Document:

Exhibit 10.1

 

DIGITAL ANGEL CORPORATION

ANNUAL INCENTIVE PLAN

 

I.              PURPOSES OF THE PLAN

 

1.01                         The
Digital Angel Corporation (“Company”) Annual Incentive Plan (“Plan”) is
established to promote the interests of the Company and to enhance shareholder
value of the Company by creating an annual incentive program to (i) attract and
retain employees who will strive for excellence, and (ii) motivate those
individuals to set and achieve above-average objectives by providing them with
rewards for contributions to the financial performance of the Company.

 

II.            ADMINISTRATION OF THE PLAN

 

2.01                         The
Plan is hereby adopted by the Company’s Board of Directors, which hereby
delegates the administration of the Plan to the Compensation Committee pursuant
to the powers provided to the Committee by the Board of Directors of the
Company.

 

2.02                         The
interpretation and construction of the Plan and the adoption of rules and
regulations for administering the Plan shall be made by the Committee. 
Decisions of the Committee shall be final and binding on all parties who have
an interest in the Plan.

 

III.           DETERMINATION OF PARTICIPANTS

 

3.01                         The
Committee shall, within ninety (90) days of the start of each fiscal year (a
“Performance Period”), determine which employees are entitled to participate in
the Plan for such Performance Period. An individual shall be eligible to
receive distributions pursuant to the Plan for a Performance Period if such
individual is employed by the Company or any of its participating subsidiaries
on the earlier of March 1 of the succeeding fiscal year or the date on which
bonuses under this Plan are distributed, whichever is earlier.  If an
individual is not employed by the Company or a participating subsidiary on such
date, such employee will not eligible to receive a bonus under the Plan. 
However, an individual who is on a leave of absence or whose employment
terminates and is then re-hired in the same fiscal year may remain eligible at
the discretion of the Committee, and the Committee may provide a pro rata bonus. 
In the event of termination of an individual’s employment as a result of death
or disability, the Committee shall provide the individual or the individual’s
estate with a pro rata bonus.

 

3.02                         For
purposes of the Plan:

 

A.     An
individual shall be considered an

 

 

employee for so long as such individual
remains employed by the Company or one or more subsidiary corporations.

 

B.     Each
corporation (other than the Company) in an unbroken chain of corporations
beginning with the Company shall be considered to be a subsidiary of the
Company, provided each such corporation (other than the last corporation in the
unbroken chain) owns, at the time of determination, stock possessing more than
fifty percent of the total combined voting power of all classes of stock in one
of the other corporations in such chain.

 

IV.           BONUS AWARDS

 

4.01                         No
eligible employee shall earn any portion of a bonus award made hereunder for
any Performance Period until December 31 of the applicable Plan year.

 

4.02                         The
individual bonus awards payable to the participants in the Plan for any
Performance Period shall be based upon the Company’s success in achieving
specified financial and operational targets determined by the Committee for
that Performance Period (“Annual Targets”), which Annual Targets shall be set
forth in an Exhibit to this Plan and provided to all participants in the Plan. In
determining whether the Company has achieved the Annual Targets, the
measurement of each Annual Target will be finally determined by the Committee
consistent with the Company’s historical methodology for calculating such
amounts for financial reporting purposes; provided, however, the
Committee shall have the right, in its discretion, to make adjustments to
exclude the effect of one time or special items which, in the Committee’s
judgment, unfairly affect the applicable Annual Target.   In the event the
Company acquires, sells or engages in transactions with other companies or
businesses during any applicable fiscal year that would affect the computation
of the Annual Targets, the Committee shall use its discretion to determine the
impact, if any, such transactions should have on the Annual Targets. 
While the bonuses shall be granted if the Company achieves the Annual Targets,
the Committee may use its discretion to award bonuses based on curves, matrices
or other criteria or measurement for prorating the amount of the payout if the
Committee determines it to be appropriate based on executive performance and
other facts and circumstances, with the goal being to reward performance based
upon the Company’s objectives.

 

4.03                         The
bonuses of an individual participant shall be based on a percentage of each
individual’s base salary as of the last day of the applicable Performance
Period, which percentage may be increased or decreased based on the extent to
which the Company meets or exceeds the Annual Targets.  The percentage of
base salary applicable to each participant shall be as established by the
Committee, taking into account the provisions of any applicable employment
agreements.  In the event the Company achieves Annual Targets that are in
between specified Annual Targets, the Committee may use its discretion to
provide or not provide an individual an additional bonus, pro rata or
otherwise, based on the Company’s achievement.

 

 

4.04                         Following
completion of the bonus calculation referenced above, the Committee shall issue
a written report containing the final calculation.

 

4.05                         Following
the end of each Performance Period, the Committee may determine to grant to any
Participant a bonus, which may not exceed the maximum amount specified in
sections 4.02 and 4.03 above for such Participant. The Committee may reduce or
eliminate the bonus granted to any Participant based on factors determined by
the Committee, including but not limited to, performance against budgeted
financial goals and the Participant’s personal performance.

