Document:

Exhibit 10.1

 

SECURITIES
PURCHASE AGREEMENT

This Securities Purchase Agreement (this “Agreement”)
is dated as of October 13, 2006, among MedicalCV, Inc., a Minnesota corporation
(the “Company”), and each purchaser identified on the signature pages
hereto (each, including its successors and assigns, a “Purchaser” and
collectively the “Purchasers”).

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

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

ARTICLE I.

DEFINITIONS

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

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

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

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

“Closing” means the closing of the purchase and sale of the
Shares and Warrants pursuant to Section 2.1.

“Closing Date” means the Business Day when all of the
Transaction Documents have been executed and delivered by the applicable
parties thereto, and all conditions precedent to (i) the Purchasers’
obligations to pay the Subscription Amount and (ii) the Company’s obligations
to deliver the Shares and Warrants have been satisfied or waived.

“Closing Price” means on any particular date (a) the last
reported closing bid price per share of Common Stock on such date on the
Trading Market (as reported by Bloomberg L.P. at 4:15 PM (New York time)), or
(b) if there is no such price on such

 

date, then the closing bid price on the Trading Market
on the date nearest preceding such date (as reported by Bloomberg L.P. at 4:15
PM (New York time)), or (c)  if the Common Stock is not then listed or
quoted on the Trading Market and if prices for the Common Stock are then
reported in the “pink sheets” published by Pink Sheets LLC (or a similar
organization or agency succeeding to its functions of reporting prices), the
most recent bid price per share of the Common Stock so reported, or (d) if
the shares of Common Stock are not then publicly traded the fair market value
of a share of Common Stock as determined by an appraiser selected in good faith
by the Purchasers of a majority in interest of the Shares and reasonably
acceptable to the Company.

“Commission” means the Securities and Exchange Commission.

“Common Stock” means the common stock of the Company, par value
$0.01 per share, and any other class of securities into which such securities
may hereafter be reclassified or changed into.

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

“Company Counsel” means Briggs and Morgan, P.A.

“Disclosure Schedules” means the Disclosure Schedules of the
Company delivered concurrently herewith.

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

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

“Exchange Act” means the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.

“Exempt Issuance” means the issuance of (a) shares of Common
Stock or options to employees, officers or directors of, or consultants to, the
Company pursuant to any stock option agreement, stock option plan or equity
incentive plan duly adopted by a majority of the non-employee members of the
Board of Directors of the Company or a majority of the members of a committee
of non-employee directors established
for such purpose (for purposes of clarity, the issuance of shares of Common
Stock upon exercise of options granted pursuant to a stock option agreement,
stock option plan or equity incentive plan subsequent to the date hereof shall
also be an Exempt Issuance), (b) securities upon the exercise or exchange of or
conversion of (i) any Securities issued hereunder or (ii) securities to a
registered broker-dealer in connection with the transactions contemplated by
this Agreement; and/or (iii) other securities or rights exercisable or
exchangeable for or convertible into shares of Common Stock which are

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issued and outstanding on the date of this Agreement,
provided that such securities have not been amended since the date of this
Agreement (other than on a non-discretionary basis pursuant to the pre-existing
anti-dilution provisions thereof) to increase the number of such securities or
to decrease the exercise, exchange or conversion price of any such securities,
(c) securities issued pursuant to acquisitions or strategic transactions
approved by a majority of the disinterested
directors, provided any such issuance shall only be to a Person which is,
itself or through its subsidiaries, an operating company in a business
synergistic with the business of the Company and in which the Company receives
benefits in addition to the investment of funds, but shall not include a
transaction in which the Company is issuing securities primarily for the
purpose of raising capital or to an entity whose primary business is investing
in securities, and (d) shares of Common Stock or other securities issued in
connection with any stock split, stock dividend or recapitalization of the
Company (subject to Section 4.13 hereof).

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

“Indemnified Liabilities” shall have the meaning ascribed to
such term is Section 4.8.

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

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

“Liens” means a lien, charge, security interest, encumbrance,
right of first refusal, preemptive right or other restriction.

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

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

“Participation Amount” shall have the meaning ascribed to such
term in Section 4.11.

“Per Share Purchase Price” equals $3.50, subject to adjustment
for reverse and forward stock splits, stock dividends, stock combinations and
other similar transactions of the Common Stock that occur between the date of
this Agreement and the Closing Date.

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

“Pre-Notice” shall have the meaning ascribed to such term in
Section 4.11.

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

“Purchaser Party” shall have the meaning ascribed to such term
in Section 4.8.

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

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

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

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

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

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

“Securities Act” means the Securities Act of 1933, as amended,
and the rules and regulations promulgated thereunder.

“Shares” means the shares of Common Stock issued or issuable to
each Purchaser pursuant to this Agreement.

“Short Sales” shall include all “short sales” as defined in Rule
200 of Regulation SHO under the Exchange Act.

“Subscription Amount” means, as to each Purchaser, the aggregate
amount to be paid for Shares and Warrants purchased hereunder as specified
below such Purchaser’s name on the signature page of this Agreement and next to
the heading “Subscription Amount”, in United States Dollars and in immediately
available funds.

“Subsequent Financing” shall have the meaning ascribed to such
term in Section 4.11.

“Subsequent Financing Notice” shall have the meaning ascribed to
such term in Section 4.11.

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

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

“Trading Market” means the following markets or exchanges on
which the Common Stock is listed or quoted for trading on the date in question:
the American Stock Exchange, the Nasdaq Capital Market, the Nasdaq Global
Market, the Nasdaq Global Select Market, the New York Stock Exchange or the OTC
Bulletin Board.

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

“VWAP” means, for any date, the price determined by the first of
the following clauses that applies: (a) if the Common Stock is then listed or
quoted on a Trading Market, the daily volume weighted average price of the
Common Stock for such date (or the nearest preceding date) on the Trading
Market on which the Common Stock is then listed or quoted for trading as
reported by Bloomberg Financial L.P. (based on a Trading Day from 9:30 a.m.
(New York City time) to 4:02 p.m. (New York City time); (b)  if the OTC
Bulletin Board is not a Trading Market, the volume weighted average price of
the Common Stock for such date (or the nearest preceding date) on the OTC
Bulletin Board; (c) if the Common Stock is not then quoted for trading on the
OTC Bulletin Board and if prices for the Common Stock are then reported in the “Pink
Sheets” published by Pink Sheets, LLC (or a similar organization or agency
succeeding to its functions of reporting prices), the most recent bid price per
share of the Common Stock so reported; or (d) in all other cases, the fair
market value of a share of Common Stock as determined by an independent
appraiser selected in good faith by the Purchasers of a majority in interest of
the Shares and reasonably acceptable to the Company.

“Warrants” means collectively the Common Stock purchase
warrants, in the form of Exhibit C delivered to the Purchasers at the
Closing in accordance with Section 2.2(a) hereof, which Warrants shall be
exercisable immediately and have a term of exercise equal to five (5) years.

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

ARTICLE II.

PURCHASE AND SALE

2.1           Closing.  On the Closing Date, upon the terms and
subject to the conditions set forth herein, substantially concurrent with the
execution and delivery of this Agreement by the parties hereto, the Company
agrees to sell, and each Purchaser agrees to purchase in the aggregate,
severally and not jointly, the amount of Shares and Warrants as set forth
opposite its name on Schedule I hereto. 
Each Purchaser shall deliver to the Company via wire transfer
immediately available funds equal to its Subscription Amount and the Company
shall deliver to each Purchaser its respective Shares and Warrants as
determined pursuant to Section 2.2(a) and the other items set forth in Section
2.2 issuable at the Closing.  Upon
satisfaction of the

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conditions set forth in Sections 2.2 and 2.3, the
Closing shall occur at the offices of Company Counsel, or such other location
as the parties shall mutually agree.

2.2           Deliveries

(a)           On or prior to the Closing Date, the
Company shall deliver or cause to be delivered to each Purchaser the following:

(i)            this Agreement duly executed by the
Company;

(ii)           a legal opinion of Company Counsel,
in the form of Exhibit B attached hereto;

(iii)          a copy of the irrevocable instructions
to the Company’s transfer agent instructing the transfer agent to deliver, on
an expedited basis, a certificate evidencing the nearest whole number of Shares
(rounded down) equal to such Purchaser’s Subscription Amount divided by the Per
Share Purchase Price, registered in the name of such Purchaser;

(iv)          a Warrant registered in the name of
such Purchaser to purchase up to the nearest whole number of shares of Common
Stock (rounded down) equal to 25% of the Shares to be purchased by such
Purchaser, with an exercise price equal to the Closing Price on the Closing
Date, subject to adjustment therein;

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

(vi)          a
certificate signed by the chief executive officer and chief financial officer
of the Company, dated as of the Closing Date, to the effect that, to the
knowledge of the Company and such officers, the conditions set forth in
Section 2.3(b) have been satisfied; and

(vii)         a
certificate signed by the Secretary of the Company, dated as of the Closing
Date, as to: (i) a copy, certified by the Secretary of the Company, of the
resolutions of the Board of Directors of the Company evidencing approval of the
Transaction Documents and consummation of the transactions contemplated therein
and other matters contemplated hereby; (ii) a copy, certified by the Secretary
of the Company, of the bylaws of the Company; and (iii) a copy, certified by
the Secretary of the Company and certified by the Secretary of State of
Minnesota, of the Restated Articles of Incorporation, as amended, of the
Company as in effect on the Closing Date. 

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

(i)            this Agreement duly executed by such
Purchaser;

(ii)           such Purchaser’s Subscription Amount
by wire transfer to:

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Chase Manhattan Bank

ABA # 021 000 021

1 Chase Manhattan Plaza

NY NY 10005

FAO NFS (National Financial Services)

AC# 066-196-221

FC: C.E.U.T Private Banking Escrow Account #2

Acct# KRT-980110

; and

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

2.3           Closing Conditions.

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

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

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

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

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

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

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

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

(iv)          there has been no event,
occurrence or development that has or that could reasonably be expected to
result in a Material Adverse Effect;

(v)           from the date
hereof to the Closing Date, trading in the Common Stock shall not have been
suspended by the Commission or the Company’s

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

ARTICLE III.

REPRESENTATIONS AND WARRANTIES

3.1           Representations and Warranties of
the Company.  Except as set forth
under the corresponding section of the Disclosure Schedules which Disclosure
Schedules shall be deemed a part hereof and to qualify any representation or
warranty otherwise made herein to the extent of such disclosure, the Company
hereby makes the representations and warranties set forth below to each
Purchaser:

(a)           Subsidiaries.  The Company has no direct or indirect
Subsidiaries.

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

(c)           Authorization; Enforcement.  The Company has the requisite corporate power
and authority to enter into and to consummate the transactions contemplated by
each of the Transaction Documents and otherwise to carry out its obligations
hereunder and thereunder.  The execution
and delivery of each of the Transaction Documents by the

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Company and the
consummation by it of the transactions contemplated hereby and thereby have
been duly authorized by all necessary action on the part of the Company and no
further action is required by the Company, its board of directors or its
shareholders in connection therewith other than in connection with the Required
Approvals.  Each Transaction Document has
been (or upon delivery will have been) duly executed by the Company and, when
delivered in accordance with the terms hereof and thereof, will constitute the
valid and binding obligation of the Company enforceable against the Company in
accordance with its terms except (i) as limited by general equitable principles
and applicable bankruptcy, insolvency, reorganization, moratorium and other
laws of general application affecting enforcement of creditors’ rights
generally, (ii) as limited by laws relating to the availability of specific
performance, injunctive relief or other equitable remedies and (iii) insofar as
indemnification and contribution provisions may be limited by applicable law.

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

(e)           Filings, Consents and Approvals.  The Company is not required to obtain any
consent, waiver, authorization or order of, give any notice to, or make any
filing or registration with, any court or other federal, state, local or other
governmental authority or other Person in connection with the execution,
delivery and performance by the Company of the Transaction Documents, other
than (i) filings required pursuant to Section 4.4 of this Agreement, (ii) the filing
with the Commission of the Registration Statement, (iii) the filing of Form D
with the Commission and such filings as are required to be made under
applicable state securities laws, and (iv) those made or obtained prior to
Closing (collectively, the “Required Approvals”).

(f)            Issuance of the Securities.  The Securities are duly authorized and, when
issued and paid for in accordance with the applicable Transaction Documents,
will be duly and validly issued, fully paid and nonassessable, free and clear of
all Liens imposed

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by the Company other than
restrictions on transfer provided for in the Transaction Documents.  The Warrant Shares, when issued in accordance
with the terms of the Transaction Documents, will be validly issued, fully paid
and nonassessable, free and clear of all Liens imposed by the Company.  The Company has reserved from its duly
authorized capital stock the maximum number of shares of Common Stock issuable
pursuant to this Agreement and the Warrants.

(g)           Capitalization.  The capitalization of the Company is as set
forth on Schedule 3.1(g).  The
Company has not issued any capital stock since its most recently filed periodic report under the Exchange Act, other
than pursuant to the conversion or exercise of Common Stock Equivalents outstanding
as of the date of the most recently filed periodic report under the Exchange
Act.  No Person has any right of first
refusal, preemptive right, right of participation, or any similar right to
participate in the transactions contemplated by the Transaction Documents.  Except as disclosed on Schedule 3.1(g)
or as a result of the purchase and sale of the Securities, there are no
outstanding options, warrants, script rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities, rights or
obligations convertible into or exercisable or exchangeable for, or giving any
Person any right to subscribe for or acquire, any shares of Common Stock, or
contracts, commitments, understandings or arrangements by which the Company or
any Subsidiary is or may become bound to issue additional shares of Common
Stock or Common Stock Equivalents. 
Except as disclosed on Schedule 3.1(g), the issuance and sale of
the Securities will not obligate the Company to issue shares of Common Stock or
other securities to any Person (other than the Purchasers) and will not result
in a right of any holder of Company securities to adjust the exercise,
conversion, exchange or reset price under any of such securities.

(h)           SEC Reports; Financial Statements.
 The Company has filed all reports,
schedules, forms, statements and other documents required to be filed by it
under the Securities Act and the Exchange Act, including pursuant to Section
13(a) or 15(d) thereof, for the 12 months preceding the date hereof (or such
shorter period as the Company was required by law or regulation to file such
material) (the foregoing materials, including any amendments and exhibits
thereto and documents incorporated by reference therein, being collectively
referred to herein as the “SEC Reports” and together with the Disclosure
Schedule to this Agreement, the “Disclosure Materials”) on a timely
basis or has received a valid extension of such time of filing and has filed
any such SEC Reports prior to the expiration of any such extension.  As of their respective dates, the SEC Reports
complied in all material respects with the requirements of the Securities Act
and the Exchange Act, as applicable, and none of the SEC Reports, as amended,
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.  The financial
statements of the Company included in the SEC Reports, as amended, comply in
all material respects with applicable accounting requirements and the rules and
regulations of the Commission with respect thereto as in effect at the time of
filing.  Such financial statements have
been prepared in accordance with United States generally accepted accounting
principles applied on a consistent basis during the periods involved (“GAAP”),
except as may be otherwise specified in such financial statements or the notes

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thereto and except that
unaudited financial statements may not contain all footnotes required by GAAP,
and fairly presented in all material respects the financial position of the
Company and its consolidated subsidiaries as of and for the dates thereof and
the results of operations and cash flows for the periods then ended, subject,
in the case of unaudited statements, to normal, immaterial, year-end audit
adjustments.

(i)            Material Changes; Undisclosed
Events, Liabilities or Developments. 
Since the date of the latest audited financial statements included
within the SEC Reports, except as disclosed in the SEC Reports, (i) there has
been no event, occurrence or development that has had or that could reasonably
be expected to result in a Material Adverse Effect, (ii) the Company has not
incurred any liabilities (contingent or otherwise) other than trade payables
and accrued expenses incurred in the ordinary course of business consistent
with past practice, (iii) the Company has not altered its method of accounting,
(iv) the Company has not declared or made any dividend or distribution of cash
or other property to its shareholders or purchased, redeemed or made any
agreements to purchase or redeem any shares of its capital stock and (v) the
Company has not issued any equity securities to any officer, director or
Affiliate, except pursuant to existing Company stock option agreements, stock
option plans or equity incentive plans. 
The Company does not have pending before the Commission any request for
confidential treatment of information.

(j)            Litigation.  Except as disclosed in the SEC Reports, there
is no action, suit, inquiry, notice of violation, proceeding or investigation
pending or, to the knowledge of the Company, threatened against or affecting
the Company, any Subsidiary or any of their respective properties before or by
any court, arbitrator, governmental or administrative agency or regulatory
authority (federal, state, county, local or foreign) (collectively, an “Action”)
which (i) adversely affects or challenges the legality, validity or
enforceability of any of the Transaction Documents or the Securities or (ii)
could, if there were an unfavorable decision, have or reasonably be expected to
result in a Material Adverse Effect. 
Except as disclosed in the SEC Reports, neither the Company nor any
Subsidiary, nor any director or officer thereof, is or has been the subject of
any Action involving a claim of violation of or liability under federal or
state securities laws or a claim of breach of fiduciary duty.  There has not been, and to the knowledge of
the Company, there is not pending or contemplated, any investigation by the
Commission involving the Company or any current or former director or officer
of the Company.  The Commission has not
issued any stop order or other order suspending the effectiveness of any
registration statement filed by the Company or any Subsidiary under the
Exchange Act or the Securities Act.

(k)           Labor Relations.  No material labor dispute exists or, to the
knowledge of the Company, is imminent with respect to any of the employees of
the Company which could reasonably be expected to result in a Material Adverse
Effect.

(l)            Compliance.  Neither the Company nor any Subsidiary (i) is
in default under or in violation of (and no event has occurred that has not
been waived that, with notice or lapse of time or both, would result in a
default by the Company or any Subsidiary under), nor has the Company or any
Subsidiary received notice of a claim that

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it is in default under or
that it is in violation of, any indenture, loan or credit agreement or any
other agreement or instrument to which it is a party or by which it or any of
its properties is bound (whether or not such default or violation has been
waived), (ii) is in violation of any order of any court, arbitrator or
governmental body, or (iii) is or has been in violation of any statute, rule or
regulation of any governmental authority, including without limitation all
foreign, federal, state and local laws applicable to its business and all such
laws that affect the environment, except in each case as could not have or
reasonably be expected to result in a Material Adverse Effect.

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

(n)           Title to Assets.  The Company and the Subsidiaries have good
and marketable title in fee simple to all real property owned by them that is
material to the business of the Company and the Subsidiaries and good and
marketable title in all personal property owned by them that is material to the
business of the Company and the Subsidiaries, in each case free and clear of
all Liens, except for Liens as do not materially affect the value of such
property and do not materially interfere with the use made and proposed to be
made of such property by the Company and the Subsidiaries and Liens for the
payment of federal, state or other taxes, the payment of which is neither
delinquent nor subject to penalties.  Any
real property and facilities held under lease by the Company and the
Subsidiaries are held by them under valid, subsisting and enforceable leases
with which the Company and the Subsidiaries are in compliance, except as could
not, individually or in the aggregate, have or reasonably be expected to result
in a Material Adverse Effect.

(o)           Patents and Trademarks.  The Company and the Subsidiaries own, or have
legally enforceable rights to use, all patents, patent rights, patent
applications, trademarks, trademark applications, service marks, trade names,
copyrights, trade secrets, inventions, know-how, licenses and other similar
rights necessary or material for use in connection with their respective
businesses as described in the SEC Reports and which the failure to so have
could have a Material Adverse Effect (collectively, the “Intellectual
Property Rights”).  Neither the
Company nor any Subsidiary has received a written notice or has knowledge that
the Intellectual Property Rights used by the Company or any Subsidiary violates
or infringes, or allegedly violates or allegedly infringes, upon the rights of
any Person.  Except as disclosed in the
SEC Reports, to the knowledge of the Company, all such Intellectual Property
Rights are enforceable (except for pending patent applications and trademark
applications) and there is no existing infringement by another Person of any of
the Intellectual Property Rights.

(p)           Insurance.  The Company and the Subsidiaries are insured
by insurers of recognized financial responsibility against such losses and
risks and in such amounts as

 12
 

 

are prudent and customary
in the businesses in which the Company and the Subsidiaries are engaged.  Neither the Company nor any Subsidiary has
any reason to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business on terms
consistent with market for the Company’s and such Subsidiary’s line of
business.

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

(r)            Sarbanes-Oxley; Internal
Accounting Controls.  The Company is
in material compliance with all provisions of the Sarbanes-Oxley Act of 2002
which are applicable to it as of the Closing Date.  The Company
and the Subsidiaries maintain a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are executed
in accordance with management’s general or specific authorizations, (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with GAAP and to maintain asset accountability, (iii)
access to assets is permitted only in accordance with management’s general or
specific authorization, and (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.  The Company has established disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the Company and designed such disclosure controls and procedures
to ensure that information required to be disclosed by the Company in the
reports it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Commission’s
rules and forms.  The Company’s
certifying officers have evaluated the effectiveness of the Company’s
disclosure controls and procedures as of the end of the period covered by the
Company’s most recently filed periodic report under the Exchange Act (such
date, the “Evaluation Date”).  The
Company presented in its most recently filed periodic report under the Exchange
Act the conclusions of the certifying officers about the effectiveness of the
disclosure controls and procedures based on their evaluations as of the
Evaluation Date.  Since the Evaluation
Date, there have been no changes in the Company’s internal control over
financial reporting (as such term is defined in the Exchange Act) that has
materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting, and no significant deficiencies or

 13
 

 

material
weaknesses in internal controls over financial reporting, other than as
disclosed in the SEC Reports, have been identified.

(s)           Certain Fees.  Except for the 6 percent cash commission
payable to C.E. Unterberg, Towbin, LLC, no brokerage or finder’s fees or
commissions are or will be payable by the Company to any broker, financial
advisor or consultant, finder, placement agent, investment banker, bank or
other Person with respect to the transactions contemplated by the Transaction
Documents.  The Purchasers shall have no
obligation with respect to any fees or with respect to any claims made by or on
behalf of other Persons for fees of a type contemplated in this Section that may
be due in connection with the transactions contemplated by the Transaction
Documents.

(t)            Private Placement.  Assuming the accuracy of the Purchasers
representations and warranties set forth in Section 3.2, no registration under
the Securities Act is required for the offer and sale of the Securities by the
Company to the Purchasers as contemplated hereby.  The issuance and sale of the Securities
hereunder does not contravene the rules and regulations of the Trading
Market.  The Company has not distributed
and will not distribute prior to the Closing Date any offering material in
connection with this offering and sale of the Securities other than the
documents of which this Agreement is a part or the SEC Reports.

