Document:

Exhibit 10.1

SECURITIES PURCHASE AGREEMENT

This Securities Purchase
Agreement (this “Agreement”) is dated as of September 25, 2007, between
ImageWare Systems, Inc., a Delaware corporation (the “Company”), and
each purchaser identified on the signature pages hereto (each, including its
successors and assigns, a “Purchaser” and collectively the “Purchasers”).

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

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

ARTICLE I.

DEFINITIONS

1.1           Definitions. 
In addition to the terms defined elsewhere in this Agreement, for all
purposes of this Agreement, the following terms have the meanings set forth 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 405 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.

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

“Business Day” means any day except
any Saturday, any Sunday, any day which is 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 Securities pursuant to Section 2.1.

“Closing Date” means the Trading 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 Securities have been satisfied or waived.

“Commission” means the Securities and
Exchange Commission.

 

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“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 Paul, Hastings,
Janofsky & Walker LLP, with offices located at 3579 Valley Centre Drive, San
Diego, CA 92130.

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

“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) (I) shares of Common
Stock or options to employees, officers or directors of the Company and (II) up
to 250,000 shares of Common Stock or options (subject to adjustment for reverse
and forward stock splits and the like) to consultants of the Company in any
rolling 12-month period, in each case pursuant to any stock or option plan duly
adopted for such purpose, by a majority of the non-employee members of the
Board of Directors or a majority of the members of a committee of non-employee
directors established for such purpose, (b) securities upon the exercise or
exchange of or conversion of any Securities issued hereunder and/or other
securities exercisable or exchangeable for or convertible into shares of Common
Stock issued and outstanding on the date of this Agreement, provided that such
securities have not been amended since the date of this Agreement to increase
the number of such securities or to decrease the exercise, exchange or
conversion price of such securities, including shares of Common Stock issuable
in lieu of cash dividends on the Company’s outstanding Preferred Stock, and (c)
securities issued pursuant to acquisitions or strategic transactions approved
by a majority of the disinterested directors of the Company, provided that 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.

 

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 “FWS”
means Feldman Weinstein & Smith LLP with offices located at 420 Lexington
Avenue, Suite 2620, New York, New York 10170-0002.

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

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

 “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 Maximum” shall have the
meaning ascribed to such term in Section 4.12.

“Per Share Purchase Price” equals
$1.50, subject to adjustment for reverse and forward stock splits, stock
dividends, stock combinations and other similar transactions of the Common Stock
that occur after the date of this Agreement.

“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 4.12.

“Proceeding” means an action, claim,
suit, investigation or proceeding (including, without limitation, an informal
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.

 

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“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” means all “short sales”
as defined in Rule 200 of Regulation SHO under the Exchange Act (but shall not
be deemed to include the location and/or reservation of borrowable shares of
Common Stock). 

 “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 4.12.

“Subsequent Financing Notice” shall
have the meaning ascribed to such term in Section 4.12.

“Subsidiary” means any subsidiary of
the Company as set forth on Schedule 3.1(a), and shall, where
applicable, include any subsidiary of the Company formed or acquired after the
date hereof.

 “Trading
Day” means a day on which the New York Stock Exchange is open for trading.

“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, the
Registration Rights Agreement, all schedules and exhibits thereto and hereto,
and any other

 

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documents or agreements executed in connection with the transactions
contemplated hereunder.

“Transfer Agent” means ComputerShare
Trust Company, N.A., with a mailing address of 250 Royall Street, Canton,
Massachusetts 02021 and a facsimile number of (617) 575-2549, and any successor
transfer agent of the Company.

“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 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 then outstanding and reasonably
acceptable to the Company.

“Warrants” means, collectively, the
Common Stock purchase warrants delivered to the Purchasers at the Closing in
accordance with Section 2.2(a) hereof, which Warrants shall become exercisable
6 months and 1 day following their issuance and have a term of exercise equal
to five years, in the form of Exhibit C attached hereto.

“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 the Purchasers, severally and not jointly, agree to
purchase, up to an aggregate of $3,500,000 of Shares and Warrants, at a
purchase price of $1.50 per share.  Each
Purchaser shall deliver to the Company, via wire transfer or a certified check,
immediately available funds equal to its Subscription Amount and the Company
shall deliver to each Purchaser its respective Shares and a Warrant as
determined pursuant to Section 2.2(a), and the Company and each Purchaser shall
deliver the other items set forth in Section 2.2 deliverable at the Closing.  Upon satisfaction of the covenants and
conditions set forth in Sections 2.2 and 2.3, the Closing shall occur at the
offices of FWS or such other location as the parties shall mutually agree.

 

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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,
substantially in the form of Exhibit B attached hereto;

(iii)          a certificate evidencing a number of
Shares 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 a number of shares of Common Stock equal to 50% of the Shares
issuable to such Purchaser hereunder, with an exercise price equal to $1.67,
subject to adjustment therein; and

 

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

(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 the Company;

(iii)          if such Purchaser is an individual,
such Purchaser shall provide the Company with an accredited investor
questionnaire in form and substance reasonably acceptable to the Company; and

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

2.3           Closing Conditions. 

(a)           The obligations of the Company
hereunder in connection with 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 Purchasers contained herein;

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

 

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(iii)          the
delivery by each Purchaser 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
shall have been no Material Adverse Effect with respect to the Company since
the date hereof; and

(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 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 L.P. 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 Securities at the Closing.

ARTICLE III.

REPRESENTATIONS AND WARRANTIES

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

(a)           Subsidiaries.  All of the direct and indirect subsidiaries of
the Company are set forth on Schedule 3.1(a).  The Company owns, directly or indirectly, all
of the capital stock or other equity interests of each Subsidiary free and
clear of any Liens, and all of the issued and outstanding shares of capital
stock of each Subsidiary are validly issued and are fully paid, non-assessable
and free of preemptive and similar rights to 

 

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subscribe for or purchase
securities.  If the Company has no
subsidiaries, then all other references to the Subsidiaries or any of them in
the Transaction Documents shall be disregarded.

(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 certificate 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 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”)
and no Proceeding has been instituted in any such jurisdiction revoking,
limiting or curtailing or seeking to revoke, limit or curtail such power and
authority or qualification.

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

 

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charter documents, or (ii)
conflict with, or constitute a material 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) application(s)
to each applicable Trading Market for the listing of the Securities for trading
thereon in the time and manner required thereby and (iv) the filing of Form D
with the Commission and such filings as are required to be made under
applicable state securities laws (collectively, the “Required Approvals”).

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

(g)           Capitalization.  The capitalization of the Company is as set
forth on Schedule 3.1(g), which Schedule 3.1(g) shall also include
the number of shares of Common Stock owned beneficially, and of record, by
Affiliates of the Company as of the date hereof. The Company has not issued any
capital stock since its most recently filed
periodic report under the Exchange Act, other than pursuant to the
exercise of employee stock options under the Company’s incentive plans, the
issuance of shares of Common Stock to employees pursuant to the Company’s
employee stock purchase plans and 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 

 

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has any right of first
refusal, preemptive right, right of participation, or any similar right to
participate in the transactions contemplated by the Transaction Documents.  Except as a result of the purchase and sale
of the Securities, there are no outstanding options, warrants, scrip rights to
subscribe to, calls or commitments of any character whatsoever relating to, or
securities, rights or obligations convertible into or 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.  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. All of the outstanding shares of
capital stock of the Company are validly issued, fully paid and nonassessable,
have been issued in compliance with all federal and state securities laws, and
none of such outstanding shares was issued in violation of any preemptive
rights or similar rights to subscribe for or purchase securities.  No further approval or authorization of any
stockholder, the Board of Directors or others is required for the issuance and
sale of the Securities.  There are no
stockholders agreements, voting agreements or other similar agreements with
respect to the Company’s capital stock to which the Company is a party or, to
the knowledge of the Company, between or among any of the Company’s
stockholders.

(h)           SEC Reports; Financial Statements.  The Company has complied in all material respects
with requirements to file all reports, schedules, forms, statements and other
documents required to be filed by the Company under the Securities Act and the
Exchange Act, including pursuant to Section 13(a) or 15(d) thereof, for the two
years preceding the date hereof (the foregoing materials, including the
exhibits thereto and documents incorporated by reference therein, being
collectively referred to herein as the “SEC Reports”) on a timely basis
or has received a valid extension of such time of filing and has filed any such
SEC Reports prior to the expiration of any such extension.  Except to the extent corrected by subsequent
SEC Reports or amendments to a prior SEC Report, 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, when filed, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading. 
The financial statements of the Company included in the SEC Reports
comply in all material respects with applicable accounting requirements and the
rules and regulations of the Commission with respect thereto as in effect at
the time of filing.  Such financial
statements have been prepared in accordance with United States generally
accepted accounting principles (“GAAP”) applied on a consistent basis
during the periods involved, except as may be otherwise specified in such
financial statements or the notes thereto and except that unaudited financial
statements may not contain all footnotes required by GAAP, and fairly present
in all material respects the financial position of the Company and its
consolidated Subsidiaries as of and for the dates thereof and the results of
operations and cash flows for the periods then ended, subject, in the case of
unaudited statements, to normal, immaterial, year-end audit adjustments.

