of any
applicable stockholder approval provisions, including, without limitation,
under the rules and regulations of the American Stock Exchange nor, other than
as required by the Registration Rights Agreement, will the Company or any
Company Subsidiary or Affiliate take any action or steps that would require
registration of any of the Securities under the Securities Act or cause the
offering of the Securities to be so integrated with other offerings.

3.14         Fees.  Except
as set forth on Schedule 3.14, the Company is not obligated to pay any
brokers, finders or financial advisory fees or commissions to any underwriter,
broker, agent or other representative in connection with the transactions
contemplated hereby. The Company will indemnify and hold harmless such Investor
from and against any claim by any person or entity alleging that such Investor
is obligated to pay any such compensation, fee, cost or related expenditure in
connection with the transactions contemplated hereby.

3.15         Foreign Corrupt Practices.  Neither the Company, any Company Subsidiary
nor, to the knowledge of the Company, any director, officer, agent, employee or
other person acting on behalf of the Company or any Company Subsidiary, has (i)
used any corporate funds for any unlawful contribution, gift, entertainment or
other unlawful expenses relating to political activity, (ii) made any direct or
indirect unlawful payment to any foreign or domestic government official or
employee, or (iii) violated any provision of the Foreign Corrupt Practices Act
of 1977, as amended, or made any bribe, rebate, payoff, influence payment,
kickback or other unlawful payment to any foreign or domestic government
official or employee.

 

 20

3.16         Key Employees. Except as set forth on Schedule 3.16, each of the Company’s
and each Company Subsidiary’s executive officers (as defined in Rule 501(f) of
the Securities Act) (each, a “Key Employee”)
is currently serving in the capacity described in the Disclosure Documents.
Except as set forth on Schedule 3.16,
the Company has no knowledge of any fact or circumstance (including without
limitation (i) the terms of any agreement to which such person is a party or
any litigation in which such person is or may become involved and (ii) any
illness or medical condition that could reasonably be expected to result in the
disability or incapacity of such person) that would limit or prevent any such
person from serving in such capacity on a full-time basis in the foreseeable
future, or of any intention on the part of any such person to limit or
terminate his or her employment with the Company or any Company Subsidiary. To
the knowledge of the Company, no Key Employee has borrowed money pursuant to a
currently outstanding loan that is secured by Common Stock or any right or
option to receive Common Stock.

3.17         Employee Matters. 
There is no strike, labor dispute or union organization activities
pending or, to the knowledge of the Company, threatened between the Company or
any Company Subsidiary and any of their employees.  Other than as set forth on Schedule 3.17 or in the Disclosure
Documents, no employees of the Company or any Company Subsidiary belong to any
union or collective bargaining unit. The Company and each Company Subsidiary
has complied in all material respects with all applicable federal and state
equal opportunity and other laws related to employment.

3.18         Environment.  Except
as disclosed in the Disclosure Documents, the Company and the Company Subsidiaries
have no liabilities under any Environmental Law, nor, to the Company’s
knowledge, do any factors exist that are reasonably likely to give rise to any
such liability, affecting any of the properties owned or leased by the Company
or any Company Subsidiary that, individually or in the aggregate, has had or would reasonably be expected to have a
Material Adverse Effect.  Neither the
Company nor any Company Subsidiary has violated any Environmental Law
applicable to it now or previously in effect, other than such violations or
infringements that, individually or in the aggregate, have not had and would
not reasonably be expected to have a Material Adverse Effect.

3.19         ERISA.  Except as described on Schedule
3.19, the Company does not maintain or contribute to, or have
any obligation under, any Pension Plan. 
The Company is in compliance in all material respects with the presently
applicable provisions of ERISA and the United States Internal Revenue Code of
1986, as amended, with respect to each Pension Plan except in any such case for
any such matters that, individually or in the aggregate, have not had, and
would not reasonably be expected to have, a Material Adverse Effect.

3.20         Disclosure.  Except with respect to the material terms and
conditions of the transactions contemplated by the Transaction Documents and
the information to be disclosed by the Company pursuant to Section
4.1(d), the Company confirms that neither it nor any other
Person acting on its behalf has provided any of the Investors or their agents
or counsel with any information that it believes constitutes or might
constitute material, nonpublic information. The Company understands and
confirms that the Investors will rely on the foregoing representation and the
obligations of the Company under Section 4.1
in effecting transactions in securities of the Company.  All disclosure furnished by or on behalf of
the Company to the Investors regarding the Company and the Company
Subsidiaries, and their respective businesses and the

 21
 

transactions contemplated
hereby, including the Schedules to this Agreement, is true and correct and does
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 press
releases disseminated by the Company during the twelve months preceding the
date of this Agreement did not, at the time they were issued, contain any
untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary in order to make the statements, in light of
the circumstances under which they were made and when made, not
misleading.  The Company acknowledges and
agrees that no Investor makes or has made any representations or warranties
with respect to the transactions contemplated hereby other than those
specifically set forth in Section 2.

3.21         Insurance.  The Company maintains insurance for itself
and the Company Subsidiaries in such amounts and covering such losses and risks
as are reasonably sufficient and customary in the businesses in which the
Company and the Company Subsidiaries are engaged. As of the date hereof and as of the Closing Date, no notice of
cancellation has been received for any of such policies and the Company is in
compliance in all material respects with all of the terms and conditions
thereof.  The Company has no reason to
believe that it will not be able to renew its existing insurance coverage as
and when such coverage expires or to obtain similar coverage from similar
insurers as may be necessary to continue to conduct its business as currently
conducted without a significant increase in cost.  Without limiting the generality of the foregoing,
the Company maintains Director’s and Officer’s insurance in an amount not less
than $5 million for each covered occurrence.

3.22         Property. 
Except as set forth on Schedule 3.22,
the Company and the Company Subsidiaries
have good and marketable title to all real and personal Property owned by them,
in each case free and clear of all Liens, except for Permitted Liens.  Any Property held under lease by the Company
or the Company Subsidiaries is held by them under valid, subsisting and
enforceable leases with such exceptions as are not material and do not
interfere with the use made or proposed to be made of such Property by the
Company or any Company Subsidiary.  Schedule 3.22 sets forth all real
property owned by the Company and all mortgages or other liens (other than
Permitted Liens specified in paragraphs (b), (c) and (d) in the definition
thereof) encumbering such Property.

3.23         Regulatory Permits.  The Company and the Company Subsidiaries
possess all certificates, authorizations and permits issued by the appropriate
federal, state or foreign regulatory authorities necessary to conduct their
respective businesses, except where the failure to have any such certificate, authorization or permit would
not have a Material Adverse Effect, and
neither the Company nor any such Company Subsidiary has received any notice of
proceedings relating to the revocation or modification of any such certificate,
authorization or permit.

3.24         Exchange Act Registration; Listing.  The Company’s Common Stock is registered
pursuant to Section 12(g) of the Exchange Act and is listed on the American
Stock Exchange.  The Company currently
meets the continuing eligibility requirements for listing on the American Stock
Exchange and has not received any notice from such exchange that it may not
currently satisfy such requirements or that such continued listing is in any
way threatened.  The Company has taken no
action designed to, or which, to the knowledge of the Company, may have the
effect of, terminating the registration of the Common Stock under the Exchange
Act or delisting the Common Stock from the American Stock Exchange.

 22
 

3.25         Investment Company Status. The Company is not, and
immediately after any Closing will not be, an “investment
company” or an entity “controlled”
by an “investment company” within
the meaning of the Investment Company Act of 1940, as amended (the “Investment Company Act”), and shall
conduct its business in a manner so that it will not become subject to the
Investment Company Act.

3.26         Transfer Taxes. No stock
transfer or other taxes (other than income taxes) are required to be paid in
connection with the issuance and sale of any of the Securities, other than such
taxes for which the Company has established appropriate reserves and intends to
pay in full on or before the Closing.

3.27         Sarbanes-Oxley Act; Internal Controls and Procedures.  The Company is in material compliance with
any and all applicable requirements of the Sarbanes-Oxley Act of 2002, as
amended, and any and all applicable rules and regulations promulgated by the
SEC thereunder that are effective as of the date hereof.  The Company maintains internal accounting
controls, policies and procedures, and such books and records as are reasonably
designed to provide reasonable assurance that (i) all transactions to which the
Company or any Company Subsidiary is a party or by which its properties are
bound are effected by a duly authorized employee or agent of the Company,
supervised by and acting within the scope of the authority granted by the
Company’s senior management; (ii) the recorded accounting of the Company’s
consolidated assets is compared with existing assets at regular intervals; and
(iii) all transactions to which the Company or any Company Subsidiary is a
party, or by which its properties are bound, are recorded (and such records
maintained) in accordance with all Government Requirements and as may be
necessary or appropriate to ensure that the financial statements of the Company
are prepared in accordance with GAAP.

3.28         Embargoed Person. 
None of the funds or other assets of the Company or the Company
Subsidiaries shall constitute property of, or shall be beneficially owned,
directly or indirectly, by any person subject to trade restrictions under
United States law, including, but not limited to, the International Emergency Economic
Powers Act, 50 U.S.C. § 1701 et seq.,
the Trading with the Enemy Act, 50 U.S.C. App. 1 et seq., and any Executive Orders or
regulations promulgated under any such United States laws (each, an “Embargoed Person”), with the result
that the investments evidenced by the Securities are or would be in violation
of law.  No Embargoed Person shall have
any interest of any nature whatsoever in the Company or any Company Subsidiary
with the result that the investments evidenced by the Securities are or would
be in violation of law.  None of the
funds or other assets of the Company or the Company Subsidiaries shall be
derived from any unlawful activity with the result that the investments
evidenced by the Securities are or would be in violation of law.