 

V.            PAYMENT OF BONUS AWARDS

 

5.01                         Bonuses
shall be paid no later than March 1 of the calendar year following the
applicable Performance Period.  All payments under the Plan shall be
subject to the Company’s collection of all applicable federal, state and local
income and employment withholding taxes.

 

VI.           GENERAL PROVISIONS

 

6.01                         The
Plan shall become effective when adopted by the Compensation Committee. 
The Committee may at any time amend, suspend or terminate the Plan, provided
such action is effected by written resolution and does not adversely affect
rights and interests of Plan participants.

 

6.02                         No
amounts awarded or accrued under this Plan shall actually be funded, set aside
or otherwise segregated prior to payment.  The obligation to pay the
bonuses awarded hereunder shall at all times be an unfunded and unsecured
obligation of the Company.  Plan participants shall have the status of
general creditors and shall look solely to the general assets of the Company
for the payment of their bonus awards.

 

6.03                         No
Plan participant shall have the right to alienate, pledge or encumber his/her
interest in this Plan, and such interest shall not (to the extent permitted by
law) be subject in any way to the claims of the employee’s creditors or to
attachment, execution or other process of law.

 

6.04                         Neither
the action of the Company in establishing the Plan, nor any action taken under
the Plan by the Committee, nor any provision of the Plan, shall be construed so
as to grant any person the right to a onus or to remain in the employ of the
Company or its subsidiaries for any period of specific duration.  Rather,
each employee will be employed “at-will,” which means that either such employee
or the 

 

 

Company may
terminate the employment relationship at any time for any reason, with or
without cause, subject in each case to any employment agreement between such
person and the Company.

 

6.05                         This
is the full and complete agreement between the eligible employees and the
Company with respect to incentive bonus compensation. This Plan does not
supersede, but is supplemental to, any provisions of any employment agreement
to which any of the employees eligible under this Plan may be party.

 

6.06                         This
plan shall be interpreted in accordance with the laws of the State of
Minnesota.

 

6.07                         This
plan may be amended or terminated by the decision of the Board of Directors of
the Company; provided, however, that amendment or termination shall not affect
any incentive compensation that was earned prior to the date of such amendment
or termination.Exhibit 10.32

 

SECURITIES PURCHASE AGREEMENT

 

LAURUS MASTER FUND, LTD.

 

and

 

IWT TESORO CORPORATION

 

 

Dated: May 3, 2006

 

 

TABLE OF CONTENTS

 

	
   

  	
   

  	
  Page

  
	
   

  	
   

  	
   

  
	
  1.

  	
  Agreement to Sell and Purchase

  	
  1

  
	
   

  	
   

  	
   

  
	
  2.

  	
  Fees and Warrant. On the Closing Date:

  	
  1

  
	
   

  	
   

  	
   

  
	
  3.

  	
  Closing, Delivery and Payment

  	
  2

  
	
   

  	
  3.1

  	
  Closing

  	
  2

  
	
   

  	
  3.2

  	
  Delivery

  	
  2

  
	
   

  	
   

  	
   

  
	
  4.

  	
  Representations and Warranties of the Company

  	
  2

  
	
   

  	
  4.1

  	
  Organization, Good Standing and Qualification

  	
  2

  
	
   

  	
  4.2

  	
  Subsidiaries

  	
  3

  
	
   

  	
  4.3

  	
  Capitalization; Voting Rights

  	
  3

  
	
   

  	
  4.4

  	
  Authorization; Binding Obligations

  	
  4

  
	
   

  	
  4.5

  	
  Liabilities

  	
  4

  
	
   

  	
  4.6

  	
  Agreements; Action

  	
  5

  
	
   

  	
  4.7

  	
  Obligations to Related Parties

  	
  6

  
	
   

  	
  4.8

  	
  Changes

  	
  6

  
	
   

  	
  4.9

  	
  Title to Properties and Assets; Liens, Etc.

  	
  7

  
	
   

  	
  4.10

  	
  Intellectual Property

  	
  8

  
	
   

  	
  4.11

  	
  Compliance with Other Instruments

  	
  8

  
	
   

  	
  4.12

  	
  Litigation

  	
  9

  
	
   

  	
  4.13

  	
  Tax Returns and Payments

  	
  9

  
	
   

  	
  4.14

  	
  Employees

  	
  9

  
	
   

  	
  4.15

  	
  Registration Rights and Voting Rights

  	
  10

  
	
   

  	
  4.16

  	
  Compliance with Laws; Permits

  	
  10

  
	
   

  	
  4.17

  	
  Environmental and Safety Laws

  	
  11

  
	
   

  	
  4.18

  	
  Valid Offering

  	
  11

  
	
   

  	
  4.19

  	
  Full Disclosure

  	
  11

  
	
   

  	
  4.20

  	
  Insurance

  	
  11

  
	
   

  	
  4.21

  	
  SEC Reports

  	
  12

  
	
   

  	
  4.22

  	
  Listing

  	
  12

  
	
   

  	
  4.23

  	
  No Integrated Offering

  	
  12

  
	
   

  	
  4.24

  	
  Stop Transfer

  	
  12

  
	
   

  	
  4.25

  	
  Dilution

  	
  12

  
	
   

  	
  4.26

  	
  Patriot Act

  	
  13

  
	
   

  	
  4.27

  	
  ERISA

  	
  13

  
	
   

  	
   

  	
   

  
	
  5.