(u)           Investment Company.  The Company is not, and is not an Affiliate
of, and immediately after receipt of payment for the Securities, will not be or
be an Affiliate of, an “investment company” within the meaning of the
Investment Company Act of 1940, as amended.

(v)           Registration Rights.  Except as disclosed on the disclosure
schedule to the Registration Rights Agreement, other than each of the
Purchasers and any registered broker-dealer receiving compensation in the form
of equity in connection with the transactions contemplated by this Agreement, no
Person has any right to cause the Company to effect the registration under the
Securities Act of any securities of the Company.

(w)          Listing and Maintenance
Requirements.  The Company’s Common
Stock is registered pursuant to Section 12(b) or 12(g) of the Exchange Act, and
the Company has taken no action designed to, or which to its knowledge is
likely to have the effect of, terminating the registration of the Common Stock
under the Exchange Act nor has the Company received any notification that the
Commission is contemplating terminating such registration.  The Company has not, in the 12 months
preceding the date hereof, received notice from any Trading Market on which the
Common Stock is or has been listed or quoted to the effect that the Company is
not in compliance with the listing or maintenance requirements of such Trading
Market.  The Company is, and has no
reason to believe that it will not in the foreseeable future continue to be, in
compliance with all such listing and maintenance requirements.

(x)            Application of Takeover
Protections.  The control share
acquisition provisions of the Minnesota Business Corporation Act are
inapplicable to the transaction

 14
 

 

contemplated by this
Agreement.  The Company has not adopted
any poison pill (including any distribution under a rights agreement) or other
similar anti-takeover provision under the Company’s Articles of
Incorporation (or similar charter documents) or the laws of its state of
incorporation that is or could become applicable to the Purchasers as a result
of the Purchasers and the Company fulfilling their obligations or exercising
their rights under the Transaction Documents, including without limitation as a
result of the Company’s issuance of the Securities and the Purchasers’
ownership of the Securities.  Section 673
of the Minnesota Business Corporation Act pertaining to business combinations
in applicable to the Company; however, the transaction contemplated by this
Agreement does not constitute a business combination as to Purchasers who are
not “interested shareholders” as defined in Section 11 of Minnesota Business
Corporation Act immediately prior to consummation of the transaction
contemplated by this Agreement.

(y)           Disclosure.  Except with respect to the material terms and
conditions of the transactions contemplated by the Transaction Documents, the
Company confirms that, neither it nor any other Person acting on its behalf has
provided any of the Purchasers or their agents or counsel with any information
that constitutes or might constitute material, non-public information.  The Company understands and confirms that the
Purchasers will rely on the foregoing representation in effecting transactions
in securities of the Company.  All
disclosure furnished by or on behalf of the Company to the Purchasers regarding
the Company, its business and the transactions contemplated hereby, including
the Disclosure Schedules to this Agreement, with respect to the representations
and warranties made herein are true and correct with respect to such
representations and warranties and do not contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements made therein, in light of the circumstances under which they were
made, not misleading.

(z)            No Integrated Offering.  Assuming the accuracy of the Purchasers’
representations and warranties set forth in Section 3.2, neither the Company,
nor any of its affiliates, nor any Person acting on its or their behalf has,
directly or indirectly, made any offers or sales of any security or solicited
any offers to buy any security, under circumstances that would cause this
offering of the Securities to be integrated with prior offerings by the Company
for purposes of the Securities Act or any applicable shareholder approval
provisions of any Trading Market on which any of the securities of the Company
are listed or designated.  

(aa)         Solvency.  Based on the financial condition of the
Company as of the Closing Date after giving effect to the receipt by the
Company of the proceeds from the sale of the Securities hereunder, (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 debts and other
liabilities (including known contingent liabilities) as they mature; (ii) the
Company’s assets constitute sufficient capital to carry on its business as now
conducted and as proposed to be conducted for the three months following the
Closing Date, including its capital needs taking into account the particular
capital requirements of the business conducted by the Company, and projected
capital requirements and capital availability thereof; and (iii) the current
cash flow of the Company, together with the

 15
 

 

proceeds the Company
would receive, were it to liquidate all of its assets, after taking into
account all anticipated uses of the cash, would be sufficient to pay all
amounts on or in respect of its liabilities when such amounts are required to
be paid.  The Company does not intend to
incur debts beyond its ability to pay such debts as they mature (taking into
account the timing and amounts of cash to be payable on or in respect of its
debt).

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

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

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

(ee)         Accountants.  The Company’s accountants are Lurie Besikof
Lapidus & Company, LLP.  To the
knowledge of the Company, such accountants, who expressed their opinion with
respect to the financial statements included in the Company’s Annual Report on
Form 10-KSB for the year ending April 30, 2006, are a registered public
accounting firm as required by the Exchange Act and registered with the Public
Company Accounting Oversight Board.  The
Company expects such accountants to consent to the inclusion of their opinion
on such financial statements into the Registration Statement and the prospectus
which forms a part thereof.

(ff)           Acknowledgment Regarding
Purchasers’ Purchase of Securities. 
The Company acknowledges and agrees that each of the Purchasers is
acting solely in the capacity of an arm’s length purchaser with respect to the
Transaction Documents and the transactions contemplated thereby.  The Company further acknowledges that no
Purchaser is acting as a financial advisor or fiduciary of the Company (or in
any similar capacity) with respect to the Transaction Documents and the
transactions contemplated thereby and any advice given by any Purchaser or any
of their respective representatives or agents in connection with the
Transaction Documents and the transactions contemplated thereby is merely
incidental to the Purchasers’ purchase of the Securities.

 16
 

 

The Company further
represents to each Purchaser that the Company’s decision to enter into this
Agreement and the other Transaction Documents has been based solely on the
independent evaluation of the transactions contemplated hereby by the Company
and its representatives.

(gg)         Acknowledgement Regarding Purchasers’
Trading Activity.  Anything in this
Agreement or elsewhere herein to the contrary notwithstanding (except for
Section 4.14 hereof), it is understood and acknowledged by the Company (i) that
none of the Purchasers have been asked to agree, nor has any Purchaser agreed,
to hold the Securities for any specified term; (ii) that past or future open
market or other transactions by any Purchaser, including Short Sales, and
specifically including, without limitation, Short Sales or “derivative”
transactions executed in compliance with applicable federal law, may negatively
impact the market price of the Company’s publicly-traded securities; (iii) that
any Purchaser, and counter-parties in “derivative” transactions to which any
such Purchaser is a party, directly or indirectly, presently may have a “short”
position in the Common Stock, and (iv) that each Purchaser shall not be deemed
to have any affiliation with or control over any arm’s length, unaffiliated,
counter-party in any “derivative” transaction.

(hh)         Manipulation of Price.  The Company has not, and to its knowledge no
one acting on its behalf has, (i) taken, directly or indirectly, any action
designed to cause or to result in the stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of any of
the Securities, (ii) sold, bid for, purchased, or, paid any compensation for
soliciting purchases of, any of the Securities, or (iii) paid or agreed to pay
to any person any compensation for soliciting another to purchase any other
securities of the Company, other than, in the case of clauses (ii) and (iii),
compensation paid to the Company’s placement agent in connection with the
placement of the Securities.

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

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

 17
 

 

or other equitable
remedies and (iii) insofar as indemnification and contribution provisions may
be limited by applicable law.

(b)           Own Account.  Such Purchaser understands that the
Securities are “restricted securities” and have not been registered under the
Securities Act or any applicable state securities law and is acquiring the
Securities as principal for its own account and not with a view to or for
distributing or reselling such Securities or any part thereof in violation of
the Securities Act or any applicable state securities law, has no present intention
of distributing any of such Securities in violation of the Securities Act or
any applicable state securities law and has no direct or indirect arrangement
or understandings with any other persons to distribute or regarding the
distribution of such Securities (this representation and warranty not limiting
such Purchaser’s right to sell the Securities pursuant to the Registration
Statement or otherwise in compliance with applicable federal and state
securities laws) in violation of the Securities Act or any applicable state
securities law.  Such Purchaser is
acquiring the Securities hereunder in the ordinary course of its business.

(c)           Purchaser Status.  At the time such Purchaser was offered the
Securities, it was, and at the date hereof it is, and on each date on which it
exercises any Warrants, it will be either: (i) an “accredited investor” as
defined in Rule 501(a)(1), (a)(2), (a)(3), (a)(7) or (a)(8) under the
Securities Act or (ii) a “qualified institutional buyer” as defined in Rule
144A(a) under the Securities Act.  

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

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

(f)            Short Sales and Confidentiality
Prior To The Date Hereof.  Other than
the transaction contemplated hereunder, such Purchaser has not directly or
indirectly, nor has any Person acting on behalf of or pursuant to any
understanding with such Purchaser, executed any disposition, including Short
Sales, in the securities of the Company during the period commencing from
the time that such Purchaser first received a term sheet (written or oral) from
the Company or any other Person setting forth the material terms of the
transactions contemplated hereunder until the date hereof (“Discussion Time”).  Notwithstanding
the foregoing, in the case of a Purchaser that is a multi-managed investment
vehicle whereby separate portfolio managers manage separate portions of such

 18
 

 

Purchaser’s assets and
the portfolio managers have no direct knowledge of the investment decisions
made by the portfolio managers managing other portions of such Purchaser’s
assets, the representation set forth above shall only apply with respect to the
portion of assets managed by the portfolio manager that made the investment
decision to purchase the Securities covered by this Agreement.  Other than to other Persons party to this
Agreement, such Purchaser has maintained the confidentiality of all disclosures
made to it in connection with this transaction (including the existence and
terms of this transaction).

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

(h)           Independent Investment Decision.  Each Purchaser has independently evaluated
the merits of its decision to purchase Securities pursuant to this Agreement,
such decision has been independently made by such Purchaser and such Purchaser
confirms that it has only relied on the advice of its own business and/or legal
counsel and not on the advice of any other Purchaser’s business and/or legal
counsel, or the Company’s legal counsel, in making such decision.  Each Purchaser has not relied on the truth,
accuracy or completeness of the statements contained in any research report
concerning the Company that was prepared by an investment banking firm.  

(i)            Reliance.  Each Purchaser understands and acknowledges
that: (i) the Securities are being offered and sold to it without registration
under the Securities Act in a private placement that is exempt from the
registration provisions of the Securities Act and (ii) the availability of such
exemption depends in part on, and the Company will rely upon the accuracy and
truthfulness of, the foregoing representations and such Investor hereby
consents to such reliance.

ARTICLE IV.

OTHER AGREEMENTS OF THE PARTIES

4.1           Transfer Restrictions.

(a)           The Securities may only be disposed
of in compliance with state and federal securities laws.  In connection with any transfer of Securities
other than pursuant to an effective registration statement or Rule 144, to the
Company or to an affiliate of a Purchaser or in connection with a pledge as
contemplated in Section 4.1(b), the Company

 19
 

 

may require the
transferor thereof to provide to the Company an opinion of counsel selected by
the transferor and reasonably acceptable to the Company, the form and substance
of which opinion shall be reasonably satisfactory to the Company, to the effect
that such transfer does not require registration of such transferred Securities
under the Securities Act.  As a condition
of transfer, any such transferee shall agree in writing to be bound by the
terms of this Agreement and shall have the rights of a Purchaser under this
Agreement and the Registration Rights Agreement.

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

THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE
SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN
RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT
OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO,
THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO
THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY
ACCEPTABLE TO THE COMPANY.  THESE
SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT WITH A
REGISTERED BROKER-DEALER OR OTHER LOAN WITH A FINANCIAL INSTITUTION THAT IS AN “ACCREDITED
INVESTOR” AS DEFINED IN RULE 501(a) UNDER THE SECURITIES ACT OR OTHER LOAN
SECURED BY SUCH SECURITIES.

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

 20
 

 

Securities Act or other
applicable provision of the Securities Act to appropriately amend the list of
selling shareholders thereunder.  Each
Purchaser acknowledges that the Company shall not be responsible for any
pledges relating to, or the grant of any security interest in, any of the
Securities or for any agreement, understanding or arrangement between any
Purchaser and its pledgee or secured party. 
The Company’s indemnification obligations pursuant to this Agreement
shall not extend to any Proceeding or Losses (as defined in the Registration
Rights Agreement) arising out of or related to this Section 4.1(b).

(c)           Certificates evidencing the Shares
and Warrant Shares shall not contain any legend (including the legend set forth
in Section 4.1(b)), (i) following any sale of such Shares or Warrant Shares
under a registration statement (including the Registration Statement) covering
the resale of such security under the Securities Act, (ii) following any sale
of such Shares or Warrant Shares pursuant to Rule 144, or (iii) if such Shares
or Warrant Shares are eligible for sale under Rule 144(k) (to the extent that
the applicable Purchaser provides a certification or legal opinion to the Company
to that effect).  The Company shall cause
its counsel to issue a legal opinion to the Company’s transfer agent if
required by the Company’s transfer agent to effect the removal of the legend
hereunder.  The Company agrees that at
such time as such legend is no longer required under this Section 4.1(c), it
will, no later than three Trading Days following the delivery by a Purchaser to
the Company or the Company’s transfer agent of a certificate representing
Shares or Warrant Shares, as the case may be, issued with a restrictive legend
(endorsed or with stock powers attached, signatures guaranteed, and otherwise
in form necessary to affect the reissuance and/or transfer) (such third Trading
Day, the “Legend Removal Date”), deliver or cause to be delivered to such
Purchaser a certificate representing such shares that is free from such
restrictive legend.  The Company may not
make any notation on its records or give instructions to any transfer agent of
the Company that enlarge the restrictions on transfer set forth in this
Section.  Certificates for Securities
subject to legend removal hereunder shall be transmitted by the transfer agent
of the Company to the Purchasers by crediting the account of the Purchaser’s
prime broker with the Depository Trust Company System, if practicable.

(d)           Each Purchaser, severally and not
jointly with the other Purchasers, agrees that the removal of the restrictive
legend from certificates representing Securities as set forth in this Section
4.1 is predicated upon the Company’s reliance that the Purchaser will sell any
Securities pursuant to either the registration requirements of the Securities
Act, including any applicable prospectus delivery requirements, or an exemption
therefrom, and that if Securities are sold pursuant to a Registration
Statement, they will be sold in compliance with the plan of distribution set
forth therein.  To provide further
assurance in connection with legend removal, each Purchaser hereunder commits
that it will continue to hold the shares in its own name, and not in the name
of a nominee, until such time as the shares are duly and properly sold in
compliance with all relevant securities laws. 
Both the Company and its transfer agent, and their respective directors,
officers, employees and agents, may rely on this subsection (d) and each
Purchaser hereunder will indemnify and hold harmless each of such persons from
any breaches or violations of this paragraph.

 21

4.2           Furnishing of Information.  As long as any Purchaser owns Securities, the
Company covenants to timely file (or obtain extensions in respect thereof and
file within the applicable grace period) all reports required to be filed by
the Company after the date hereof pursuant to the Exchange Act.  As long as any Purchaser owns Securities, if
the Company is not required to file reports pursuant to the Exchange Act, it
will prepare and furnish to the Purchasers and make publicly available in
accordance with Rule 144(c) such information as is required for the Purchasers
to sell the Securities under Rule 144. 
The Company further covenants that it will use commercially reasonable
efforts to take such further action as any holder of Securities may reasonably
request, to the extent required from time to time to enable such Person to sell
such Securities without registration under the Securities Act within the
requirements of the exemption provided by (a) Rule 144 under the Securities
Act, as such Rule may be amended from time to time, or (b) any similar rule or
regulation hereafter adopted by the SEC. 
Upon request, the Company will provide to a Purchaser written
certification of its compliance with the provisions of this Section 4.2.

4.3           Integration.  The Company shall not sell, offer for sale or
solicit offers to buy or otherwise negotiate in respect of any security (as
defined in Section 2 of the Securities Act) that would be integrated with the
offer or sale of the Securities in a manner that would require the registration
under the Securities Act of the sale of the Securities to the Purchasers or
that would be integrated with the offer or sale of the Securities for purposes
of the rules and regulations of the Trading Market such that it would require
shareholder approval prior to the closing of such other transaction unless
shareholder approval is obtained before the closing of such subsequent
transaction.

4.4           Securities Laws Disclosure;
Publicity.  The Company shall, by
9:30 a.m. Eastern time on the Trading Day immediately following the date
hereof, file a Current Report on Form 8-K, disclosing the material terms of the
transactions contemplated hereby, and shall attach the Transaction Documents
thereto.  No Purchaser shall issue any
such press release or otherwise make any public statement with respect to the
transactions contemplated hereby without the prior consent of the Company,
except if such disclosure is required by law. 
The Company shall not publicly disclose the name of any Purchaser, or
include the name of any Purchaser in any filing with the Commission or any
regulatory agency or Trading Market, without the prior written consent of such
Purchaser, except (i) in connection with (A) any registration statement
contemplated by the Registration Rights Agreement and (B) the filing of final
Transaction Documents (including signature pages thereto) with the Commission
and (ii) to the extent such disclosure is required by law or Trading Market
regulations.

4.5           Shareholder Rights Plan.  No claim will be made or enforced by the
Company or, with the consent of the Company, any other Person, that any
Purchaser is an “Acquiring Person” under any control share acquisition, poison
pill (including any distribution under a rights agreement) or similar
anti-takeover plan or arrangement in effect or hereafter adopted by the
Company, or that any Purchaser could be deemed to trigger the provisions of any
such plan or arrangement, by virtue of receiving Securities under the
Transaction Documents or under any other agreement between the Company and the
Purchasers.

4.6           Non-Public Information.  Except with respect to the material terms and
conditions of the transactions contemplated by the Transaction Documents, the
Company covenants and

 22
 

 

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

4.7           Use of Proceeds.  The Company shall use the net proceeds from
the sale of the Shares hereunder for working capital purposes and for capital
expenditures, and not to redeem any Common Stock or Common Stock Equivalents.

4.8           Indemnification of Purchasers.  Subject to the provisions of this Section
4.8, in consideration of each Purchaser’s execution and delivery of the
Transaction Documents and acquiring the Securities thereunder and in addition
to all of the Company’s other obligations under the Transaction Documents, the
Company will indemnify, protect and hold the Purchasers and their directors,
officers, shareholders, members, partners, employees and agents (and any other
Persons with a functionally equivalent role of a Person holding such titles
notwithstanding a lack of such title or any other title), each Person who
controls such Purchaser (within the meaning of Section 15 of the Securities Act
and Section 20 of the Exchange Act), and the directors, officers, shareholders,
agents, members, partners or employees (and any other Persons with a functionally
equivalent role of a Person holding such titles notwithstanding a lack of such
title or any other title) of such controlling persons (each, a “Purchaser
Party”) harmless from any and all losses, liabilities, obligations, claims,
contingencies, damages, actions, causes of action, suits, penalties, fees,
costs and expenses, (irrespective of whether any such Purchaser Party is a
party to the action for which indemnification hereunder is sought), including
all judgments, amounts paid in settlements, court costs and reasonable
attorneys’ fees and costs of investigation (collectively, the “Indemnified
Liabilities”) that any such Purchaser Party may suffer or incur as a result
of, arising out or, or relating to (a) any misrepresentation or breach of any
representation or warranty made by the Company in the Transaction Documents or
any other certificate, instrument or document contemplated hereby or thereby,
(b) any breach of any covenant, agreement or obligation of the Company
contained in the Transaction Documents or any other certificate, instrument or
document contemplated hereby or thereby or (c) any cause of action, suit or
claim brought or made against such Purchaser Party by a third party (including
for these purposes a derivative action brought on behalf of the Company) and
arising out of or resulting from (i) the execution, delivery, performance or
enforcement of the Transaction Documents or any other certificate, instrument
or document contemplated hereby or thereby, (ii) any transaction financed or to
be financed in whole or in part, directly or indirectly, with the proceeds of
the issuance of the Securities, or (iii) the status of such Purchaser or holder
of the Securities as an investor in the Company pursuant to the transactions
contemplated by the Transaction Documents (unless, and only to the extent that,
such action is based solely upon a breach of such Purchaser’s representations,
warranties or covenants under the Transaction Documents or any conduct by such
Purchaser which constitutes fraud, gross negligence or willful
misconduct).  To the extent that the
foregoing undertaking by the Company may be unenforceable for any reason, the
Company shall make the maximum contribution to the payment and satisfaction of
each of the Indemnified Liabilities which is permissible under applicable
law.  If any action shall be brought
against any Purchaser Party in respect of which indemnity may be sought
pursuant to this Agreement, such Purchaser Party shall promptly notify the
Company in writing, and the

 23
 

 

Company shall have the right to assume the defense
thereof with counsel of its own choosing reasonably acceptable to such
Purchaser.  Any Purchaser Party shall
have the right to employ separate counsel in any such action and participate in
the defense thereof, but the fees and expenses of such counsel shall be at the
expense of such Purchaser Party except to the extent that (i) the employment
thereof has been specifically authorized by the Company in writing, (ii) the
Company has failed after a reasonable period of time to assume such defense and
to employ counsel reasonably acceptable to such Purchaser, or (iii) in such
action there is, in the reasonable opinion of such separate counsel, a material
conflict on any material issue between the position of the Company and the
position of such Purchaser Party (in which case, if such Indemnified Party
notifies the Indemnifying Party in writing that it elects to employ separate
counsel at the expense of the Indemnifying Party, the Indemnifying Party shall
not have the right to assume the defense thereof and the reasonable fees and
expenses of one separate counsel shall be at the expense of the Indemnifying
Party).  The Company will not be liable
to any Purchaser Party under this Agreement (i) for any settlement by a Purchaser
Party effected without the Company’s prior written consent, which shall not be
unreasonably withheld or delayed; or (ii) to the extent, but only to the extent
that a loss, claim, damage or liability is attributable to any Purchaser Party’s
breach of any of the representations, warranties, covenants or agreements made
by the Purchasers in this Agreement or in the other Transaction Documents.  The Company shall not, without the prior
written consent of the applicable Purchaser Party, consent to entry of any
judgment or enter into any settlement or other compromise which does not
include as an unconditional term thereof the giving by the claimant or
plaintiff to the applicable Purchaser Party of a release from all liability in
respect to such claim or litigation.  The
failure to deliver written notice to the Company within a reasonable time of
the commencement of any such action shall not relieve the Company of any
liability to the Purchaser Party under this Section 4.8, except to the extent
that the Company is prejudiced in its ability to defend such action.

4.9           Reservation of Common Stock.  As of the date hereof, the Company has
reserved and the Company shall continue to reserve and keep available at all
times, free of preemptive rights, a sufficient number of shares of Common Stock
for the purpose of enabling the Company to issue Shares pursuant to this
Agreement and Warrant Shares pursuant to any exercise of the Warrants.