3.29         Transactions with
Interested Persons.  Except as set
forth in the Disclosure Documents, no officer, director or employee of the
Company or any Company Subsidiary is or has made any arrangements with the
Company or any Company Subsidiary to become a party to any transaction with the
Company or any Company 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

 23
 

otherwise
requiring payments to or from any officer, director or such employee or, to the
knowledge of the Company, any entity in which any officer, director, or any
such employee has a substantial interest or is an officer, director, trustee or
partner.

3.30         Customers and
Suppliers.  The relationships of the
Company and the Company Subsidiaries with their respective customers and
suppliers are maintained on commercially reasonable terms.  Except as set forth on Schedule
3.30 hereto, to the Company’s knowledge, no customer or supplier
of the Company or any Company Subsidiary has any plan or intention to terminate
its agreement with the Company or such Company Subsidiary, which termination
would reasonably be expected to have a Material Adverse Effect.

3.31         Accountants.  The Company’s accountants, who the Company expects will render their opinion
with respect to the financial statements to be included in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2006, are, to the Company’s
knowledge, independent accountants as required by the Securities Act.

3.32         No Other Agreements.  The Company has not, directly or indirectly,
entered into any agreement with or granted any right to any Investor relating
to the terms or conditions of the transactions contemplated by the Transaction
Documents, except as expressly set forth in the Transaction Documents.

3.33         Solvency.  The Company believes that (i) the fair
saleable value of the Company’s assets exceeds the amount that will be required
to be paid on or in respect of the Company’s existing Debt; (ii) the Company’s
assets do not constitute unreasonably small capital to carry on its business as
now conducted and as proposed to be conducted; and (iii) the expected cash
flows of the Company for future periods, together with the proceeds the Company
would receive upon liquidation of its assets and the proceeds from expected
debt or equity offerings, after taking into account all anticipated uses of
such amounts, would be sufficient to pay all Debt when such Debt is required to
be paid.  The Company has no knowledge of
any facts or circumstances which led it to believe that it will be required to
file for reorganization or liquidation under bankruptcy or reorganization laws
of any jurisdiction, and has no present intention to so file.

4.             COVENANTS OF THE COMPANY
AND EACH INVESTOR.

4.1           Filings and Disclosure Reports.  The Company agrees with each Investor that
the Company will:

(a)           file a Form D with respect to the Securities issued at the
Closing as and when required under Regulation D and provide a copy thereof to
such Investor promptly after such filing;

(b)           at or prior to the Closing, take such action as the
Company reasonably determines upon the advice of counsel is necessary to
qualify the Securities for sale under applicable state or “blue-sky” laws or
obtain an exemption therefrom, and shall promptly provide evidence of any such
action to such Investor at such Investor’s request;

 24
 

(c)           on or prior to 5:00 p.m. (eastern time) on the third
Business Day following the Execution Date, file with the Commission a Current Report on Form 8-K disclosing the
material terms of and including as exhibits this Agreement and the other
Transaction Documents and the transactions contemplated hereby and thereby; provided, however, that each Investor shall have a
reasonable opportunity to review and comment on such Form 8-K prior to the
issuance or filing thereof; and provided, further,
that if the Company fails to file a Form 8-K disclosing the material terms of
this Agreement and the other Transaction Documents within the time frames
described herein, any Investor may issue a press release disclosing such
information without any notice to or consent by the Company.  Thereafter, the Company shall timely file any
filings and notices required by the Commission or applicable law with respect
to the transactions contemplated hereby;

(d)           on or prior to the earlier of (i)
February 16, 2007 and (ii) the date on which the Company closes the Bank Facility,
the Company shall issue a press release relating to the Bank Facility and the
transactions contemplated by this Agreement and the other Transaction Documents; provided, however,
that each Investor shall have a reasonable opportunity to review and comment on
such press release prior to the issuance thereof; and

(e)           on or prior to the earlier of (i)
March 2, 2007 and (ii) the date that the Company publicly releases its fiscal
year 2006 results, the Company shall publicly disclose financial results and other
information such that the Investors are no longer in possession of material,
nonpublic information that has been provided by the Company or any other Person
acting on the Company’s behalf.

4.2           Existence and Compliance.  The Company agrees that it will, and will
cause each Company Subsidiary to, while any Investor holds any Securities:

                (a)           maintain its corporate existence in
good standing;

                (b)           comply with all Governmental
Requirements applicable to the operation of its business, except for instances
of noncompliance that would not reasonably be expected to have, individually or
in the aggregate, a Material Adverse Effect;

                (c)           comply with all agreements, documents and instruments
binding on it or affecting its Properties or business, including, without limitation,
all Material Contracts, except for instances of noncompliance that would not
reasonably be expected to have, individually or in the aggregate, a Material
Adverse Effect;

                (d)           provide each
Investor with copies of all materials sent to its stockholders at the same time
as such materials are delivered to such stockholders (provided that
such delivery shall be deemed effected in accordance herewith if the Company
provides the Investors with a link to the EDGAR filing containing such
materials);

                (e)           timely file with the
Commission all reports required to be filed pursuant to the Exchange Act and
refrain from terminating its status as an issuer required by the Exchange Act
to file reports thereunder even if the Exchange Act or the rules or regulations
thereunder would permit such termination;

 25
 

                (f)            take commercially
reasonable steps to limit sales of Common Stock by the Company’s Key Employees
listed on Schedule 4.2(f) during the
period beginning on the Execution Date and ending on the Effective Date, other
than pursuant to any 10b-5(1) trading plans in effect as of the Execution Date
and disclosed to each Investor in writing prior to such date; and

                (g)           use commercially
reasonable efforts to maintain adequate insurance coverage (including D&O
insurance) for the Company and each Company Subsidiary.

4.3           Reservation of Common Stock.   The Company shall, on the Closing Date, have
authorized and reserved for issuance to the Investors free from any preemptive
rights, and shall keep available at all times during which any Debentures or
Warrants are outstanding, a number of shares of Common Stock (the “Reserved Amount”) that, on the
Closing Date, is not less than two hundred percent (200%) of the sum of (i)
the number of Stock Option Shares that would be issuable if the Debentures were
then repaid in full in Stock Option Shares (and not in cash) plus (ii) the number of Warrant Shares that would be
issuable if the Warrants were then exercised in full; in each such case,
without regard to any limitation or restriction on (x) the issuance of such
Securities or (y) the exercise of any Warrants.  The Reserved Amount shall be allocated among
the Investors in accordance with each Investor’s Pro Rata Share.  In the event that an Investor shall sell or
otherwise transfer any of such Investor’s Debentures or Warrants, each
transferee shall be allocated a pro rata
portion of such transferor’s Reserved Amount. 
Any portion of the Reserved Amount allocated to any Investor or other
Person which no longer holds any Debentures or Warrants shall be reallocated to
the remaining Investors pro rata based
on the number of the Registrable Securities held by such Investors at such
time.  In the event that the Reserved
Amount is insufficient at any time to cover one hundred twenty five percent
(125%) of the Registrable Securities issued or issuable to the Investors
under the Debentures and the Warrants (such number to be determined (x) using
92% of the VWAP or the exercise price of the Warrants, as applicable, in effect
at such time and (y) without regard to any limitation or restriction on (1) the
issuance of such Registrable Securities or (2) the exercise of any Warrants), the Company shall take such action (including
without limitation holding a meeting of its stockholders) to increase the
Reserved Amount to cover two hundred percent (200%) of such Registrable
Securities, such increase to be effective not later than the thirtieth (30th)
day (or sixtieth (60th) day, in the event stockholder approval is required for
such increase) following the Company’s receipt of written notice of such
deficiency. While any Warrants are outstanding, the Company shall not reduce
the Reserved Amount without obtaining the prior written consent of each
Investor then holding a Warrant.

4.4           Use of Proceeds. 
The Company shall use the proceeds from the sale of the Debentures and
Warrants (i) for working capital and general corporate purposes of the Company
and the Company Subsidiaries and (ii) for the payment of a portion of the
purchase price in connection with the McMurdo Transaction.  The Company shall not use the proceeds from
the sale of the Debentures and Warrants to fund the operations of any
Subsidiary or other Person other than a Company Subsidiary.

4.5           Transactions with Affiliates.  (a) The Company agrees that, during the
period beginning on the Execution Date and ending on the Termination Date, any
transaction or arrangement between the Company or any Company Subsidiary, on
the one hand, and any Affiliate of the Company or any Company Subsidiary
(including, in the case of the Company, any Company Subsidiary, and in the case
of a Company Subsidiary, the Company or any other

 26
 

Company
Subsidiary), or any officer, director, manager, shareholder, member or employee
of the foregoing,  on the other hand (each, an “Affiliate Transaction”), shall be
effected on an arms’ length basis and shall be approved by the independent
members of board of directors of the Company or the board of directors or
equivalent thereof of the Company Subsidiary, as the case may be.

(b)           In
addition to (and without limiting) the provisions of Section
4.5(a), the Company agrees that, during the period beginning on
the Execution Date and ending on the Termination Date, the Company shall not
permit Signature to (i) engage in any Affiliate Transaction, or (ii) dividend
or make any other distribution of its cash or other properties to any Person
other than distributions of cash to the Company that has been generated by the
cash flow of Signature’s operations from and after the Closing Date.

4.6           Use of Investor Name.  Except as may be required by applicable law
and/or this Agreement, the Company shall not use, directly or indirectly, any
Investor’s name or the name of any of its Affiliates in any advertisement,
announcement, press release or other similar communication unless it has
received the prior written consent of such Investor for the specific use
contemplated or as otherwise required by applicable law or regulation.