  	
  Representations and Warranties of the Purchaser

  	
  14

  
	
   

  	
  5.1

  	
  No Shorting

  	
  14

  
	
   

  	
  5.2

  	
  Requisite Power and Authority

  	
  14

  
	
   

  	
  5.3

  	
  Investment Representations

  	
  14

  
	
   

  	
  5.4

  	
  The Purchaser Bears Economic Risk

  	
  14

  
	
   

  	
  5.5

  	
  Acquisition for Own Account

  	
  15

  
	
   

  	
  5.6

  	
  The Purchaser Can Protect Its Interest

  	
  15

  
	
   

  	
  5.7

  	
  Accredited Investor

  	
  15

  
	
   

  	
  5.8

  	
  Legends

  	
  15

  

 

i

 

	
   

  	
   

  	
  Page(s)

  
	
   

  	
   

  	
   

  
	
  6.

  	
  Covenants of the Company

  	
  16

  
	
   

  	
  6.1

  	
  Stop-Orders

  	
  16

  
	
   

  	
  6.2

  	
  Listing

  	
  17

  
	
   

  	
  6.3

  	
  Market Regulations

  	
  17

  
	
   

  	
  6.4

  	
  Reporting Requirements

  	
  17

  
	
   

  	
  6.5

  	
  Use of Funds

  	
  17

  
	
   

  	
  6.6

  	
  Access to Facilities

  	
  17

  
	
   

  	
  6.7

  	
  Taxes

  	
  17

  
	
   

  	
  6.8

  	
  Insurance

  	
  17

  
	
   

  	
  6.9

  	
  Intellectual Property

  	
  19

  
	
   

  	
  6.10

  	
  Properties

  	
  19

  
	
   

  	
  6.11

  	
  Confidentiality

  	
  19

  
	
   

  	
  6.12

  	
  Required Approvals

  	
  19

  
	
   

  	
  6.13

  	
  Reissuance of Securities

  	
  21

  
	
   

  	
  6.14

  	
  Opinion

  	
  21

  
	
   

  	
  6.15

  	
  Margin Stock

  	
  21

  
	
   

  	
  6.16

  	
  Financing Right of First Refusal

  	
  21

  
	
   

  	
  6.17

  	
  Authorization and Reservation of Shares

  	
  22

  
	
   

  	
   

  	
   

  
	
  7.

  	
  Covenants of the Purchaser

  	
  22

  
	
   

  	
  7.1

  	
  Confidentiality

  	
  22

  
	
   

  	
  7.2

  	
  Non-Public Information

  	
  22

  
	
   

  	
  7.3

  	
  Limitation on Acquisition of Common Stock of the Company

  	
  22

  
	
   

  	
   

  	
   

  
	
  8.

  	
  Covenants of the Company and the Purchaser Regarding Indemnification

  	
  23

  
	
   

  	
  8.1

  	
  Company Indemnification

  	
  23

  
	
   

  	
  8.2

  	
  Purchaser’s Indemnification

  	
  23

  
	
   

  	
   

  	
   

  
	
  9.

  	
  LEFT INTENTIONALLY BLANK

  	
  23

  
	
   

  	
   

  	
   

  
	
   

  	
  10.

  	
  Registration Rights

  	
  23

  
	
   

  	
  10.1

  	
  Registration Rights Granted

  	
  23

  
	
   

  	
  10.2

  	
  Offering Restrictions

  	
  23

  
	
   

  	
   

  	
   

  
	
  11.

  	
  Miscellaneous

  	
  24

  
	
   

  	
  11.1

  	
  Governing Law, Jurisdiction and Waiver of Jury Trial

  	
  24

  
	
   

  	
  11.2

  	
  Severability

  	
  25

  
	
   

  	
  11.3

  	
  Survival

  	
  25

  
	
   

  	
  11.4

  	
  Successors

  	
  25

  
	
   

  	
  11.5

  	
  Entire Agreement; Maximum Interest

  	
  25

  
	
   

  	
  11.6

  	
  Amendment and Waiver

  	
  25

  
	
   

  	
  11.7

  	
  Delays or Omissions

  	
  26

  
	
   

  	
  11.8

  	
  Notices

  	
  26

  
	
   

  	
  11.9

  	
  Attorneys’ Fees

  	
  27

  
	
   

  	
  11.10

  	
  Titles and Subtitles

  	
  27

  
	
   

  	
  11.11

  	
  Facsimile Signatures; Counterparts

  	
  27

  
	
   

  	
  11.12

  	
  Broker’s Fees

  	
  27

  
	
   

  	
  11.13

  	
  Construction

  	
  27

  

 

ii

 

LIST OF EXHIBITS

 

	
  Form of Term Note

  	
   

  	
  Exhibit A

  
	
  Form of Warrant

  	
   

  	
  Exhibit B

  
	
  Form of Opinion

  	
   

  	
  Exhibit C

  
	
  Form of Escrow Agreement

  	
   

  	
  Exhibit D

  

 

iii

 

SECURITIES PURCHASE AGREEMENT

 

THIS SECURITIES PURCHASE AGREEMENT (this “Agreement”) is made and
entered into as of May 3, 2006, by and between IWT TESORO CORPORATION, a
Nevada corporation (the “Company”), and LAURUS MASTER FUND, LTD., a Cayman
Islands company (the “Purchaser”).