 

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(i)            Material Changes.  Since the date of the latest audited
financial statements included within the SEC Reports, except as specifically
disclosed in a subsequent SEC Report filed prior to the date hereof, (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 material liabilities (contingent or otherwise) other than
(A) trade payables and accrued expenses incurred in the ordinary course of
business consistent with past practice and (B) liabilities not required to be
reflected in the Company’s financial statements pursuant to GAAP or disclosed
in filings made with the Commission, (iii) the Company has not altered its
method of accounting, (iv) the Company has not declared or made any dividend or
distribution of cash or other property to its stockholders or purchased,
redeemed or made any agreements to purchase or redeem any shares of its capital
stock and (v) the Company has not issued any equity securities to any officer,
director or Affiliate, except pursuant to existing Company stock option plans
or securities outstanding as of the date hereof.  The Company does not have pending before the
Commission any request for confidential treatment of information.  Except for the issuance of the Securities
contemplated by this Agreement or as set forth on Schedule 3.1(i), no
event, liability or development has occurred or exists with respect to the
Company or its Subsidiaries or their respective business, properties,
operations or financial condition, that would be required to be disclosed by
the Company under applicable securities laws at the time this representation is
made or deemed made that has not been publicly disclosed at least 1 Trading Day
prior to the date that this representation is made.

(j)            Litigation.  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.  Neither the Company nor any
Subsidiary, nor, to the knowledge of the Company, any director or officer
thereof, is or has been the subject of any Action involving a claim of
violation of or liability under federal or state securities laws or a claim of
breach of fiduciary duty.  There has not
been, and to the knowledge of the Company, there is not pending 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.  None of the Company’s or its
Subsidiaries’ employees is a member of a union that relates to such employee’s
relationship with the Company or such Subsidiary, and neither the Company nor
any of its Subsidiaries is a party to a collective bargaining agreement, and
the Company and its Subsidiaries believe that their relationships with their
employees are 

 

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good.  No executive officer, to the knowledge of the
Company, is, or is now expected to be, in violation of any material term of any
employment contract, confidentiality, disclosure or proprietary information
agreement or non-competition agreement, or any other contract or agreement or
any restrictive covenant in favor of any third party, and the continued
employment of each such executive officer does not subject the Company or any
of its Subsidiaries to any liability with respect to any of the foregoing
matters.  The Company and its
Subsidiaries are in compliance with all U.S. federal, state, local and foreign
laws and regulations relating to employment and employment practices, terms and
conditions of employment and wages and hours, except where the failure to be in
compliance could not, individually or in the aggregate, reasonably be expected
to have a Material Adverse Effect.

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

 

12

 

(o)           Patents and Trademarks.  To the Company’s knowledge, the Company and
the Subsidiaries have, or have rights to use, all patents, patent applications,
trademarks, trademark applications, service marks, trade names, trade secrets,
inventions, copyrights, licenses and other intellectual property rights and
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 notice (written or otherwise) that
any of the Intellectual Property Rights used by the Company or any Subsidiary
violates or infringes upon the intellectual property rights of any Person.  To the knowledge of the Company, all such
Intellectual Property Rights are enforceable and there is no existing
infringement by another Person of any of the Intellectual Property Rights.  The Company and its Subsidiaries have taken
reasonable security measures to protect the secrecy, confidentiality and value
of all of their intellectual properties, except where failure to do so could
not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect.

(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 the Company deems adequate for the businesses in
which the Company and the Subsidiaries are engaged, including, but not limited to,
directors and officers insurance coverage at least equal to the aggregate
Subscription Amount.  Neither the Company
nor any Subsidiary has any reason to believe that it will not be able to renew
its existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business without a significant increase in cost.

(q)           Transactions with Affiliates and
Employees.  Except as set forth in
the SEC Reports, none of the officers or directors of the Company and, to the
knowledge 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 $100,000 other than for (i) payment of
salary or consulting fees for services rendered, (ii) reimbursement for
expenses incurred on behalf of the Company and (iii) other employee benefits,
including stock option agreements under any stock option plan of the Company.

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

 

13

 

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 material 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.

(s)           Certain Fees.  Except for fees payable to Empire Financial
Group (“Empire”), 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 and the accuracy of the statements made to the Company by the
placement agent to this transaction, no registration under the Securities Act
is required for the offer and sale of the Securities by the Company to the Purchasers
as contemplated hereby. The issuance and sale of the Securities hereunder does
not contravene the rules and regulations of the Trading Market.

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

(v)           Registration Rights.  Other than each of the Purchasers, no Person
has any right to cause the Company to effect the registration under the
Securities Act of any securities of the Company that are currently not satisfied.

(w)          Listing and Maintenance
Requirements.  The Common Stock is
registered pursuant to Section 12(b) or 12(g) of the Exchange Act, and the
Company has taken no 

 

14

 

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 in all material
respects with all such listing and maintenance requirements, provided that the
price of the Common Stock continues to meet the minimum price requirements for
continued listing on the Trading Market; and provided further that the Company
makes no warranty as to the future price of its Common Stock and its impact on
such listing or maintenance requirements.

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

(y)           Disclosure.  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 it believes 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, is true and correct in all material respects and does not contain
any untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements made therein, in light of the
circumstances under which they were made, not misleading.  The Company acknowledges and agrees that no
Purchaser makes or has made any representations or warranties with respect to
the transactions contemplated hereby other than those specifically set forth in
Section 3.2 hereof.

(z)            No Integrated Offering.
Assuming the accuracy of the Purchasers’ representations and warranties set
forth in Section 3.2 and the accuracy of the statements made to the placement
agents to the transaction contemplated hereunder, 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
(i) the Securities Act 

 

15

 

which would require the
registration of any such securities under the Securities Act, or (ii) 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 consolidated 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, 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.  The Company does not intend to incur debts
beyond its ability to pay such debts as they mature (taking into account the
timing and amounts of cash to be payable on or in respect of its debt).  The Company has no knowledge of any facts or
circumstances which lead it to believe that it will file for reorganization or
liquidation under the bankruptcy or reorganization laws of any jurisdiction
within one year from the Closing Date. 
The SEC Reports set forth as of the respective dates thereof all
outstanding secured and unsecured Indebtedness of the Company or any
Subsidiary, or for which the Company or any Subsidiary has commitments.  For the purposes of this Agreement, “Indebtedness”
means (a) any liabilities for borrowed money or amounts owed in excess of
$50,000 (other than trade accounts payable incurred in the ordinary course of
business), (b) all guaranties, endorsements and other contingent obligations in
respect of indebtedness of others, whether or not the same are or should be
reflected in the Company’s balance sheet (or the notes thereto), except
guaranties by endorsement of negotiable instruments for deposit or collection
or similar transactions in the ordinary course of business; and (c) the present
value of any lease payments in excess of $50,000 due under leases required to
be capitalized in accordance with GAAP. 
Neither the Company nor any Subsidiary is in default with respect to any
Indebtedness.

(bb)         Tax Status.  Except for matters that would not,
individually or in the aggregate, have or reasonably be expected to result in a
Material Adverse Effect, the Company and each Subsidiary has filed all
necessary federal, state and foreign income and franchise tax returns 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.  Assuming the accuracy of the statements made
to the placement agents to the transaction contemplated hereunder, 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 

 

16

 

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
accounting firm is set forth on Schedule 3.1(ee).  To the knowledge and belief of the Company,
such accounting firm (i) is a registered public accounting firm as required by
the Exchange Act and (ii) shall express its opinion with respect to the
financial statements to be included in the Company’s Annual Report on Form 10-K
for the year ending December 31, 2007.

(ff)           No Disagreements with Accountants
and Lawyers.  There are no
disagreements of any kind presently existing, or reasonably anticipated by the
Company to arise, between the Company and the independent auditing firms and
outside counsel formerly or presently employed by the Company which could
affect the Company’s ability to perform any of its obligations under any of the
Transaction Documents, and the Company is current with respect to any fees owed
to its independent auditing firm and outside counsel.

(gg)           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.  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.

(hh)         Acknowledgement Regarding Purchaser’s Trading Activity. 
Anything in this Agreement or elsewhere herein to the contrary
notwithstanding (except for Sections 3.2(f) and 4.14 hereof), it is understood
and acknowledged by the Company (i) that none of the Purchasers have been asked
by the Company to agree, nor has any Purchaser agreed, to desist from
purchasing or selling, long and/or short, securities of the Company, or “derivative”
securities based on securities issued by the Company or to hold the Securities
for any specified term; (ii) that past or future open market or other
transactions by any Purchaser, specifically including, without limitation,
Short Sales or “derivative” transactions, before or after the closing of this
or future private placement transactions, 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 counter-party in any “derivative”
transaction.  The Company further
understands and acknowledges that (a) one or more Purchasers may 

 

17

 

engage in hedging activities
at various times during the period that the Securities are outstanding,
including, without limitation, during the periods that the value of the Warrant
Shares deliverable with respect to Securities are being determined and (b) such
hedging activities (if any) could reduce the value of the existing stockholders’
equity interests in the Company at and after the time that the hedging
activities are being conducted.  The
Company acknowledges that such aforementioned hedging activities do not
constitute a breach of any of the Transaction Documents.