4.7           Limitations on Disposition.  No Investor shall sell, transfer, assign or dispose
of any Securities, unless:

(a)           there is then in
effect an effective registration statement under the Securities Act covering
such proposed disposition and such disposition is made in accordance with such
registration statement; or

(b)           such
Investor has notified the Company in writing of any such disposition, and
furnished the Company with an opinion of counsel, reasonably satisfactory to
the Company, that such disposition will not require registration of such
Securities under the Securities Act; provided, however,
that no such opinion of counsel will be required (A) if the sale,
transfer, assignment or disposition is made to an Affiliate of such Investor,
(B) if the sale, transfer, assignment or disposition is made pursuant to
Rule 144 and such Investor provides the Company with evidence reasonably
satisfactory to the Company that the proposed transaction satisfies the
requirements of Rule 144, (C) if such
Securities are eligible for resale under Rule 144(k) or any successor provision
or (D) if in connection with a bona
fide pledge or hypothecation of any Securities under a margin
arrangement with a broker-dealer or other financial institution or the sale of
any such Securities by such broker-dealer or other financial institution
following such Investor’s default under such margin arrangement.

4.8           Disclosure of Non-Public Information. In addition
to the Company’s obligations under Section 4.1,
the Company agrees that it will not at any time following the Execution Date
disclose material non-public information to any Investor without first
obtaining such Investor’s written consent to such disclosure.

4.9           Indemnification of Investors.   The Company will indemnify and hold each
Investor and its directors, managers, officers, shareholders, members,
partners, employees and agents (each, an “Investor Party”)
harmless from any and all losses, liabilities, obligations, claims,
contingencies,

 27
 

damages, costs and expenses, including all judgments,
amounts paid in settlements, court costs and reasonable attorneys’ fees and
costs of investigation that any such Investor 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 an
Investor, or any of them or their respective Affiliates, by any stockholder of
the Company who is not an Affiliate of such Investor, with respect to any of
the transactions contemplated by the Transaction Documents (unless such action
is based upon a breach of such Investor’s representation, warranties or
covenants under the Transaction Documents or any agreements or understandings
such Investor may have with any such stockholder or any violations by such Investor
of state or federal securities laws or any conduct by such Investor which
constitutes fraud, gross negligence, willful misconduct or malfeasance).  If any action shall be brought against any
Investor Party in respect of which indemnity may be sought pursuant to this
Agreement, such Investor 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 Investor 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 Investor 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
following such Investor Party’s written request that it do so, 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
Investor Party.  The Company will not be
liable to any Investor Party under this Agreement (i) for any settlement by an
Investor 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 such
Investor Party’s wrongful actions or omissions, or gross negligence or to such
Investor Party’s breach of any of the representations, warranties, covenants or
agreements made by such Investor in this Agreement or in the other Transaction
Documents.

4.10         Limitation on Debt
and Liens; Financial Covenants.

(a)           During the
period beginning on the Execution Date and ending on the Termination Date, the
Company shall refrain, and shall ensure that each Company Subsidiary refrains,
from (A) incurring any Debt other than Permitted Debt, and (B) granting, establishing
or maintaining any Lien on any of its Property other than Permitted Liens.

(b)           When
used in this Section 4.10(b), the
following terms shall have the respective meanings indicated:

“Accounts Receivable”
means, as to any Person at any time of determination, all accounts receivable
of such Person (i) not including prepaid deposits, deferred revenue and
offsets, and (ii) excluding (1) all receivables that remain unpaid for over 90
days from the respective invoice dates thereof, (2) if 35% or more of all
receivables of such Person is payable by any one debtor and its Affiliates,
then all receivables payable by such debtor and its Affiliates in excess of 35%
of the total amount of all receivables of such Person; (3) all receivables
payable by any Affiliate of such Person; (4) all receivables generated as a
result of pre-billing, progress billing, retention billing, bill and

 28
 

hold accounts, ship in place accounts, contra revenue accounts or
cross-aged balances; (5) all receivables of a debtor and its Affiliates if 35%
or more of all receivables payable by such debtor and its Affiliates remain
unpaid for over 90 days from the respective invoice dates thereof; and (6) all
receivables payable by debtors whose principal place of business is located
outside of the United States, Canada and the member nations of the European
Union after a total of $1,000,000 of receivables payable by such debtors have
been included as “qualifying” receivables for purposes of determining the
Accounts Receivable of such Person.

“Consolidated Liabilities”
means, at any time of determination, the total Liabilities of the Company and
the Company Subsidiaries at such time, without duplication.

“Consolidated Net Tangible
Assets” means, at any time of determination, the total Net
Tangible Assets of the Company and the Company Subsidiaries at such time,
without duplication.

“Consolidated U.S.
Liabilities” means, at any time of determination, the total
Liabilities of the Company and the U.S. Company Subsidiaries at such time,
without duplication.

“Consolidated U.S. Net
Tangible Assets” means, at any time of determination, the total
Net Tangible Assets of the Company and the U.S. Company Subsidiaries at such
time, without duplication.

“Liabilities”
means, as to any Person at any time of determination, all Debt (including
Permitted Debt) of such Person, provided that
with respect to any revolving credit line facility of such Person, only (x)
that portion of such facility that has actually been drawn under such facility
at such time plus (y) any additional amount
that such Person is obligated to draw pursuant to the terms of such facility at
any time on or after such time, shall be included as a Liability of such
Person.

“Net Tangible Assets”
means, as to any Person at any time of determination, the aggregate value of
(i) all cash and cash equivalents of such Person; (ii) all Accounts Receivable
of such Person, (iii) all inventory of such Person, valued at cost and
multiplied by 0.90 and excluding the portion of all work in process inventory
that is in excess of 20% of the total inventory of such Person; and (iv) all
real and personal property and equipment of such Person net of depreciation.

During the period
beginning on the Execution Date and ending on the Termination Date, the Company
shall, and shall ensure that each of the Company Subsidiaries, comply with each
of the following financial covenants:

(i)            the
Consolidated Net Tangible Assets shall at all times be equal to or exceed
$35,000,000;

 29
 

(ii)           the
Consolidated U.S. Net Tangible Assets shall at all times be equal to or exceed
$16,500,000;

(iii)          the
Net Tangible Assets of Signature shall at all times be equal to or exceed
$11,500,000;

(iv)          the
Consolidated Liabilities shall at all times be less than $20,000,000;

(v)           the
Consolidated U.S. Liabilities shall at all times be less than $15,000,000; and

(vi)          the
Liabilities of Signature shall at all times be less than $2,000,000.

In furtherance of the
foregoing financial covenants, the Company shall, on or prior to the 30th day following each fiscal quarter following
the Closing Date (or, if such fiscal quarter is the Company’s fourth fiscal
quarter, then on or prior to the 45th day following such fiscal quarter), deliver to
each Investor a certificate certified by the Chief Financial Officer of the Company
certifying (i) that at all times during such fiscal quarter, the Company and
the Company Subsidiaries were, to such officer’s knowledge, in compliance with
each of the foregoing financial covenants and (ii) the actual Net Tangible
Assets and Liability amounts for each of the foregoing financial covenant
categories as of the last day of such fiscal quarter.  Following the closing of the McMurdo
Transaction, but in no case later than six months after the Closing Date, the
Company and Investors agree to review and renegotiate the foregoing financial
covenants in good faith to take into account the then current financial
condition of the Company and Company Subsidiaries, specifically taking into
account the McMurdo Transaction.

4.11         Restricted Payments.  During the period beginning on the Execution
Date and ending on the Termination Date, the Company will not, and will not
permit any Company Subsidiary to, make any Restricted Payments other than
Restricted Payments made by a Company Subsidiary to the Company (provided, that any Restricted Payment by Signature that
would be permitted under this Section 4.11
shall be further subject to the restrictions contained in Section
4.5(b)(ii)).

4.12         Disposition of Property.  During
the period beginning on the Execution Date and ending on the Termination Date,
the Company will not, and will not permit any Company Subsidiary to, (i) dispose in a single transaction or in a series of
related transactions all or any part of its Property unless (x) such
disposition is in the ordinary course of business and for fair market value (provided, any such disposition does not exceed $50,000 per
annum), and (y) such Property is not material to the Company’s or any Company
Subsidiary’s business, operations or financial condition or performance or (ii)
sell, assign or otherwise transfer any equity interest in any Company
Subsidiary to a Person other than the Company or another Company Subsidiary.

4.13         Modification of Organizational
Documents.  Except as described on Schedule 4.13 and Section 4.17, and
as may be required to comply with the listing requirements of the

 

 30

Principal Market, during
the period beginning on the Execution Date and ending on the Termination Date,
the Company will not, nor will it permit any Company Subsidiary to, consent to
or implement any termination, amendment, modification, supplement or waiver of
the certificate or articles of incorporation, articles of organization, bylaws,
regulations or other constituent documents of the Company or any such Company
Subsidiary.

4.14         Issuance Limitation.  During the period
beginning on the Execution Date and ending on the date that is 90 days after
the Effective Date, the Company shall not effect a Subsequent Placement.  During
the period beginning on the Execution Date and ending on the Termination Date,
the Company will not permit any Company Subsidiary to effect a Subsequent
Placement.  During the period
beginning on the Execution Date and ending on the Stockholder Amendment
Approval Date, the Company shall not effect a Subsequent Placement that
constitutes a Dilutive Issuance (as defined in the Warrants).

4.15         Acquisitions and Investments.  Other than any purchase of additional equity
securities of a Company Subsidiary or another Affiliate, during the period beginning on the Execution Date
and ending on the Termination Date, the Company will not, nor will it
permit any Company Subsidiary to, purchase or otherwise acquire the capital
stock or other equity interests in or assets (constituting a business unit) of,
any Person or agree to do so, unless the Company believes in good faith that
the acquired business or entity will generate positive cash flow during the
twelve-month period immediately following such acquisition.