4.10         Equal Treatment of Purchasers.  No consideration shall be offered or paid to
any Person to amend or consent to a waiver or modification of any provision of
any of the Transaction Documents unless the same consideration is also offered
to all of the parties to the Transaction Documents.  For clarification purposes, this provision
constitutes a separate right granted to each Purchaser by the Company and
negotiated separately by each Purchaser, and is intended to treat for the
Company the Purchasers as a class and shall not in any way be construed as the
Purchasers acting in concert or as a group with respect to the purchase,
disposition or voting of Securities or otherwise.

4.11         Participation in Future Financing.  

(a)           From the date hereof until the date
that is the 12 month anniversary of the Closing Date, upon any issuance by the
Company or any of its Subsidiaries of Common Stock or Common Stock Equivalents
(a “Subsequent Financing”), each Purchaser shall have the right to
purchase in the Subsequent Financing that portion of the Subsequent

 24
 

 

Financing as the number
of shares of Common Stock or Common Stock Equivalents held by such Purchaser
bears to the number of shares of Common Stock and Common Stock Equivalents held
by all Purchasers (the “Participation Amount”), at a price and on such
terms as shall have been specified by the Company in a Subsequent Financing
Notice.

(b)           At least 5 Trading Days prior to the
closing of the Subsequent Financing, the Company shall deliver to each
Purchaser a written notice of its intention to effect a Subsequent Financing (“Pre-Notice”),
which Pre-Notice shall ask such Purchaser if it wants to review the details of
such financing (such additional notice, a “Subsequent Financing Notice”).  Upon the request of a Purchaser, and only
upon a request by such Purchaser, for a Subsequent Financing Notice, the Company
shall promptly, but no later than 2 Trading Days after such request, deliver a
Subsequent Financing Notice to such Purchaser. 
The Subsequent Financing Notice shall describe in reasonable detail the
proposed terms of such Subsequent Financing, the amount of proceeds intended to
be raised thereunder, the Person or Persons through or with whom such
Subsequent Financing is proposed to be effected, and attached to which shall be
a term sheet or similar document relating thereto.   

(c)           Any Purchaser desiring to participate
in such Subsequent Financing must provide written notice to the Company by not
later than 5:30 p.m. (New York City time) on the 5th Trading Day after all of
the Purchasers have received the Pre-Notice that the Purchaser is willing to
participate in the Subsequent Financing, the amount of the Purchaser’s
participation, and that the Purchaser has such funds ready, willing, and
available for investment on the terms set forth in the Subsequent Financing
Notice.  If the Company receives no
notice from a Purchaser as of such 5th Trading Day, such Purchaser shall be
deemed to have notified the Company that it does not elect to participate.  

(d)           If by 5:30 p.m. (New York City time)
on the 5th Trading Day after all of the Purchasers have received the Pre-Notice,
notifications by the Purchasers of their willingness to participate in the
Subsequent Financing (or to cause their designees to participate) is, in the
aggregate, less than the total amount of the Subsequent Financing, then the
Company may effect the remaining portion of such Subsequent Financing on the
terms and with the Persons set forth in the Subsequent Financing Notice.

(e)           The Company must provide the
Purchasers with a second Subsequent Financing Notice, and the Purchasers will
again have the right of participation set forth above in this Section 4.11, if
the Subsequent Financing subject to the initial Subsequent Financing Notice is
not consummated for any reason on the terms set forth in such Subsequent
Financing Notice within 90 Trading Days after the date of the initial
Subsequent Financing Notice.

(f)            Notwithstanding the foregoing, this
Section 4.11 shall not apply in respect of an Exempt Issuance or to a
registered primary public offering.

 25
 

 

4.12         Subsequent Equity Sales.  

(a)           From the date hereof until the date
that is the 18 month anniversary of the Closing Date, in addition to any other
vote required by law or the Articles of Incorporation of the Company, without
the prior written consent of the Purchasers of a majority in interest of the
Shares, the Company will not create or authorize the creation of any additional
class or series of shares of stock (or any debt security which by its terms is
convertible into or exchangeable for any equity security of the Company and any
security which is a combination of debt and equity) unless the same ranks
junior to the Common Stock as to dividends and the distribution of assets on
the liquidation, dissolution or winding up of the Company.  

(b)           From the date hereof until the date
that is the 18 month anniversary of the Closing Date, the Company shall be
prohibited from effecting or entering into an agreement to effect any
Subsequent Financing involving a “Variable Rate Transaction”.  The term “Variable Rate Transaction”
shall mean a transaction in which the Company issues or sells (i) any debt or
equity securities that are convertible into, exchangeable or exercisable for,
or include the right to receive additional shares of Common Stock, either (A)
at a conversion, exercise or exchange rate or other price that is based upon
and/or varies with the trading prices of or quotations for the shares of Common
Stock at any time after the initial issuance of such debt or equity securities,
or (B) with a conversion, exercise or exchange price that is subject to being
reset at some future date after the initial issuance of such debt or equity
security or upon the occurrence of specified or contingent events directly or
indirectly related to the business of the Company or the market for the Common
Stock or (ii) enters into any agreement, including, but not limited to, an
equity line of credit, whereby the Company may sell securities at a future
determined price.

(c)           Notwithstanding the foregoing, this
Section 4.12 shall not apply in respect of (i) an Exempt Issuance, except that
no Variable Rate Transaction shall be an Exempt Issuance, (ii) a registered
primary public offering, or (iii) the issuance of non-convertible,
interest-bearing debt with an equity or equity-linked component.

4.13         Stock Splits and Reclassification.  From the date hereof until the date that is
the 18 month anniversary of the Closing Date, the Company shall not, without
the prior written consent of the Purchasers of a majority in interest of the
Shares, undertake a reverse or forward stock split or reclassification of the
Common Stock.

4.14         Short Sales and Confidentiality
After The Date Hereof.  Each
Purchaser severally and not jointly with the other Purchasers covenants that
neither it nor any Affiliate acting on its behalf or pursuant to any understanding
with it will engage, directly or indirectly, in any transactions in the
securities of the Company (including, without limitation, any Short Sales
involving the Company’s securities) during the period commencing at the
Discussion Time and until such time as (i) the transactions contemplated by
this Agreement are first publicly announced as described in Section 4.4 or (ii)
this Agreement is terminated in full pursuant to Section 5.1.  Each Purchaser, severally and not jointly
with the other Purchasers, covenants that until such time as the transactions
contemplated by this Agreement are publicly disclosed by the Company as
described in Section 4.4, such Purchaser will maintain the confidentiality of
all disclosures made to it in connection with this transaction (including the
existence and terms of

 26
 

 

this transaction). 
Each Purchaser understands and acknowledges, severally and not jointly
with any other Purchaser, that the Commission currently takes the position that
coverage of short sales of shares of Common Stock “against the box” prior to
the Effective Date of the Registration Statement covering the Securities is a
violation of Section 5 of the Securities Act, as set forth in Item 65, Section
A, of the Manual of Publicly Available Telephone Interpretations, dated July
1997, compiled by the Office of Chief Counsel, Division of Corporation
Finance.  Except in compliance with the
Securities Act and the rules and regulations promulgated thereunder and
applicable state securities laws, the Purchaser will not engage in any Short
Sales that result in the disposition of the Securities (including the Warrant
Shares) acquired hereunder by the Purchaser. 
Notwithstanding the foregoing, in the case of a Purchaser that is a
multi-managed investment vehicle whereby separate portfolio managers manage
separate portions of such Purchaser’s assets and the portfolio managers have no
direct knowledge of the investment decisions made by the portfolio managers
managing other portions of such Purchaser’s assets, the covenant set forth
above shall only apply with respect to the portion of assets managed by the
portfolio manager that made the investment decision to purchase the Securities
covered by this Agreement.

4.15         Delivery of Securities After Closing.  The Company shall deliver, or cause to be
delivered, the respective Securities purchased by each Purchaser to such
Purchaser within 3 Trading Days of the Closing Date.

4.16         Form D; Blue Sky Filings.  The Company agrees to timely file a Form D
with respect to the Securities as required under Regulation D and to provide a
copy thereof, promptly upon request of any Purchaser.  The Company shall take such action as the
Company shall reasonably determine is necessary in order to obtain an exemption
for, or to qualify the Securities for, sale to the Purchasers at the Closing
under applicable securities or “Blue Sky” laws of the states of the United
States, and shall provide evidence of such actions promptly upon request of any
Purchaser.

ARTICLE V.

MISCELLANEOUS

5.1           Termination.  This Agreement may be terminated by any
Purchaser, as to such Purchaser’s obligations hereunder only and without any
effect whatsoever on the obligations between the Company and the other
Purchasers, by written notice to the other parties, if the Closing has not been
consummated on or before October 20, 2006.

5.2           Fees and Expenses.  The Company shall reimburse C.E. Unterberg,
Towbin, LLC in an amount not to exceed $50,000, for its fees and expenses
incurred in connection with the transactions, contemplated in the Transaction
Documents.  The Company shall deliver,
prior to the Closing, a completed and executed copy of the Closing Statement,
attached hereto as Annex A. 
Except as expressly set forth in the Transaction Documents to the
contrary, each party shall pay the fees and expenses of its advisers, counsel,
accountants and other experts, if any, and all other expenses incurred by such
party incident to the negotiation, preparation, execution, delivery and
performance of this Agreement.  The
Company shall pay all transfer agent fees and stamp taxes levied in connection
with the initial delivery of the Securities to the Purchasers.

 27
 

 

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

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

5.5           Amendments; Waivers.  No provision of this Agreement may be waived
or amended except in a written instrument signed, in the case of an amendment,
by the Company and the Purchasers of at least a majority in interest of the
Shares or, in the case of a waiver, by the party against whom enforcement of
any such waived provision is sought.  No
waiver of any default with respect to any provision, condition or requirement
of this Agreement shall be deemed to be a continuing waiver in the future or a
waiver of any subsequent default or a waiver of any other provision, condition
or requirement hereof, nor shall any delay or omission of any party to exercise
any right hereunder in any manner impair the exercise of any such right.

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

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

5.8           No Third-Party Beneficiaries.  This Agreement is intended for the benefit of
the parties hereto and their respective successors and permitted assigns and is
not for the benefit of, nor may any provision hereof be enforced by, any other
Person, except as otherwise set forth in Section 4.8.

5.9           Governing Law.  All questions concerning the construction,
validity, enforcement and interpretation of the Transaction Documents shall be
governed by and construed and

 28
 

 

enforced in accordance with the internal laws of the
State of New York, without regard to the principles of conflicts of law
thereof.  Each party agrees that all
legal proceedings concerning the interpretations, enforcement and defense of
the transactions contemplated by this Agreement and any other Transaction
Documents (whether brought against a party hereto or its respective affiliates,
directors, officers, shareholders, employees or agents) shall be commenced
exclusively in the state and federal courts sitting in the City of New
York.  Each party hereby irrevocably
submits to the exclusive jurisdiction of the state and federal courts sitting
in the City of New York, borough of Manhattan for the adjudication of any
dispute hereunder or in connection herewith or with any transaction
contemplated hereby or discussed herein (including with respect to the
enforcement of any of the Transaction Documents), and hereby irrevocably waives,
and agrees not to assert in any suit, action or proceeding, any claim that it
is not personally subject to the jurisdiction of any such court, that such
suit, action or proceeding is improper or is an inconvenient venue for such
proceeding.  Each party hereby
irrevocably waives personal service of process and consents to process being
served in any such suit, action or proceeding by mailing a copy thereof via
registered or certified mail or overnight delivery (with evidence of delivery)
to such party at the address in effect for notices to it under this Agreement
and agrees that such service shall constitute good and sufficient service of
process and notice thereof.  Nothing
contained herein shall be deemed to limit in any way any right to serve process
in any other manner permitted by law. 
The parties hereby waive all rights to a trial by jury.  If either party shall commence an action or
proceeding to enforce any provisions of the Transaction Documents, then the
prevailing party in such action or proceeding shall be reimbursed by the other
party for its reasonable attorneys’ fees and other costs and expenses incurred
with the investigation, preparation and prosecution of such action or
proceeding.

5.10         Survival.  The representations and warranties contained
herein shall survive the Closing and the delivery of the Shares and Warrant
Shares.

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

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

 29
 

 

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

5.14         Replacement of Securities.  If any certificate or instrument evidencing
any Securities is mutilated, lost, stolen or destroyed, the Company shall issue
or cause to be issued in exchange and substitution for and upon cancellation
thereof (in the case of mutilation), or in lieu of and substitution therefor, a
new certificate or instrument, but only upon receipt of evidence reasonably
satisfactory to the Company of such loss, theft or destruction.  The applicant for a new certificate or
instrument under such circumstances shall also pay any reasonable third-party
costs (including customary indemnity) associated with the issuance of such
replacement Securities.

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

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

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

 30
 

 

other Purchaser to be joined as an additional party in
any proceeding for such purpose.  Each
Purchaser has been represented by its own separate legal counsel in their
review and negotiation of the Transaction Documents.  For reasons of administrative convenience
only, Purchasers and their respective counsel have chosen to communicate with
the Company through Goodwin Procter LLP. 
Goodwin Procter LLP does not represent the Purchasers but only C.E.
Unterberg, Towbin, who has acted as placement agent to the transaction.  The Company has elected to provide all
Purchasers with the same terms and Transaction Documents for the convenience of
the Company and not because it was required or requested to do so by the
Purchasers.

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

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

(Signature
Pages Follow)

 31
 

 

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

 

	
  MEDICALCV, INC.

  	
   

  	
  Address for Notice:

   

  MedicalCV, Inc.

  9725 South Robert Trail

  Inver Grove Heights, MN 55077

  Attn: Eapen Chacko

  

 

	
  By:

  	
  /s/ Eapen Chacko

  	
   

  
	
   

  	
  Name:

  	
  Eapen Chacko

  
	
   

  	
  Title:

  	
  Vice President,
  Finance and

  Chief Financial Officer

  
				

 

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

 

Avron L. Gordon, Esq.

Briggs and Morgan, P.A.

2200 IDS Center

80 South Eighth Street

Minneapolis, MN 55402

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK

SIGNATURE PAGE FOR PURCHASER(S) FOLLOW]

 32

[PURCHASER SIGNATURE
PAGES TO MEDICALCV, INC. SECURITIES PURCHASE AGREEMENT]

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

	
  Name of Purchaser:

  	
  Potomac Capital Partners LP

  
	
   

  
	
  Signature of Authorized Signatory of Purchaser:

  	
   

  	
  /s/ Kenneth Berkow

  
	
   

  	
   

  
	
  Name of Authorized Signatory:

  	
  Kenneth Berkow

  
	
   

  	
   

  
	
  Title of Authorized Signatory:

  	
  CFO

  
	
   

  	
   

  
	
  Email Address of Purchaser:

  	
  kberkow@potomaccap.com

  
	
   

  	
   

  
	
  Fax Number of Purchaser:

  	
  212-521-5116

  
	
   

  	
   

  
	
  Address for Notice of Purchaser:

  
								

c/o Potomac Capital Management

825 Third Avenue, 33rd Floor

New York, NY 10022

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

 

 

 

Subscription
Amount:  $1,050,000

Shares: 300,000

Warrant Shares:
75,000

Taxpayer Identification Number:
13-3984299

 

 

[SIGNATURE PAGES CONTINUE]

 

 33

[PURCHASER SIGNATURE
PAGES TO MEDICALCV, INC. SECURITIES PURCHASE AGREEMENT]

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

	
  Name of Purchaser:

  	
  Potomac Capital International Ltd

  
	
   

  
	
  Signature of Authorized Signatory of Purchaser:

  	
   

  	
  /s/ Kenneth Berkow

  
	
   

  	
   

  
	
  Name of Authorized Signatory:

  	
  Kenneth Berkow

  
	
   

  	
   

  
	
  Title of Authorized Signatory:

  	
  CFO

  
	
   

  	
   

  
	
  Email Address of Purchaser:

  	
  kberkow@potomaccap.com

  
	
   

  	
   

  
	
  Fax Number of Purchaser:

  	
  212-521-5110

  
	
   

  	
   

  
	
  Address for Notice of Purchaser:

  
								

c/o Potomac Capital Management

825 Third Avenue, 33rd Floor

New York, NY 10022

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

 

 

 

Subscription
Amount: $700,000

Shares: 200,000

Warrant Shares:
50,000

Taxpayer Identification Number:
No Tax ID, a British Virgin Island Corp.

 

 

[SIGNATURE PAGES CONTINUE]

 34
 

[PURCHASER SIGNATURE PAGES TO MEDICALCV, INC. SECURITIES PURCHASE
AGREEMENT]

 

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

	
  Name of Purchaser:

  	
  Pleiades Investment Partners - R LP

  
	
   

  
	
  Signature of Authorized Signatory of Purchaser:

  	
   

  	
  /s/ Kenneth Berkow

  
	
   

  	
   

  
	
  Name of Authorized Signatory:

  	
  Kenneth Berkow

  
	
   

  	
   

  
	
  Title of Authorized Signatory:

  	
  CFO

  
	
   

  	
   

  
	
  Email Address of Purchaser:

  	
  kberkow@potomaccap.com

  
	
   

  	
   

  
	
  Fax Number of Purchaser:

  	
  212-521-5116

  
	
   

  	
   

  
	
  Address for Notice of Purchaser:

  
								

c/o Potomac Capital Management

825 Third Avenue, 33rd Floor

New York, NY 10022

 

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

 

 

 

Subscription
Amount: $750,000

Shares: 214,286

Warrant Shares:
53,571

Taxpayer Identification Number:
26-0041618

 

 

[SIGNATURE PAGES CONTINUE]

 35

SCHEDULE I

 

	
  Purchaser

  	
   

  	
   

  	
   

  	
  Shares

  	
   

  	
  Warrants

  	
   

  
	
  Potomac Captial Partners LP

  	
   

  	
  300,000

  	
   

  	
  75,000

  	
   

  
	
  Potomac Capital International Ltd

  	
   

  	
  200,000

  	
   

  	
  50,000

  	
   

  
	
  Pleiades
  Investment Partners-R LP

  	
   

  	
  214,286

  	
   

  	
  53,571

  	
   

  

 34

Annex A

 

CLOSING STATEMENT

Pursuant to the attached Securities Purchase
Agreement, dated as of the date hereto, the purchasers shall purchase up to $                 
of Common Stock and Warrants from MedicalCV, Inc. (the “Company”).  All funds will be wired into an escrow
account maintained by C.E. Unterberg, Towbin, LLC as follows:

Chase Manhattan Bank

ABA # 021 000 021

1 Chase Manhattan Plaza

NY NY 10005

 

FAO NFS (National Financial Services)

AC# 066-196-221

 

FC: C.E.U.T Private Banking Escrow Account #2

Acct# KRT-980110

  All funds will
be disbursed in accordance with this Closing Statement.  

Disbursement Date:            October 13, 2006

 

I.              PURCHASE
PRICE

	
  Gross Proceeds

  	
   

  	
  $

  	
  2,500,000

  

 

II.            DISBURSEMENTS

 

	
  MedicalCV, Inc.

  	
   

  	
  $

  	
  2,300,001.00

  
	
  C.E. Unterberg,
  Towbin, LLC

  	
   

  	
  $

  	
  199,999.00

  

 

	
  Total Amount Disbursed:

  	
   

  	
  $

  	
  2,500,000.00

  

 

 

Acknowledged:

MEDICALCV, INC.

 

	
  By

  	
  /s/ Eapen Chacko

  	
   

  
	
   

  	
   

  	
  Eapen Chacko

  
	
   

  	
   

  	
  Vice President, Finance and Chief Financial Officer

  
				

 

 A-1

 

SCHEDULE
3.1(g)

Capitalization

 

As of October 9, 2006

 

	
   

  	
   

  	
  Authorized

  	
   

  	
  Outstanding

  	
   

  
	
  5% Series A
  Redeemable Convertible Preferred Stock

  	
   

  	
  1,900

  	
   

  	
  0

  	
   

  
	
  Preferred Stock

  	
   

  	
  998,100

  	
   

  	
  0

  	
   

  
	
  Common Stock

  	
   

  	
  24,000,000

  	
   

  	
  9,122,938

  	
   

  
	
  Option / Equity
  Incentive Plans

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  1992

  	
   

  	
  1,175

  	
   

  	
  1,175

  	
   

  
	
  1993

  	
   

  	
  4,200

  	
   

  	
  4,200

  	
   

  
	
  1997

  	
   

  	
  50,000

  	
   

  	
  37,535

  	
   

  
	
  2001

  	
   

  	
  599,000

  	
   

  	
  317,215

  	
   

  
	
  2005

  	
   

  	
  100,000

  	
   

  	
  31,346

  	
   

  
	
  Options Outside
  Plans

  	
   

  	
   

  	
   

  	
  557,364

  	
   

  
	
  Warrants

  	
   

  	
   

  	
   

  	
  1,118,498

  	
   

  
	
  Anti-Dilution
  Adjustment of Existing Warrants

  	
   

  	
   

  	
   

  	
  TBD

  	
   

  
	
  Total Shares, Options and
  Warrants

  	
   

  	
   

  	
   

  	
  11,190,271

  	
   

  

 

Outstanding Warrants Subject to Anti-dilution
Adjustments as a result of the transaction contemplated by the Transaction
Documents:

	
  Holder

  	
   

  	
  Date Issued

  	
   

  	
  Number of Shares

  	
   

  
	
  PKM Properties,
  LLC

  	
   

  	
  1/17/03

  	
   

  	
  59,600

  	
   

  
	
  PKM Properties,
  LLC

  	
   

  	
  4/4/03

  	
   

  	
  60,763

  	
   

  
	
  PKM Properties,
  LLC

  	
   

  	
  7/1/03

  	
   

  	
  62,256

  	
   

  
	
  PKM Properties,
  LLC

  	
   

  	
  8/20/03

  	
   

  	
  11,701

  	
   

  
	
  PKM Properties,
  LLC

  	
   

  	
  11/13/03

  	
   

  	
  28,888

  	
   

  
	
  PKM Properties,
  LLC

  	
   

  	
  2/3/04

  	
   

  	
  140,822

  	
   

  
	
  PKM Properties,
  LLC

  	
   

  	
  11/17/04

  	
   

  	
  11,363

  	
   

  
	
  PKM Properties,
  LLC

  	
   

  	
  3/3/05

  	
   

  	
  75,000

  	
   

  
	
  Peter Hauser

  	
   

  	
  7/1/03

  	
   

  	
  73,958

  	
   

  
	
  Peter Hauser

  	
   

  	
  2/3/04

  	
   

  	
  57,872

  	
   

  
	
  Draftco

  	
   

  	
  11/24/03

  	
   

  	
  9,069

  	
   

  
	
  Feltl (unit warrants)

  	
   

  	
  5/21/04

  	
   

  	
  96,374

  	
   

  

 

 

 A-2

EXHIBIT A

REGISTRATION
RIGHTS AGREEMENT

This Registration Rights Agreement (this “Agreement”)
is made and entered into as of October      , 2006, by
and among MedicalCV, Inc., a Minnesota corporation (the “Company”), and
the purchasers signatory hereto (each a “Purchaser” and collectively,
the “Purchasers”).