(ii)           Regulation M Compliance. 
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 (other than for the placement agents’ placement 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.

(jj)           Form S-3 Eligibility.  The Company is eligible to register the
resale of the Securities for resale by the Purchaser on Form S-3 promulgated
under the Securities Act.

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

(a)           Organization; Authority.  Such Purchaser, if not an individual, 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 and delivery of the
Transaction Documents and performance by such Purchaser of the transactions
contemplated by the Transaction Documents 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 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 

 

18

 

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 under the Securities Act or (ii) a “qualified institutional
buyer” as defined in Rule 144A(a) under the Securities Act.  Such Purchaser is not required to be
registered as a broker-dealer under Section 15 of the Exchange Act and all of
the SEC Reports have been made available to the Purchaser.

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

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

(f)            Short Sales and Confidentiality
Prior To The Date Hereof.  Other than
consummating the transactions 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, directly or indirectly executed any
purchases or sales, including Short Sales, of the securities of the
Company during the period commencing from the time that such Purchaser first
received notice of the identity of the Company as the issuer in the transaction
from the Company or any other Person representing the Company 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 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 

 

19

 

has maintained the
confidentiality of all disclosures made to it in connection with this
transaction (including the existence and terms of this transaction).

(g)           No Government Review.  Such Purchaser understands that no United
States federal or state agency or any other government or governmental agency
has passed upon or made any recommendation or endorsement of the Securities
purchased hereunder.

(h)           No Conflict.  The execution and delivery of this Agreement
and the transactions and contemplated herein by such Purchaser and the
consummation of the transactions contemplated hereby and thereby will not
conflict with or result in any violation of or default by such Purchaser (with
or without notice or lapse of time, or both) under, or give rise to a right of
termination, cancellation or acceleration of any obligation or to a loss of a
material benefit under (i) any provision of the organizational documents of
such Purchaser, (ii) any material agreement or instrument, permit, franchise,
or license or (iii) any judgment, order, statute, law, ordinance, rule or
regulations, applicable to such Purchaser or its respective properties or
assets.

(i)            Brokers.  Each Purchaser has not retained, utilized or
been represented by any broker or finder in connection with the transactions
contemplated by this Agreement.

(j)            Information.  Each Purchaser and its advisors, if any, have
been furnished with all materials relating to the business, finances and
operations of the Company, and materials relating to the offer and sale of the
Securities, if any, that have been requested by the Purchaser or its advisors,
if any. The Purchaser and its advisors, if any, have been afforded the
opportunity to ask questions of the Company. The Purchaser acknowledges and
understands that its investment in the Securities involves a significant degree
of risk, including the risks reflected in the SEC Reports. Neither such
inquiries nor any other due diligence investigation conducted by such Purchaser
shall modify, limit or otherwise affect such Purchaser’s right to rely on the
Company’s representations and warranties contained in this Agreement.

ARTICLE IV.

OTHER AGREEMENTS OF THE PARTIES

4.1           Transfer Restrictions.  

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

 

20

 

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:

THIS SECURITY HAS 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.  THIS SECURITY
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.  Further, no notice shall be required of such
pledge.  At the appropriate Purchaser’s
expense, the Company will execute and deliver such reasonable documentation as
a pledgee or secured party of Securities may reasonably request in connection
with a pledge or transfer of the Securities, including, if the Securities are
subject to registration pursuant to the Registration Rights Agreement, the
preparation and filing of any required prospectus supplement under Rule
424(b)(3) under the Securities Act or other applicable provision of the
Securities Act to appropriately amend the list of Selling Stockholders
thereunder.

(c)           Certificates evidencing the Shares
and Warrant Shares shall not contain any legend (including the legend set forth
in Section 4.1(b)), (i) while a registration statement (including the
Registration Statement) covering the resale of such security is 

 

 

21

 

effective under the
Securities Act, or (ii) following any sale of such Shares or Warrant Shares
pursuant to Rule 144, or (iii) if such Shares or Warrant Shares are eligible
for sale under Rule 144(k), or (iv) if such legend is not required under
applicable requirements of the Securities Act (including judicial
interpretations and pronouncements issued by the staff of the Commission).  The Company shall cause its counsel to issue
a legal opinion to the Transfer Agent promptly after the Effective Date if
required by the Transfer Agent to effect the removal of the legend
hereunder.  If all or any portion of a
Warrant is exercised at a time when there is an effective registration
statement to cover the resale of the Warrant Shares, such Warrant Shares shall
be issued free of all legends, provided that the holder of the Warrant Shares
is not an Affiliate of the Company.  The
Company agrees that following the Effective Date or at such time as such legend
is no longer required under this Section 4.1(c), it will, no later than three
Trading Days following the delivery by a Purchaser to the Company or the
Transfer Agent of a certificate representing Shares or Warrant Shares, as the
case may be, issued with a restrictive legend (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 all restrictive and
other legends.  The Company may not make
any notation on its records or give instructions to the Transfer Agent 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 to the Purchaser
by crediting the account of the Purchaser’s prime broker with the Depository
Trust Company System as directed by such Purchaser.

 

(d)           In addition to such Purchaser’s other
available remedies, the Company shall pay to a Purchaser, in cash, as partial
liquidated damages and not as a penalty, for each $1,000 of Shares or Warrant
Shares (based on the VWAP of the Common Stock on the date such Securities are
submitted to the Transfer Agent) delivered for removal of the restrictive
legend and subject to Section 4.1(c), $10 per Trading Day (increasing to $20
per Trading Day seven (7) Trading Days after such damages have begun to accrue)
for each Trading Day commencing on the second Trading Day after the Legend
Removal Date until such certificate is delivered without a legend. Nothing
herein shall limit such Purchaser’s right to pursue actual damages for the
Company’s failure to deliver certificates representing any Securities as
required by the Transaction Documents, and such Purchaser shall have the right
to pursue all remedies available to it at law or in equity including, without
limitation, a decree of specific performance and/or injunctive relief.

(e)           Each Purchaser, severally and not
jointly with the other Purchasers, agrees that such 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, and acknowledges 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 upon this understanding.

 

 

22

 

4.2           Furnishing of
Information.  Until the earliest of the time that (i)
no Purchaser owns Securities or (ii) the Warrants have expired, the Company
covenants to use reasonable efforts 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 even if the Company is not then subject to the reporting
requirements of the Exchange Act.  As
long as any Purchaser owns Securities, if the Company is not required to file
reports pursuant to the Exchange Act, it will prepare and furnish to the
Purchasers and make publicly available in accordance with Rule 144(c) such
information as is required for the Purchasers to sell the Securities under Rule
144. The Company further covenants that it will take such further action as any
holder of Securities may reasonably request, 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 Rule
144.

4.3           Integration.  For
a period of six months from the Closing Date, 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 for purposes of the rules and regulations of any 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 9:00 a.m. (New York City time) on the Trading Day immediately
following the date hereof, issue a press release, disclosing the material terms
of the transactions contemplated hereby, and 
by the fourth Trading Day following the date hereof, file a Current
Report on Form 8-K, filing the Transaction Documents as exhibits thereto.  The Company and each Purchaser shall consult
with each other in issuing any other press releases with respect to the
transactions contemplated hereby, and neither the Company nor any Purchaser
shall issue any such press release or otherwise make any such public statement
without the prior consent of the Company, with respect to any press release of
any Purchaser, or without the prior consent of each Purchaser, with respect to
any press release of the Company, which consent shall not unreasonably be
withheld or delayed, except if such disclosure is required by law, in which
case the disclosing party shall promptly provide the other party with prior
notice of such public statement or communication.  Notwithstanding the foregoing, the Company
shall not publicly disclose the name of 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)
as required by federal securities law 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, in which case the Company shall provide the Purchasers with
prior notice of such disclosure permitted under this clause (ii).

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,
business combination, 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 

23

 

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

4.7           Use of Proceeds.  Except as set forth on Schedule 4.7
attached hereto, the Company shall use the net proceeds from the sale of the
Securities hereunder for working capital purposes and shall not use such
proceeds for (a) the satisfaction of any portion of the Company’s debt (other
than payment of trade payables in the ordinary course of the Company’s business
and prior practices), (b) the redemption of any Common Stock or Common Stock
Equivalents or (c) the settlement of any outstanding litigation.