4.16         Limitation on Issuance of Stock
Option Shares and Warrant Shares. 
Each Investor acknowledges and agrees that the aggregate number of shares
of Common Stock that may be issued by the Company pursuant to this Agreement,
the Debentures and the Warrants may not at any time exceed the Cap Amount
without the Stockholder Cap Approval and that the Company shall have no
obligation to issue shares of Common Stock pursuant to this Agreement, the
Debentures or the Warrants in excess of the Cap Amount unless the Stockholder
Cap Approval has been obtained.  In
furtherance of the limitation set forth in the immediately preceding sentence,
at any time following the Closing Date, the aggregate number of Stock Option
Shares and Warrant Shares that such Investor may receive under such Investor’s
Debenture and/or upon the exercise of such Investor’s Warrant may not exceed
the product of (A) the Cap Amount and (B) such Investor’s Pro Rata Share (the “Allocation Amount”).    In the event that an Investor shall sell or
otherwise transfer any of such Investor’s Debentures or Warrants, each
transferee shall be allocated a pro rata
portion of such transferor’s Allocation Amount. 
Any portion of the Allocation Amount allocated to any Investor or other
Person which no longer holds any Debentures or Warrants shall be reallocated to
the remaining Investors pro rata
based on the number of the Registrable Securities held by such Investors at
such time.

4.17         Stockholder Approvals.

(a)           The Company shall use its
commercially reasonable efforts to obtain the Stockholder Amendment Approval as
promptly as practicable after the date hereof. 
In furtherance of the foregoing, the Company shall hold a stockholders
meeting no later than May 31, 2007.  If
the Stockholder Amendment Approval is not obtained at such meeting, the Company
shall continue to use its commercially reasonable efforts to obtain the
Stockholder Amendment Approval at each

 31
 

annual or other stockholder meeting held by the
Company until such approval has been obtained (provided,
that the Company shall ensure that a stockholder meeting is called at least
once every 90 days until the Stockholder Amendment Approval has been obtained).

(b)           The Company shall use its
commercially reasonable efforts to obtain the Stockholder Cap Approval as
promptly as practicable after the first date on which the total number of
shares of Common Stock issued or issuable by the Company pursuant to this
Agreement, the Debentures and the Warrants is equal to or greater than 70% of
the Cap Amount.  In furtherance of
obtaining the Stockholder Cap Approval if and when such approval is required,
the Company shall use its commercially reasonable efforts to obtain the
Stockholder Cap Approval at each annual or other stockholder meeting held by
the Company until such approval has been obtained (provided, that, if and when such approval is required, the
Company shall ensure that a stockholder meeting is called at least once every
90 days until the Stockholder Cap Approval has been obtained).

4.18         Issuance of Stock Option Shares and Warrant Shares.  The Company shall cause all Stock Option
Shares and the Warrant Shares, when issued and delivered in accordance with the
terms of the Debentures or the Warrants, as the case may be, to be duly and
validly issued, fully paid and nonassessable, free and clear of any Liens
imposed by or through the Company.

4.19         Newly Created Subsidiaries.  During the period beginning on the
Execution Date and ending on the Termination Date, if the Company creates or acquires any new Subsidiary that owns, at the
time of creation or acquisition or any time thereafter, assets having a fair
market value in excess of $50,000, then the Company shall cause such new
Subsidiary to become party to the Subsidiary Guarantee and Security Agreement.

4.20         Listing on American Stock Exchange.  The Company shall use its commercially
reasonable efforts to obtain listing approval from the American Stock Exchange
for the issuance of the Warrant Shares and Stock Option Shares as promptly as
practicable but in no event later than March 2, 2007 (the “Listing
Deadline Date”).  If such
listing approval is not obtained by the Listing Deadline Date, the term of the
Warrant shall be extended by a number days equal to the number of days between
the Listing Deadline Date and the date on which the Company obtains such
listing approval; provided, that each Investor
shall have the right to pursue all other remedies provided under the
Transaction Documents.

4.21         Events of Default.  Upon the occurrence of an Event of Default, the Company shall (i)
notify the Investors of the nature of such Event of Default as soon as
practicable (but in no event later than one Business Day after the Company
becomes aware of such Event of Default), and (ii) not later than two Business
Days after delivering such notice to the Investors, issue a press release
disclosing such Event of Default and take such other actions as may be
necessary to ensure that none of the Investors are in the possession of
material, nonpublic information as a result of receiving such notice from the
Company.

 32
 

4.22         Certain Representations.  Each Investor shall notify the Company if, as
of any date on which an Investor is to receive Stock Option Shares and/or
Warrant Shares that are not subject to an effective registration statement with
the Commission, such Investor is unable to make the following representations:
(i) such Investor is an “accredited investor”, (ii) such Investor acknowledges
that the Securities may not be transferred or resold without registration under
the Securities Act or unless pursuant to an exemption therefrom, and (iii) such
Investor understands that the Securities are being delivered to it in reliance
upon specific exemptions from the registration requirements of U.S. federal and
state laws.  If an Investor delivers the
notice contemplated in this Section 4.22,
the Company shall not be obligated to deliver any Stock Option Shares or
Warrant Shares to such Investor until such Investor has provided a certificate
making the representations contained in this Section
4.22.  If an Investor does
not deliver the notice contemplated in this Section
4.22, then such Investor shall be deemed to have made the representations
contained in this Section 4.22, and the Company
shall deliver the Stock Option Shares and the Warrant Shares as and when due.

5.             CONDITIONS TO CLOSING.

5.1           Conditions to Investors’ Obligations at the Closing.  Each Investor’s obligations to effect the
Closing, including without limitation its obligation to purchase a Debenture
and Warrant at the Closing, are conditioned upon the fulfillment (or waiver by
such Investor in its sole and absolute discretion) of each of the following
events as of the Closing Date, and the Company shall use commercially
reasonable efforts to cause each of such conditions to be satisfied:

5.1.1                        the
representations and warranties of the Company set forth in this Agreement and
in the other Transaction Documents shall be true and correct in all material
respects as of such date as if made on such date (except that to the extent
that any such representation or warranty relates to a particular date, such
representation or warranty shall be true and correct in all material respects
as of that particular date);

5.1.2                        the
Company shall have complied with or performed in all material respects all of
the agreements, obligations and conditions set forth in this Agreement and in
the other Transaction Documents that are required to be complied with or
performed by the Company on or before the Closing;

5.1.3                        the
Company shall have delivered to such Investor a certificate, signed by the
Chief Executive Officer and Chief Financial Officer of the Company, certifying
that the conditions specified in this Section 5.1
have been fulfilled as of the Closing, it being understood that such Investor
may rely on such certificate as though it were a representation and warranty of
the Company made herein;

5.1.4                        the
Company shall have delivered to such Investor reasonably acceptable opinions of
counsel for the Company and of counsel for the Company Subsidiaries, dated as
of the Closing Date;

 33
 

5.1.5                        the
Company shall have executed and delivered to such Investor the Debenture and
the Warrant being purchased by such Investor at the Closing;

5.1.6                        the
Company shall have executed and delivered to such Investor the Registration
Rights Agreement, the Security Agreement and the Subsidiary Guarantee, each
Company Subsidiary shall have executed and delivered to such Investor the
Security Agreement and the Subsidiary Guarantee, and certificates evidencing
the Pledged Securities (as defined in the Security Agreement) shall have been
delivered to Imperium Advisers, LLC, as collateral agent;

5.1.7                        the
Company shall have delivered to such Investor a certificate, signed by the
Secretary or an Assistant Secretary of the Company, attaching (i) the
certificate of incorporation and by-laws of the Company and (ii) resolutions
passed by its Board of Directors to authorize the transactions contemplated
hereby and by the other Transaction Documents, and (iii) resolutions passed by
the respective boards of directors of the Company Subsidiaries to authorize the
transactions contemplated by the Security Agreement and the Subsidiary
Guarantee, and certifying that such documents are true and complete copies of
the originals and have not been amended or superseded, it being understood that
such Investor may rely on such certificate as a representation and warranty of
the Company made herein;

5.1.8                        the
Company shall have obtained the written agreement of the Key Employees listed
on Schedule 4.2(f) to refrain from
selling shares of Common Stock for the period specified in, and in accordance
with, Section 4.2(f) of this
Agreement;

5.1.9                        there
shall have occurred no material adverse change in the Company’s consolidated
business or financial condition since the date of the Company’s most recent
financial statements contained in the Disclosure Documents;

5.1.10                  the Company
shall have authorized and reserved for issuance the aggregate number of shares
of Common Stock required to be authorized and reserved under Section 4.3;

5.1.11                  there shall be
no injunction, restraining order or decree of any nature of any court or
Government Authority of competent jurisdiction that is in effect that restrains
or prohibits the consummation of the transactions contemplated hereby and by
the other Transaction Documents;

 34
 

5.1.12                  the Investors
shall have completed their due diligence to their satisfaction;

5.1.13                  the Company
shall have, or shall have caused Signature to, deliver to the Investors a
written consent executed by the Royal Bank of Scotland and the National
Westminster Bank that consents to the security interest and Liens being granted
by Signature in favor of the Investors under the Security Agreement; and

5.1.14                  the Company
shall have paid the expenses described in Section 6.10
of this Agreement.

5.2           Conditions to Company’s Obligations at the Closing.  The Company’s obligations to effect the
Closing with an Investor are conditioned upon the fulfillment (or waiver by the
Company in its sole and absolute discretion) of each of the following events as
of the Closing Date:

5.2.1                        the
representations and warranties of such Investor set forth in this Agreement and
in the other Transaction Documents to which it is a party shall be true and
correct in all material respects as of such date as if made on such date
(except that to the extent that any such representation or warranty relates to
a particular date, such representation or warranty shall be true and correct in
all material respects as of that date);

5.2.2                        such
Investor shall have complied with or performed all of the agreements,
obligations and conditions set forth in this Agreement that are required to be
complied with or performed by such Investor on or before the Closing;

5.2.3                        there
shall be no injunction, restraining order or decree of any nature of any court
or Government Authority of competent jurisdiction that is in effect that
restrains or prohibits the consummation of the transactions contemplated hereby
and by the other Transaction Documents;

5.2.4                        such
Investor shall have executed each Transaction Document to which it is a party
and shall have delivered the same to the Company;

5.2.5                        such
Investor shall have tendered to the Company the Purchase Price for the
Debenture and the Warrant being purchased by it at the Closing by wire transfer
of immediately available funds;

5.2.6                        the
Company shall have obtained the requisite approval from its board of directors
to enter into the Transaction Documents and perform its obligations thereunder;
and

 35
 

5.2.7                        the
Company shall have paid the fees set forth on Schedule
3.14.