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

The Company and the Purchasers hereby agree as
follows:

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

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

“Common Stock” means the common stock of the
Company, par value $0.01 per share.

“Commission” means the Securities and Exchange
Commission.

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

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

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

“Exchange Act” means the Securities Exchange
Act of 1934, as amended, or any successor statute, and the rules and
regulations of the Commission thereunder.

“Filing Date” means, with respect to the
Registration Statement required hereunder, the 45th calendar day following the Closing Date.

“Free Writing Prospectus” means a free writing
prospectus as defined in Rule 405 under the Securities Act.

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

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

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

“Issuer Free Writing Prospectus” means an
issuer free writing prospectus as defined in Rule 433 under the Securities Act.

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

 

“Permitted Free Writing Prospectus” shall have
the meaning set forth in Section 6(d).

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

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

“Prospectus” means the prospectus included in a
Registration Statement as supplemented by any and all prospectus supplements,
and including all material incorporated by reference or deemed to be
incorporated by reference in such Prospectus.

“Registrable Securities” means all of (i) the
Shares, (ii) the Warrant Shares, and (iii) any shares of Common Stock issued or
issuable upon any stock split, dividend or other distribution, recapitalization
or similar event with respect to the foregoing; provided, however, that a
security shall cease to be a Registrable Security when it is sold pursuant to a
Registration Statement, when it is sold pursuant to Rule 144, or when it becomes
eligible for sale under Rule 144(k).

“Registration Statement” means any registration
statement of the Company under the Securities Act that covers any of the
Registrable Securities pursuant to the provisions of this Agreement, including
all amendments to such registration statement, including post-effective
amendments, and all exhibits thereto.

“Required Effective Date” shall have the
meaning set forth in Section 2(a).

“Rule 415” means Rule 415 promulgated by the
Commission pursuant to the Securities Act, as such Rule may be amended from
time to time, or any similar rule or regulation hereafter adopted by the
Commission having substantially the same purpose and effect as such Rule.

“Rule 424” means Rule 424 promulgated by the
Commission pursuant to the Securities Act, as such Rule may be amended from
time to time, or any similar rule or regulation hereafter adopted by the
Commission having substantially the same purpose and effect as such Rule.

“Securities Act” means the Securities Act of
1933, as amended, or any successor statute, and the rules and regulations of
the Commission thereunder.

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

“Trading Market” means whichever of the New
York Stock Exchange, the American Stock Exchange, the NASDAQ National Market,
the NASDAQ Capital Market or the OTC Bulletin Board on which the Common Stock
is listed or quoted for trading on the date in question.

 2
 

 

2.             Registration.

(a)           On or prior to the Filing Date, the
Company shall prepare and file with the Commission a Registration Statement
covering the resale of all of the Registrable Securities for an offering to be
made on a continuous basis pursuant to Rule 415, or if Rule 415 is not
available for offers and sales of the Registrable Securities by such other
means of distribution of Registrable Securities as the Holders may
specify.  The Registration Statement
shall be on Form S-3 (except if the Company is not then eligible to register
for resale the Registrable Securities on Form S-3, in which case the
Registration Statement shall be on another appropriate form in accordance
herewith) and shall contain (unless otherwise directed by the Holders) the “Plan
of Distribution” attached hereto as Annex A.  Subject to the terms of this Agreement, the
Company shall use its commercially reasonable efforts to cause the Registration
Statement to be declared effective under the Securities Act on or prior to the
earlier of (i) the 90th calendar day following the Filing Date (the
120th calendar day in the event of a review by the
Commission) and (ii) the fifth business day after the Commission advises the
Company that the Registration Statement will not be reviewed or the Commission
has no further comments on the Registration Statement (the “Required Effective
Date”).  The Company shall use its
commercially reasonable efforts to keep the Registration Statement continuously
effective under the Securities Act until all Registrable Securities covered by
such Registration Statement have been sold or may be sold without volume
restrictions pursuant to Rule 144(k) as determined by the counsel to the
Company pursuant to a written opinion letter to such effect, addressed and
acceptable to the Company’s transfer agent (the “Effectiveness Period”).  The Company shall telephonically request
effectiveness of a Registration Statement as of 5:00 pm Eastern Time on a
Trading Day.  The Company shall
immediately notify the Holders via facsimile or by e-mail of the effectiveness
of a Registration Statement on the same Trading Day that the Company
telephonically confirms effectiveness with the Commission.  The Company shall, on the Trading Day after
the Effective Date (as defined in the Purchase Agreement), file a 424(b)
prospectus with the Commission.

(b)           If: (i) a Registration Statement is
not filed on or prior to its Filing Date; or (ii) a Registration Statement
filed or required to be filed hereunder is not declared effective by the
Commission by its Required Effective Date or (iii) after the Required Effective
Date, a Registration Statement ceases for any reason to remain continuously
effective as to all Registrable Securities for which it is required to be
effective, or the Holders are not permitted to utilize the Prospectus therein
to resell such Registrable Securities for more than an aggregate of 75 calendar
days during any 12-month period (which need not be consecutive calendar days)
(any such failure or breach being referred to as an “Event”, and for
purposes of clause (i) or (ii) the date on which such Event occurs or for
purposes of clause (iii) the date on which such 75 calendar day period is
exceeded being referred to as “Event Date”), then in addition to any
other rights the Holders may have hereunder or under applicable law, on each
such Event Date and on each monthly anniversary of each such Event Date until
the applicable Event is cured, the Company shall pay to each Holder an amount
in cash as partial liquidated damages and not as a penalty, equal to 1.5% of
the aggregate purchase price paid by such Holder pursuant to the Purchase
Agreement for any Registrable Securities then held by such 

 3
 

 

Holder; provided,
that such liquidated damages shall not exceed 10% of the aggregate purchase
price paid by all Holders pursuant to the Purchase Agreement.  The partial liquidated damages pursuant to
the terms hereof shall apply on a daily pro-rata basis for any portion of a
month prior to the cure of an Event.

3.             Registration Procedures

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

(a)           Not less than three (3) Trading Days
prior to the filing of a Registration Statement, furnish to each Holder copies
of all such documents proposed to be filed, which documents will be subject to
the review of such Holders.  The Company
shall not file a Registration Statement to which the Holders of a majority of
the Registrable Securities shall reasonably object in good faith, provided
that, the Company is notified of such objection in writing no later than two
(2) Trading Days after the Holders have been so furnished copies of such
documents.  Each Holder agrees to furnish
to the Company a completed Questionnaire in the form attached to this Agreement
as Annex B (a “Selling Shareholder Questionnaire”) not less than
five (5) Trading Days prior to the Filing Date.

(b)           (i) Prepare and file with the
Commission such amendments, including post-effective amendments, to a
Registration Statement and the Prospectus used in connection therewith as may
be necessary to keep a Registration Statement continuously effective as to the
applicable Registrable Securities for the Effectiveness Period; (ii) cause the
related Prospectus to be amended or supplemented by any required Prospectus
supplement, and as so supplemented or amended to be filed pursuant to Rule 424;
(iii) respond as promptly as reasonably possible to any comments received from
the Commission with respect to a Registration Statement or any amendment
thereto; and (iv) comply in all material respects with the provisions of the
Securities Act and the Exchange Act with respect to the disposition of all
Registrable Securities covered by a Registration Statement during the
applicable period in accordance (subject to the terms of this Agreement) with
the intended methods of disposition by the Holders thereof set forth in such
Registration Statement as so amended or in such Prospectus as so supplemented.

(c)           Notify the Holders of Registrable
Securities to be sold as promptly as reasonably possible (and, in the case of
(i)(A) below, not less than two (2) Trading Days prior to such filing): (i)(A)
when a post-effective amendment to a Registration Statement is proposed to be
filed; (B) when the Commission notifies the Company whether there will be a “review”
of such Registration Statement and whenever the Commission comments in writing
on such Registration Statement (the Company shall provide true and complete
copies thereof and all written responses thereto to each of the Holders who so
requests provided such requesting Holders agree to keep such information
confidential until it is publicly disclosed and to waive Section 4.6 of the
Purchase Agreement with respect thereto); and (C) with respect to a
Registration Statement or any post-effective amendment, when the same has
become effective; (ii) of any request by the Commission or any other Federal or
state governmental authority for amendments or supplements to a Registration
Statement or Prospectus; (iii) of the issuance by the Commission or any other
federal or state governmental authority of any stop order suspending the 

 4
 

 

effectiveness of a
Registration Statement covering any or all of the Registrable Securities or the
initiation of any Proceedings for that purpose; (iv) of the receipt by the
Company of any notification with respect to the suspension of the qualification
or exemption from qualification of any of the Registrable Securities for sale
in any jurisdiction, or the initiation or threatening of any Proceeding for
such purpose; and (v) of the occurrence of any event or passage of time that
makes the financial statements included in a Registration Statement ineligible
for inclusion therein or any statement made in a Registration Statement or
Prospectus or any document incorporated or deemed to be incorporated therein by
reference untrue in any material respect or that requires any revisions to a
Registration Statement, Prospectus or other documents so that, in the case of a
Registration Statement or the Prospectus, as the case may be, it will not
contain any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading (provided
that such Holder of Registrable Securities agrees to keep such information
confidential until it is publicly disclosed and to waive Section 4.6 of the
Purchase Agreement with respect thereto).

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

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

(f)            Promptly deliver to each Holder,
without charge, as many copies of the Prospectus or Prospectuses (including
each form of prospectus) and each amendment or supplement thereto as such
Persons may reasonably request in connection with resales by the Holder of
Registrable Securities; provided, however, that the Company shall have no such
obligation to furnish copies of a final prospectus if the conditions of Rule
172(c) under the Securities Act are satisfied by the Company.  Subject to the terms of this Agreement, the
Company hereby consents to the use of such Prospectus and each amendment or
supplement thereto by each of the selling Holders in connection with the
offering and sale of the Registrable Securities covered by such Prospectus and
any amendment or supplement thereto, except after the giving of any notice
pursuant to Section 3(c).

(g)           Prior to any resale of Registrable
Securities by a Holder, use its commercially reasonable efforts to register or
qualify or cooperate with the selling Holders in connection with the
registration or qualification (or exemption from the registration or
qualification) of such Registrable Securities for the resale by the Holder
under the securities or Blue Sky laws of such jurisdictions within the United
States as any 

 5
 

 

Holder reasonably
requests in writing, to keep each registration or qualification (or exemption
therefrom) effective during the Effectiveness Period and to do any and all
other acts or things reasonably necessary to enable the disposition in such
jurisdictions of the Registrable Securities covered by each Registration
Statement; provided, that the Company shall not be required to qualify
generally to do business in any jurisdiction where it is not then so qualified,
subject the Company to any material tax in any such jurisdiction where it is
not then so subject or file a general consent to service of process in any such
jurisdiction.

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

(i)            Upon the occurrence of any event
contemplated by Section 3(c)(ii)-(v), as promptly as reasonably possible,
prepare a supplement or amendment, including a post-effective amendment, to the
Registration Statement or a supplement to the related Prospectus or any
document incorporated or deemed to be incorporated therein by reference, and
file any other required document so that, as thereafter delivered, neither the
Registration Statement nor such Prospectus will contain an untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading.

(j)            If requested by Holders, in the
event of an underwritten offering of the Registrable Securities by the Holders,
the Company shall furnish to the Holders (i) on the date of the effectiveness
of the Registration Statement, a letter, dated such date, from the Company’s
independent certified public accountants in form and substance as is customarily
given by independent certified public accountants to underwriters in an
underwritten public offering, addressed to the Holders, and (ii) on the date
that Registrable Securities are delivered to the underwriters for sale in any
such registration, an opinion, dated as of such date, of counsel representing
the Company for purposes of such Registration Statement, in form, scope and
substance as is customarily given in an underwritten public offering, addressed
to the Holders.  The Company may require
each selling Holder to furnish to the Company a certified statement as to the
number of shares of Common Stock beneficially owned by such Holder and, if
required by the Commission, the person thereof that has voting and disposition
control over the Shares.

(k)           The Company shall not permit any
officer, director, underwriter, broker or any other person acting on behalf of
the Company to use any Free Writing Prospectus in connection with the
Registration Statement covering Registrable Securities, without the prior
written consent of the Holders which consent shall not be unreasonably withheld
or delayed.  Any consent to the use of a
Free Writing Prospectus included in an underwriting agreement to which the
Holders are parties shall be deemed to satisfy the requirement for such
consent.

 6
 

 

4.             Registration Expenses.  All fees and expenses incident to the
performance of or compliance with this Agreement by the Company shall be borne
by the Company whether or not any Registrable Securities are sold pursuant to a
Registration Statement.  The fees and
expenses referred to in the foregoing sentence shall include, without
limitation, (i) all registration and filing fees (including, without
limitation, fees and expenses (A) with respect to filings required to be made
with the Trading Market on which the Common Stock is then listed for trading
and (B) in compliance with applicable state securities or Blue Sky laws
reasonably agreed to by the Company (including, without limitation, fees and
disbursements of counsel for the Company in connection with Blue Sky
qualifications or exemptions of the Registrable Securities and determination of
the eligibility of the Registrable Securities for investment under the laws of
such jurisdictions as requested by the Holders), (ii) printing expenses
(including, without limitation, expenses of printing certificates for
Registrable Securities and of printing prospectuses if the printing of
prospectuses is reasonably requested by the holders of a majority of the
Registrable Securities included in a Registration Statement), (iii) messenger,
telephone and delivery expenses of the Company, (iv) fees and disbursements of
counsel for the Company, (v) Securities Act liability insurance, if the Company
so desires such insurance, and (vi) fees and expenses of all other Persons
retained by the Company in connection with the consummation of the transactions
contemplated by this Agreement.  In
addition, the Company shall be responsible for all of its internal expenses
incurred in connection with the consummation of the transactions contemplated
by this Agreement (including, without limitation, all salaries and expenses of
its officers and employees performing legal or accounting duties). In no event
shall the Company be responsible for any broker or similar commissions or,
except to the extent provided for in the Transaction Documents, any legal fees
or other costs of the Holders.

5.             Indemnification

(a)           Indemnification by the Company.  The Company shall, and hereby does
notwithstanding any termination of this Agreement, indemnify, defend and hold
harmless each Holder, the officers, directors, agents, members, partners, and
employees of each of them, each Person who controls any such Holder (within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act)
and the officers, directors, agents, members, partners, and employees of each
such controlling Person, to the fullest extent permitted by applicable law,
from and against any and all losses, claims, damages, liabilities, costs
(including, without limitation, reasonable attorneys’ fees) and expenses,
(collectively, “Losses”),
as incurred, to the extent arising out of or relating to, any untrue or alleged
untrue statement of a material fact contained or incorporated by reference in a
Registration Statement, any Prospectus or any form of prospectus or in any
amendment or supplement thereto or in any preliminary prospectus, or Issuer
Free Writing Prospectus or arising out of or relating to any omission or
alleged omission of a material fact required to be stated therein or necessary
to make the statements therein (in the case of any Prospectus or form of
prospectus or supplement thereto, in light of the circumstances under which
they were made) not misleading, or any violation or alleged violation by
the Company of the Securities Act, the Exchange Act, any other law, including,
without limitation, any state securities law, or any rule or regulation
thereunder relating to the offer or sale of the Registrable Securities pursuant
to a Registration Statement, but only to the extent, that (i) such untrue
statements or omissions were not based upon information regarding such Holder
furnished in writing to the Company by such Holder 

 7
 

 

or (ii) in the case of an
occurrence of an event of the type specified in Section 3(c)(ii)-(v), the use
by such Holder of an outdated or defective Prospectus or Issuer Free Writing
Prospectus where the Company has failed to notify such Holder in writing that
the Prospectus or Issuer Free Writing Prospectus is outdated or defective.  The Company shall notify the Holders promptly
of the institution, threat or assertion of any Proceeding arising from or in
connection with the transactions contemplated by this Agreement of which the
Company is aware.

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

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

 8
 

 

An Indemnified Party shall have the right to employ
separate counsel in any such Proceeding and to participate in the defense
thereof, but the fees and expenses of such counsel shall be at the expense of
such Indemnified Party or Parties unless: 
(1) the Indemnifying Party has agreed in writing to pay such fees and
expenses; (2) the Indemnifying Party shall have failed promptly to assume the
defense of such Proceeding and to employ counsel reasonably satisfactory to
such Indemnified Party in any such Proceeding; or (3) the named parties to any
such Proceeding (including any impleaded parties) include both such Indemnified
Party and the Indemnifying Party, and such Indemnified Party shall reasonably
believe that a material conflict of interest is likely to exist if the same
counsel were to represent such Indemnified Party and the Indemnifying Party (in
which case, if such Indemnified Party notifies the Indemnifying Party in
writing that it elects to employ separate counsel at the expense of the
Indemnifying Party, the Indemnifying Party shall not have the right to assume
the defense thereof and the reasonable fees and expenses of one separate
counsel shall be at the expense of the Indemnifying Party).  The Indemnifying Party shall not be liable
for any settlement of any such Proceeding effected without its written consent,
which consent shall not be unreasonably withheld, delayed or conditioned.  No Indemnifying Party shall, without the
prior written consent of the Indemnified Party, effect any settlement of any
pending Proceeding in respect of which any Indemnified Party is a party, unless
such settlement includes an unconditional release of such Indemnified Party
from all liability on claims that are the subject matter of such
Proceeding.  The failure to deliver
written notice to the Indemnifying Party within a reasonable time of the
commencement of any such action shall not relieve such Indemnifying Party of
any liability to the Indemnified Party under this Section 5, except to the
extent that the Indemnifying Party is prejudiced in its ability to defend such
action.

Subject to the terms of this Agreement, all reasonable
fees and expenses of the Indemnified Party (including reasonable fees and
expenses to the extent incurred in connection with investigating or preparing
to defend such Proceeding in a manner not inconsistent with this Section) shall
be paid promptly to the Indemnified Party, as incurred, but no later than ten (10)
Trading Days of written notice thereof to the Indemnifying Party.

The indemnity agreements contained herein shall be in
addition to  (i) any cause of action or
similar right of the Indemnified Party or Indemnified Person against the
indemnifying party or others, and (ii) any liabilities to which the
Indemnifying Party may be subject pursuant to law.

(d)           Contribution.  If the indemnification under Section 5(a) or
5(b) is unavailable to an Indemnified Party, then each Indemnifying Party, in
lieu of indemnifying such Indemnified Party, shall contribute to the amount
paid or payable by such Indemnified Party as a result of such Losses, in such
proportion as is appropriate to reflect the relative fault of the Indemnifying
Party and Indemnified Party in connection with the actions, statements or
omissions that resulted in such Losses as well as any other relevant equitable
considerations. The relative fault of such Indemnifying Party and Indemnified
Party shall be determined by reference to, among other things, whether any
action in question, including any untrue or alleged untrue statement of a
material fact or 

 9
 

 

omission or alleged
omission of a material fact, has been taken or made by, or relates to
information supplied by, such Indemnifying Party or Indemnified Party, and the
parties’ relative intent, knowledge, access to information and opportunity to
correct or prevent such action, statement or omission.  The amount paid or payable by a party as a
result of any Losses shall be deemed to include, subject to the limitations set
forth in this Agreement, any reasonable attorneys’ or other reasonable fees or
expenses incurred by such party in connection with any Proceeding to the extent
such party would have been indemnified for such fees or expenses if the indemnification
provided for in this Section was available to such party in accordance with its
terms.

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

The indemnity and contribution agreements contained in
this Section are in addition to any liability that the Indemnifying Parties may
have to the Indemnified Parties. The parties to this Agreement hereby acknowledge that they are
sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions hereof including, without limitation, the
provisions of this Section 5, and are fully informed regarding said
provisions.  They further acknowledge
that the provisions of this Section 5 fairly allocate the risks in light
of the ability of the parties to investigate the Company and its business in
order to assure that adequate disclosure is made in the Registration Statement
as required by the Securities Act and the Exchange Act.  The parties are advised that federal or state
public policy as interpreted by the courts in certain jurisdictions may be
contrary to certain of the provisions of this Section 5, and the parties
hereto hereby expressly waive and relinquish any right or ability to assert
such public policy as a defense to a claim under this Section 5 and
further agree not to attempt to assert any such defense.

6.             Miscellaneous

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

 10
 

 

(b)           No Piggyback on Registrations.  Neither the Company nor any of its security
holders (other than the Holders in such capacity pursuant hereto) may include
securities of the Company in the Registration Statement other than the
Registrable Securities and the securities listed on Schedule 6(b) attached
hereto without the consent of the Holders of a majority in interest of the
Registrable Securities.  No Person has
any right to cause the Company to effect the registration under the Securities
Act of any securities of the Company prior to filing the Registration
Statement.  The Company shall not file
any other registration statements until the initial Registration Statement
required hereunder is declared effective by the Commission, provided that this
Section 6(b) shall not prohibit the Company from filing amendments to
registration statements already filed.

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

(d)           Free Writing Prospectuses.  Each Holder represents that it has not
prepared or had prepared on its behalf or used or referred to, and agrees that
it will not prepare or have prepared on its behalf or use or refer to, any Free
Writing Prospectus, and has not distributed and will not distribute any written
materials in connection with the offer or sale of Common Stock without the
prior written consent of the Company and, in connection with any underwritten
offering, the underwriters.  Any such
Free Writing Prospectus consented to by the Company and the underwriters, as
the case may be, is hereinafter referred to as a “Permitted Free Writing
Prospectus.”  The Company represents
and agrees that it has treated and will treat, as the case may be, each
Permitted Free Writing Prospectus as an Issuer Free Writing Prospectus,
including in respect of timely filing with the SEC, legending and record
keeping.

(e)           Suspension of Trading.  At any time after the Registrable Securities
are covered by an effective Registration Statement, the Company may deliver to
the Holders of such Registrable Securities a certificate (the “Suspension
Certificate”) approved by the Chief Executive Officer of the Company and signed
by an officer of the Company stating that the effectiveness of and sales of
Registrable Securities under the Registration Statement would:

(i)            materially interfere with any
transaction that would require the Company to prepare financial statements
under the Securities Act that the Company would otherwise not be required to
prepare in order to comply with its obligations under the Exchange Act, or

(ii)           require public disclosure of any
transaction of the type discussed in Section 6(e)(i) prior to the time such
disclosure might otherwise be required.