 

RECITALS

 

WHEREAS, the Company has authorized the sale to the Purchaser of a
Secured Term Note in the aggregate principal amount of Two Million Dollars
($2,000,000.00) in the form of Exhibit A hereto (as amended, modified
and/or supplemented from time to time, the “Note”);

 

WHEREAS, the Company wishes to issue to the Purchaser a warrant in the form of
Exhibit B hereto (as amended, modified and/or supplemented from time to
time, the “Warrant”) to purchase up to 333,333 shares of the Company’s Common
Stock (subject to adjustment as set forth therein) in connection with the
Purchaser’s purchase of the Note;

 

WHEREAS, the Purchaser desires to purchase the Note and the Warrant on
the terms and conditions set forth herein; and

 

WHEREAS, the Company desires to issue and sell the Note and Warrant to
the Purchaser on the terms and conditions set forth herein.

 

AGREEMENT

 

NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual promises, representations, warranties and covenants hereinafter set
forth and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:

 

1.             Agreement to Sell
and Purchase. Pursuant to the terms and conditions set forth in this
Agreement, on the Closing Date (as defined in Section 3), the Company
shall sell to the Purchaser, and the Purchaser shall purchase from the Company,
the Note and the Warrant. The sale of the Note on the Closing Date shall be
known as the “Offering.”  The Note will
mature on the Maturity Date (as defined in the Note). Collectively, the Note,
the Warrant, and the Common Stock issuable upon exercise of the Warrant are
referred to as the “Securities.”

 

2.             Fees and Warrant.
On the Closing Date:

 

(a)           The Company will issue
and deliver to the Purchaser the Warrant to purchase up to 333,333 shares of
Common Stock (subject to adjustment as set forth therein) in connection with
the Offering, pursuant to Section 1 hereof. All the representations,
covenants, warranties, undertakings, and indemnification, and other rights made
or granted to or for the benefit of the Purchaser by the Company are hereby
also made and granted for the benefit of the holder of the Warrant and shares
of the

 

 

Company’s Common Stock issuable upon exercise of the Warrant (the “Warrant
Shares”).

 

(b)           Subject to the terms of
Section 2(d) below, the Company shall pay to Laurus Capital
Management, LLC, the manager of the Purchaser, a closing payment in an amount
equal to 2.80% of the aggregate principal amount of the Note. The foregoing fee
is referred to herein as the “Closing Payment.”

 

(c)           The Company shall
reimburse the Purchaser for its reasonable expenses (including legal fees and
expenses) incurred in connection with the preparation and negotiation of this
Agreement and the Related Agreements (as hereinafter defined), and expenses
incurred in connection with the Purchaser’s due diligence review of the Company
and its Subsidiaries (as defined in Section 4.2) and all related matters. Amounts
required to be paid under this Section 2(c) will be paid on the
Closing Date and shall be $5,000 for such expenses referred to in this Section 2(c).

 

(d)           The Closing Payment and
the expenses referred to in the preceding clause (c) (net of deposits
previously paid by the Company) shall be paid at closing out of funds held
pursuant to the Escrow Agreement (as defined below) and a disbursement letter
(the “Disbursement Letter”).

 

3.             Closing, Delivery
and Payment.

 

3.1           Closing. Subject
to the terms and conditions herein, the closing of the transactions
contemplated hereby (the “Closing”), shall take place on the date hereof, at
such time or place as the Company and the Purchaser may mutually agree
(such date is hereinafter referred to as the “Closing Date”).

 

3.2           Delivery. Pursuant
to the Escrow Agreement, at the Closing on the Closing Date, the Company will
deliver to the Purchaser, among other things, the Note, and the Warrant and the
Purchaser will deliver to the Company, among other things, the amounts set
forth in the Disbursement Letter by certified funds or wire transfer. The
Company hereby acknowledges and agrees that Purchaser’s obligation to purchase
the Note from the Company on the Closing Date shall be contingent upon the
satisfaction (or waiver by the Purchaser in its sole discretion) of the items and matters set forth in the closing checklist provided by the
Purchaser to the Company on or prior to the Closing Date.