6.                                       MISCELLANEOUS.

6.1           Survival; Severability.  The representations, warranties, covenants
and indemnities made by the parties herein and in the other Transaction
Documents shall survive the Closing notwithstanding any due diligence
investigation made by or on behalf of the party seeking to rely thereon. In the
event that any provision of this Agreement becomes or is declared by a court of
competent jurisdiction to be illegal, unenforceable or void, this Agreement
shall continue in full force and effect without said provision; provided that in such case the parties shall negotiate in
good faith to replace such provision with a new provision which is not illegal,
unenforceable or void, as long as such new provision does not materially change
the economic benefits of this Agreement to the parties.

6.2           Successors and Assigns.  The terms and conditions of this Agreement
shall inure to the benefit of and be binding upon the respective successors and
permitted assigns of the parties. 
Nothing in this Agreement, express or implied, is intended to confer
upon any party other than the parties hereto or their respective successors and
permitted assigns any rights, remedies, obligations or liabilities under or by
reason of this Agreement, except as expressly provided in this Agreement. An
Investor may assign its rights and obligations hereunder in connection with any
private sale or transfer of the Securities in accordance with the terms hereof,
as long as, as a condition precedent to such transfer, the transferee executes
an acknowledgment agreeing to be bound by the applicable provisions of this
Agreement, in which case the term “Investor” shall be deemed to refer to such
transferee as though such transferee were an original signatory hereto.  The Company may not assign its rights or
obligations under this Agreement.

6.3           No Reliance. 
Each party acknowledges that (i) it has such knowledge in business and
financial matters as to be fully capable of evaluating this Agreement, the
other Transaction Documents and the transactions contemplated hereby and
thereby, (ii) it is not relying on any advice or representation of any other
party in connection with entering into this Agreement, the other Transaction
Documents or such transactions (other than the representations made in this
Agreement or the other Transaction Documents), (iii) it has not received from
any other party any assurance or guarantee as to the merits (whether legal,
regulatory, tax, financial or otherwise) of entering into this Agreement or the
other Transaction Documents or the performance of its obligations hereunder and
thereunder, and (iv) it has consulted with its own legal, regulatory, tax,
business, investment, financial and accounting advisors to the extent that it
has deemed necessary, and has entered into this Agreement and the other
Transaction Documents based on its own independent judgment and, if applicable,
on the advice of such advisors, and not on any view (whether written or oral)
expressed by any other party.

6.4           Independent Nature of Investors’ Obligations and Rights.  The obligations of each Investor hereunder
are several and not joint with the obligations of the other Investors
hereunder, and no Investor shall be responsible in any way for the performance
of the obligations of any other Investor hereunder. The Company acknowledges
and agrees that nothing contained herein or in any other Transaction Document,
and no action taken by any Investor pursuant hereto or thereto, shall be deemed
to constitute the Investors as a partnership, an association, a joint venture
or any other kind of entity, or a “group” as described in Section 13(d) of the
Exchange Act, or create a

 36
 

presumption that the Investors are in any way acting
in concert with respect to such obligations or the transactions contemplated by
this Agreement.  Each Investor has been
represented by its own separate counsel in connection with the transactions
contemplated hereby, shall be entitled to protect and enforce its rights,
including without limitation rights arising out of this Agreement or the other
Transaction Documents, individually, and shall not be required to join any other
Investor as an additional party in any proceeding for such purpose.

6.5           Injunctive Relief. 
The Company acknowledges and agrees that a breach by it of its
obligations hereunder will cause irreparable harm to each Investor and that the
remedy or remedies at law for any such breach will be inadequate and agrees, in
the event of any such breach, in addition to all other available remedies, such
Investor shall be entitled to an injunction restraining any breach and
requiring immediate and specific performance of such obligations without the
necessity of showing economic loss or the posting of any bond.

6.6           Governing Law; Jurisdiction; Waiver of Jury Trial.  (a) 
This Agreement shall be governed by and construed under the laws of the
State of New York applicable to contracts made and to be performed entirely
within the State of New York. Each party hereby irrevocably submits to the
exclusive jurisdiction of the state and federal courts sitting in the City and
County of New York for the adjudication of any dispute hereunder or any other
Transaction Document or in connection herewith or therewith or with any
transaction contemplated hereby or thereby, 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 brought in an inconvenient forum or that the venue of
such suit, action or proceeding is improper. 
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 to such party at the address in effect for notices to it
under this Agreement and agrees that such service shall constitute good and
sufficient service of process and notice thereof.  Nothing contained herein shall be deemed to
limit in any way any right to serve process in any manner permitted by law.

(b) EACH PARTY TO THIS
AGREEMENT ACKNOWLEDGES AND AGREES THAT ANY DISPUTE OR CONTROVERSY THAT MAY ARISE
UNDER THIS AGREEMENT OR THE OTHER TRANSACTION DOCUMENTS IS LIKELY TO INVOLVE
COMPLICATED AND DIFFICULT ISSUES AND, THEREFORE, EACH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY
JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR
RELATING TO THIS AGREEMENT, OR THE BREACH, TERMINATION OR VALIDITY OF THIS
AGREEMENT OR THE OTHER TRANSACTION DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED
HEREBY OR THEREBY. EACH PARTY TO THIS AGREEMENT CERTIFIES AND ACKNOWLEDGES THAT
(I) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED,
EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF
LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (II) EACH SUCH PARTY UNDERSTANDS
AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (III) EACH SUCH PARTY MAKES
THIS WAIVER VOLUNTARILY, AND (IV) EACH SUCH PARTY HAS BEEN

 37
 

INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER
THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 6.6(b).

6.7           Counterparts. 
This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original, and all of which together shall constitute
one and the same instrument.  This
Agreement may be executed and delivered by facsimile transmission.

6.8           Headings. 
The headings used in this Agreement are used for convenience only and
are not to be considered in construing or interpreting this Agreement.

6.9           Notices.  Any
notice, demand or request required or permitted to be given by the Company or
the Investor pursuant to the terms of this Agreement shall be in writing and
shall be deemed delivered (i) when delivered personally or by verifiable
facsimile transmission, unless such delivery is made on a day that is not a
Business Day, in which case such delivery will be deemed to be made on the next
succeeding Business Day, (ii) on the next Business Day after timely delivery to
an overnight courier and (iii) on the Business Day actually received if
deposited in the U.S. mail (certified or registered mail, return receipt
requested, postage prepaid), addressed as follows:

	
  

  	
  If to the Company:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Digital Angel Corporation

  	
   

  
	
   

  	
  Suite 201

  	
   

  
	
   

  	
  1690 South Congress

  	
   

  
	
   

  	
  Delray Beach, Florida 33483

  	
   

  
	
   

  	
  Attn: Kevin McGrath

  	
   

  
	
   

  	
  Tel: (561) 276-0477

  	
   

  
	
   

  	
  Fax: (561) 805-8001

  	
   

  
	
   

  	
   

  	
   

  
	
   

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

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Winthrop & Weinstine, P.A

  	
   

  
	
   

  	
  Suite 3500

  	
   

  
	
   

  	
  225 South 6th Street

  	
   

  
	
   

  	
  Minneapolis, Minnesota 55402

  	
   

  
	
   

  	
  Attn: Philip T. Colton

  	
   

  
	
   

  	
  Tel: (612) 604-6729

  	
   

  
	
   

  	
  Fax: (612) 604-6929

  	
   

  

 

and
if to any Investor, to such address for such Investor as shall appear on the
signature page hereof executed by such Investor, or as shall be designated by
such Investor in writing to the Company in accordance with this Section 6.9.

6.10         Expenses.  The
Company and each Investor shall pay all costs and expenses that it incurs in
connection with the negotiation, execution, delivery and performance of this
Agreement or the other Transaction Documents, provided,
however, that that the Company shall, at the Closing,

 38
 

pay to Imperium Advisers, LLC (“Imperium”)
an amount up to $65,000 in immediately available funds as reimbursement for its
out-of-pocket expenses (including without limitation legal fees and expenses)
incurred or to be incurred by it in connection with its due diligence
investigation of the Company and the negotiation, preparation, execution,
delivery and performance of this Agreement and the other Transaction Documents. At the Closing, the amount due for such fees
and expenses may be netted out of the Purchase Price payable by any Investor
managed by Imperium and an invoice shall be submitted to identify the
amount to be reimbursed.

6.11         Entire Agreement; Amendments.  This Agreement and the other Transaction
Documents constitute the entire agreement between the parties with regard to
the subject matter hereof and thereof, superseding all prior agreements or
understandings, whether written or oral, between or among the parties.  Except as expressly provided herein, neither
this Agreement nor any term hereof may be amended except pursuant to a written
instrument executed by the Company and (i) prior to the Termination Date, by
the holders of a majority of the aggregate principal of the Debentures then
outstanding and the holders of a majority of the aggregate number of the
Warrant Shares into which the Warrants then outstanding are exercisable (without
regard to any limitation on the exercise of the Warrants), and (ii) on and after the Termination Date, by
the holders of a majority of the aggregate number of the Warrant Shares into
which the Warrants then outstanding are exercisable (without regard to
any limitation on the exercise of the Warrants).   Any waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given.

[Signature
Pages to Follow]

 39
 

IN WITNESS WHEREOF, the
undersigned have executed this Agreement as of the date first-above written.