4.8           Indemnification of Purchasers.   Subject to the provisions of this Section
4.8, the Company will indemnify and hold each Purchaser and its 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, costs and expenses, including all judgments, amounts
paid in settlements, court costs and reasonable attorneys’ fees and reasonable
costs of investigation that any such Purchaser Party may suffer or incur as a
result of or relating to (a) any breach of any of the representations,
warranties, covenants or agreements made by the Company in this Agreement or in
the other Transaction Documents or (b) any action instituted against a
Purchaser in any capacity, or any of them or their respective Affiliates, by
any stockholder of the Company who is not an Affiliate of such Purchaser, with
respect to any of the transactions contemplated by the Transaction Documents
(unless such action is based upon a breach of such Purchaser’s representations,
warranties or covenants under the Transaction Documents or any agreements or
understandings such Purchaser may have with any such stockholder or any
violations by the Purchaser of state or federal securities laws or any conduct
by such Purchaser which constitutes fraud, gross negligence, willful misconduct
or malfeasance).  If any action shall be
brought against any Purchaser Party in respect of which indemnity may be sought
pursuant to this Agreement, such Purchaser Party shall promptly notify the
Company in writing, and the Company shall have the right to assume the defense
thereof with counsel of its own choosing reasonably acceptable to the Purchaser
Party.  To the extent that a Purchaser
Party fails to provide timely notice of a claim for indemnity under this
Section 4.8, and such failure materially prejudices the Company’s ability to
defend against such claim, then the Company shall have no obligation under this
Section 4.8 to indemnify the Purchaser Party for the claim (or portion 

24

 

thereof) that was so
affected. Any Purchaser Party shall have the right to employ separate counsel
in any such action and participate in the defense thereof, but the fees and
expenses of such counsel shall be at the expense of such Purchaser Party except
to the extent that (i) the employment thereof has been specifically authorized
by the Company in writing, (ii) the Company has failed after a reasonable
period of time to assume such defense and to employ counsel or (iii) in such
action there is, in the reasonable opinion of such separate counsel, a material
conflict on any material issue between the position of the Company and the
position of such Purchaser Party, in which case the Company shall be
responsible for the reasonable fees and expenses of no more than one such
separate counsel.  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 such Purchaser Party in this Agreement or in the other
Transaction Documents or any agreements or understandings such Purchaser may
have with any such stockholder or any violations by the Purchaser of state or
federal securities laws or any conduct by such Purchaser which constitutes
fraud, gross negligence, willful misconduct or malfeasance.

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         Listing of Common Stock. 
The Company hereby agrees to use best efforts to maintain the listing of
the Common Stock on a Trading Market, and as soon as reasonably practicable
following the Closing (but not later than the earlier of the Effective Date and
the first anniversary of the Closing Date) to list all of the Shares and Warrant
Shares on such Trading Market. The Company further agrees, if the Company
applies to have the Common Stock traded on any other Trading Market, it will
include in such application all of the Shares and Warrant Shares, and will take
such other action as is reasonably necessary to cause all of the Shares and
Warrant Shares to be listed on such other Trading Market as promptly as
possible.  The Company will take all
action reasonably necessary to continue the listing and trading of its Common
Stock on a Trading Market and will comply in all respects with the Company’s
reporting, filing and other obligations under the bylaws or rules of the
Trading Market.

4.11         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 for the Company to
treat 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. The provisions of this
Section 4.11 notwithstanding, nothing in this Agreement shall prohibit the
Company from negotiating and entering into separate settlements with any
Purchaser in the event of litigation arising out of the transactions 

25

 

contemplated by the
Transaction Documents without triggering the obligation to make a similar
payment to any other Purchaser.

4.12         [INTENTIONALLY
LEFT BLANK]

4.13         Subsequent Equity Sales.

(a)           From the date hereof until 90 days
after the Effective Date, neither the Company nor any Subsidiary shall issue
shares of Common Stock or Common Stock Equivalents; provided, however,
the 90 day period set forth in this Section 4.13 shall be extended for the
number of Trading Days during such period in which (i) trading in the Common
Stock is suspended by any Trading Market, or (ii) following the Effective Date,
the Registration Statement is not effective or the prospectus included in the
Registration Statement may not be used by the Purchasers for the resale of the
Shares and Warrant Shares.

(b)           From the date hereof until the one
year anniversary of the Effective Date, the Company shall be prohibited from
effecting or entering into an agreement to effect any Subsequent Financing
involving a Variable Rate Transaction.  “Variable
Rate Transaction” means 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. 
Any Purchaser shall be entitled to obtain injunctive relief against the
Company to preclude any such issuance, which remedy shall be in addition to any
right to collect damages.

(c)           Notwithstanding the foregoing, this
Section 4.13 shall not apply in respect of an Exempt Issuance, except that no
Variable Rate Transaction shall be an Exempt Issuance.

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 have executed or will execute
any Short Sales during the period commencing at the Discussion Time and ending
at the time that the transactions contemplated by this Agreement are first
publicly announced as described in Section 4.4. 
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 has maintained and will maintain the confidentiality of the
existence and terms of this transaction and the information included in the
Disclosure Schedules.  Each Purchaser severally and not jointly with any
other Purchaser, 

26

 

understands and
acknowledges, and agrees, to act in a manner that will not violate the
positions of the Commission 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. Notwithstanding the foregoing, no Purchaser makes any
representation, warranty or covenant hereby that it will not engage in Short
Sales in the securities of the Company after the time that the transactions
contemplated by this Agreement are first publicly announced as described in
Section 4.4.  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.

4.17         Capital Changes.  Until the one year anniversary of the Closing
Date, the Company shall not undertake a reverse or forward stock split or
reclassification of the Common Stock without the prior written consent of the
Purchasers holding a majority in interest of the Shares unless reasonably
required in order to maintain a listing of the Common Stock on the American
Stock Exchange. No such separate approval requirement shall exist for any other
proposed corporate actions, including, without limitation, any proposed
amendments to the Company’s Certificate of Incorporation for the purpose of
increasing the authorized capital stock of the Company.

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 September 31,
2007; provided, however, that no such termination will affect the
right of any party to sue for any breach by the other party (or parties).

5.2           Fees and Expenses.  At the Closing, the Company has agreed to
reimburse Empire Financial Group (“Empire”) the non-accountable sum of
$25,000 for its legal fees and expenses, 

27

 

none of which has been paid
prior to the Closing.  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, stamp taxes and other taxes and
duties levied in connection with the delivery of any Securities to the
Purchasers.

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 second (2nd) 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.

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 67% of the Shares still held by
the Purchasers 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 that 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.”

28

 

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 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.  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 for the period of the statute of limitations applicable thereto.

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

 

29

 

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.

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; provided,
however, in the case of a rescission of an exercise of a Warrant, the
Purchaser shall be required to return any shares of Common Stock delivered in
connection with any such rescinded exercise notice.

5.14         Replacement of Securities.  If any certificate or instrument evidencing
any Securities is mutilated, lost, stolen or destroyed, the Company shall issue
or cause to be issued in exchange and substitution for and upon cancellation
thereof (in the case of mutilation), or in lieu of and substitution therefor, a
new certificate or instrument, but only upon receipt of an affidavit of loss or
presentation of other 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 

 

30

 

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 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 FWS.  FWS does not represent all of the Purchasers
but only Empire, which 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 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         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.

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

5.21         Waiver of Jury Trial. 
In any action, suit or proceeding in any jurisdiction brought by any
party against any other party, the parties each knowingly and intentionally, to
the greatest extent permitted by applicable law, hereby absolutely,
unconditionally, irrevocably and expressly waives forever trial by jury.

 

(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.

 

	
  IMAGEWARE SYSTEMS, INC.

  	
   

  	
  Address for Notice:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
  /s/ Wayne G. Wetherell

  	
   

  	
  Fax:

  
	
   

  	
  Name: Wayne G. Wetherell

  	
   

  	
   

  
	
   

  	
  Title: SVP & CFO, Secretary

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

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

  	
   

  	
   

  

 

 

 

 

 

[REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK

SIGNATURE
PAGE FOR PURCHASER FOLLOWS]

 

32

 

[PURCHASER
SIGNATURE PAGES TO IW 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:                                                                                                          

 

Signature of Authorized Signatory
of Purchaser:                                                                                                          

 

Name of Authorized Signatory:                                                                                                          

 

Title of Authorized Signatory:                                                                                                          

 

Email Address of Purchaser:
                                                                                                         

 

Fax Number of Purchaser:                                                                                                          

 

Address for Notice of Purchaser:

 

 

 

 

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

 

 

 

 

 

Subscription Amount: $                         

 

Shares:                            

 

Warrant Shares:                          

 

EIN Number: 
[PROVIDE THIS UNDER SEPARATE COVER]

 

 

[SIGNATURE PAGES CONTINUE]

 

33

 

Annex A

 

CLOSING
STATEMENT

 

Pursuant to the attached Securities Purchase
Agreement, dated as of the date hereto, the purchasers shall purchase up to
$3,500,000 of Common Stock and Warrants from Imageware Systems, Inc. (the “Company”).  All funds will be wired into an account
maintained by the Company.  All funds
will be disbursed in accordance with this Closing Statement.