 

4.             Representations
and Warranties of the Company. The Company hereby represents and warrants
to the Purchaser as follows

 

4.1           Organization, Good
Standing and Qualification. Each of the Company and each of its Subsidiaries
is a corporation, partnership or limited liability company, as the case may be,
duly organized, validly existing and in good standing under the laws of its
jurisdiction of organization. Each of the Company and each of its Subsidiaries
has the corporate, limited liability company or partnership, as the case may be,
power and authority to own and operate its properties and assets and, insofar
as it is or shall be a party thereto, to (1) execute and deliver (i) this
Agreement, (ii) the Note and the Warrant to be issued in connection with
this Agreement, (iii) the Master Security Agreement dated as of the date
hereof between the Company, certain

 

2

 

Subsidiaries
of the Company and the Purchaser (as amended, modified and/or supplemented from
time to time, the “Master Security Agreement”), (iv) the Reaffirmation and
Ratification Agreement dated as of the date hereof by and among the Company,
certain Subsidiaries and the Purchaser (as amended, modified or supplemented,
the “Reaffirmation Agreement”), which reaffirms and ratifies the obligations of
the Company and the Subsidiaries under (a) that certain Security Agreement
by and among the Company, certain Subsidiaries of the Company and the Purchaser
dated as of August 25, 2005 (as amended, modified and/or supplemented from
time to time, the “Security Agreement”) and reaffirmed on February 10,
2006; (b) that certain Security Agreement dated as of August 25, 2005
and reaffirmed on February 10, 2006 by and among certain Subsidiaries of
the Company and the Purchaser (as amended, modified and/or supplemented from
time to time, the “Subsidiary Security Agreement”) and (c) that certain
Continuing Guaranty Agreement dated as of August 25, 2005 and reaffirmed
on February 10, 2006 among certain Subsidiaries of the Company and the
Purchaser (as amended, modified and/or or supplemented from time to time, the “Continuing
Guaranty”); (v) the Funds Escrow Agreement dated as of the date hereof
among the Company, the Purchaser and the escrow agent referred to therein,
substantially in the form of Exhibit D hereto (as amended, modified
and/or supplemented from time to time, the “Escrow Agreement”) and (vi) all
other documents, instruments and agreements entered into in connection with the
transactions contemplated hereby and thereby (the preceding clauses (iii) through
(vi), collectively, the “Related Agreements”); (2) issue and sell the
Note; (3) issue and sell the Warrant and the Warrant Shares; and (5) carry
out the provisions of this Agreement and the Related Agreements and to carry on
its business as presently conducted. Each of the Company and each of its
Subsidiaries is duly qualified and is authorized to do business and is in good
standing as a foreign corporation, partnership or limited liability company, as
the case may be, in all jurisdictions in which the nature or location of
its activities and of its properties (both owned and leased) makes such
qualification necessary, except for those jurisdictions in which failure to do
so has not, or could not reasonably be expected to have, individually or in the
aggregate, a material adverse effect on the business, assets, liabilities,
condition (financial or otherwise), properties, operations or prospects of the
Company and its Subsidiaries, taken individually and as a whole (a “Material
Adverse Effect”).

 

4.2           Subsidiaries. Each
of its direct and indirect Subsidiaries, the direct owner of each such
Subsidiary and its percentage ownership thereof, is set forth on Schedule 4.2.

 

4.3           Capitalization;
Voting Rights.

 

(a)           The authorized capital
stock of the Company, as of the date hereof consists of 100,000,000 shares, par
value $0.001 per share, the number of shares issued and outstanding are as set
forth on Schedule 4.3, and 25,000,000 are shares of preferred stock, par
value $0.001 per share of which no shares of preferred stock are issued and
outstanding. The authorized, issued and outstanding capital stock of each
Subsidiary of the Company is set forth on Schedule 4.3.

 

(b)           Except as disclosed on Schedule 4.3,
other than:  (i) the shares reserved
for issuance under the Company’s stock option plans; and (ii) shares which
may be granted pursuant to this Agreement and the Related Agreements,
there are no outstanding options, warrants, rights (including conversion or
preemptive rights and rights of first refusal), proxy or stockholder
agreements, or arrangements or agreements of any kind for

 

3

 

the purchase or acquisition from the Company of any of its securities. Except
as disclosed on Schedule 4.3, neither the offer, issuance or sale of any
of the Note, the Warrant, or the issuance of the Warrant Shares, nor the
consummation of any transaction contemplated hereby will result in a change in
the price or number of any securities of the Company outstanding, under
anti-dilution or other similar provisions contained in or affecting any such
securities.

 

(c)           All issued and
outstanding shares of the Company’s Common Stock:  (i) have been duly authorized and
validly issued and are fully paid and nonassessable; and (ii) were issued
in compliance with all applicable state and federal laws concerning the
issuance of securities.

 

(d)           The rights,
preferences, privileges and restrictions of the shares of the Common Stock are
as stated in the Company’s Certificate of Incorporation (the “Charter”). The
Warrant Shares have been duly and validly reserved for issuance. When issued in
compliance with the provisions of this Agreement and the Company’s Charter, the
Securities will be validly issued, fully paid and nonassessable, and will be
free of any liens or encumbrances; provided, however, that the Securities may be
subject to restrictions on transfer under state and/or federal securities laws
as set forth herein or as otherwise required by such laws at the time a
transfer is proposed.