	
  DIGITAL ANGEL CORPORATION

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
  /s/ Kevin N. McGrath

  	
   

  
	
   

  	
  Name: 

  	
  Kevin N. McGrath

  
	
   

  	
  Title: 

  	
  President and Chief Executive Officer

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  IMPERIUM MASTER
  FUND, LTD.

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:     Imperium Advisers, LLC

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Maurice Hryshko

  	
   

  
	
   

  	
  Name: 

  	
  Maurice Hryshko

  
	
   

  	
  Title: 

  	
  Counsel

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Principal Amount
  of Debenture Purchased at Closing:

  	
  $6,000,000

  
	
   

  	
   

  
	
  Number of Shares
  into which Warrant Exercisable:

  	
  699,600

  
									

ADDRESS:

c/o Imperium Advisers,
LLC 

153 East 53rd Street- 29th Floor

New York, NY   10022

Attn:       Maurice Hryshko, Esq.
Tel: (212) 433-1360

Fax: (212) 433-1361

 40Exhibit
10.20

 

THIS SENIOR SECURED DEBENTURE
(THIS “DEBENTURE”) HAS NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES
ACT”), OR ANY STATE SECURITIES LAW, AND MAY NOT BE OFFERED FOR SALE OR SOLD
UNLESS A REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES
LAWS SHALL BE EFFECTIVE WITH RESPECT THERETO, OR AN EXEMPTION FROM REGISTRATION
UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS IS AVAILABLE IN
CONNECTION WITH SUCH OFFER OR SALE.  THIS
DEBENTURE (I) MAY BE PLEDGED OR HYPOTHECATED IN CONNECTION WITH A BONA FIDE
MARGIN LOAN OR OTHER FINANCING SECURED BY THIS DEBENTURE AND (II) MAY BE
TRANSFERRED OR ASSIGNED TO AN AFFILIATE OF THE HOLDER HEREOF WITHOUT THE
NECESSITY OF AN OPINION OF COUNSEL OR THE CONSENT OF THE ISSUER HEREOF.

THIS DEBENTURE DOES NOT REQUIRE
PHYSICAL SURRENDER HEREOF IN ORDER TO EFFECT A PARTIAL PAYMENT OR REDEMPTION
HEREOF. ACCORDINGLY, THE OUTSTANDING PRINCIPAL AMOUNT OF THIS DEBENTURE MAY BE
LESS THAN THE PRINCIPAL AMOUNT SHOWN BELOW.

DIGITAL ANGEL CORPORATION

10.25% SENIOR SECURED DEBENTURE

	
  Issue Date: February 6, 2007

  	
   

  	
  $6,000,000.00

  

 

FOR VALUE
RECEIVED, DIGITAL ANGEL CORPORATION, a Delaware corporation (the
“Company”), hereby promises to pay to
the order of IMPERIUM MASTER FUND, LTD., or its permitted successors or assigns
(the “Holder”), the sum of SIX
MILLION DOLLARS ($6,000,000.00) in same day funds, on or before the three (3)
year anniversary of the Issue Date (the “Maturity Date”).

Except as specifically provided by the terms of Section
4 and the Monthly Payments contemplated in Section
2(a), the Company shall not have the right to prepay any
principal of this Debenture.

The Company has
issued this Debenture pursuant to a Securities Purchase Agreement, dated as of
the date hereof (the “Securities Purchase
Agreement”), between the Company and the investors named
therein.  The Debentures issued by the
Company pursuant to the Securities Purchase Agreement, including this
Debenture, are collectively referred to herein as the “Debentures”.  The Company’s obligations under the
Debentures, including, without limitation, its obligation to make payments of
principal and interest thereon, are guaranteed by the Company 

Subsidiaries of the
Company and secured by the assets and properties of the Company and the Company
Subsidiaries.

The following terms shall
apply to this Debenture:

1.             DEFINITIONS.

“Change of Control” means the
existence, occurrence, public announcement or entering into an agreement
contemplating of any of the following: (a) the effectuation of a transaction or
series of transactions in which more than fifty percent (50%) of the equity or
voting power of the Company is disposed of; (b) the effectuation of a
transaction or series of transactions in which any of the equity or voting
power of any Company Subsidiary is disposed to a Person other than the Company
or another Company Subsidiary; (c) the consolidation, merger or other business
combination of the Company with or into any other entity, immediately following
which the prior stockholders of the Company fail to own, directly or
indirectly, at least fifty percent (50%) of the equity and voting power of the
surviving entity; (d) the consolidation, merger or other business combination
of any Company Subsidiary with or into any other entity other than the Company
or another Company Subsidiary; or (e) the Continuing Directors do not at any
time constitute at least a majority of the Board of Directors of the Company; provided, however, that a Change of Control shall not be
deemed to have occurred if (i) the Company enters into a consolidation, merger,
share exchange or other business combination with an Affiliate or Subsidiary of
the Company and prior to effecting such business combination, the Company has
obtained the written consent of the Holder for such business combination, (ii)
the surviving entity of such transaction assumes all of the obligations of the
Company under all of the Debentures and the other Transaction Documents, and
(iii) after assuming all such obligations, such surviving entity is and would
be solvent until such obligations are paid in full or otherwise discharged.

“Continuing Director” means, at any
date, a member of the Company’s Board of Directors (i) who was a member of such
board on the date of the Securities Purchase Agreement or (ii) who was
nominated or elected by at least a majority of the directors who were
Continuing Directors at the time of such nomination or election or whose
election to the Company’s Board of Directors was recommended or endorsed by at
least a majority of the directors who were Continuing Directors at the time of
such nomination or election or such lesser number comprising a majority of a
nominating committee if authority for such nominations or elections has been
delegated to a nominating committee whose authority and composition have been
approved by at least a majority of the directors who were Continuing Directors
at the time such committee was formed.

“Default Interest Rate” means the
lower of eighteen (18%) and the maximum rate permitted by applicable law or by
the applicable rules or regulations of any governmental agency or of any stock
exchange or other self-regulatory organization having jurisdiction over the
Company or the trading of its securities.

“Equity
Conditions” means each of the following:

(i)            the Registration Statement shall
have been declared effective, not be the subject of any stop order, be
available to the Holder, and cover the number of Registrable 

 2
 

Securities (as defined in
the Registration Rights Agreement) required by the Registration Rights
Agreement;

(ii)           the Reserved Amount must be equal to
or greater than the number of shares of Common Stock that the Company is
required to reserve under the Securities Purchase Agreement;

(iii)          the Stock Option Shares shall have
been listed on the Principal Market and trading in the Common Stock shall not
have been suspended on the Principal Market;

(iv)          the shares of Common Stock that the
Holder would beneficially own, after giving effect to the contemplated issuance
of Company securities for which these Equity Conditions must be satisfied,
shall not exceed the limitation set forth in Section
2(b)(iii) or Section 4.16 of the Securities Purchase Agreement;

(v)           an
Event of Default, or an event that with the passage of time or giving of
notice, or both, would constitute an Event of Default, has not occurred and is
not continuing; and

(vi)          the
Stockholder Amendment Approval Date shall have occurred.

“Event of Default”
means the occurrence of any of the following events:

(i)            a
Liquidation Event occurs or is publicly announced;

(ii)           the Company fails to make any payment
of principal or interest on this Debenture as and when due, and such payment
remains unpaid for two (2) Business Days following written notice thereof from
the Holder;

(iii)          the Company or any Company Subsidiary
breaches or provides notice of its intent to breach any financial covenant
contained in Section 4.10(b) of the Securities Purchase Agreement; and such
breach continues for a period of five (5) Business Days following written
notice thereof from the Holder;

(iv)          other than a breach described in clauses (ii) or (iii)
above, the Company or any Company Subsidiary breaches or provides notice of its
intent to breach any material term or condition of this Debenture or any other
Transaction Document (including, without limitation, an Exercise Default (as
defined in the Warrants) and a Registration Default (as defined in the
Registration Rights Agreement)); and such breach continues for a period of five
(5) Business Days following written notice thereof from the Holder;

(v)           any
representation or warranty made by the Company or any Company Subsidiary in
this Debenture or any other Transaction Document was inaccurate or misleading
in any material respect as of the date such representation or warranty was
made; or

 3
 

(vi)          a
default occurs or is declared, or any amounts are accelerated, under or with
respect to any instrument that evidences Debt of the Company or any Company
Subsidiary in a principal amount exceeding $100,000.

“Interest” has the meaning set forth
in Section 2(a)(i) of this Debenture.

“Issue Date” means February 6, 2007.

“Liquidation Event” means the (i)
institution of any insolvency or bankruptcy proceedings, or any receivership, liquidation,
reorganization or other similar proceedings in connection therewith, relative
to the Company or any Company Subsidiary,
or (ii) the dissolution or other winding up of the Company or any material Company Subsidiary, or
(iii) any assignment for the benefit of creditors or any marshalling of the
material assets or material liabilities of the Company or any Company Subsidiary.

“Mandatory Redemption,” “Mandatory Redemption Date” and “Mandatory Redemption Notice” have
the respective meanings set forth in Section 3(a)
of this Debenture.

“Mandatory Redemption Price” means an
amount equal to the sum of (i) 110% of the outstanding principal amount of this
Debenture on the date of determination, plus (ii) all
accrued and unpaid Interest (including default interest (if any)) hereon, plus (iii) all other amounts due hereunder.

“Maturity Date” has the meaning set
forth in the preamble of this Debenture.

“Monthly Payment” has the meaning set forth in Section
2(a)(ii) of this Debenture.

“Monthly Payment Date” means the
first Business Day of each calendar month.

“Prepayment” has the meaning set forth in Section 4(a) of this Debenture.