Beginning five (5) Business Days after the receipt of
a Suspension Certificate by Holders of Registrable Securities, the Company may,
in its discretion, require such Holders of Registrable Securities to refrain
from selling or otherwise transferring or disposing of any Registrable
Securities or other Company securities then held by such

 11

 

Holders for a specified period of time that is
customary under the circumstances (not to exceed 75 days during any 12-month
period.  The Company may impose stop
transfer instructions to enforce any required agreement of the Holders under
this Section 6(e).

(f)            Discontinued Disposition.  Each Holder agrees by its acquisition of such
Registrable Securities that, upon receipt of a notice from the Company of the
occurrence of any event of the kind described in Section 3(c)(ii)-(v), such
Holder will forthwith discontinue disposition of such Registrable Securities
under a Registration Statement until such Holder’s receipt of the copies of the
supplemented Prospectus and/or amended Registration Statement or until it is
advised in writing (the “Advice”) by the Company that the use of the
applicable Prospectus may be resumed, and, in either case, has received copies
of any additional or supplemental filings that are incorporated or deemed to be
incorporated by reference in such Prospectus or Registration Statement.  The Company will use its best efforts to
ensure that the use of the Prospectus may be resumed as promptly as it
practicable.  The Company agrees and
acknowledges that any periods during which the Holder is required to
discontinue the disposition of the Registrable Securities hereunder shall be
subject to the provisions of Section 2(b).

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

(h)           Amendments and Waivers. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, unless the same shall be in writing and signed by the Company
and the Holders of a majority in interest of the then outstanding Registrable
Securities.  Notwithstanding the
foregoing, a waiver or consent to depart from the provisions hereof with
respect to a matter that relates exclusively to the rights of Holders and that
does not directly or indirectly affect the rights of other Holders may be given
by Holders of all of the Registrable Securities to which such waiver or consent
relates; provided, however, that the provisions of this sentence
may not be amended, modified, or supplemented except in accordance with the
provisions of the immediately preceding sentence.

 12
 

 

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

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

(k)           No Inconsistent Agreements. Neither the Company nor any of
its subsidiaries has entered, as of the date hereof, nor shall the Company or
any of its subsidiaries, on or after the date of this Agreement, enter into any
agreement with respect to its securities, that would have the effect of
impairing the rights granted to the Holders in this Agreement or otherwise
conflicts with the provisions hereof.

(l)            Execution and Counterparts.  This Agreement may be executed in any number
of counterparts, each of which when so executed shall be deemed to be an
original and, all of which taken together shall constitute one and the same
Agreement.  In the event that any
signature is delivered by facsimile transmission or by e-mail delivery of a “.pdf”
format data file, such signature shall create a valid binding obligation of the
party executing (or on whose behalf such signature is executed) the same with
the same force and effect as if such facsimile or “.pdf” signature page were
the original thereof.

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

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

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

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

(q)           Independent Nature of Holders’
Obligations and Rights.  The
obligations of each Holder hereunder are several and not joint with the
obligations of any other 

 13
 

 

Holder hereunder, and no
Holder shall be responsible in any way for the performance of the obligations
of any other Holder hereunder.  Nothing
contained herein or in any other agreement or document delivered at any
closing, and no action taken by any Holder pursuant hereto or thereto, shall be
deemed to constitute the Holders as a partnership, an association, a joint
venture or any other kind of entity, or create a presumption that the Holders
are in any way acting in concert with respect to such obligations or the
transactions contemplated by this Agreement. 
Each Holder shall be entitled to protect and enforce its rights,
including without limitation the rights arising out of this Agreement, and it
shall not be necessary for any other Holder to be joined as an additional party
in any proceeding for such purpose.

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

 14
 

 

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

	
   

  	
  MEDICALCV, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Eapen Chacko

  
	
   

  	
   

  	
  Title:

  	
  Vice President,
  Finance and

  
	
   

  	
   

  	
   

  	
  Chief Financial
  Officer

  
	
   

  	
   

  	
   

  	
   

  
					

 

 

[SIGNATURE PAGE
OF HOLDERS FOLLOWS]

 15
 

 

[SIGNATURE PAGE
OF HOLDERS TO MEDICALCV, INC.

REGISTRATION RIGHTS AGREEMENT]

	
  Name of Holder:

  	
   

  	
   

  
	
   

  
	
  Signature
  of Authorized Signatory of Holder:

  	
   

  	
   

  
	
   

  
	
  Name of
  Authorized Signatory:

  	
   

  	
   

  
	
   

  
	
  Title of
  Authorized Signatory:

  	
   

  	
   

  
								

 

[SIGNATURE
PAGES CONTINUE]

 16

 

ANNEX A

Plan of Distribution

The selling shareholders, which as used herein
includes donees, pledgees, transferees or other successors-in-interest selling
shares of common stock or interests in shares of common stock received after
the date of this prospectus from a selling shareholder as a gift, pledge,
partnership distribution or other transfer, may, from time to time, sell,
transfer or otherwise dispose of any or all of their shares of common stock or
interests in shares of common stock on any stock exchange, market or trading facility
on which the shares are traded or in private transactions.  These dispositions may be at fixed prices, at
prevailing market prices at the time of sale, at prices related to the
prevailing market price, at varying prices determined at the time of sale, or
at negotiated prices.

The selling shareholders may use any one or more of
the following methods when disposing of shares or interests therein:

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

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

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

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

·    privately
negotiated transactions;

·    short
sales effected after the date the registration statement of which this
prospectus is a part is declared effective by the SEC;

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

·    broker-dealers
may agree with the selling shareholders to sell a specified number of such
shares at a stipulated price per share; and

·    a
combination of any such methods of sale.

The selling shareholders may, from time to time,
pledge or grant a security interest in some or all of the shares of common
stock owned by them and, if they default in the performance of their secured
obligations, the pledgees or secured parties may offer and sell the shares of
common stock, from time to time, under this prospectus, or under an amendment
or supplement to this prospectus under Rule 424(b)(3) or other applicable
provision of the Securities Act amending the list of selling shareholders to
include the pledgee, transferee or other successors in interest as selling
shareholders under this prospectus.  The
selling shareholders also may transfer the shares of common stock in other
circumstances, in which case the transferees, pledgees or other successors in
interest will be the selling beneficial owners for purposes of this prospectus.

 A-1
 

 

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

The aggregate proceeds to the selling shareholders
from the sale of the common stock offered by them will be the purchase price of
the common stock less discounts or commissions, if any.  Each of the selling shareholders reserves the
right to accept and, together with their agents from time to time, to reject,
in whole or in part, any proposed purchase of common stock to be made directly
or through agents.  We will not receive
any of the proceeds from this offering. Upon any exercise of any warrants by
payment of cash, however, we will receive the exercise price of the warrants.

The selling shareholders also may resell all or a
portion of the shares in open market transactions in reliance upon Rule 144
under the Securities Act, provided that they meet the criteria and conform to
the requirements of that rule.

The selling shareholders and any underwriters,
broker-dealers or agents that participate in the sale of the common stock or
interests therein may be “underwriters” within the meaning of Section 2(11) of
the Securities Act.  Any discounts,
commissions, concessions or profit they earn on any resale of the shares may be
underwriting discounts and commissions under the Securities Act.  Selling shareholders who are “underwriters”
within the meaning of Section 2(11) of the Securities Act will be subject to
the prospectus delivery requirements of the Securities Act.

To the extent required, the shares of our common stock
to be sold, the names of the selling shareholders, the respective purchase
prices and public offering prices, the names of any agents, dealer or
underwriter, any applicable commissions or discounts with respect to a
particular offer will be set forth in an accompanying prospectus supplement or,
if appropriate, a post-effective amendment to the registration statement that
includes this prospectus.

In order to comply with the securities laws of some
states, if applicable, the common stock may be sold in these jurisdictions only
through registered or licensed brokers or dealers.  In addition, in some states the common stock
may not be sold unless it has been registered or qualified for sale or an
exemption from registration or qualification requirements is available and is
complied with.

We have advised the selling shareholders that the
anti-manipulation rules of Regulation M under the Exchange Act may apply to
sales of shares in the market and to the activities of the selling shareholders
and their affiliates.  In addition, we
will make copies of this prospectus (as it may be supplemented or amended from
time to time) available to the selling shareholders for the 

 A-2
 

 

purpose of satisfying the
prospectus delivery requirements of the Securities Act.  The selling shareholders may indemnify any
broker-dealer that participates in transactions involving the sale of the
shares against certain liabilities, including liabilities arising under the
Securities Act.

We have agreed to indemnify the selling shareholders
against liabilities, including liabilities under the Securities Act and state
securities laws, relating to the registration of the shares offered by this
prospectus.

We have agreed with the selling shareholders to keep
the registration statement of which this prospectus constitutes a part
effective until the earlier of (1) such time as all of the shares covered by
this prospectus have been disposed of pursuant to and in accordance with the
registration statement or Rule 144 under the Securities Act, or (2) the date on
which the shares may be sold pursuant to Rule 144(k) of the Securities Act.

 A-3

 

ANNEX B

	
  

  	
   

  	
  Name of Selling
  Shareholder

  

 

MEDICALCV, INC.

QUESTIONNAIRE FOR SELLING SHAREHOLDERS

PLEASE RETURN BY:  October 20, 2006

This Questionnaire is being
furnished to all selling shareholders of MedicalCV, Inc., a Minnesota
corporation (the “Company”), and relates to certain information required
to be disclosed in the registration statement (the “Registration Statement”)
being prepared on behalf of you and the Company for filing with the United
States Securities and Exchange Commission (the “SEC”).

Selling shareholders of the Company
may be personally liable under the federal securities laws of the United States
if the Registration Statement contains any statement which is false or
misleading as to any material fact or omits to state any material fact
necessary in order to make the statements therein not false or misleading.

Your careful completion of this
Questionnaire will help ensure that the Registration Statement will be complete
and accurate.  Careful consideration of
the instructions and definitions contained in the endnotes to various items is
essential to an understanding of the questions.

PLEASE PROVIDE A RESPONSE TO EVERY
QUESTION, indicating “None”
or “Not Applicable” where appropriate. 
Please complete, sign, and fax one copy of this Questionnaire NO  LATER  THAN OCTOBER 20,
2006 to:

Melissa
S. Tveit

Briggs and Morgan, P.A.

2200 IDS Center

80 South Eighth Street

Minneapolis, MN 55402

(612) 977-8628 (phone)

(612) 977-8650 (fax)

mtveit@briggs.com (email)

 B-1
 

 

Unless stated otherwise, answers
should be given as of the date you complete this Questionnaire.  However, it is your responsibility to inform
us of any changes that may occur to your situation between the date you
complete the Questionnaire and the effective date of the Registration
Statement.  If there is any situation
about which you have any doubt, please give relevant facts so that the
information may be reviewed.

 B-2
 

 

QUESTIONNAIRE

STOCK OWNERSHIP

Item 1.  Beneficial Ownership.

a.  Deemed
Beneficial Ownership.  Please state
the amount of securities of the Company you own as of October 1, 2006,
assuming, if applicable, the conversion of your shares of Preferred Stock into,
and exercise of warrants for, shares of Common Stock.  (If none, please so state in each case.) 

	
  Amount
  Beneficially Owned(1)

  	
   

  	
  Number of Shares of Common Stock Owned

  (on an as-converted basis, as applicable)

  
	
   

  	
   

  	
   

  
	
  Total Shares:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Of such shares: 

  	
   

  	
   

  
	
  Shares as to which you have sole voting
  power:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Shares as to which you have shared voting
  power:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Shares as to which you have sole investment
  power:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Shares as to which you have shared investment
  power:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Please state the
  number of shares owned by family members, trusts and other organizations with
  which you have a relationship, and any other shares of which you may be
  deemed to be the “beneficial owner”(1)

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Total Shares:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Of such shares: 

  	
   

  	
   

  
	
  Shares as to which you have sole voting
  power:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Shares as to which you have shared voting
  power:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Shares as to which you have sole investment
  power:

  	
   

  	
   

  

 

 B-3
 

 

 

	
  Shares as to which you have shared investment
  power:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Shares which you
  will have a right to acquire before November 30, 2006, through the exercise
  of options, warrants or otherwise:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Shares of Common
  Stock you intend to offer for sale pursuant to the Registration Statement:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Shares of Common
  Stock that you will hold after the offering for sale of Common Stock that is
  the subject of the Registration Statement:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Do you have any
  present plans to exercise options or otherwise acquire, dispose of or
  transfer shares of Common Stock (on an as-converted basis) of the Company
  between the date you complete this Questionnaire and November 30, 2006?

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Answer:

  	
   

  	
   

  
	
   

  	
   

  	
   

  

 

If so, please describe.

 

 

b.             Pledged
Securities.  If any of such
securities have been pledged or otherwise deposited as collateral or are the
subject matter of any voting trust or other similar agreement or of any
contract providing for the sale or other disposition of such securities, please
give the details thereof.

Answer:

 

c.             Disclaimer
of Beneficial Ownership.  Do you wish
to disclaim beneficial ownership(1) of any of the shares reported in response
to Item 1(a)?

Answer:

 

 B-4

 

If the answer is “Yes”, please furnish the following
information with respect to the person or persons who should be shown as the
beneficial owner(s)1 of the shares in question.

	
  Name and Address of

  Actual Beneficial Owner

  	
   

  	
  Relationship of

  Such Person To You

  	
   

  	
  Number of Shares

  Beneficially Owned

  
	
    

  	
   

  	
   

  	
   

  	
   

  
	
    

  	
   

  	
   

  	
   

  	
   

  
	
    

  	
   

  	
   

  	
   

  	
   

  

 

Item 2.  Major Shareholders.  Please state below the names of persons or
groups known by you to own beneficially(1) more than 5% of the Company’s Common
Stock.

Answer:

 

Item 3.  Change of Control.  Do you know of any contractual arrangements,
including any pledge of securities of the Company, the operation of which may
at a subsequent date result in a change of control of the Company?

Answer:

 

Item 4.  Relationship with the Company.  Please state the nature of any position,
office or other material relationship you have, or have had within the past
three years, with the Company or its affiliates.

	
  

  	
   

  	
  Nature of

  
	
  Name

  	
   

  	
  Relationship

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  

 

Item 5.  Correct Name.  Please confirm that your name or your
organization’s name, as it appears on the signature page to this Questionnaire,
is exactly as it should appear in the “Principal and Selling Shareholder” section
of the Registration Statement:

o
Yes, this name is correct.

o
No, the correct name should be:                                                 

 B-5
 

 

SIGNATURE

If at any time any of the information set forth in my
responses to this Questionnaire has changed due to passage of time, or any
development occurs which requires a change in any of my answers, or has for any
other reason become incorrect, I agree immediately to furnish to the individual
to whom a copy of this Questionnaire is to be sent, as indicated and at the
address shown on the first page hereof, any necessary or appropriate correcting
information.  Otherwise, the Company is
to understand that the above information continues to be, to the best of my
knowledge, information and belief, complete and correct.

I understand that the information that I am furnishing
to you herein will be used by the Company in the preparation of its
Registration Statement and hereby consent to the inclusion of such information
in the Registration Statement.

	
   

  	
   

  	
  Name of Shareholder:

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Date:                            ,
  2006

  	
   

  	
  Signature:

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Print Name:

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Title (if applicable):

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Address:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Street

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  City

  	
  State

  	
  Zip Code

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Telephone Number

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Facsimile Number

  
								

 

 B-6
 

 

ENDNOTE

1.                                       Beneficial
Ownership.  You are the beneficial
owner of a security, as defined in Rule 13d-3 under the Securities
Exchange Act of 1934 (the “Exchange Act”), if you, directly or
indirectly, through any contract, arrangement, understanding, relationship or
otherwise have or share: (1) voting power, which includes the power to
vote, or to direct the voting of, such security, and/or (2) investment
power, which includes the power to dispose, or to direct the disposition of,
such security.  You are also the
beneficial owner of a security if you, directly or indirectly, create or use a
trust, proxy, power of attorney, pooling arrangement or any other contract,
arrangement, or device with the purpose or effect of divesting yourself of
beneficial ownership of a security or preventing the vesting of such beneficial
ownership.

You are deemed to be the beneficial owner of a
security if you have the right to acquire beneficial ownership of such security
at any time within sixty days including, but not limited to, any right
to acquire such security (a) through the exercise of any option, warrant
or right, (b) through the conversion of a security, or (c) pursuant
to the automatic termination of, or the power to revoke a trust, discretionary
account, or similar arrangement.

Ordinarily, shares held in the name of your spouse or
minor child should be considered as beneficially owned by you absent special
circumstances to indicate that you do not have, as a practical matter, voting power
or investment power over such shares. 
Similarly, absent countervailing facts, securities held in the name of
relatives who share your home are to be reported as being beneficially owned by
you.  In addition, securities held for
your benefit in the name of others, such as nominees, trustees and other
fiduciaries, securities held by a partnership of which you are a partner, and
securities held by a corporation controlled by you should be regarded as
beneficially owned by you.

This definition of beneficial ownership is very broad;
therefore, even through you may not actually have or share voting or investment
power with respect to securities owned by persons in your family or living in
your home, you should include such shares in your beneficial ownership
disclosure and may then disclaim beneficial ownership of such securities. Please note, however, that shares in which you have an economic
interest but over which you have no voting or investment control (for example,
shares in a trust of which you are the beneficiary but not the trustee) are not
deemed beneficially owned by you for the purposes of this questionnaire.

 B-7

 

Schedule 6(b)

(Registration Rights)

The following securities, which have not been previously registered,
have piggyback registration rights:

Warrants
issued on November 20, 2001, to the underwriter of the Company’s initial public
offering for the purchase of an aggregate of 11,250 shares, exercisable at
$67.50 per share, expiring November 20, 2006.

The following securities, which have been previously registered, have
piggyback registration rights:

The
securities registered for resale on the Company’s Registration Statements on
Form SB-2 (File Nos. 333-131147 and 333-131148).

EXHIBIT C

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

COMMON STOCK
PURCHASE WARRANT

To Purchase                   
Shares of Common Stock of

MEDICALCV, INC.

THIS COMMON STOCK PURCHASE WARRANT (the “Warrant”)
certifies that, for value received,                   
(the “Holder”), is entitled, upon the terms and subject to the
limitations on exercise and the conditions hereinafter set forth, at any time
on or after the date hereof (the “Initial Exercise Date”) and on or
prior to the close of business on the fifth (5th) anniversary of the Initial Exercise
Date (the “Termination Date”) but not thereafter, to subscribe for and
purchase from MEDICALCV, INC., a Minnesota corporation (the “Company”),
up to            shares (the “Warrant
Shares”) of Common Stock, par value $0.01 per share, of the Company (the “Common
Stock”).  The purchase price of one
share of Common Stock under this Warrant shall be equal to the Exercise Price,
as defined in Section 2(b).

Section 1.                                            Definitions.  Capitalized terms used and not otherwise
defined herein shall have the meanings set forth in that certain Securities
Purchase Agreement (the “Purchase Agreement”), dated October     ,
2006, among the Company and the purchasers signatory thereto.

Section 2.                                            Exercise.

a)                                      Exercise
of Warrant.  Exercise of the purchase
rights represented by this Warrant may be made, in whole or in part, at any
time or times on or after the Initial Exercise Date and on or before the
Termination Date by delivery to the Company of a duly executed facsimile or “.pdf”
copy of the Notice of Exercise Form annexed hereto (or such other office or
agency of the Company as it may designate by notice in writing to the
registered Holder at the address of such Holder appearing on the books of the
Company); and, within 3 Trading Days of the date said Notice of Exercise is
delivered to the Company, the Company shall have received  payment of the aggregate Exercise Price

 

of the shares thereby
purchased by wire transfer or cashier’s check drawn on a United States bank,
unless this Warrant is being exercised pursuant to the cashless exercise
provision set forth in Section 2(c) below. 
Notwithstanding anything herein to the contrary, the Holder shall not be
required to physically surrender this Warrant to the Company until the Holder
has purchased all of the Warrant Shares available hereunder and the Warrant has
been exercised in full, in which case, the Holder shall surrender this Warrant
to the Company for cancellation within 3 Trading Days of the date the final
Notice of Exercise is delivered to the Company. 
Partial exercises of this Warrant resulting in purchases of a portion of
the total number of Warrant Shares available hereunder shall have the effect of
lowering the outstanding number of Warrant Shares purchasable hereunder in an
amount equal to the applicable number of Warrant Shares purchased.  The Holder and the Company shall maintain
records showing the number of Warrant Shares purchased and the date of such
purchases.  In the event of any dispute
or discrepancy, the records of the Company shall be controlling and
determinative in the absence of manifest error. 
The Holder and any assignee, by acceptance of this Warrant, acknowledge
and agree that, by reason of the provisions of this paragraph, following the
purchase of a portion of the Warrant Shares hereunder, the number of Warrant
Shares available for purchase hereunder at any given time may be less than the
amount stated on the face hereof.

b)                                     Exercise Price.  The exercise price per share of the Common
Stock under this Warrant shall be $         
[Closing Price], subject to adjustment
hereunder (the “Exercise Price”).

c)                                      Cashless
Exercise.  If a Notice of Exercise
Form is delivered at a time when (i) a registration statement permitting the
Holder to resell the Warrant Shares is required to be effective but is not then
effective, or (ii) the prospectus forming a part thereof is not then available
to the Holder for the resale of the Warrant Shares, then this Warrant may also
be exercised at such time by means of a “cashless exercise” in which the Holder
shall be entitled to receive a certificate for the number of Warrant Shares
equal to the quotient obtained by dividing [(A-B) (X)] by (A), where:

(A) =                    the VWAP on
the Trading Day immediately preceding the date of such election;

(B) =                      the Exercise
Price of this Warrant, as adjusted; and

(X) =                     the number of
Warrant Shares issuable upon exercise of this Warrant in accordance with the
terms of this Warrant by means of a cash exercise rather than a cashless
exercise.

d)                                     Mechanics
of Exercise.

i.                                          Authorization
of Warrant Shares.  The Company
covenants that all Warrant Shares which may be issued upon the exercise of the
purchase rights represented by this Warrant will, upon exercise of the purchase
rights represented by this Warrant, be duly authorized, validly issued, fully
paid and nonassessable and free from all taxes, liens and charges created by
the Company in respect of

 2
 

 

the issue thereof (other
than taxes in respect of any transfer occurring contemporaneously with such
issue).

ii.                                       Delivery
of Certificates Upon Exercise.  Certificates
for shares purchased hereunder shall be transmitted by the transfer agent of
the Company to the Holder by crediting the account of the Holder’s prime broker
with the Depository Trust Company through its Deposit Withdrawal Agent
Commission (“DWAC”) system if the Company is a participant in such
system, and otherwise by physical delivery to the address specified by the
Holder in the Notice of Exercise within 3 Trading Days from the delivery to the
Company of the Notice of Exercise Form, surrender of this Warrant (if required)
and payment of the aggregate Exercise Price as set forth above (“Warrant
Share Delivery Date”).  This Warrant
shall be deemed to have been exercised on the date (a) the Exercise Price is
received by the Company or (b) notification to the Company that this Warrant is
being exercised pursuant to a cashless exercise provision set forth in Section
2(c) above.  The Warrant Shares shall be
deemed to have been issued, and Holder or any other person so designated to be
named therein shall be deemed to have become a holder of record of such shares
for all purposes, as of the date the Warrant has been exercised by payment to
the Company of the Exercise Price (or by cashless exercise, if permitted) and
all taxes required to be paid by the Holder, if any, pursuant to Section 2(d)(vi)
prior to the issuance of such shares, have been paid.

iii.                                    Delivery
of New Warrants Upon Exercise.  If
this Warrant shall have been exercised in part, the Company shall, at the
request of a Holder and upon surrender of this Warrant certificate, at the time
of delivery of the certificate or certificates representing Warrant Shares,
deliver to Holder a new Warrant evidencing the rights of Holder to purchase the
unpurchased Warrant Shares called for by this Warrant, which new Warrant shall
in all other respects be identical with this Warrant.

iv.                                   Rescission
Rights.  If the Company fails to cause
its transfer agent to transmit to the Holder a certificate or certificates
representing the Warrant Shares pursuant to this Section 2(d) by the Warrant
Share Delivery Date, then the Holder will have the right to rescind such
exercise.

v.                                      No
Fractional Shares or Scrip.  No
fractional shares or scrip representing fractional shares shall be issued upon
the exercise of this Warrant.  As to any
fraction of a share which Holder would otherwise be entitled to purchase upon
such exercise, the Company shall at its election, either pay a cash adjustment
in respect of such final fraction in an amount equal to such fraction
multiplied by the Exercise Price or round up to the next whole share.

vi.                                   Charges,
Taxes and Expenses.  Issuance of
certificates for Warrant Shares shall be made without charge to the Holder for
any issue or transfer tax or other incidental expense in respect of the
issuance of such certificate, all of which taxes and expenses shall be paid by
the Company, and such certificates shall be issued in the name of the Holder or
in such name or names as may be directed by

 3
 

 

the Holder; provided,
however, that in the event certificates for Warrant Shares are to be
issued in a name other than the name of the Holder, this Warrant when
surrendered for exercise shall be accompanied by the Assignment Form attached
hereto duly executed by the Holder; and the Company may require, as a condition
thereto, the payment of a sum sufficient to reimburse it for any transfer tax
incidental thereto.

vii.                                Closing
of Books.  The Company will not close
its shareholder books or records in any manner which prevents the timely
exercise of this Warrant, pursuant to the terms hereof.