 

Disbursement Date:           September    , 2007

 

	
  I. PURCHASE PRICE

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Gross Proceeds to be Received

  	
   

  	
  $

  
	
   

  	
   

  	
   

  
	
  II. DISBURSEMENTS

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  
	
   

  	
   

  	
  $

  
	
   

  	
   

  	
  $

  
	
   

  	
   

  	
  $

  
	
   

  	
   

  	
  $

  
	
   

  	
   

  	
   

  
	
  Total Amount Disbursed:

  	
   

  	
  $

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  WIRE INSTRUCTIONS:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  To:
                                                                                   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  To:
                                                                                   

  	
   

  	
   

  
	
   

  	
   

  	
   

  

 

34Exhibit 10.2

 

REGISTRATION RIGHTS AGREEMENT

 

                This
Registration Rights Agreement (this “Agreement”) is made and entered
into as of September 25, 2007, between ImageWare Systems, Inc., a Delaware
corporation (the “Company”) and each of the several purchasers signatory
hereto (each such purchaser, a “Purchaser” and, collectively, the “Purchasers”).

 

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

 

                The
Company and each Purchaser hereby agrees as follows:

 

                1.
            Definitions

 

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

 

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

 

“Effectiveness
Date” means, with respect to the Initial Registration Statement required to
be filed hereunder, the 90th calendar day following the date hereof
(or, in the event of a “full review” by the Commission, the 135th
calendar day following the date hereof) and with respect to any additional
Registration Statements which may be required pursuant to Section 3(c), the 90th
calendar day following the date on which an additional Registration Statement
is required to be filed hereunder; provided, however, that in the
event the Company is notified by the Commission that one or more of the above
Registration Statements will not be reviewed or is no longer subject to further
review and comments, the Effectiveness Date as to such Registration Statement
shall be the fifth (5th) Trading Day following the date on which the Company is
so notified if such date precedes the dates otherwise required above.

 

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

 

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

 

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

 

“Filing
Date” means, with respect to the Initial Registration Statement required
hereunder, the 45th calendar day following the date hereof and, with
respect to any additional Registration Statements which may be required
pursuant to Section 3(c), the earliest practical date on which the Company is
permitted by SEC Guidance to file such additional Registration Statement
related to the Registrable Securities.

 

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

 

1

 

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

 

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

 

“Initial
Registration Statement” means the initial Registration Statement filed
pursuant to this Agreement.

 

“Initial
Shares” means a number of Registrable Securities equal to the lesser of (i)
the total number of Registrable Securities and (ii) one-third of the number of
issued and outstanding shares of Common Stock that are held by non-affiliates
of the Company on the day immediately prior to the filing date of the Initial
Registration Statement.

 

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

 

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

 

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

 

“Registrable
Securities” means (i) all Shares, (ii) all Warrant Shares (assuming on the
date of determination the Warrants are exercised in full without regard to any
exercise limitations therein), (iii) any additional shares of Common Stock
issuable in connection with any anti-dilution provisions in the Warrants (in
each case, without giving effect to any limitations on exercise set forth in
the Warrant) and (iv) any securities issued or issuable upon any stock split,
dividend or other distribution, 
recapitalization or similar event with respect to the foregoing;
provided, however, that Registrable Securities shall not include those
securities that (a) have been effectively registered under Section 5 of the
Securities Act and disposed of pursuant to a registration statement or (b) have
been transferred pursuant to Rule 144 promulgated under the Securities Act or
any successor rule.

 

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

 

2

 

 “Rule 415” means Rule 415 promulgated
by the Commission pursuant to the Securities Act, as such Rule may be amended
or interpreted 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 or interpreted 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.

 

“SEC
Guidance” means (i) any publicly-available written or oral guidance,
comments, requirements or requests of the Commission staff and (ii) the
Securities Act.

 

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

 

                2.             Shelf Registration

 

(a)           On or prior to each Filing Date, the Company shall use
commercially reasonable efforts to prepare and file with the Commission a
Registration Statement covering the resale of all or such maximum portion of
the Registrable Securities as permitted by SEC Guidance (provided that the
Company shall use commercially reasonable efforts to advocate with the Commission
for the registration of all of the Registrable Securities in accordance with
the SEC Guidance, including without limitation, the Manual of Publicly
Available Telephone Interpretations D.29) that are not then registered on an
effective Registration Statement for an offering to be made on a continuous
basis pursuant to Rule 415.  The
Registration Statement shall be on Form S-3 (except if the Company is not then
eligible to register for resale the Registrable Securities on Form S-3, in
which case such registration shall be on another appropriate form in accordance
herewith) and shall contain (unless otherwise directed by at least a 67%
majority in interest of the Holders) substantially the “Plan of Distribution”
attached hereto as Annex A; provided that such Plan of Distribution
section of the Registration Statement shall be amended to the extent required
to respond to comments received by the Company from the Commission.  Subject to the terms of this Agreement, the
Company shall use its commercially reasonable efforts to cause a Registration
Statement filed pursuant to this Section 2(a) to be declared effective under
the Securities Act as promptly as possible after the filing thereof, but in any
event prior to the applicable Effectiveness Date, and shall use its
commercially reasonable efforts to keep such Registration Statement
continuously effective under the Securities Act until the earlier of (i) the
2nd anniversary of the Effective Date, or (ii) the date when all Registrable
Securities covered by such Registration Statement have been sold, or may be
sold without volume limitations pursuant to Rule 144(k) (the “Effectiveness
Period”).  The Company shall
telephonically request effectiveness of a Registration Statement as of 5:00
p.m. New York City 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 

 

3

 

Commission, which shall be the date requested
for effectiveness of such Registration Statement.  The Company shall on the Trading Day after the effective
date of such Registration Statement, file a final Prospectus with the Commission
as required by Rule 424.  Failure to so
notify the Holder within two (2) Trading Days of such notification of
effectiveness or failure to file a final Prospectus as foresaid shall be deemed
an Event under Section 2(b). 
Notwithstanding any other provision of this Agreement and subject to the
payment of liquidated damages pursuant to Section 2(b), if any SEC Guidance
sets forth a limitation on the number of Registrable Securities permitted to be
registered on a particular Registration Statement (and notwithstanding that the
Company used commercially reasonable efforts to advocate with the Commission
for the registration of all or a greater portion of Registrable Securities),
unless otherwise directed in writing by a Holder as to its Registrable Securities,
the number of Registrable Securities to be registered on such Registration
Statement will first be reduced by Registrable Securities represented by
Warrant Shares (applied, in the case that some Warrant Shares may be
registered, to the Holders on a pro rata basis based on the total number of
unregistered Warrant Shares held by such Holders), and second by Registrable
Securities represented by Shares (applied, in the case that some shares may be
registered, to the Holders on a pro rata basis based on the total number of
unregistered Registrable Securities held by such Holders); provided, however,
that, prior to any reduction in the number of Registrable Securities included
in a Registration Statement as set forth in this sentence, the number of shares
of Common Stock set forth on Schedule 6(b) hereto which shall have been
included on such Registration Statement shall be reduced by up to 100%.

 

(b)           If: (i) the Initial Registration Statement is not filed on
or prior to its Filing Date (if the Company files the Initial Registration
Statement without affording the Holders the opportunity to review and comment
on the same as required by Section 3(a) herein, the Company shall be deemed to
have not satisfied this clause (i)), or (ii) the Company fails to file with the
Commission a request for acceleration of a Registration Statement in accordance
with Rule 461 promulgated by the Commission pursuant to the Securities Act,
within five Trading Days of the date that the Company is notified (orally or in
writing, whichever is earlier) by the Commission that such Registration
Statement will not be “reviewed” or will not be subject to further review, or
(iii) prior to the effective date of a Registration Statement, the Company
fails to file a pre-effective amendment and otherwise respond in writing to
comments made by the Commission in respect of such Registration Statement
within fifteen (15) Trading Days after the receipt of comments by or notice
from the Commission that such amendment is required in order for such Registration
Statement to be declared effective, or (iv) a Registration Statement filed or
required to be filed hereunder is not declared effective by the Commission by
its Effectiveness Date, or (v) after the effective date of a Registration
Statement, such Registration Statement ceases for any reason to remain
continuously effective as to all Registrable Securities included in such
Registration Statement, or the Holders are otherwise not permitted to utilize
the Prospectus therein to resell such Registrable Securities, for more than ten
(10) consecutive Trading Days or more than an aggregate of twenty (20) calendar
days (which need not be consecutive calendar days) during any twelve (12)-month
period (any such failure or breach being referred to as an “Event”, and for purposes of
clause (i), and (iv) the date on which such Event occurs, and for purpose 

 