“Prepayment Amount”
means an amount equal to the sum of (A) 102% of the outstanding
principal amount of this Debenture on the date of determination plus (B) all accrued and unpaid Interest (including default
interest (if any)) hereon, plus (C) all
other amounts due hereunder.

“Prepayment Date”
and “Prepayment Notice” have the
respective meanings set forth in Section 4(a) of
this Debenture.

“Stock Option”
has the meaning set forth in Section 2(b)
of this Debenture

“Stock Option Month” means, with
respect to a Monthly Payment for which the Stock Option is being exercised, the
calendar month for which such Monthly Payment is being made.  To illustrate, the Stock Option Month for the
Monthly Payment due on June 1, 2007 is the month of May, 2007.

“Stock Option Notice”
has the meaning set forth in Section 2(b)(i)
of this Debenture.

 4
 

“Stock Option Notice
Date” means, with
respect to a Monthly Payment for which the Stock Option is being exercised,the date that is thirteen (13) Trading Days prior
to the last day of the Stock Option Month for which such Monthly Payment is
being made.  To illustrate, the Stock
Option Notice Date for the Monthly Payment due on June 1, 2007 is  May 14, 2007, which takes into account that
May 28, 2007 is a federal holiday and not a Trading Day.

“Stock Option Shares” has the meaning
set forth in Section 2(b)(ii) of this
Debenture.

“Trading Day”
means a Business Day on which shares of Common Stock are purchased and sold on
the Principal Market.

“VWAP” on a
Trading Day means the volume weighted average price of the Common Stock for
such Trading Day on the Principal Market as reported by Bloomberg Financial
Markets or, if Bloomberg Financial Markets is not then reporting such prices,
by a comparable reporting service of national reputation selected by the
Holders and reasonably satisfactory to the Company.  If the VWAP cannot be calculated for the
Common Stock on such Trading Day on any of the foregoing bases, then the
Company shall submit such calculation to an independent investment banking firm
of national reputation reasonably acceptable to the Holders of a majority of
the Registrable Securities then outstanding, and shall cause such investment
banking firm to perform such determination and notify the Company and the
Holders of the results of determination no later than two (2) Business Days
from the time such calculation was submitted to it by the Company.  All such determinations shall be
appropriately adjusted for any stock dividend, stock split, reverse stock split
or other similar transaction during such period.

Any
capitalized term used but not defined herein has the meaning specified in the
Securities Purchase Agreement.

All
definitions contained in this Debenture are equally applicable to the singular
and plural forms of the terms defined. 
The words “hereof”, “herein” and “hereunder” and words of similar import
refer to this Debenture as a whole and not to any particular provision of this
Debenture.

2.             PAYMENT OF PRINCIPAL AND
INTEREST.

(a)           Interest;
Amortization.

(i)            Interest.  This Debenture shall bear interest on the
unpaid principal amount hereof (“Interest”)
at an annual rate equal to 10.25%, computed on the basis of a 360-day year and
calculated using the actual number of days elapsed since the Issue Date or the
date on which Interest was most recently paid, as the case may be.

(ii)           Amortization.  The Company shall, on June 1, 2007 and on
each Monthly Payment Date thereafter, pay the Holder an amount (each such
payment, a “Monthly Payment”)equal to the sum of (i) the lesser
of (x) 3.333% of the original principal amount of this Debenture 

 5
 

and
(y) the then total remaining unpaid principal of this Debenture plus (ii) the accrued and unpaid Interest (including default
interest (if any)) on this Debenture up to but not including the date of such
payment.  Notwithstanding the foregoing,
the outstanding principal amount of this Debenture plus
all accrued and unpaid Interest (including default interest (if any)) hereon, plus all other amounts due hereunder shall be paid in full
on the Maturity Date.

(iii)          Payment
in Cash.  Except to the extent
permitted under Section 2(b), all payments of
principal and Interest (including default interest (if any)) on this Debenture
shall be paid in cash by wire transfer of
immediately available funds pursuant to the written wire instructions provided
by the Holder to the Company.

(iv)          Default Interest. 
Any amount of principal or Interest that is not paid (whether in cash or
stock) as and when due in accordance with this Debenture shall bear interest at
the Default Interest Rate, compounded monthly, until paid.

(b)           Stock Option. 
Subject to the terms of this Section 2(b),
including the satisfaction of all of the Equity Conditions as specified in Section 2(b)(iii), the Company may
elect to pay all or any of the Monthly Payments in shares of Common Stock (the “Stock Option”).

(i)            Exercise
Notice.  In order to exercise the
Stock Option for a Monthly Payment, the Company shall give the Holder written
notice thereof (a “Stock Option Notice”) on or
prior to the Stock Option Notice Date for such Monthly Payment.  A Stock Option Notice, once delivered by the
Company, shall be irrevocable, provided that
if the applicable Equity Conditions are neither satisfied nor waived, then such
Stock Option Notice shall be deemed cancelled, and the Company shall be
required to make the applicable Monthly Payment in cash in accordance with Section 2(a)(iii).  If the Company does not deliver a Stock
Option Notice on or before the applicable Stock Option Notice Date, then the
Company will be deemed to have elected to pay the applicable Monthly Payment in
cash in accordance with Section 2(a)(iii).  If the Company exercises the Stock Option for
a Monthly Payment, such exercise must be made with respect to all of the
Debentures.

(ii)           Stock Option Shares; Delivery; Pricing.  The number of shares of Common Stock to be
issued to the Holder in satisfaction of a Monthly Payment (the “Stock Option Shares”), and the
delivery thereof to the Holder, shall be as follows:  (i) on or prior to the 5th Trading
Day prior to the Monthly Payment Date for such Monthly Payment (e.g., if the
Monthly Payment Date is June 1, 2007, then on or prior to May 24, 2007), the
Company shall deliver to the Holder a number of Stock Option Shares equal to
the quotient of (x) 50% of such Monthly Payment divided by
(y) 92% of the average of the daily VWAP for each of the five consecutive
Trading Days occurring immediately prior to (but not including) such date, and
(ii) on the Monthly Payment Date for such Monthly Payment, the Company shall
deliver to the Holder a number of Stock Option Shares equal to the difference
of (x) the quotient of (A) the amount of such Monthly Payment divided by (B) 92% of the average of the daily VWAP for each
of the ten consecutive Trading Days occurring immediately prior to (but not
including) such date minus (y) the
number of Stock Option Shares previously delivered to the Holder pursuant to clause (i) of this sentence.  If any fractional share would be issuable
upon exercise of a Stock Option, such fractional share shall be disregarded and
the number of shares issuable shall, in the aggregate, be equal to the nearest
whole number of shares.

 6
 

(iii)          Equity
Conditions; Beneficial Ownership Limitation.  All Stock Option Shares shall have been
registered in accordance with the Registration Statement.  The
Company shall not be permitted to effect delivery of Stock Option Shares unless
all of the Equity Conditions are satisfied in full on the date of such delivery
and on each of the twenty (20) Trading Days immediately preceding such delivery
date.  If any of the Equity
Conditions are not satisfied (or waived by the Holder) as of a delivery date or
on any of the twenty (20) Trading Days preceding such delivery date (except, in
the case of the Monthly Payment due June 1, 2007, it shall be any of the five
(5) Trading Days (and not twenty Trading Days) preceding the first delivery
date for such payment, and any of the ten (10) Trading Days (and not twenty
Trading Days) preceding the second delivery date for such payment), the Company
shall be required to pay the portion of the Monthly Payment represented by such
Stock Option Shares in cash in accordance with Section
2(a)(iii).  Notwithstanding the foregoing, the Company shall
not be permitted to effect delivery of Stock Option Shares to the extent that,
upon receipt of the shares of Common Stock deliverable thereby, the Holder
would beneficially own more than 4.99% of the number of shares of Common Stock
then outstanding (provided that such beneficial
ownership limitation may be waived by the Holder in accordance with Section 4(c)).  As used herein, beneficial ownership shall be
determined in accordance with Section 13(d) of the Exchange Act.  If, as a result of the foregoing
beneficial ownership limitation, the Company is prohibited from effecting delivery of Stock Option Shares, the
Company shall be required to pay the portion of the Monthly Payment represented
by such Stock Option Shares in cash in accordance with Section
2(a)(iii).

(iv)          DTC; Physical Certificates.  The
Company shall effect delivery of Stock Option Shares, as long as the Company’s
designated transfer agent or co-transfer agent in the United States for the
Common Stock (the “Transfer Agent”) participates in the Depository Trust Company (“DTC”) Fast Automated Securities
Transfer program (“FAST”), by crediting the
account of the Holder or its nominee at DTC (as specified by the Holder) with
the number of Stock Option Shares required to be delivered, no later than the
close of business on the date on which such Stock Option Shares are due.  In the event that the Transfer Agent is not a
participant in FAST or if the Holder so specifies in writing, the Company shall
effect delivery of Stock Option Shares by delivering to the Holder or its
nominee physical certificates representing such Stock Option Shares, no later
than the close of business on the date on which such Stock Option Shares are
due.  Stock Option Shares
delivered to the Holder shall not contain any restrictive legend.

(v)           Failure to Deliver Stock Option
Shares.  In the event that the
Company fails for any reason to deliver to the Holder the number of Stock
Option Shares due to such Holder on or before the date on which such Stock
Option Shares are due (a “Stock Option Default”),
the Holder shall have the right to receive
from the Company an amount equal to (i) (N/365) multiplied
by (ii) the principal amount of, and any Interest and any other
amounts accrued on, this Debenture represented by such Stock Option Shares multiplied by (iii) the Default Interest Rate, where “N”
equals the number of days elapsed between the date on which such Stock Option
Shares were due and the date on which such Stock Option Default has been
cured.  In the event that shares of
Common Stock are purchased by or on behalf of the Holder in order to make delivery on a sale effected in
anticipation of receiving Stock Option Shares, and there is a Stock Option
Default with respect to such Stock Option Shares, the Holder shall have the
right to receive from the Company, in addition to the foregoing amounts, (i)
the aggregate amount paid by or on behalf of the Holder for such shares of
Common Stock minus (ii) the aggregate amount
of net proceeds, if any, received by the Holder from 

 7
 

the sale of such Stock
Option Shares after such shares are actually delivered to the Holder.  Amounts
payable under this Section 2(b)(v) shall be paid to the Holder in immediately
available funds on or before the second (2nd) Business Day following written notice from the
Holder to the Company.  In
addition to its rights under this Section 2(b)(v),
the Holder shall have the right to pursue all other remedies available to it at
law or in equity (including, without limitation, a decree of specific
performance and/or injunctive relief).