 

4.4           Authorization;
Binding Obligations. All corporate, partnership or limited liability
company, as the case may be, action on the part of the Company and
each of its Subsidiaries (including their respective officers and directors)
necessary for the authorization of this Agreement and the Related Agreements,
the performance of all obligations of the Company and its Subsidiaries
hereunder and under the other Related Agreements at the Closing and, the
authorization, sale, issuance and delivery of the Note, and Warrant has been
taken or will be taken prior to the Closing. This Agreement and the Related
Agreements, when executed and delivered and to the extent it is a party
thereto, will be valid and binding obligations of each of the Company and each
of its Subsidiaries, enforceable against each such person or entity in
accordance with their terms, except:

 

(a)           as limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other laws of
general application affecting enforcement of creditors’ rights; and

 

(b)           general principles of
equity that restrict the availability of equitable or legal remedies.

 

The sale of the Note is not and will not be subject to any preemptive
rights or rights of first refusal that have not been properly waived or
complied with. The issuance of the Warrant and the subsequent exercise of the
Warrant for Warrant Shares are not and will not be subject to any preemptive
rights or rights of first refusal that have not been properly waived or
complied with.

 

4.5           Liabilities. Except
as set forth on Schedule 4.5, neither the Company nor any of its
Subsidiaries has any liabilities, except current liabilities incurred in the
ordinary course of business and liabilities disclosed in any of the Company’s
filings under the Securities

 

4

 

Exchange Act
of 1934 (“Exchange Act”) made prior to the date of this Agreement
(collectively, the “Exchange Act Filings”), copies of which have been provided
to the Purchaser.

 

4.6           Agreements; Action.
Except as set forth on Schedule 4.6 or as disclosed in any Exchange Act
Filings:

 

(a)           there are no
agreements, understandings, instruments, contracts, proposed transactions,
judgments, orders, writs or decrees to which the Company or any of its
Subsidiaries is a party or to its knowledge by which it is bound which
involves: (i) obligations (contingent or otherwise) of, or payments to,
the Company or any of its Subsidiaries in excess of $100,000 (other than
obligations of, or payments to, the Company or any of its Subsidiaries arising
from purchase or sale agreements entered into in the ordinary course of
business); or (ii) the transfer or license of any patent, copyright, trade
secret or other proprietary right to or from the Company or any of its
Subsidiaries (other than licenses arising from the purchase of “off the shelf”
or other standard products); or (iii) provisions restricting the
development, manufacture or distribution of the Company’s or any of its
Subsidiaries products or services; or (iv) indemnification by the Company
or any of its Subsidiaries with respect to infringements of proprietary rights.

 

(b)           Since September 30,
2005, (the “Balance Sheet Date”), neither the Company nor any of its
Subsidiaries has:  (i) declared or
paid any dividends, or authorized or made any distribution upon or with respect
to any class or series of its capital stock; (ii) incurred any
indebtedness for money borrowed or any other liabilities (other than ordinary
course obligations) individually in excess of $100,000 or, in the case of
indebtedness and/or liabilities individually less than $100,000, in excess of
$100,000 in the aggregate; (iii) made any loans or advances to any person
or entity not in excess, individually or in the aggregate, of $100,000, other
than ordinary course advances for travel expenses; or (iv) sold, exchanged
or otherwise disposed of any of its assets or rights, other than the sale of
its inventory in the ordinary course of business.

 

(c)           For the purposes of
subsections (a) and (b) above, all indebtedness, liabilities,
agreements, understandings, instruments, contracts and proposed transactions
involving the same person or entity (including persons or entities the Company
or any Subsidiary of the Company has reason to believe are affiliated
therewith) shall be aggregated for the purpose of meeting the individual
minimum dollar amounts of such subsections.

 

(d)           The Company maintains
disclosure controls and procedures (“Disclosure Controls”) as required by the
Securities and Exchange Commission (“SEC”) for companies the size of the
Company designed to ensure that information required to be disclosed by the
Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized, and reported, within the time periods
specified in the rules and forms of the SEC.

 

(i)            The Company makes and
keeps books, records, and accounts that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions

 

5

 

of the Company’s assets. The Company maintains internal control over
financial reporting (“Financial Reporting Controls”) as required by the SEC for
entities of its size.

 

4.7           Obligations to
Related Parties. Except as set forth on Schedule 4.7, there are no
obligations of the Company or any of its Subsidiaries to officers, directors,
stockholders or employees of the Company or any of its Subsidiaries other than:

 

(a)           for payment of salary
for services rendered and for bonus payments;

 

(b)           reimbursement for
reasonable expenses incurred on behalf of the Company and its Subsidiaries;

 

(c)           for other standard
employee benefits made generally available to all employees (including stock
option agreements outstanding under any stock option plan approved by the Board
of Directors of the Company and each Subsidiary of the Company, as applicable);
and

 

(d)           obligations listed in
the Company’s and each of its Subsidiary’s financial statements or disclosed in
any of the Company’s Exchange Act Filings.