4

 

of clause (ii) the date on which such five
Trading Day period is exceeded, and for purpose of clause (iii) the date which
such ten (10) Trading Day period is exceeded, and for purpose of clause (v) the
date on which such ten (10) or twenty (20) Trading Day period, as applicable,
is exceeded being referred to as “Event
Date”), then, in addition to any other rights the Holders may have
hereunder or under applicable law, on each such Event Date and on each monthly
anniversary of each such Event Date (if the applicable Event shall not have
been cured by such date) until the applicable Event is cured, the Company shall
pay to each Holder an amount in cash, as partial liquidated damages and not as
a penalty, equal to 1.0% of the aggregate purchase price paid by such Holder
pursuant to the Purchase Agreement for any issued and outstanding unregistered
Registrable Securities then held by such Holder.  The parties agree that (1) the Company shall
not be liable for liquidated damages under this Agreement with respect to any
Warrants or Warrant Shares, and (2) the maximum aggregate liquidated damages
payable to a Holder unexercised under this Agreement shall be twelve percent
(12%) of the aggregate Subscription Amount paid by such Holder pursuant to the
Purchase Agreement.  If the Company fails
to pay any partial liquidated damages pursuant to this Section in full within
seven (7) Trading Days after the date payable, the Company will pay interest
thereon at a rate of twelve percent (12%) per annum (or such lesser maximum
amount that is permitted to be paid by applicable law) to the Holder, accruing
daily from the date such partial liquidated damages are due until such amounts,
plus all such interest thereon, are paid in full. The partial liquidated
damages pursuant to the terms hereof shall apply on a daily pro rata basis for
any portion of a month prior to the cure of an Event; provided that it shall
not be deemed an Event if the Company fails to file a Registration Statement or
prior to its Filing Date following notification of an objection with respect
thereto from the Holders pursuant to Section 3(a) hereof provided that such Registration
Statement is filed not later than five (5) Trading Days after receipt by the
Company of written notice of the withdrawal of such objection.

 

3.             Registration Procedures.

 

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

 

(a)           Not less than five
(5) Trading Days prior to the initial filing of each Registration Statement and
not less than one (1) Trading Day prior to the filing of any related Prospectus
or any pre- or post-amendment or supplement thereto or to such Registration
Statement (including, upon request of any Holder, any document that would be
incorporated or deemed to be incorporated therein by reference, provided that
if such request is not made prior to such five (5) or two (2) Trading Day
period, as applicable, then the Company’s obligation shall only be to provide
such document promptly within a reasonable period of time following such
request), the Company shall (i) furnish to each Holder copies of all such
documents substantially in the form proposed to be filed (which may be
delivered by email or facsimile), which documents (other than those
incorporated or deemed to be incorporated by reference) will be subject to the
review of such Holders(provided, however, as to any related Prospectus, amendment
or supplement thereto proposed to be filed, the Company shall only be required
to provide the Holders 

 

5

 

with
copies of such documents prior to the filing thereof to the extent there are
changes to the Selling Stockholder table or Plan of Distribution contained
therein from such sections included in the initial Registration Statement filed
hereunder) and (ii) cause its officers and directors, counsel and independent
certified public accountants to respond to such inquiries as shall be
necessary, in the reasonable opinion of respective counsel to each Holder, to
conduct a reasonable investigation within the meaning of the Securities Act.
The Company shall not file a Registration Statement or any such Prospectus or
any amendments or supplements thereto relating to the Registrable Securities 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 five (5) Trading Days after the Holders have been so
furnished copies of an initial Registration Statement or one (1) Trading Day
after the Holders have been so furnished copies of any related Prospectus or
pre- or post-effective amendments or supplements thereto or to such
Registration Statement. 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 three Trading Days
prior to the Filing Date or by the end of the fourth (4th) Trading Day
following the date on which such Holder receives draft materials in accordance
with this Section.

 

(b)           (i) Prepare and file
with the Commission such amendments, including post-effective amendments, to a
Registration Statement and the Prospectus used in connection therewith as may
be necessary to keep a Registration Statement continuously effective as to the
applicable Registrable Securities for the Effectiveness Period and prepare and
file with the Commission such additional Registration Statements in order to
register for resale under the Securities Act all of the Registrable Securities;
(ii) cause the related Prospectus to be amended or supplemented by any required
Prospectus supplement (subject to the terms of this Agreement), and, as so
supplemented or amended, to be filed pursuant to Rule 424; (iii) respond as
promptly as reasonably possible to any comments received from the Commission
with respect to a Registration Statement or any amendment thereto and provide
as promptly as reasonably possible to any Holder upon request true and complete
copies of all correspondence from and to the Commission relating to a
Registration Statement (provided that the Company may excise any information contained
therein which would constitute material non-public information as to any Holder
which has not executed a confidentiality agreement with the Company); and (iv)
comply in all material respects with the provisions of the Securities Act and
the Exchange Act applicable to the Company 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)           [INTENTIONALLY
DELETED]

 

(d)           Notify the Holders
of Registrable Securities to be sold (which notice shall, pursuant to clauses
(iii) through (vi) hereof, be accompanied by an instruction to suspend the use
of the Prospectus until the requisite changes have been made) as promptly as 

 

6

 

reasonably
possible (and, in the case of (i)(A) below, not less than one (1) Trading Day
prior to such filing) and (if requested by any such Person) confirm such notice
in writing no later than one (1) Trading Day following the day (i)(A) when a
Prospectus or any Prospectus supplement or post-effective amendment to a
Registration Statement is proposed to be filed; (B) when the Commission
notifies the Company whether there will be a “review” of such Registration
Statement and, upon request of any Holder, whenever the Commission comments in
writing on such Registration Statement; and (C) with respect to a Registration
Statement or any post-effective amendment, when the same has become effective;
(ii) of any request by the Commission or any other federal or state
governmental authority for amendments or supplements to a Registration
Statement or Prospectus or for additional information; (iii) of the issuance by
the Commission or any other federal or state governmental authority of any stop
order suspending the effectiveness of a Registration Statement covering any or
all of the Registrable Securities or the initiation of any Proceedings for that
purpose; (iv) of the receipt by the Company of any notification with respect to
the suspension of the qualification or exemption from qualification of any of
the Registrable Securities for sale in any jurisdiction, or the initiation or
threatening of any Proceeding for such purpose; (v) of the occurrence of any
event or passage of time that makes the financial statements included in a
Registration Statement ineligible for inclusion therein or any statement made
in a Registration Statement or Prospectus or any document incorporated or
deemed to be incorporated therein by reference untrue in any material respect
or that requires any revisions to a Registration Statement, Prospectus or other
documents so that, in the case of a Registration Statement or the Prospectus,
as the case may be, it will not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading; and (vi) of the occurrence or existence of any
pending corporate development with respect to the Company that the Company
believes may be material and that, in the determination of the Company, makes
it not in the best interest of the Company to allow continued availability of a
Registration Statement or Prospectus, provided that any and all of such
information shall remain confidential to each Holder until such information
otherwise becomes public, unless disclosure by a Holder is required by law; provided,
further, that notwithstanding each Holder’s agreement to keep such
information confidential, each such Holder makes no acknowledgement that any
such information is material, non-public information.

 

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

 

(f)            Furnish to each
Holder (which may be delivered via email or facsimile), without charge, at
least one (1) conformed copy of each such Registration Statement and each
amendment thereto, including financial statements and schedules, all documents
incorporated or deemed to be incorporated therein by reference to the extent
requested by such Person, and all exhibits to the extent requested by such
Person (including those 

 

7

 

previously
furnished or incorporated by reference) promptly after the filing of such
documents with the Commission; provided, that any such item which is available
on the EDGAR system need not be furnished in physical form.

 

(g)           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(d).

 

(h)            The Company shall
cooperate with any registered broker-dealer which is effecting resales of
Registrable Securities in effecting any filing with the National Association of
Securities Dealers, Inc. (“NASD”) Corporate Financing Department
pursuant to NASD Rule 2710 and pay the filing fee required in connection with
the first such filing.

 

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

 

(j)            If requested by a
Holder, cooperate with such 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 Holder may request.

 

(k)           Upon the occurrence
of any event contemplated by Section 3(d), as promptly as reasonably possible
under the circumstances taking into account the Company’s good faith assessment
of any adverse consequences to the Company and its stockholders of the
premature disclosure of such event, prepare a supplement or amendment,
including a post-effective amendment, to a Registration Statement or a
supplement to the related Prospectus or any document incorporated or deemed to
be incorporated therein by reference, and file any other required document so
that, as thereafter delivered, neither a Registration Statement nor such
Prospectus will contain an untrue statement of a material fact or omit to state
a material fact required to be stated 

 

8

 

therein
or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading.  If the Company
notifies the Holders in accordance with clauses (iii) through (vi) of Section
3(d) above to suspend the use of any Prospectus until the requisite changes to
such Prospectus have been made, then the Holders shall suspend use of such
Prospectus.  The Company will use its
commercially reasonable efforts to ensure that the use of the Prospectus may be
resumed as promptly as is practicable. 
The Company shall be entitled to exercise its right under this Section
3(k) to suspend the availability of a Registration Statement and Prospectus,
subject to the payment of partial liquidated damages otherwise required
pursuant to Section 2(b), for a period not to exceed sixty (60) calendar days
(which need not be consecutive days) in any twelve (12) month period.