3.             EVENTS OF DEFAULT;
MANDATORY REDEMPTION.

(a)           Mandatory Redemption.  In the event that an Event of Default or a
Change of Control occurs, the Holder shall have the right, upon written notice
to the Company (a “Mandatory Redemption Notice”),
to have all of the unpaid principal amount of this Debenture, plus all accrued and unpaid Interest (including default
interest (if any), redeemed by the Company (a “Mandatory
Redemption”) at the Mandatory Redemption Price in same day
funds.  The Mandatory Redemption Notice
shall specify the effective date of such Mandatory Redemption (the “Mandatory Redemption Date”), which
date must be at least two (2) Business Days following the Business Day on which
the Mandatory Redemption Notice is delivered to the Company, and the amount of
principal and interest (and other amounts, if any) to be redeemed.  In order to effect a Mandatory Redemption
hereunder, the Holder must deliver a Mandatory Redemption Notice no later than,
in the case of an Event of Default, the close of business on the third (3rd) Business Day following the
date on which an Event of Default is no longer continuing and, with respect to
a Change of Control, the close of business on the third (3rd) Business Day following the date on
which the Change of Control is completed.

(b)           Payment of Mandatory Redemption
Price.

(i)            The Company shall pay the Mandatory
Redemption Price to the Holder on the Mandatory Redemption Date.  After the Company has paid the Mandatory
Redemption Price to the Holder in cash, the Holder shall return this Debenture
to the Company for cancellation.

(ii)           If the Company fails to pay the
Mandatory Redemption Price to the Holder on or prior to the Mandatory
Redemption Date, the Holder shall be entitled to interest thereon at the
Default Interest Rate from the Mandatory Redemption Date until the date on
which the Mandatory Redemption Price has been paid in full.

4.             PREPAYMENT.

(a)           Prepayment.  The Company may, at any time after the Issue
Date, prepay all but not less than all, of the unpaid principal amount of this
Debenture, plus all accrued and unpaid Interest, by
delivering to the Holder the Prepayment Amount (“Prepayment”).  In order to effect a Prepayment, the Company
must deliver to the Holder written notice thereof (a “Prepayment
Notice”), specifying the
intended payment date of such Prepayment (the “Prepayment
Date”), which date must be at
least sixty(60) days following delivery of
such Prepayment Notice to the Holder. 
A Prepayment Notice, once delivered, is irrevocable and may only be
waived by the Holder in its sole discretion upon request.  In the event that the Company effects a
Prepayment with respect to this Debenture, it must contemporaneously effect a
Prepayment of all but not less than all of the other Debentures.

 8
 

(b)           Payment of Prepayment Amount.

(i)            The Company
shall pay the Prepayment Amount to the Holder on the Prepayment Date.  After the Company has paid the Prepayment
Amount in full, the Holder shall return this Debenture to the Company for
cancellation.

(ii)           If the
Company fails to pay the Prepayment Amount to the Holder on the Prepayment
Date, the Holder shall be entitled to interest thereon at the Default Interest
Rate from the Prepayment Date until the date on which Prepayment Amount and
accrued and unpaid default interest thereon have been paid in full.

5.             MISCELLANEOUS.

(a)           Failure to Exercise Rights not
Waiver.  No failure or delay on the
part of the Holder in the exercise of any power, right or privilege hereunder
shall operate as a waiver thereof, nor shall any single or partial exercise of
any such power, right or privilege preclude any other or further exercise
thereof. All rights and remedies of the Holder hereunder are cumulative and not
exclusive of any rights or remedies otherwise available. In the event that the
Company does not pay any amount under this Debenture when such amount becomes
due, the Company shall bear all costs incurred by the Holder in collecting such
amount, including without limitation reasonable legal fees and expenses.

(b)           Notices. Any notice, demand or
request required or permitted to be given by the Company or the Holder pursuant
to the terms of this Debenture shall be in writing and shall be deemed
delivered (i) when delivered personally or by verifiable facsimile
transmission, unless such delivery is made on a day that is not a Business Day,
in which case such delivery will be deemed to be made on the next succeeding
Business Day, (ii) on the next Business Day after timely delivery to an
overnight courier and (iii) on the Business Day actually received if deposited
in the U.S. mail (certified or registered mail, return receipt requested,
postage prepaid), addressed as follows:

If to the Company:

Digital Angel Corporation

Suite 201

1690 South Congress

Delray Beach, Florida 33483

Attn:       Kevin McGrath

Tel:         (561) 276-0477

Fax:         (561) 805-8001

 

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

Winthrop & Weinstine, P.A.

Suite 3500

225 South 6th Street

Minneapolis, Minnesota 55402

 9
 

Attn:       Philip T. Colton

Tel:         (612) 604-6729

Fax:         (612) 604-6929

and
if to the Holder, to such address for the Holder as shall appear on the
signature page of the Securities Purchase Agreement executed by the Holder, or
as shall be designated by the Holder in writing to the other parties hereto in
accordance this Section 5(b).

(c)           Amendments and Waivers.  No amendment, modification or other change
to, or waiver of any provision of, this Debenture or any other Debenture may be
made unless such amendment, modification or change, or request for waiver, is
(A) set forth in writing and is signed by the Company, (B) consented to in
writing by the holders of at least sixty-six percent (66%) of the unpaid
principal amount of the Debentures, and (C) applied to all of the
Debentures.  Upon the satisfaction of the
conditions described in (A), (B) and (C) above, this Debenture shall be deemed
to incorporate any amendment, modification, change or waiver effected thereby
as of the effective date thereof, even if the Holder did not consent to such
amendment, modification, change or waiver. 
Notwithstanding the foregoing, the
limitation on beneficial ownership set forth in Section
2(b)(iii) may not be amended
without the consent of the holders of a majority of the shares of Common Stock
then outstanding; provided, however,
that such limitation may be waived by the Holder upon sixty (60) days’ prior
written notice to the Company, and such waiver shall be valid and shall not
require the consent of the Company or any other holder of Common Stock or
Debentures.

(d)           Transfer of Debenture.  The Holder may sell, transfer or otherwise
dispose of all or any part of this Debenture (including without limitation
pursuant to a pledge) to any person or entity as long as such sale, transfer or
disposition is the subject of an effective registration statement under the
Securities Act of 1933, as amended, and applicable state securities laws, or is
exempt from registration thereunder, and is otherwise made in accordance with
the applicable provisions of the Securities Purchase Agreement.  From and after the date of any such sale,
transfer or disposition, the transferee hereof shall be deemed to be the holder
of a Debenture in the principal amount acquired by such transferee, and upon
notice the Company shall, as promptly as practicable, issue and deliver to such
transferee a new Debenture identical in all respects to this Debenture, in the
name of such transferee. The Company shall be entitled to treat the original
Holder as the holder of this entire Debenture unless and until it receives
written notice of the sale, transfer or disposition hereof.

(e)           Lost or Stolen Debenture.  Upon receipt by the Company of evidence of
the loss, theft, destruction or mutilation of this Debenture, and (in the case
of loss, theft or destruction) of indemnity or security reasonably satisfactory
to the Company, and upon surrender and cancellation of the Debenture, if
mutilated, the Company shall execute and deliver to the Holder a new Debenture
identical in all respects to this Debenture.

(f)            Governing Law.  This Debenture shall be governed by and
construed in accordance with the laws of the State of New York applicable to contracts made and to be performed
entirely within the State of New York.

(g)           Successors and
Assigns.  The terms and conditions of
this Debenture shall inure to the
benefit of and be binding upon the respective successors (whether by merger or
otherwise) and 

 10
 

permitted
assigns of the Company and the Holder. The Company may not assign its rights or
obligations under this Debenture
except as specifically required or permitted pursuant to the terms hereof.

(h)           Usury.  This Debenture is subject to the
express condition that at no time shall the Company be obligated or required to
pay interest hereunder at a rate which could subject the Holder to either civil
or criminal liability as a result of being in excess of the maximum interest
rate which the Company is permitted by applicable law to contract or agree to
pay.  If by the terms of this Debenture, the Company is at any time
required or obligated to pay interest hereunder at a rate in excess of such
maximum rate, the rate of interest under this Debenture shall be deemed to be
immediately reduced to such maximum rate and the interest payable shall be
computed at such maximum rate and all prior interest payments in excess of such
maximum rate shall be applied and shall be deemed to have been payments in
reduction of the principal balance of this Debenture.

(i)            Cap Amount Limitation.  Notwithstanding anything to the contrary in
this Debenture, the aggregate number of shares of Common Stock that may be
issued by the Company to the Holder pursuant to this Debenture shall be subject
to the shareholder cap limitations set forth in Section 4.16 of the Securities
Purchase Agreement.

[Signature Page to Follow]

 11
 

IN WITNESS
WHEREOF, the Company has caused this Debenture to be signed in its name by its
duly authorized officer on the date first above written.

DIGITAL
ANGEL CORPORATION

 

	
  By:

  	
   

  	
  /s/ Kevin N. McGrath

  	
   

  
	
   

  	
   

  	
  Name: Kevin N. McGrath

  	
   

  
	
   

  	
   

  	
  Title: President and Chief Executive Officer

  	
   

  

 

 12

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