Section 3.                                            Certain
Adjustments.

a)                                      Stock
Dividends and Splits.  If the
Company, at any time while this Warrant is outstanding: (A) pays a stock
dividend or otherwise make a distribution or distributions on shares of its
Common Stock or any other equity or equity equivalent securities payable in
shares of Common Stock (which, for avoidance of doubt, shall not include any
shares of Common Stock issued by the Company upon exercise of this Warrant, any
other warrant or any option), (B) subdivides outstanding shares of Common Stock
into a larger number of shares, (C) combines (including by way of reverse stock
split) outstanding shares of Common Stock into a smaller number of shares, or
(D) issues by reclassification of shares of the Common Stock any shares of
capital stock of the Company, then in each case the Exercise Price shall be
multiplied by a fraction of which the numerator shall be the number of shares
of Common Stock (excluding treasury shares, if any) outstanding immediately before
such event and of which the denominator shall be the number of shares of Common
Stock outstanding immediately after such event and the number of shares
issuable upon exercise of this Warrant shall be proportionately adjusted.  Any adjustment made pursuant to this Section
3(a) shall become effective immediately after the record date for the
determination of shareholders entitled to receive such dividend or distribution
and shall become effective immediately after the effective date in the case of
a subdivision, combination or re-classification.

b)                                     Adjustment
for Issuance of Shares of Common Stock Below Exercise Price.  From the date hereof until 9 months after the
Closing Date (the “Adjustment Period”), the Exercise Price shall be
subject to adjustment from time to time as provided in this Section 3(b).

i.                                          If
during the Adjustment Period, the Company issues or sells, or in accordance
with this Section 3(b) is deemed to have issued or sold, any shares of
Common Stock (excluding Excluded Securities) for a consideration per share (the
“New Securities Issuance Price”)
less than a price (the “Applicable
Price”) equal to the Exercise Price in effect immediately prior to
such time, then immediately after such issue or sale, the Exercise Price then
in effect shall be reduced to an amount equal to the New Securities Issuance
Price.

ii.                                       For
purposes of determining the adjusted Exercise Price under Section 3(b) hereof,
the following will be applicable:

 4
 

 

(A)                              Issuance
of Rights or Options. If the Company in any manner grants or sells any
Options and the lowest price per share for which one share of Common Stock is
issuable upon the exercise of any such Option or upon conversion, exchange or
exercise of any Convertible Securities issuable upon exercise of such Option is
less than the Applicable Price, then such share of Common Stock shall be deemed
to be outstanding and to have been issued and sold by the Company at the time
of the granting or sale of such Option for such price per share. For purposes
of this Section 3(b)(ii)(A), the “lowest price per share for which one
share of Common Stock is issuable upon the exercise of any such Option or upon
conversion, exchange or exercise of any Convertible Securities issuable upon
exercise of such Option” shall be equal to the sum of the lowest amounts of
consideration (if any) received or receivable by the Company with respect to
any one share of Common Stock upon granting or sale of the Option, upon
exercise of the Option and upon conversion, exchange or exercise of any
Convertible Security issuable upon exercise of such Option. No further
adjustment of the Exercise Price shall be made upon the actual issuance of such
Common Stock or of such Convertible Securities upon the exercise of such
Options or upon the actual issuance of such Common Stock upon conversion,
exchange or exercise of such Convertible Securities.  “Convertible Securities” means any
evidence of indebtedness, shares or securities, in each case convertible into
or exchangable for Common Stock.  “Options”
means rights, options or warrants to subscribe for, purchase or otherwise
acquire shares of Common Stock or Convertible Securities.

(B)                                Issuance
of Convertible Securities. If the Company in any manner issues or sells any
Convertible Securities and the lowest price per share for which one share of
Common Stock is issuable upon such conversion, exchange or exercise thereof is
less than the Applicable Price, then such share of Common Stock shall be deemed
to be outstanding and to have been issued and sold by the Company at the time
of the issuance or sale of such Convertible Securities for such price per
share. For the purposes of this Section 3(b)(ii)(B), the “lowest price per
share for which one share of Common Stock is issuable upon such conversion,
exchange or exercise” shall be equal to the sum of the lowest amounts of
consideration (if any) received or receivable by the Company with respect to
any one share of Common Stock upon the issuance or sale of the Convertible
Security and upon the conversion, exchange or exercise of such Convertible
Security. No further adjustment of the Exercise Price shall be made upon the
actual issuance of such Common Stock upon conversion, exchange or exercise of
such Convertible Securities, and if any such issue or sale of such Convertible
Securities is made upon exercise of any Options for which adjustment of the Exercise
Price had been or are to be made pursuant to other provisions of this Section
3(b)(ii), no further adjustment of the Exercise Price shall be made by reason
of such issue or sale.

(C)                                Change
in Option Price or Conversion Rate. If the purchase or exercise price
provided for in any Options, or the additional consideration, if any, payable
upon the issue, conversion, exchange or exercise of any Convertible Securities,
or the rate at which any Convertible Securities are convertible into or

 5
 

 

exchangeable or exercisable for Common Stock changes
at any time, the Exercise Price in effect at the time of such change shall be
adjusted to the Exercise Price which would have been in effect at such time had
such Options or Convertible Securities provided for such changed purchase
price, additional consideration or changed conversion rate, as the case may be,
at the time initially granted, issued or sold. For purposes of this Section
3(b)(ii)(C), if the terms of any Option or Convertible Security that was
outstanding as of the Closing Date are changed in the manner described in the
immediately preceding sentence, then such Option or Convertible Security and
the Common Stock deemed issuable upon exercise, conversion or exchange thereof
shall be deemed to have been issued as of the date of such change. No
adjustment shall be made if such adjustment would result in an increase of the
Exercise Price then in effect unless the holders of the Warrant are provided at
least ten (10) Business Days’ prior notice.  Notwithstanding the foregoing, no adjustment
shall be made to the Exercise Price of this Warrant due to anti-dilution
adjustments made to securities outstanding as of the Closing Date as a result
of the issuance of Securities pursuant to the Transaction Documents.

(D)                               Calculation
of Consideration Received. In case any Option is issued in connection with
the issue or sale of other securities of the Company, together comprising one
integrated transaction in which no specific consideration is allocated to such
Options by the parties thereto, the Options will be deemed to have been issued
for a consideration of $0.01. If any Common Stock, Options or Convertible
Securities are issued or sold or deemed to have been issued or sold for cash,
the consideration received therefor will be deemed to be the gross amount
received by the Company therefor. If any Common Stock, Options or Convertible
Securities are issued or sold for a consideration other than cash, the amount
of the consideration other than cash received by the Company will be the fair
value of such consideration, except where such consideration consists of
marketable securities, in which case the amount of consideration received by
the Company will be the arithmetic average of the closing sale prices of such
securities during the ten (10) consecutive trading days ending on the date
of receipt of such securities. The fair value of any consideration other than
cash or securities will be determined jointly by the Company and the holders of
at least a majority in interest of the Warrants then outstanding.

(E)                                 Exceptions
to Adjustment of Exercise Price. Notwithstanding the foregoing, no
adjustment will be made under this Section 3(b) in respect of Excluded
Securities.   “Excluded Securities”
means the issuance of (a) shares of Common Stock or options to employees,
officers or directors of, or consultants to, the Company pursuant to any stock
option agreement, stock option plan or equity incentive plan duly adopted by a
majority of the non-employee members of the Board of Directors of the Company
or a majority of the members of a committee of non-employee directors established for such purpose (for purposes of clarity, the
issuance of shares of Common Stock upon exercise of options granted pursuant to
a stock option agreement, stock option plan or equity incentive plan subsequent
to the date hereof shall also be Excluded Securities), (b) securities upon the
exercise or exchange of or conversion of (i) any Securities issued under

 6
 

 

the Purchase
Agreement; (ii) securities to a registered broker-dealer in connection with the
transactions contemplated by the Purchase Agreement; and/or (iii) other
securities or rights exercisable or exchangeable for or convertible into shares
of Common Stock which are issued and outstanding on the date of the Purchase
Agreement, provided that such securities have not been amended since the date
of the Purchase Agreement (other than on a non-discretionary basis pursuant to
the pre-existing anti-dilution provisions thereof) to increase the number of
such securities or to decrease the exercise, exchange or conversion price of
any such securities, (c) securities issued pursuant to acquisitions or
strategic transactions approved by a majority of
the disinterested directors, provided any such issuance shall only be to a
Person which is, itself or through its subsidiaries, an operating company in a
business synergistic with the business of the Company and in which the Company
receives benefits in addition to the investment of funds, but shall not include
a transaction in which the Company is issuing securities primarily for the
purpose of raising capital or to an entity whose primary business is investing
in securities, (d) shares of Common Stock or other securities issued in
connection with any stock split, stock dividend or recapitalization of the
Company (subject to Section 3(a) and Section 4.14 of the Purchase Agreement
hereof), and (e) shares of Common Stock or other securities issued in
connection with any registered primary public offering.

c)                                      Calculations.  All calculations under this Section 3 shall
be made to the nearest cent or the nearest 1/100th of a share, as the case may
be.  For purposes of this Section 3, the
number of shares of Common Stock deemed to be issued and outstanding as of a
given date shall be the sum of the number of shares of Common Stock (excluding
treasury shares, if any) issued and outstanding.

d)                                     Voluntary
Adjustment By Company.  The Company
may at any time during the term of this Warrant reduce the then current
Exercise Price to any amount and for any period of time deemed appropriate by
the Board of Directors of the Company.

e)                                      Notice
to Holders.

i.                                          Adjustment
to Exercise Price.  Whenever the
Exercise Price is adjusted pursuant to any provision of this Section 3, the
Company shall promptly mail to each Holder a notice setting forth the Exercise
Price after such adjustment and setting forth a brief statement of the facts
requiring such adjustment.

ii.                                       Notice
to Allow Exercise by Holder.  If (A)
the Company shall declare a dividend (or any other distribution in whatever
form) on the Common Stock; (B) the Company shall declare a special nonrecurring
cash dividend on or a redemption of the Common Stock; (C) the Company shall
authorize the granting to all holders of the Common Stock rights or warrants to
subscribe for or purchase any shares of capital stock of any class or of any
rights; (D) the approval of any shareholders of the Company shall be required
in connection with any reclassification of the Common Stock, any consolidation
or merger to which the Company is a party, any sale or transfer of all or
substantially all of the assets of the Company, of any compulsory share
exchange whereby the Common Stock is

 7
 

 

converted into other
securities, cash or property; (E) the Company shall authorize the voluntary or
involuntary dissolution, liquidation or winding up of the affairs of the
Company; then, in each case, the Company shall cause to be mailed to the Holder
at its last address as it shall appear upon the Warrant Register of the
Company, at least 20 calendar days prior to the applicable record or effective
date hereinafter specified, a notice stating (x) the date on which a record is
to be taken for the purpose of such dividend, distribution, redemption, rights
or warrants, or if a record is not to be taken, the date as of which the
holders of the Common Stock of record to be entitled to such dividend,
distributions, redemption, rights or warrants are to be determined or (y) the
date on which such reclassification, consolidation, merger, sale, transfer or
share exchange is expected to become effective or close, and the date as of
which it is expected that holders of the Common Stock of record shall be
entitled to exchange their shares of the Common Stock for securities, cash or
other property deliverable upon such reclassification, consolidation, merger,
sale, transfer or share exchange; provided that the failure to mail such notice
or any defect therein or in the mailing thereof shall not affect the validity
of the corporate action required to be specified in such notice.  The Holder is entitled to exercise this
Warrant during the 20-day period commencing on the date of such notice to the
effective date of the event triggering such notice.

Section 4.                                            Transfer
of Warrant.

a)                                      Transferability.  Subject to compliance with any applicable
securities laws and the conditions set forth in Section 4(d) hereof and to the
provisions of Section 4.1 of the Purchase Agreement, this Warrant and all
rights hereunder (including, without limitation, any registration rights) are
transferable, in whole or in part, upon surrender of this Warrant at the
principal office of the Company or its designated agent, together with a
written assignment of this Warrant substantially in the form attached hereto
duly executed by the Holder or its agent or attorney and funds sufficient to
pay any transfer taxes payable upon the making of such transfer.  Upon such surrender and, if required, such
payment, the Company shall execute and deliver a new Warrant or Warrants in the
name of the assignee or assignees and in the denomination or denominations
specified in such instrument of assignment, and shall issue to the assignor a
new Warrant evidencing the portion of this Warrant not so assigned, and this
Warrant shall promptly be cancelled.  A
Warrant, if properly assigned, may be exercised by a new holder for the
purchase of Warrant Shares without having a new Warrant issued.

b)                                     New
Warrants.  This Warrant may be
divided or combined with other Warrants upon presentation hereof at the
aforesaid office of the Company, together with a written notice specifying the
names and denominations in which new Warrants are to be issued, signed by the
Holder or its agent or attorney.  Subject
to compliance with Section 4(a), as to any transfer which may be involved in
such division or combination, the Company shall execute and deliver a new
Warrant or Warrants in exchange for the Warrant or Warrants to be divided or
combined in accordance with such notice.

c)                                      Warrant
Register.  The Company shall register
this Warrant, upon records to be maintained by the Company for that purpose
(the “Warrant Register”), in the name

 8
 

 

of the record Holder
hereof from time to time.  The Company
may deem and treat the registered Holder of this Warrant as the absolute owner
hereof for the purpose of any exercise hereof or any distribution to the
Holder, and for all other purposes, absent actual notice to the contrary.

d)                                     Transfer
Restrictions.  If, at the time of the
surrender of this Warrant in connection with any transfer of this Warrant, the
transfer of this Warrant shall not be registered pursuant to an effective
registration statement under the Securities Act and under applicable state
securities or blue sky laws, the Company may require, as a condition of
allowing such transfer (i) that the Holder or transferee of this Warrant, as
the case may be, furnish to the Company a written opinion of counsel (which
opinion shall be in form, substance and scope customary for opinions of counsel
in comparable transactions) to the effect that such transfer may be made
without registration under the Securities Act and under applicable state
securities or blue sky laws, (ii) that the holder or transferee execute and
deliver to the Company an investment letter in form and substance acceptable to
the Company and (iii) that the transferee be an “accredited investor” as
defined in Rule 501(a)(1), (a)(2), (a)(3), (a)(7), or (a)(8) promulgated under
the Securities Act or a “qualified institutional buyer” as defined in Rule
144A(a) under the Securities Act.

Section 5.                                            Miscellaneous.

a)                                      No
Rights as Shareholder Until Exercise. 
This Warrant does not entitle the Holder to any voting rights or other
rights as a shareholder of the Company prior to the exercise hereof as set
forth in Section 2(d)(ii).

b)                                     Loss,
Theft, Destruction or Mutilation of Warrant.  The Company covenants that upon receipt by
the Company of evidence reasonably satisfactory to it of the loss, theft,
destruction or mutilation of this Warrant or any stock certificate relating to
the Warrant Shares, and in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to it (which, in the case of the Warrant,
shall not include the posting of any bond), and upon surrender and cancellation
of such Warrant or stock certificate, if mutilated, the Company will make and
deliver a new Warrant or stock certificate of like tenor and dated as of such
cancellation, in lieu of such Warrant or stock certificate.

c)                                      Saturdays,
Sundays, Holidays, etc.  If the last
or appointed day for the taking of any action or the expiration of any right
required or granted herein shall not be a Business Day, then such action may be
taken or such right may be exercised on the next succeeding Business Day.

d)                                     Authorized
Shares.

The Company covenants that
during the period the Warrant is outstanding, it will reserve from its
authorized and unissued Common Stock a sufficient number of shares to provide
for the issuance of the Warrant Shares upon the exercise of any purchase rights
under this Warrant.  The Company further
covenants that its issuance of this Warrant shall constitute full authority to
its

 9
 

 

officers who are charged with the duty of executing
stock certificates to execute and issue the necessary certificates for the
Warrant Shares upon the exercise of the purchase rights under this Warrant.  The Company will take all such reasonable
action as may be necessary to assure that such Warrant Shares may be issued as
provided herein without violation of any applicable law or regulation, or of
any requirements of the Trading Market upon which the Common Stock may be
listed.

Except and to the extent
as waived or consented to by the Holder, the Company shall not by any action,
including, without limitation, amending its articles of incorporation or through
any reorganization, transfer of assets, consolidation, merger, dissolution,
issue or sale of securities or any other voluntary action, avoid or seek to
avoid the observance or performance of any of the terms of this Warrant, but
will at all times in good faith assist in the carrying out of all such terms
and in the taking of all such actions as may be necessary or appropriate to
protect the rights of Holder as set forth in this Warrant against impairment.  Without limiting the generality of the
foregoing, the Company will (a) not increase the par value of any Warrant
Shares above the amount payable therefor upon such exercise immediately prior
to such increase in par value, (b) take all such action as may be necessary or
appropriate in order that the Company may validly and legally issue fully paid
and nonassessable Warrant Shares upon the exercise of this Warrant, and (c) use
commercially reasonable efforts to obtain all such authorizations, exemptions
or consents from any public regulatory body having jurisdiction thereof as may
be necessary to enable the Company to perform its obligations under this
Warrant.

Before taking any action
which would result in an adjustment in the number of Warrant Shares for which
this Warrant is exercisable or in the Exercise Price, the Company shall obtain
all such authorizations or exemptions thereof, or consents thereto, as may be
necessary from any public regulatory body or bodies having jurisdiction
thereof.

e)                                      Jurisdiction.  All questions concerning the construction,
validity, enforcement and interpretation of this Warrant shall be determined in
accordance with the provisions of the Purchase Agreement.

f)                                        Restrictions.  The Holder acknowledges that the Warrant
Shares acquired upon the exercise of this Warrant, if not registered, will have
restrictions upon resale imposed by state and federal securities laws.

g)                                     Nonwaiver
and Expenses.  No course of dealing
or any delay or failure to exercise any right hereunder on the part of Holder
shall operate as a waiver of such right or otherwise prejudice the Company’s or
the Holder’s rights, powers or remedies, notwithstanding the fact that all
rights hereunder terminate on the Termination Date.  If the Company or a Holder willfully and
knowingly fails to comply with any provision of this Warrant, which results in
any material damages to the Holder or Company (as the case may be), the breaching
party shall pay to the other party such amounts as shall be sufficient to cover
any costs and expenses including, but not limited to, reasonable

 10
 

 

attorneys’ fees,
including those of appellate proceedings, incurred by the non-breaching party in
collecting any amounts due pursuant hereto or in otherwise enforcing any of its
rights, powers or remedies hereunder.

h)                                     Notices.  Any notice, request or other document
required or permitted to be given or delivered to the Holder by the Company
shall be delivered in accordance with the notice provisions of the Purchase
Agreement.

i)                                         Limitation
of Liability.  No provision hereof,
in the absence of any affirmative action by Holder to exercise this Warrant to
purchase Warrant Shares, and no enumeration herein of the rights or privileges
of Holder, shall give rise to any liability of Holder for the purchase price of
any Common Stock or as a shareholder of the Company, whether such liability is
asserted by the Company or by creditors of the Company.

j)                                         Remedies.  Holder, in addition to being entitled to
exercise all rights granted by law, including recovery of damages, will be
entitled to seek specific performance of its rights under this Warrant.  The Company agrees that monetary damages
would not be adequate compensation for any loss incurred by reason of a breach
by it of the provisions of this Warrant and hereby agrees to waive and not to
assert the defense in any action for specific performance that a remedy at law
would be adequate.

k)                                      Successors
and Assigns.  Subject to applicable
securities laws, this Warrant and the rights and obligations evidenced hereby
shall inure to the benefit of and be binding upon the successors of the Company
and the successors and permitted assigns of Holder.  The provisions of this Warrant are intended
to be for the benefit of all Holders from time to time of this Warrant and
shall be enforceable by any such Holder or holder of Warrant Shares.

l)                                         Amendment.  This Warrant may be modified or amended or
the provisions hereof waived with the written consent of the Company and the
Holder.

m)                                   Severability.  Wherever possible, each provision of this
Warrant shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Warrant shall be prohibited by or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provisions or the remaining provisions of this Warrant.

n)                                     Headings.  The headings used in this Warrant are for the
convenience of reference only and shall not, for any purpose, be deemed a part
of this Warrant.