 

(l)            Comply with all
applicable rules and regulations of the Commission that are applicable to the
Company.

 

(m)          The Company may
require each selling Holder and each Holder hereby agrees, to furnish to the
Company a certified statement as to the number of Registrable Securities
beneficially owned by such Holder, other information relating to such Holder,
the Registrable Securities it intends to sell and its plan of distribution (to
the extent required for a Registration Statement), and, if required by the
Commission, the natural persons thereof that have voting and dispositive
control over the Registrable Securities. During any periods that the Company is
unable to meet its obligations hereunder with respect to the registration of
the Registrable Securities solely because any Holder fails to furnish such
information within three (3) Trading Days of the Company’s request, any
liquidated damages that are accruing at such time as to such Holder only shall
be tolled and any Event that may otherwise occur solely because of such delay
shall be suspended as to such Holder only, until such information is delivered
to the Company; provided, further, that the Holders agree and acknowledge that
the Company will not delay the filing of a Registration Statement (or amendment
or supplement to a Registration Statement) due to the failure of any Holder to
deliver the information required hereby in accordance with the terms hereof.

 

(n)   Each Holder agrees not to
take any action with respect to any distribution deemed to be made pursuant to
such registration statement which would constitute a violation of Regulation M
under the Exchange Act or any other applicable rule, regulation or law.

 

 

                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 of the Company’s counsel and auditors) (A) with
respect to filings made with the Commission, (B) with respect to filings
required to be made with any Trading Market on which the Common Stock is then
listed for trading, (C) in compliance with applicable state securities or Blue
Sky laws reasonably agreed to 

 

9

 

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

 

                5.             Indemnification.

 

(a)           Indemnification by the Company.
The Company shall, notwithstanding any termination of this Agreement, indemnify
and hold harmless each Holder, the officers, directors, members, partners,
agents, brokers (including brokers who offer and sell Registrable Securities as
principal as a result of a pledge or any failure to perform under a margin call
of Common Stock), investment advisors and employees (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 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, members,
shareholders, partners, agents and 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 each such controlling Person, to the
fullest extent permitted by applicable law, from and against any and all
losses, claims, damages, liabilities, costs (including, without limitation,
reasonable attorneys’ fees) and expenses (collectively, “Losses”), as
incurred arising out of or relating to (1) any untrue or alleged untrue
statement of a material fact contained in a Registration Statement, any
Prospectus or in any amendment or supplement thereto or in any preliminary
prospectus, or arising out of or relating to any omission or alleged omission
of a material fact required to be stated therein or necessary to make the
statements therein (in the case of any Prospectus or supplement thereto, in
light of the circumstances under which they were made) not misleading or (2)
any violation or alleged violation by the Company of the Securities Act, the
Exchange Act or any state securities law, or any rule or regulation thereunder,
in connection with the performance of its obligations under this Agreement,
except to the extent, but only to the extent, that (i) such untrue statements
or omissions are based solely upon information

 

 

10

 

regarding such Holder
furnished in writing to the Company by such Holder expressly for use therein,
or to the extent that such information relates to such Holder or such Holder’s
proposed method of distribution of Registrable Securities and was reviewed and
expressly approved in writing by such Holder expressly for use in a
Registration Statement, such Prospectus or in any amendment or supplement
thereto (it being understood that the Holder has approved Annex A hereto for
this purpose), (ii) in the case of an occurrence of an event of the type
specified in Section 3(d)(iii)-(vi), the use by such Holder of a suspended, an
outdated or a defective Prospectus after the Company has notified such Holder
in writing that the Prospectus is outdated or defective and prior to the
receipt by such Holder of the Advice contemplated in Section 6(d) or (iii) such
Holder engaged in willful misconduct. 
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 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 in any amendment or supplement thereto or in any preliminary
prospectus, or arising out of or relating to any omission or alleged omission
of a material fact required to be stated therein or necessary to make the
statements therein not misleading (i) to the extent, but only to the extent,
that such untrue statement or omission is contained in any information so
furnished in writing by such Holder to the Company specifically for inclusion
in such Registration Statement or such Prospectus or (ii) to the extent that
such information relates to such Holder’s proposed method of distribution of
Registrable Securities and was reviewed and expressly approved in writing by
such Holder expressly for use in a Registration Statement (it being understood
that the Holder has approved Annex A hereto for this purpose), such Prospectus
or in any amendment or supplement thereto or (iii) in the case of an occurrence
of an event of the type specified in Section 3(d)(iii)-(vi), the use by such
Holder of an outdated or defective Prospectus after the Company has notified
such Holder in writing that the Prospectus is outdated or defective and prior
to the receipt by such Holder of the Advice contemplated in Section 6(d). In no
event shall the liability of any selling Holder hereunder be greater in amount
than the dollar amount of the 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

 

 

11

 

satisfactory
to the Indemnified Party and the payment of all reasonable and documented 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.

 

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 counsel to the 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 no more than one (1) 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 or delayed.  No
Indemnifying Party shall, without the prior written consent of the Indemnified
Party, effect any settlement of any pending Proceeding in respect of which any
Indemnified Party is a party, unless such settlement includes an unconditional
release of such Indemnified Party from all liability on claims that are the
subject matter of such Proceeding.

 

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

 

(d)           Contribution. If the
indemnification under Section 5(a) or 5(b) is unavailable to an Indemnified Party
or insufficient to hold an Indemnified Party harmless for any Losses, then each
Indemnifying Party shall contribute to the amount paid or payable by such
Indemnified Party, in such proportion as is appropriate to reflect the relative
fault of the Indemnifying Party and Indemnified Party in connection with the
actions, statements or omissions that resulted in such Losses as well as any
other relevant equitable considerations. The relative fault of such
Indemnifying Party and Indemnified

 

12

 

Party
shall be determined by reference to, among other things, whether any action in
question, including any untrue or alleged untrue statement of a material fact
or omission or alleged omission of a material fact, has been taken or made by,
or relates to information supplied by, such Indemnifying Party or Indemnified
Party, and the parties’ relative intent, knowledge, access to information and
opportunity to correct or prevent such action, statement or omission.  The amount paid or payable by a party as a
result of any Losses shall be deemed to include, subject to the limitations set
forth in this Agreement, any reasonable attorneys’ or other 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 or giving rise to
the Proceeding exceeds the amount of any damages that such Holder has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission, except in the case of fraud by such Holder.

 

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

 

6.                Miscellaneous.

 

(a)           Remedies.  In the event of a breach by the Company or by
a Holder of any of their respective 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, shall 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 not assert or shall
waive the defense that a remedy at law would be adequate.

 

(b)           No Piggyback on Registrations; Prohibition on Filing Other Registration
Statements. Except as set forth on Schedule 6(b) attached
hereto, neither the Company nor any of its security holders (other than the
Holders in such capacity pursuant hereto) may include securities of the Company
in any Registration Statements other than the Registrable Securities.  The Company shall not file any other
registration statements (other than on Form S-8 or Form S-4) until all
Registrable Securities are registered pursuant to a Registration Statement that
is declared effective by the Commission, provided that this Section 6(b) shall
not prohibit the

 

13

 

Company from filing
amendments to registration statements filed prior to the date of this
Agreement.

 

(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)           Discontinued Disposition. 
By its acquisition of Registrable Securities, each Holder agrees that,
upon receipt of a notice from the Company of the occurrence of any event of the
kind described in Section 3(d)(iii) through (vi), such Holder will forthwith
discontinue disposition of such Registrable Securities under a Registration
Statement until it is advised in writing (the “Advice”) by the Company
that the use of the applicable Prospectus (as it may have been supplemented or
amended) may be resumed.  The Company
will use its commercially reasonable efforts to ensure that the use of the
Prospectus may be resumed as promptly as is practicable.  The Company agrees and acknowledges that any
periods during which the Holder is required to discontinue the disposition of
the Registrable Securities hereunder shall be subject to the provisions of
Section 2(b).

 

(e)           Piggy-Back Registrations. If, at any time during the
Effectiveness Period, there is not an effective Registration Statement covering
all of the Registrable Securities and the Company shall determine to prepare
and file with the Commission a registration statement relating to an offering
for its own account or the account of others under the Securities Act of any of
its equity securities, other than on Form S-4 or Form S-8 (each as promulgated
under the Securities Act) or their then equivalents relating to equity
securities to be issued solely in connection with any acquisition of any entity
or business or equity securities issuable in connection with the Company’s
stock option or other employee benefit plans, then the Company shall deliver to
each Holder a written notice of such determination and, if within fifteen (15)
days after the date of the delivery 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(e)
that are eligible for resale pursuant to Rule 144(k) promulgated by the
Commission pursuant to the Securities Act or that are the subject of a then
effective Registration Statement.