 

Except as described above or set forth on Schedule 4.7, none of
its officers, directors or, to the best of the Company’s knowledge, key
employees or stockholders of the Company or any of its Subsidiaries or any
members of their immediate families, are indebted to the Company or any of its
Subsidiaries, individually or in the aggregate, in excess of $100,000 or have
any direct or indirect ownership interest in any firm or corporation with which
the Company or any of its Subsidiaries is affiliated or with which the Company
or any of its Subsidiaries has a business relationship, or any firm or
corporation which competes with the Company or any of its Subsidiaries, other
than passive investments in publicly traded companies (representing less than
one percent (1%) of such company) which may compete with the Company or
any of its Subsidiaries. Except as described above, no officer, director or
stockholder of the Company or any of its Subsidiaries, or any member of their
immediate families, is, directly or indirectly, interested in any material
contract with the Company or any of its Subsidiaries and no agreements,
understandings or proposed transactions are contemplated between the Company or
any of its Subsidiaries and any such person. Except as set forth on Schedule 4.7,
neither the Company nor any of its Subsidiaries is a guarantor or indemnitor of
any indebtedness of any other person or entity.

 

4.8           Changes. Except
as set forth on Schedule 4.8, since the Balance Sheet Date, except as
disclosed in any Exchange Act Filing or in any Schedule to this Agreement
or to any of the Related Agreements, there has not been:

 

(a)           any change in the
business, assets, liabilities, condition (financial or otherwise), properties,
operations or prospects of the Company or any of its Subsidiaries, which
individually or in the aggregate has had, or could reasonably be expected to
have, individually or in the aggregate, a Material Adverse Effect;

 

6

 

(b)           any resignation or
termination of any officer, key employee or group of employees of the Company
or any of its Subsidiaries;

 

(c)           any material change,
except in the ordinary course of business, in the contingent obligations of the
Company or any of its Subsidiaries by way of guaranty, endorsement, indemnity,
warranty or otherwise;

 

(d)           any damage, destruction
or loss, whether or not covered by insurance, which has had, or could
reasonably be expected to have, individually or in the aggregate, a Material Adverse
Effect;

 

(e)           any waiver by the
Company or any of its Subsidiaries of a valuable right or of a material debt
owed to it;

 

(f)            any direct or indirect
loans made by the Company or any of its Subsidiaries to any stockholder,
employee, officer or director of the Company or any of its Subsidiaries, other
than advances made in the ordinary course of business;

 

(g)           any material change in
any compensation arrangement or agreement with any employee, officer, director
or stockholder of the Company or any of its Subsidiaries;

 

(h)           any declaration or
payment of any dividend or other distribution of the assets of the Company or
any of its Subsidiaries;

 

(i)            any labor organization
activity related to the Company or any of its Subsidiaries;

 

(j)            any debt, obligation or
liability incurred, assumed or guaranteed by the Company or any of its
Subsidiaries, except those for immaterial amounts and for current liabilities
incurred in the ordinary course of business;

 

(k)           any sale, assignment or
transfer of any patents, trademarks, copyrights, trade secrets or other
intangible assets owned by the Company or any of its Subsidiaries;

 

(l)            any change in any
material agreement to which the Company or any of its Subsidiaries is a party
or by which either the Company or any of its Subsidiaries is bound which either
individually or in the aggregate has had, or could reasonably be expected to
have, individually or in the aggregate, a Material Adverse Effect;

 

(m)          any other event or
condition of any character that, either individually or in the aggregate, has
had, or could reasonably be expected to have, individually or in the aggregate,
a Material Adverse Effect; or

 

(n)           any arrangement or
commitment by the Company or any of its Subsidiaries to do any of the acts
described in subsection (a) through (m) above.

 

4.9           Title to Properties
and Assets; Liens, Etc. Except as set forth on Schedule 4.9, each of
the Company and each of its Subsidiaries has good and marketable title to

 

7

 

its properties
and assets, and good title to its leasehold interests, in each case subject to
no mortgage, pledge, lien, lease, encumbrance or charge, other than:

 

(a)           Minor liens and
encumbrances which do not materially detract from the value of the property
subject thereto or materially impair the operations of the Company or any of
its Subsidiaries, so long as in each such case, such liens and encumbrances
have no effect on the lien priority of the Purchaser in such property; and

 

(b)           Those that have
otherwise arisen in the ordinary course of business, so long as they have no
effect on the lien priority of the Purchaser therein.

 

All facilities, machinery, equipment, fixtures, vehicles and other
properties owned, leased or used by the Company and its Subsidiaries are in
good operating condition and repair and are reasonably fit and usable for the
purposes for which they are being used. Except as set forth on Schedule 4.9,
the Company and its Subsidiaries are in compliance with all material terms of
each lease to which it is a party or is otherwise bound.

 

4.10         Intellectual Property.

 

(a)           Each of the Company and
each of its Subsidiaries owns or possesses sufficient legal rights to all
patents, trademarks, service marks, trade names, copyrights, trade secrets,
licenses, information and other proprietary rights and processes necessary for
its business as now conducted and, to the Company’s knowledge, as presently
proposed to be conducted (the “Intellectual Property”), without any known
infringement of the rights of others. There are no outstanding options,
licenses or agreements of any kind relating to the foregoing proprietary
rights, nor is the Company or any of its Subsidiaries bound by or a party to
any options, licenses or agreements of any kind with respect to the patents,
trademarks, service marks, trade names, copyrights, trade secrets, licenses,
information and other proprietary rights and processes of any other person or
entity other than such licenses or agreements arising from the purchase of “off
the shelf” or standard products.