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

 11
 

 

IN WITNESS WHEREOF, the Company has caused this
Warrant to be executed by its officer thereunto duly authorized.

Dated:  October     , 2006

	
  

  	
   

  	
  MEDICALCV, INC.

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Name:

  	
  Eapen Chacko

  	 

	
   

  	
   

  	
   

  	
  Title:

  	
  Vice President, Finance and Chief

  	 

	
   

  	
   

  	
   

  	
   

  	
  Financial Officer

  	 

									

 12

 

NOTICE OF EXERCISE

To:                                                                           

(1)                                  The
undersigned hereby elects to purchase                   
Warrant Shares of the Company pursuant to the terms of the attached Warrant
(only if exercised in full), and tenders herewith payment of the exercise price
in full, together with all applicable transfer taxes, if any.

(2)                                  Payment
shall take the form of (check applicable box):

o  in
lawful money of the United States; or

o  if
permitted, the cancellation of such number of Warrant Shares as is necessary,
in accordance with the formula set forth in subsection 2(c), to exercise this
Warrant with respect to the maximum number of Warrant Shares purchasable
pursuant to the cashless exercise procedure set forth in subsection 2(c).

(3)                                  Please
issue a certificate or certificates representing said Warrant Shares in the
name of the undersigned or in such other name as is specified below:

	
  

  	
   

  	
   

  

 

The Warrant Shares shall
be delivered to the following DWAC Account Number or by physical delivery of a
certificate to:

	
  

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  

 

(4)                                  Accredited
Investor.  The undersigned is an “accredited
investor” as defined in Regulation D promulgated under the Securities Act of
1933, as amended.

[SIGNATURE OF HOLDER]

	
  Name of Investing Entity:

  	
   

  
	
  Signature
  of Authorized Signatory of Investing Entity:

  	
   

  
	
  Name of
  Authorized Signatory:

  	
   

  
	
  Title of
  Authorized Signatory:

  	
   

  
	
  Date:

  	
   

  
						

 

 

ASSIGNMENT FORM

(To assign the foregoing warrant, execute

this form and supply required information. 

Do not use this form to exercise the warrant.)

FOR VALUE RECEIVED, [      ]
all of or [            ]
shares of the foregoing Warrant and all rights evidenced thereby are hereby
assigned to

	
  

  	
  whose address is

  
	
   

  
	
   

  	
  .

  
	
   

  
	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Dated:                       ,
               

  
			

 

	
   

  	
  Holder’s Signature:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Holder’s
  Address:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  

 

	
  Signature Guaranteed: 

  	
   

  	
   

  

 

NOTE:  The signature to this Assignment Form must
correspond with the name as it appears on the face of the Warrant, without
alteration or enlargement or any change whatsoever, and must be guaranteed by a
bank or trust company.  Officers of
corporations and those acting in a fiduciary or other representative capacity
should file proper evidence of authority to assign the foregoing Warrant.Exhibit
10.2

REGISTRATION
RIGHTS AGREEMENT

This Registration Rights Agreement (this “Agreement”)
is made and entered into as of October      , 2006, by
and among MedicalCV, Inc., a Minnesota corporation (the “Company”), and
the purchasers signatory hereto (each a “Purchaser” and collectively,
the “Purchasers”).

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

The Company and the Purchasers hereby agree as
follows:

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

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

“Common Stock” means the common stock of the
Company, par value $0.01 per share.

“Commission” means the Securities and Exchange
Commission.

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

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

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

“Exchange Act” means the Securities Exchange
Act of 1934, as amended, or any successor statute, and the rules and
regulations of the Commission thereunder.

“Filing Date” means, with respect to the
Registration Statement required hereunder, the 45th calendar day following the Closing Date.

“Free Writing Prospectus” means a free writing
prospectus as defined in Rule 405 under the Securities Act.

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

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

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

“Issuer Free Writing Prospectus” means an
issuer free writing prospectus as defined in Rule 433 under the Securities Act.

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

 

“Permitted Free Writing Prospectus” shall have
the meaning set forth in Section 6(d).

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

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

“Prospectus” means the prospectus included in a
Registration Statement as supplemented by any and all prospectus supplements,
and including all material incorporated by reference or deemed to be
incorporated by reference in such Prospectus.

“Registrable Securities” means all of (i) the
Shares, (ii) the Warrant Shares, and (iii) any shares of Common Stock issued or
issuable upon any stock split, dividend or other distribution, recapitalization
or similar event with respect to the foregoing; provided, however, that a
security shall cease to be a Registrable Security when it is sold pursuant to a
Registration Statement, when it is sold pursuant to Rule 144, or when it becomes
eligible for sale under Rule 144(k).

“Registration Statement” means any registration
statement of the Company under the Securities Act that covers any of the
Registrable Securities pursuant to the provisions of this Agreement, including
all amendments to such registration statement, including post-effective
amendments, and all exhibits thereto.

“Required Effective Date” shall have the
meaning set forth in Section 2(a).

“Rule 415” means Rule 415 promulgated by the
Commission pursuant to the Securities Act, as such Rule may be amended from
time to time, or any similar rule or regulation hereafter adopted by the
Commission having substantially the same purpose and effect as such Rule.

“Rule 424” means Rule 424 promulgated by the
Commission pursuant to the Securities Act, as such Rule may be amended from
time to time, or any similar rule or regulation hereafter adopted by the
Commission having substantially the same purpose and effect as such Rule.

“Securities Act” means the Securities Act of
1933, as amended, or any successor statute, and the rules and regulations of
the Commission thereunder.

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

“Trading Market” means whichever of the New
York Stock Exchange, the American Stock Exchange, the NASDAQ National Market,
the NASDAQ Capital Market or the OTC Bulletin Board on which the Common Stock
is listed or quoted for trading on the date in question.

 2
 

 

2.             Registration.

(a)           On or prior to the Filing Date, the
Company shall prepare and file with the Commission a Registration Statement
covering the resale of all of the Registrable Securities for an offering to be
made on a continuous basis pursuant to Rule 415, or if Rule 415 is not
available for offers and sales of the Registrable Securities by such other
means of distribution of Registrable Securities as the Holders may
specify.  The Registration Statement
shall be on Form S-3 (except if the Company is not then eligible to register
for resale the Registrable Securities on Form S-3, in which case the
Registration Statement shall be on another appropriate form in accordance
herewith) and shall contain (unless otherwise directed by the Holders) the “Plan
of Distribution” attached hereto as Annex A.  Subject to the terms of this Agreement, the
Company shall use its commercially reasonable efforts to cause the Registration
Statement to be declared effective under the Securities Act on or prior to the
earlier of (i) the 90th calendar day following the Filing Date (the
120th calendar day in the event of a review by the
Commission) and (ii) the fifth business day after the Commission advises the
Company that the Registration Statement will not be reviewed or the Commission
has no further comments on the Registration Statement (the “Required Effective
Date”).  The Company shall use its
commercially reasonable efforts to keep the Registration Statement continuously
effective under the Securities Act until all Registrable Securities covered by
such Registration Statement have been sold or may be sold without volume
restrictions pursuant to Rule 144(k) as determined by the counsel to the
Company pursuant to a written opinion letter to such effect, addressed and
acceptable to the Company’s transfer agent (the “Effectiveness Period”).  The Company shall telephonically request
effectiveness of a Registration Statement as of 5:00 pm Eastern Time on a
Trading Day.  The Company shall
immediately notify the Holders via facsimile or by e-mail of the effectiveness
of a Registration Statement on the same Trading Day that the Company
telephonically confirms effectiveness with the Commission.  The Company shall, on the Trading Day after
the Effective Date (as defined in the Purchase Agreement), file a 424(b)
prospectus with the Commission.

(b)           If: (i) a Registration Statement is
not filed on or prior to its Filing Date; or (ii) a Registration Statement
filed or required to be filed hereunder is not declared effective by the
Commission by its Required Effective Date or (iii) after the Required Effective
Date, a Registration Statement ceases for any reason to remain continuously
effective as to all Registrable Securities for which it is required to be
effective, or the Holders are not permitted to utilize the Prospectus therein
to resell such Registrable Securities for more than an aggregate of 75 calendar
days during any 12-month period (which need not be consecutive calendar days)
(any such failure or breach being referred to as an “Event”, and for
purposes of clause (i) or (ii) the date on which such Event occurs or for
purposes of clause (iii) the date on which such 75 calendar day period is
exceeded being referred to as “Event Date”), then in addition to any
other rights the Holders may have hereunder or under applicable law, on each
such Event Date and on each monthly anniversary of each such Event Date until
the applicable Event is cured, the Company shall pay to each Holder an amount
in cash as partial liquidated damages and not as a penalty, equal to 1.5% of
the aggregate purchase price paid by such Holder pursuant to the Purchase
Agreement for any Registrable Securities then held by such 

 3
 

 

Holder; provided,
that such liquidated damages shall not exceed 10% of the aggregate purchase
price paid by all Holders pursuant to the Purchase Agreement.  The partial liquidated damages pursuant to
the terms hereof shall apply on a daily pro-rata basis for any portion of a
month prior to the cure of an Event.

3.             Registration Procedures

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

(a)           Not less than three (3) Trading Days
prior to the filing of a Registration Statement, furnish to each Holder copies
of all such documents proposed to be filed, which documents will be subject to
the review of such Holders.  The Company
shall not file a Registration Statement to which the Holders of a majority of
the Registrable Securities shall reasonably object in good faith, provided
that, the Company is notified of such objection in writing no later than two
(2) Trading Days after the Holders have been so furnished copies of such
documents.  Each Holder agrees to furnish
to the Company a completed Questionnaire in the form attached to this Agreement
as Annex B (a “Selling Shareholder Questionnaire”) not less than
five (5) Trading Days prior to the Filing Date.

(b)           (i) Prepare and file with the
Commission such amendments, including post-effective amendments, to a
Registration Statement and the Prospectus used in connection therewith as may
be necessary to keep a Registration Statement continuously effective as to the
applicable Registrable Securities for the Effectiveness Period; (ii) cause the
related Prospectus to be amended or supplemented by any required Prospectus
supplement, and as so supplemented or amended to be filed pursuant to Rule 424;
(iii) respond as promptly as reasonably possible to any comments received from
the Commission with respect to a Registration Statement or any amendment
thereto; and (iv) comply in all material respects with the provisions of the
Securities Act and the Exchange Act with respect to the disposition of all
Registrable Securities covered by a Registration Statement during the
applicable period in accordance (subject to the terms of this Agreement) with
the intended methods of disposition by the Holders thereof set forth in such
Registration Statement as so amended or in such Prospectus as so supplemented.

(c)           Notify the Holders of Registrable
Securities to be sold as promptly as reasonably possible (and, in the case of
(i)(A) below, not less than two (2) Trading Days prior to such filing): (i)(A)
when a post-effective amendment to a Registration Statement is proposed to be
filed; (B) when the Commission notifies the Company whether there will be a “review”
of such Registration Statement and whenever the Commission comments in writing
on such Registration Statement (the Company shall provide true and complete
copies thereof and all written responses thereto to each of the Holders who so
requests provided such requesting Holders agree to keep such information
confidential until it is publicly disclosed and to waive Section 4.6 of the
Purchase Agreement with respect thereto); and (C) with respect to a
Registration Statement or any post-effective amendment, when the same has
become effective; (ii) of any request by the Commission or any other Federal or
state governmental authority for amendments or supplements to a Registration
Statement or Prospectus; (iii) of the issuance by the Commission or any other
federal or state governmental authority of any stop order suspending the 

 4
 

 

effectiveness of a
Registration Statement covering any or all of the Registrable Securities or the
initiation of any Proceedings for that purpose; (iv) of the receipt by the
Company of any notification with respect to the suspension of the qualification
or exemption from qualification of any of the Registrable Securities for sale
in any jurisdiction, or the initiation or threatening of any Proceeding for
such purpose; and (v) of the occurrence of any event or passage of time that
makes the financial statements included in a Registration Statement ineligible
for inclusion therein or any statement made in a Registration Statement or
Prospectus or any document incorporated or deemed to be incorporated therein by
reference untrue in any material respect or that requires any revisions to a
Registration Statement, Prospectus or other documents so that, in the case of a
Registration Statement or the Prospectus, as the case may be, it will not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading
(provided that such Holder of Registrable Securities agrees to keep such
information confidential until it is publicly disclosed and to waive Section
4.6 of the Purchase Agreement with respect thereto).

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

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

(f)            Promptly deliver to each Holder,
without charge, as many copies of the Prospectus or Prospectuses (including
each form of prospectus) and each amendment or supplement thereto as such
Persons may reasonably request in connection with resales by the Holder of
Registrable Securities; provided, however, that the Company shall have no such
obligation to furnish copies of a final prospectus if the conditions of Rule
172(c) under the Securities Act are satisfied by the Company.  Subject to the terms of this Agreement, the
Company hereby consents to the use of such Prospectus and each amendment or
supplement thereto by each of the selling Holders in connection with the
offering and sale of the Registrable Securities covered by such Prospectus and
any amendment or supplement thereto, except after the giving of any notice
pursuant to Section 3(c).

(g)           Prior to any resale of Registrable
Securities by a Holder, use its commercially reasonable efforts to register or
qualify or cooperate with the selling Holders in connection with the
registration or qualification (or exemption from the registration or
qualification) of such Registrable Securities for the resale by the Holder
under the securities or Blue Sky laws of such jurisdictions within the United
States as any 

 5
 

 

Holder reasonably
requests in writing, to keep each registration or qualification (or exemption
therefrom) effective during the Effectiveness Period and to do any and all
other acts or things reasonably necessary to enable the disposition in such
jurisdictions of the Registrable Securities covered by each Registration
Statement; provided, that the Company shall not be required to qualify
generally to do business in any jurisdiction where it is not then so qualified,
subject the Company to any material tax in any such jurisdiction where it is
not then so subject or file a general consent to service of process in any such
jurisdiction.

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

(i)            Upon the occurrence of any event
contemplated by Section 3(c)(ii)-(v), as promptly as reasonably possible,
prepare a supplement or amendment, including a post-effective amendment, to the
Registration Statement or a supplement to the related Prospectus or any document
incorporated or deemed to be incorporated therein by reference, and file any
other required document so that, as thereafter delivered, neither the
Registration Statement nor such Prospectus will contain an untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading.

(j)            If requested by Holders, in the
event of an underwritten offering of the Registrable Securities by the Holders,
the Company shall furnish to the Holders (i) on the date of the effectiveness
of the Registration Statement, a letter, dated such date, from the Company’s
independent certified public accountants in form and substance as is customarily
given by independent certified public accountants to underwriters in an
underwritten public offering, addressed to the Holders, and (ii) on the date
that Registrable Securities are delivered to the underwriters for sale in any
such registration, an opinion, dated as of such date, of counsel representing
the Company for purposes of such Registration Statement, in form, scope and
substance as is customarily given in an underwritten public offering, addressed
to the Holders.  The Company may require each
selling Holder to furnish to the Company a certified statement as to the number
of shares of Common Stock beneficially owned by such Holder and, if required by
the Commission, the person thereof that has voting and disposition control over
the Shares.

(k)           The Company shall not permit any
officer, director, underwriter, broker or any other person acting on behalf of
the Company to use any Free Writing Prospectus in connection with the
Registration Statement covering Registrable Securities, without the prior
written consent of the Holders which consent shall not be unreasonably withheld
or delayed.  Any consent to the use of a
Free Writing Prospectus included in an underwriting agreement to which the
Holders are parties shall be deemed to satisfy the requirement for such
consent.

 6
 

 

4.             Registration Expenses.  All fees and expenses incident to the
performance of or compliance with this Agreement by the Company shall be borne
by the Company whether or not any Registrable Securities are sold pursuant to a
Registration Statement.  The fees and
expenses referred to in the foregoing sentence shall include, without
limitation, (i) all registration and filing fees (including, without
limitation, fees and expenses (A) with respect to filings required to be made
with the Trading Market on which the Common Stock is then listed for trading
and (B) in compliance with applicable state securities or Blue Sky laws
reasonably agreed to by the Company (including, without limitation, fees and
disbursements of counsel for the Company in connection with Blue Sky
qualifications or exemptions of the Registrable Securities and determination of
the eligibility of the Registrable Securities for investment under the laws of
such jurisdictions as requested by the Holders), (ii) printing expenses
(including, without limitation, expenses of printing certificates for
Registrable Securities and of printing prospectuses if the printing of
prospectuses is reasonably requested by the holders of a majority of the
Registrable Securities included in a Registration Statement), (iii) messenger,
telephone and delivery expenses of the Company, (iv) fees and disbursements of
counsel for the Company, (v) Securities Act liability insurance, if the Company
so desires such insurance, and (vi) fees and expenses of all other Persons
retained by the Company in connection with the consummation of the transactions
contemplated by this Agreement.  In
addition, the Company shall be responsible for all of its internal expenses incurred
in connection with the consummation of the transactions contemplated by this
Agreement (including, without limitation, all salaries and expenses of its
officers and employees performing legal or accounting duties). In no event
shall the Company be responsible for any broker or similar commissions or,
except to the extent provided for in the Transaction Documents, any legal fees
or other costs of the Holders.

5.             Indemnification

(a)           Indemnification by the Company.  The Company shall, and hereby does
notwithstanding any termination of this Agreement, indemnify, defend and hold
harmless each Holder, the officers, directors, agents, members, partners, and
employees of each of them, each Person who controls any such Holder (within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act)
and the officers, directors, agents, members, partners, and employees of each
such controlling Person, to the fullest extent permitted by applicable law,
from and against any and all losses, claims, damages, liabilities, costs
(including, without limitation, reasonable attorneys’ fees) and expenses,
(collectively, “Losses”),
as incurred, to the extent arising out of or relating to, any untrue or alleged
untrue statement of a material fact contained or incorporated by reference in a
Registration Statement, any Prospectus or any form of prospectus or in any
amendment or supplement thereto or in any preliminary prospectus, or Issuer
Free Writing Prospectus or arising out of or relating to any omission or
alleged omission of a material fact required to be stated therein or necessary
to make the statements therein (in the case of any Prospectus or form of
prospectus or supplement thereto, in light of the circumstances under which
they were made) not misleading, or any violation or alleged violation by
the Company of the Securities Act, the Exchange Act, any other law, including,
without limitation, any state securities law, or any rule or regulation
thereunder relating to the offer or sale of the Registrable Securities pursuant
to a Registration Statement, but only to the extent, that (i) such untrue
statements or omissions were not based upon information regarding such Holder
furnished in writing to the Company by such Holder 

 7
 

 

or (ii) in the case of an
occurrence of an event of the type specified in Section 3(c)(ii)-(v), the use
by such Holder of an outdated or defective Prospectus or Issuer Free Writing
Prospectus where the Company has failed to notify such Holder in writing that
the Prospectus or Issuer Free Writing Prospectus is outdated or defective.  The Company shall notify the Holders promptly
of the institution, threat or assertion of any Proceeding arising from or in
connection with the transactions contemplated by this Agreement of which the
Company is aware.

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

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

 8
 

 

An Indemnified Party shall have the right to employ
separate counsel in any such Proceeding and to participate in the defense
thereof, but the fees and expenses of such counsel shall be at the expense of
such Indemnified Party or Parties unless: 
(1) the Indemnifying Party has agreed in writing to pay such fees and
expenses; (2) the Indemnifying Party shall have failed promptly to assume the
defense of such Proceeding and to employ counsel reasonably satisfactory to
such Indemnified Party in any such Proceeding; or (3) the named parties to any
such Proceeding (including any impleaded parties) include both such Indemnified
Party and the Indemnifying Party, and such Indemnified Party shall reasonably
believe that a material conflict of interest is likely to exist if the same
counsel were to represent such Indemnified Party and the Indemnifying Party (in
which case, if such Indemnified Party notifies the Indemnifying Party in
writing that it elects to employ separate counsel at the expense of the
Indemnifying Party, the Indemnifying Party shall not have the right to assume
the defense thereof and the reasonable fees and expenses of one separate
counsel shall be at the expense of the Indemnifying Party).  The Indemnifying Party shall not be liable
for any settlement of any such Proceeding effected without its written consent,
which consent shall not be unreasonably withheld, delayed or conditioned.  No Indemnifying Party shall, without the
prior written consent of the Indemnified Party, effect any settlement of any
pending Proceeding in respect of which any Indemnified Party is a party, unless
such settlement includes an unconditional release of such Indemnified Party
from all liability on claims that are the subject matter of such
Proceeding.  The failure to deliver
written notice to the Indemnifying Party within a reasonable time of the
commencement of any such action shall not relieve such Indemnifying Party of
any liability to the Indemnified Party under this Section 5, except to the
extent that the Indemnifying Party is prejudiced in its ability to defend such
action.

Subject to the terms of this Agreement, all reasonable
fees and expenses of the Indemnified Party (including reasonable fees and
expenses to the extent incurred in connection with investigating or preparing
to defend such Proceeding in a manner not inconsistent with this Section) shall
be paid promptly to the Indemnified Party, as incurred, but no later than ten
(10) Trading Days of written notice thereof to the Indemnifying Party.

The indemnity agreements contained herein shall be in
addition to  (i) any cause of action or
similar right of the Indemnified Party or Indemnified Person against the
indemnifying party or others, and (ii) any liabilities to which the
Indemnifying Party may be subject pursuant to law.

(d)           Contribution.  If the indemnification under Section 5(a) or
5(b) is unavailable to an Indemnified Party, then each Indemnifying Party, in
lieu of indemnifying such Indemnified Party, shall contribute to the amount
paid or payable by such Indemnified Party as a result of such Losses, in such
proportion as is appropriate to reflect the relative fault of the Indemnifying
Party and Indemnified Party in connection with the actions, statements or
omissions that resulted in such Losses as well as any other relevant equitable
considerations. The relative fault of such Indemnifying Party and Indemnified
Party shall be determined by reference to, among other things, whether any
action in question, including any untrue or alleged untrue statement of a
material fact or 

 9
 

 

omission or alleged
omission of a material fact, has been taken or made by, or relates to
information supplied by, such Indemnifying Party or Indemnified Party, and the
parties’ relative intent, knowledge, access to information and opportunity to
correct or prevent such action, statement or omission.  The amount paid or payable by a party as a
result of any Losses shall be deemed to include, subject to the limitations set
forth in this Agreement, any reasonable attorneys’ or other reasonable fees or
expenses incurred by such party in connection with any Proceeding to the extent
such party would have been indemnified for such fees or expenses if the indemnification
provided for in this Section was available to such party in accordance with its
terms.