 

(f)            Amendments and Waivers. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, unless the same shall be in writing and signed by the Company
and the Holders of a majority of the then outstanding Registrable Securities
(including, for this purpose any Registrable Securities issuable upon exercise
or conversion of any Security).  If a
Registration Statement does not register all of the Registrable Securities
pursuant to a waiver or amendment done in compliance with the previous
sentence, then the number of Registrable Securities to be registered for each
Holder shall be reduced pro rata among all Holders and each Holder shall have
the right to designate which of its Registrable Securities shall be omitted
from such Registration Statement. 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 a Holder or some Holders and that does not
directly or

 

14

 

indirectly affect the rights
of other Holders may be given by such Holder or 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
first  sentence of this Section 6(f).

 

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

 

(h)           Successors
and Assigns. This Agreement shall inure to the benefit of and
be binding upon the successors and permitted assigns of each of the parties and
shall inure to the benefit of each Holder. The right to cause the Company to
register Registrable Securities granted to the Holders by the Company under
this Agreement may be assigned in full by a Holder in connection with a
transfer by such Holder of its Registrable Securities, but only if: (i) such transfer may otherwise be
effected in accordance with applicable securities laws; (ii) such Holder gives
written notice of the proposed transfer to the Company including the name and
address of such transferee and a copy of the transfer documents and agreements;
and (iii) such transfer is otherwise in compliance with this Agreement. Except
as specifically permitted by this Section 6(h), the rights of a Holder with
respect to Registrable Securities as set out herein shall not be transferable
to any other Person, the Company may impose stop transfer orders with respect
to any such transfer or attempted transfer, and any such transfer or attempted
transfer shall be null and void.

 

(i)            No Inconsistent Agreements. Except as set forth in the SEC
Reports, 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 directly conflict with the provisions hereof.  Except as set forth on Schedule 6(i),
neither the Company nor any of its Subsidiaries has previously entered into any
agreement granting any registration rights with respect to any of its
securities to any Person that have not been satisfied in full.

 

(j)            Execution and Counterparts. This Agreement may be executed
in two or more counterparts, all of which when taken together shall be
considered one and the same agreement and shall become effective when
counterparts have been signed by each party and delivered to the other party,
it being understood that both parties need not sign the same counterpart.  In the event that any signature is delivered
by facsimile transmission or by e-mail delivery of a “.pdf” or “.tif” 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” or “.tif”signature page were an
original thereof.

 

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

 

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

 

15

 

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

 

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

 

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

 

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

 

16

 

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

 

	
   

  	
  IMAGEWARE SYSTEMS, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Wayne G. Wetherell

  
	
   

  	
   

  	
  Name: Wayne G. Wetherell

  
	
   

  	
   

  	
  Title:SVP & CFO, Secretary

  

 

 

 

[SIGNATURE
PAGE OF HOLDERS FOLLOWS]

 

17

 

[SIGNATURE
PAGE OF HOLDERS TO IW RRA]

 

 

Name of Holder:                                                      

 

Signature of Authorized Signatory
of Holder:                                                      

 

Name of Authorized Signatory:                                                      

 

Title of Authorized Signatory:                                                      

 

 

 

[SIGNATURE
PAGES CONTINUE]

 

18

Annex A

 

Plan
of Distribution

 

Each Selling Stockholder (the “Selling Stockholders”)
of the common stock and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on the American Stock Exchange or any other stock exchange,
market or trading facility on which the shares are traded or in private
transactions.  These sales may be at
fixed or negotiated prices.  A Selling
Stockholder may use any one (1) or more of the following methods when selling
shares:

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

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

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

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

•                  privately negotiated transactions;

•                  settlement of short sales entered into
after the effective date of the registration statement of which this prospectus
is a part;

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

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

•                  a combination of any such methods of
sale; or

•                  any other method permitted pursuant to
applicable law.

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

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

 

19

 

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

In connection with the sale of the common stock or
interests therein, the Selling Stockholders may enter into hedging transactions
with broker-dealers or other financial institutions, which may in turn engage
in short sales of the common stock in the course of hedging the positions they
assume.  The Selling Stockholders may
also sell shares of the common stock short and deliver these securities to
close out their short positions, or loan or pledge the common stock to
broker-dealers that in turn may sell these securities.  The Selling Stockholders may also enter into
option or other transactions with broker-dealers or other financial
institutions or the creation of one (1) or more derivative securities which
require the delivery to such broker-dealer or other financial institution of
shares offered by this prospectus, which shares such broker-dealer or other
financial institution may resell pursuant to this prospectus (as supplemented
or amended to reflect such transaction).

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

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

Because Selling Stockholders may be deemed to be “underwriters”
within the meaning of the Securities Act, they will be subject to the
prospectus delivery requirements of the Securities Act including Rule 172
thereunder.  In addition, any securities
covered by this prospectus which qualify for sale pursuant to Rule 144 under
the Securities Act may be sold under Rule 144 rather than under this
prospectus.  There is no underwriter or
coordinating broker acting in connection with the proposed sale of the resale
shares by the Selling Stockholders.

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

 

20

 

Under applicable rules
and regulations under the Exchange Act, any person engaged in the distribution
of the resale shares may not simultaneously engage in market making activities
with respect to the common stock for the applicable restricted period, as
defined in Regulation M, prior to the commencement of the distribution.  In addition, the Selling Stockholders will be
subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder, including Regulation M, which may limit the timing of
purchases and sales of shares of the common stock by the Selling Stockholders
or any other person.  We will make copies
of this prospectus available to the Selling Stockholders and have informed them
of the need to deliver a copy of this prospectus to each purchaser at or prior
to the time of the sale (including by compliance with Rule 172 under the
Securities Act).

 

21

Annex B

IMAGEWARE SYSTEMS, INC.

Selling Securityholder Notice and Questionnaire

The
undersigned beneficial owner of common stock (the “Registrable Securities”)
of ImageWare Systems, Inc., a Delaware corporation (the “Company”),
understands that the Company has filed or intends to file with the Securities
and Exchange Commission (the “Commission”) a registration statement (the
“Registration Statement”) for the registration and resale under Rule 415
of the Securities Act of 1933, as amended (the “Securities Act”), of the
Registrable Securities, in accordance with the terms of the Registration Rights
Agreement (the “Registration Rights Agreement”) to which this document
is annexed.  A copy of the Registration
Rights Agreement is available from the Company upon request at the address set
forth below.  All capitalized terms not
otherwise defined herein shall have the meanings ascribed thereto in the
Registration Rights Agreement.

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

NOTICE

The
undersigned beneficial owner (the “Selling Securityholder”) of
Registrable Securities hereby elects to include the Registrable Securities
owned by it in the Registration Statement.

 

22

 

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

QUESTIONNAIRE

	
  1.

  	
   

  	
  Name.

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  (a)

  	
   

  	
  Full Legal Name of Selling Securityholder

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  (b)

  	
   

  	
  Full Legal Name of Registered Holder (if
  not the same as (a) above) through which Registrable Securities are held:

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  (c)

  	
   

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

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  

 

	
  2.

  	
   

  	
  Address for
  Notices to Selling Securityholder:

  

 

 

	
   

  
	
   

  
	
   

  
	
  Telephone:

  
	
  Fax:

  
	
  Contact Person:

  

 

	
  3.

  	
   

  	
  Broker-Dealer
  Status:

  

 

	
   

  	
   

  	
  (a)

  	
   

  	
  Are you a broker-dealer?

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Yes   o              No   o

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  (b)

  	
   

  	
  If “yes” to Section 3(a), did you receive
  your Registrable Securities as compensation for investment banking services
  to the Company?

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Yes   o              No   o

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Note:

  	
   

  	
  If “no” to Section 3(b), the Commission’s
  staff has indicated that you should be identified as an underwriter in the
  Registration Statement.

  

 

23

 

	
   

  	
   

  	
  (c)

  	
   

  	
  Are you an affiliate of a broker-dealer?

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Yes   o              No   o

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  (d)

  	
   

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

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Yes   o              No   o

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Note:

  	
   

  	
  If “no” to Section 3(d), the Commission’s
  staff has indicated that you should be identified as an underwriter in the
  Registration Statement.

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  4.

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

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Except
  as set forth below in this Item 4, the undersigned is not the beneficial or
  registered owner of any securities of the Company other than the securities
  issuable pursuant to the Purchase Agreement.

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  (a)

  	
   

  	
  Type and Amount of other securities
  beneficially owned by the Selling Securityholder:

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  

 

24

 

	
  5.

  	
  Relationships
  with the Company:

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

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

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  State any exceptions here:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  

 

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

By
signing below, the undersigned consents to the disclosure of the information
contained herein in its answers to Items one (1) through five (5) and the
inclusion of such information in the Registration Statement and the related
prospectus and any amendments or supplements thereto.  The undersigned understands that such
information will be relied upon by the Company in connection with the preparation
or amendment of the Registration Statement and the related prospectus.

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

	
  Date:

  	
   

  	
  Beneficial Owner:

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
					

 

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

 

25

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