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

The indemnity and contribution agreements contained in
this Section are in addition to any liability that the Indemnifying Parties may
have to the Indemnified Parties. The parties to this Agreement hereby acknowledge that they are
sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions hereof including, without limitation, the
provisions of this Section 5, and are fully informed regarding said
provisions.  They further acknowledge
that the provisions of this Section 5 fairly allocate the risks in light
of the ability of the parties to investigate the Company and its business in
order to assure that adequate disclosure is made in the Registration Statement
as required by the Securities Act and the Exchange Act.  The parties are advised that federal or state
public policy as interpreted by the courts in certain jurisdictions may be contrary
to certain of the provisions of this Section 5, and the parties hereto
hereby expressly waive and relinquish any right or ability to assert such
public policy as a defense to a claim under this Section 5 and further
agree not to attempt to assert any such defense.

6.             Miscellaneous

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

 10

 

(b)           No Piggyback on Registrations.  Neither the Company nor any of its security
holders (other than the Holders in such capacity pursuant hereto) may include
securities of the Company in the Registration Statement other than the
Registrable Securities and the securities listed on Schedule 6(b) attached
hereto without the consent of the Holders of a majority in interest of the
Registrable Securities.  No Person has
any right to cause the Company to effect the registration under the Securities
Act of any securities of the Company prior to filing the Registration
Statement.  The Company shall not file
any other registration statements until the initial Registration Statement
required hereunder is declared effective by the Commission, provided that this
Section 6(b) shall not prohibit the Company from filing amendments to
registration statements already filed.

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

(d)           Free Writing Prospectuses.  Each Holder represents that it has not
prepared or had prepared on its behalf or used or referred to, and agrees that
it will not prepare or have prepared on its behalf or use or refer to, any Free
Writing Prospectus, and has not distributed and will not distribute any written
materials in connection with the offer or sale of Common Stock without the
prior written consent of the Company and, in connection with any underwritten
offering, the underwriters.  Any such
Free Writing Prospectus consented to by the Company and the underwriters, as
the case may be, is hereinafter referred to as a “Permitted Free Writing
Prospectus.”  The Company represents
and agrees that it has treated and will treat, as the case may be, each
Permitted Free Writing Prospectus as an Issuer Free Writing Prospectus,
including in respect of timely filing with the SEC, legending and record
keeping.

(e)           Suspension of Trading.  At any time after the Registrable Securities
are covered by an effective Registration Statement, the Company may deliver to
the Holders of such Registrable Securities a certificate (the “Suspension
Certificate”) approved by the Chief Executive Officer of the Company and signed
by an officer of the Company stating that the effectiveness of and sales of
Registrable Securities under the Registration Statement would:

(i)            materially interfere with any
transaction that would require the Company to prepare financial statements
under the Securities Act that the Company would otherwise not be required to
prepare in order to comply with its obligations under the Exchange Act, or

(ii)           require public disclosure of any
transaction of the type discussed in Section 6(e)(i) prior to the time such
disclosure might otherwise be required.

Beginning five (5) Business Days after the receipt of
a Suspension Certificate by Holders of Registrable Securities, the Company may,
in its discretion, require such Holders of Registrable Securities to refrain
from selling or otherwise transferring or disposing of any Registrable
Securities or other Company securities then held by such 

 11
 

 

Holders for a specified period of time that is
customary under the circumstances (not to exceed 75 days during any 12-month
period.  The Company may impose stop
transfer instructions to enforce any required agreement of the Holders under
this Section 6(e).

(f)            Discontinued Disposition.  Each Holder agrees by its acquisition of such
Registrable Securities that, upon receipt of a notice from the Company of the
occurrence of any event of the kind described in Section 3(c)(ii)-(v), such
Holder will forthwith discontinue disposition of such Registrable Securities
under a Registration Statement until such Holder’s receipt of the copies of the
supplemented Prospectus and/or amended Registration Statement or until it is
advised in writing (the “Advice”) by the Company that the use of the
applicable Prospectus may be resumed, and, in either case, has received copies
of any additional or supplemental filings that are incorporated or deemed to be
incorporated by reference in such Prospectus or Registration Statement.  The Company will use its best efforts to
ensure that the use of the Prospectus may be resumed as promptly as it
practicable.  The Company agrees and
acknowledges that any periods during which the Holder is required to
discontinue the disposition of the Registrable Securities hereunder shall be
subject to the provisions of Section 2(b).

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

(h)           Amendments and Waivers. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, unless the same shall be in writing and signed by the Company
and the Holders of a majority in interest of the then outstanding Registrable
Securities.  Notwithstanding the
foregoing, a waiver or consent to depart from the provisions hereof with respect
to a matter that relates exclusively to the rights of Holders and that does not
directly or indirectly affect the rights of other Holders may be given by
Holders of all of the Registrable Securities to which such waiver or consent
relates; provided, however, that the provisions of this sentence
may not be amended, modified, or supplemented except in accordance with the
provisions of the immediately preceding sentence.

 12
 

 

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

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

(k)           No Inconsistent Agreements. Neither the Company nor any of
its subsidiaries has entered, as of the date hereof, nor shall the Company or
any of its subsidiaries, on or after the date of this Agreement, enter into any
agreement with respect to its securities, that would have the effect of
impairing the rights granted to the Holders in this Agreement or otherwise
conflicts with the provisions hereof.

(l)            Execution and Counterparts.  This Agreement may be executed in any number
of counterparts, each of which when so executed shall be deemed to be an
original and, all of which taken together shall constitute one and the same
Agreement.  In the event that any
signature is delivered by facsimile transmission or by e-mail delivery of a
“.pdf” format data file, such signature shall create a valid binding obligation
of the party executing (or on whose behalf such signature is executed) the same
with the same force and effect as if such facsimile or “.pdf” signature page
were the original thereof.

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

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

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

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

(q)           Independent Nature of Holders’
Obligations and Rights.  The
obligations of each Holder hereunder are several and not joint with the
obligations of any other 

 13
 

 

Holder hereunder, and no
Holder shall be responsible in any way for the performance of the obligations
of any other Holder hereunder.  Nothing
contained herein or in any other agreement or document delivered at any
closing, and no action taken by any Holder pursuant hereto or thereto, shall be
deemed to constitute the Holders as a partnership, an association, a joint
venture or any other kind of entity, or create a presumption that the Holders
are in any way acting in concert with respect to such obligations or the
transactions contemplated by this Agreement. 
Each Holder shall be entitled to protect and enforce its rights,
including without limitation the rights arising out of this Agreement, and it
shall not be necessary for any other Holder to be joined as an additional party
in any proceeding for such purpose.

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

 14
 

 

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

	
   

  	
  MEDICALCV, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Eapen Chacko

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Eapen Chacko

  
	
   

  	
   

  	
  Title:

  	
  Vice President,
  Finance and

  
	
   

  	
   

  	
   

  	
  Chief Financial
  Officer

  
	
   

  	
   

  	
   

  	
   

  
					

 

 

[SIGNATURE PAGE
OF HOLDERS FOLLOWS]

 15
 

 

[SIGNATURE PAGE
OF HOLDERS TO MEDICALCV, INC.

REGISTRATION RIGHTS AGREEMENT]

	
  Name of Holder:

  	
  Potomac Capital
  Partners LP

  	
   

  
	
   

  
	
  Signature
  of Authorized Signatory of Holder:

  	
  /s/
  Kenneth Berkow

  	
   

  
	
   

  
	
  Name of
  Authorized Signatory:

  	
  Kenneth Berkow

  	
   

  
	
   

  
	
  Title of
  Authorized Signatory:

  	
  CFO

  	
   

  
								

 

[SIGNATURE
PAGES CONTINUE]

 16
 

 

[SIGNATURE PAGE
OF HOLDERS TO MEDICALCV, INC.

REGISTRATION RIGHTS AGREEMENT]

	
  Name of Holder:

  	
  Potomac Capital
  International Ltd

  	
   

  
	
   

  
	
  Signature
  of Authorized Signatory of Holder:

  	
  /s/
  Kenneth Berkow

  	
   

  
	
   

  
	
  Name of
  Authorized Signatory:

  	
  Kenneth Berkow

  	
   

  
	
   

  
	
  Title of
  Authorized Signatory:

  	
  CFO

  	
   

  
								

 

[SIGNATURE PAGES
CONTINUE]

 17
 

 

[SIGNATURE PAGE
OF HOLDERS TO MEDICALCV, INC.

REGISTRATION RIGHTS AGREEMENT]

	
  Name of Holder:

  	
  Pleiades
  Investment Partners - R LP

  	
   

  
	
   

  
	
  Signature
  of Authorized Signatory of Holder:

  	
  /s/
  Kenneth Berkow

  	
   

  
	
   

  
	
  Name of
  Authorized Signatory:

  	
  Kenneth Berkow

  	
   

  
	
   

  
	
  Title of
  Authorized Signatory:

  	
  CFO

  	
   

  
								

 

[SIGNATURE PAGES
CONTINUE]

 

 18

ANNEX A

Plan of Distribution

The selling shareholders, which as used herein
includes donees, pledgees, transferees or other successors-in-interest selling
shares of common stock or interests in shares of common stock received after
the date of this prospectus from a selling shareholder as a gift, pledge,
partnership distribution or other transfer, may, from time to time, sell,
transfer or otherwise dispose of any or all of their shares of common stock or
interests in shares of common stock on any stock exchange, market or trading
facility on which the shares are traded or in private transactions.  These dispositions may be at fixed prices, at
prevailing market prices at the time of sale, at prices related to the prevailing
market price, at varying prices determined at the time of sale, or at
negotiated prices.

The selling shareholders may use any one or more of
the following methods when disposing of shares or interests therein:

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

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

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

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

·    privately
negotiated transactions;

·    short
sales effected after the date the registration statement of which this
prospectus is a part is declared effective by the SEC;

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

·    broker-dealers
may agree with the selling shareholders to sell a specified number of such shares
at a stipulated price per share; and

·    a
combination of any such methods of sale.

The selling shareholders may, from time to time,
pledge or grant a security interest in some or all of the shares of common
stock owned by them and, if they default in the performance of their secured
obligations, the pledgees or secured parties may offer and sell the shares of
common stock, from time to time, under this prospectus, or under an amendment
or supplement to this prospectus under Rule 424(b)(3) or other applicable
provision of the Securities Act amending the list of selling shareholders to
include the pledgee, transferee or other successors in interest as selling
shareholders under this prospectus.  The
selling shareholders also may transfer the shares of common stock in other
circumstances, in which case the transferees, pledgees or other successors in
interest will be the selling beneficial owners for purposes of this prospectus.

 A-1
 

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

The aggregate proceeds to the selling shareholders
from the sale of the common stock offered by them will be the purchase price of
the common stock less discounts or commissions, if any.  Each of the selling shareholders reserves the
right to accept and, together with their agents from time to time, to reject,
in whole or in part, any proposed purchase of common stock to be made directly
or through agents.  We will not receive
any of the proceeds from this offering. Upon any exercise of any warrants by
payment of cash, however, we will receive the exercise price of the warrants.

The selling shareholders also may resell all or a
portion of the shares in open market transactions in reliance upon Rule 144
under the Securities Act, provided that they meet the criteria and conform to
the requirements of that rule.

The selling shareholders and any underwriters,
broker-dealers or agents that participate in the sale of the common stock or
interests therein may be “underwriters” within the meaning of Section 2(11) of
the Securities Act.  Any discounts,
commissions, concessions or profit they earn on any resale of the shares may be
underwriting discounts and commissions under the Securities Act.  Selling shareholders who are “underwriters”
within the meaning of Section 2(11) of the Securities Act will be subject to
the prospectus delivery requirements of the Securities Act.

To the extent required, the shares of our common stock
to be sold, the names of the selling shareholders, the respective purchase
prices and public offering prices, the names of any agents, dealer or
underwriter, any applicable commissions or discounts with respect to a
particular offer will be set forth in an accompanying prospectus supplement or,
if appropriate, a post-effective amendment to the registration statement that
includes this prospectus.

In order to comply with the securities laws of some
states, if applicable, the common stock may be sold in these jurisdictions only
through registered or licensed brokers or dealers.  In addition, in some states the common stock
may not be sold unless it has been registered or qualified for sale or an
exemption from registration or qualification requirements is available and is
complied with.

We have advised the selling shareholders that the
anti-manipulation rules of Regulation M under the Exchange Act may apply to
sales of shares in the market and to the activities of the selling shareholders
and their affiliates.  In addition, we
will make copies of this prospectus (as it may be supplemented or amended from
time to time) available to the selling shareholders for the 

 A-2
 

purpose of satisfying the
prospectus delivery requirements of the Securities Act.  The selling shareholders may indemnify any
broker-dealer that participates in transactions involving the sale of the
shares against certain liabilities, including liabilities arising under the
Securities Act.

We have agreed to indemnify the selling shareholders
against liabilities, including liabilities under the Securities Act and state
securities laws, relating to the registration of the shares offered by this
prospectus.

We have agreed with the selling shareholders to keep
the registration statement of which this prospectus constitutes a part
effective until the earlier of (1) such time as all of the shares covered by
this prospectus have been disposed of pursuant to and in accordance with the
registration statement or Rule 144 under the Securities Act, or (2) the date on
which the shares may be sold pursuant to Rule 144(k) of the Securities Act.

 A-3

ANNEX B

	
  

  	
   

  	
  Name of Selling
  Shareholder

  

 

MEDICALCV, INC.

QUESTIONNAIRE FOR SELLING SHAREHOLDERS

PLEASE RETURN BY:  October 20, 2006

This Questionnaire is being
furnished to all selling shareholders of MedicalCV, Inc., a Minnesota
corporation (the “Company”), and relates to certain information required
to be disclosed in the registration statement (the “Registration Statement”)
being prepared on behalf of you and the Company for filing with the United
States Securities and Exchange Commission (the “SEC”).

Selling shareholders of the Company
may be personally liable under the federal securities laws of the United States
if the Registration Statement contains any statement which is false or
misleading as to any material fact or omits to state any material fact
necessary in order to make the statements therein not false or misleading.

Your careful completion of this Questionnaire
will help ensure that the Registration Statement will be complete and
accurate.  Careful consideration of the
instructions and definitions contained in the endnotes to various items is
essential to an understanding of the questions.

PLEASE PROVIDE A RESPONSE TO EVERY
QUESTION, indicating “None”
or “Not Applicable” where appropriate. 
Please complete, sign, and fax one copy of this Questionnaire NO  LATER  THAN OCTOBER 20,
2006 to:

Melissa S. Tveit

Briggs and Morgan, P.A.

2200 IDS Center

80 South Eighth Street

Minneapolis, MN 55402

(612) 977-8628 (phone)

(612) 977-8650 (fax)

mtveit@briggs.com (email)

 B-1
 

 

Unless stated otherwise, answers
should be given as of the date you complete this Questionnaire.  However, it is your responsibility to inform
us of any changes that may occur to your situation between the date you
complete the Questionnaire and the effective date of the Registration
Statement.  If there is any situation
about which you have any doubt, please give relevant facts so that the
information may be reviewed.

 B-2
 

 

QUESTIONNAIRE

STOCK OWNERSHIP

Item 1.  Beneficial Ownership.

a.  Deemed
Beneficial Ownership.  Please state
the amount of securities of the Company you own as of October 1, 2006,
assuming, if applicable, the conversion of your shares of Preferred Stock into,
and exercise of warrants for, shares of Common Stock.  (If none, please so state in each case.) 

	
  Amount
  Beneficially Owned(1)

  	
   

  	
  Number of Shares of Common Stock Owned

  (on an as-converted basis, as applicable)

  
	
   

  	
   

  	
   

  
	
  Total Shares:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Of such shares: 

  	
   

  	
   

  
	
  Shares as to which you have sole voting
  power:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Shares as to which you have shared voting
  power:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Shares as to which you have sole investment
  power:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Shares as to which you have shared investment
  power:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Please state the
  number of shares owned by family members, trusts and other organizations with
  which you have a relationship, and any other shares of which you may be
  deemed to be the “beneficial owner”(1)

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Total Shares:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Of such shares: 

  	
   

  	
   

  
	
  Shares as to which you have sole voting
  power:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Shares as to which you have shared voting
  power:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Shares as to which you have sole investment
  power:

  	
   

  	
   

  

 

 B-3
 

 

 

	
  Shares as to which you have shared investment
  power:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Shares which you
  will have a right to acquire before November 30, 2006, through the exercise
  of options, warrants or otherwise:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Shares of Common
  Stock you intend to offer for sale pursuant to the Registration Statement:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Shares of Common
  Stock that you will hold after the offering for sale of Common Stock that is
  the subject of the Registration Statement:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Do you have any
  present plans to exercise options or otherwise acquire, dispose of or
  transfer shares of Common Stock (on an as-converted basis) of the Company
  between the date you complete this Questionnaire and November 30, 2006?

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Answer:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  If so, please
  describe.

  	
   

  	
   

  

 

 

b.             Pledged
Securities.  If any of such
securities have been pledged or otherwise deposited as collateral or are the
subject matter of any voting trust or other similar agreement or of any
contract providing for the sale or other disposition of such securities, please
give the details thereof.

Answer:

 

c.             Disclaimer
of Beneficial Ownership.  Do you wish
to disclaim beneficial ownership(1) of any of the shares reported in response
to Item 1(a)?

Answer:

 

 B-4
 

 

If the answer is “Yes”, please furnish the following
information with respect to the person or persons who should be shown as the
beneficial owner(s)1 of the shares in question.

	
  Name and Address of

  Actual Beneficial Owner

  	
   

  	
  Relationship of

  Such Person To You

  	
   

  	
  Number of Shares

  Beneficially Owned

  
	
     

  	
   

  	
   

  	
   

  	
   

  
	
    

  	
   

  	
   

  	
   

  	
   

  
	
     

  	
   

  	
   

  	
   

  	
   

  

 

Item 2.  Major Shareholders.  Please state below the names of persons or
groups known by you to own beneficially(1) more than 5% of the Company’s Common
Stock.

Answer:

 

Item 3.  Change of Control.  Do you know of any contractual arrangements,
including any pledge of securities of the Company, the operation of which may
at a subsequent date result in a change of control of the Company?

Answer:

 

Item 4.  Relationship with the Company.  Please state the nature of any position,
office or other material relationship you have, or have had within the past
three years, with the Company or its affiliates.

	
  

  	
   

  	
  Nature of

  
	
  Name

  	
   

  	
  Relationship

  
	
    

  	
   

  	
   

  
	
    

  	
   

  	
   

  
	
    

  	
   

  	
   

  

 

Item 5.  Correct Name.  Please confirm that your name or your
organization’s name, as it appears on the signature page to this Questionnaire,
is exactly as it should appear in the “Principal and Selling Shareholder”
section of the Registration Statement:

o
Yes, this name is correct.

o
No, the correct name should be:                                                 

 B-5
 

 

SIGNATURE

If at any time any of the information set forth in my
responses to this Questionnaire has changed due to passage of time, or any
development occurs which requires a change in any of my answers, or has for any
other reason become incorrect, I agree immediately to furnish to the individual
to whom a copy of this Questionnaire is to be sent, as indicated and at the
address shown on the first page hereof, any necessary or appropriate correcting
information.  Otherwise, the Company is to
understand that the above information continues to be, to the best of my
knowledge, information and belief, complete and correct.

I understand that the information that I am furnishing
to you herein will be used by the Company in the preparation of its Registration
Statement and hereby consent to the inclusion of such information in the
Registration Statement.

	
   

  	
   

  	
  Name of Shareholder:

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Date:                            ,
  2006

  	
   

  	
  Signature:

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Print Name:

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Title (if applicable):

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Address:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Street

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  City

  	
  State

  	
  Zip Code

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Telephone Number

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Facsimile Number

  
								

 

 B-6
 

 

ENDNOTE

1.                                       Beneficial
Ownership.  You are the beneficial
owner of a security, as defined in Rule 13d-3 under the Securities
Exchange Act of 1934 (the “Exchange Act”), if you, directly or
indirectly, through any contract, arrangement, understanding, relationship or
otherwise have or share: (1) voting power, which includes the power to
vote, or to direct the voting of, such security, and/or (2) investment
power, which includes the power to dispose, or to direct the disposition of,
such security.  You are also the
beneficial owner of a security if you, directly or indirectly, create or use a
trust, proxy, power of attorney, pooling arrangement or any other contract,
arrangement, or device with the purpose or effect of divesting yourself of
beneficial ownership of a security or preventing the vesting of such beneficial
ownership.

You are deemed to be the beneficial owner of a
security if you have the right to acquire beneficial ownership of such security
at any time within sixty days including, but not limited to, any right
to acquire such security (a) through the exercise of any option, warrant
or right, (b) through the conversion of a security, or (c) pursuant
to the automatic termination of, or the power to revoke a trust, discretionary
account, or similar arrangement.

Ordinarily, shares held in the name of your spouse or
minor child should be considered as beneficially owned by you absent special
circumstances to indicate that you do not have, as a practical matter, voting
power or investment power over such shares. 
Similarly, absent countervailing facts, securities held in the name of
relatives who share your home are to be reported as being beneficially owned by
you.  In addition, securities held for
your benefit in the name of others, such as nominees, trustees and other
fiduciaries, securities held by a partnership of which you are a partner, and
securities held by a corporation controlled by you should be regarded as
beneficially owned by you.

This definition of beneficial ownership is very broad;
therefore, even through you may not actually have or share voting or investment
power with respect to securities owned by persons in your family or living in
your home, you should include such shares in your beneficial ownership
disclosure and may then disclaim beneficial ownership of such securities. Please note, however, that shares in which you have an economic
interest but over which you have no voting or investment control (for example,
shares in a trust of which you are the beneficiary but not the trustee) are not
deemed beneficially owned by you for the purposes of this questionnaire.

 B-7

Schedule 6(b)

(Registration Rights)

The following securities, which have not been previously registered,
have piggyback registration rights:

Warrants
issued on November 20, 2001, to the underwriter of the Company’s initial public
offering for the purchase of an aggregate of 11,250 shares, exercisable at
$67.50 per share, expiring November 20, 2006.

The following securities, which have been previously registered, have
piggyback registration rights:

The securities registered for resale on the
Company’s Registration Statements on Form SB-2 (File Nos. 333-131147 and
333-131148).

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