 

(b)           Neither the Company nor
any of its Subsidiaries has received any communications alleging that the
Company or any of its Subsidiaries has violated any of the patents, trademarks,
service marks, trade names, copyrights or trade secrets or other proprietary
rights of any other person or entity, nor is the Company or any of its
Subsidiaries aware of any basis therefor.

 

(c)           The Company does not
believe it is or will be necessary to utilize any inventions, trade secrets or
proprietary information of any of its employees made prior to their employment
by the Company or any of its Subsidiaries, except for inventions, trade secrets
or proprietary information that have been rightfully assigned to the Company or
any of its Subsidiaries.

 

4.11         Compliance with Other
Instruments. Neither the Company nor any of its Subsidiaries is in
violation or default of (x) any term of its Charter or Bylaws, or (y) any
provision of any indebtedness, mortgage, indenture, contract, agreement or
instrument to which it is party or by which it is bound or of any judgment,
decree, order or writ, which violation or

 

8

 

default, in
the case of this clause (y), has had, or could reasonably be expected to have,
either individually or in the aggregate, a Material Adverse Effect. The
execution, delivery and performance of and compliance with this Agreement and
the Related Agreements to which it is a party, and the issuance and sale of the
Note by the Company and the other Securities by the Company each pursuant
hereto and thereto, will not, with or without the passage of time or giving of
notice, result in any such material violation, or be in conflict with or
constitute a default under any such term or provision, or result in the
creation of any mortgage, pledge, lien, encumbrance or charge upon any of the
properties or assets of the Company or any of its Subsidiaries or the
suspension, revocation, impairment, forfeiture or nonrenewal of any permit,
license, authorization or approval applicable to the Company, its business or
operations or any of its assets or properties.

 

4.12         Litigation. Except
as set forth on Schedule 4.12 hereto, there is no action, suit, proceeding
or investigation pending or, to the Company’s knowledge, currently threatened
against the Company or any of its Subsidiaries that prevents the Company or any
of its Subsidiaries from entering into this Agreement or the other Related
Agreements, or from consummating the transactions contemplated hereby or
thereby, or which has had, or could reasonably be expected to have, either
individually or in the aggregate, a Material Adverse Effect or any change in
the current equity ownership of the Company or any of its Subsidiaries, nor is
the Company aware that there is any basis to assert any of the foregoing. Neither
the Company nor any of its Subsidiaries is a party to or subject to the
provisions of any order, writ, injunction, judgment or decree of any court or
government agency or instrumentality. There is no action, suit, proceeding or
investigation by the Company or any of its Subsidiaries currently pending or
which the Company or any of its Subsidiaries intends to initiate.

 

4.13         Tax Returns and
Payments. Each of the Company and each of its Subsidiaries has timely filed
all tax returns (federal, state and local) required to be filed by it. All
taxes shown to be due and payable on such returns, any assessments imposed, and
all other taxes due and payable by the Company or any of its Subsidiaries on or
before the Closing, have been paid or will be paid prior to the time they
become delinquent. Except as set forth on Schedule 4.13, neither the
Company nor any of its Subsidiaries has been advised:

 

(a)           that any of its
returns, federal, state or other, have been or are being audited as of the date
hereof; or

 

(b)           of any adjustment,
deficiency, assessment or court decision in respect of its federal, state or
other taxes.

 

The Company has no knowledge of any liability for any tax to be imposed
upon its properties or assets as of the date of this Agreement that is not
adequately provided for.

 

4.14         Employees. Except
as set forth on Schedule 4.14, neither the Company nor any of its
Subsidiaries has any collective bargaining agreements with any of its employees.
There is no labor union organizing activity pending or, to the Company’s
knowledge, threatened with respect to the Company or any of its Subsidiaries. Except
as disclosed in the Exchange Act Filings or on Schedule 4.14, neither the
Company nor any of its Subsidiaries is a party to or bound by any currently
effective employment contract, deferred compensation arrangement,

 

9

 

bonus plan,
incentive plan, profit sharing plan, retirement agreement or other employee
compensation plan or agreement. To the Company’s knowledge, no employee of the
Company or any of its Subsidiaries, nor any consultant with whom the Company or
any of its Subsidiaries has contracted, is in violation of any term of any
employment contract, proprietary information agreement or any other agreement
relating to the right of any such individual to be employed by, or to contract
with, the Company or any of its Subsidiaries because of the nature of the
business to be conducted by the Company or any of its Subsidiaries; and to the
Company’s knowledge the continued employment by the Company and its
Subsidiaries of their present employees, and the performance of the Company’s
and its Subsidiaries’ contracts with its independent contractors, will not
result in any such violation. Neither the Company nor any of its Subsidiaries
is aware that any of its employees is obligated under any contract (including
licenses, covenants or commitments of any nature) or other agreement, or
subject to any judgment, decree or order of any court or administrative agency
that would interfere with their duties to the Company or any of its
Subsidiaries. Neither the Company nor any of its Subsidiaries has received any
notice alleging that any such violation has occurred. Except for employees who
have a current effective employment agreement with the Company or any of its
Subsidiaries, no employee of the Company or any of its Subsidiaries has been
granted the right to continued employment by the Company or any of its
Subsidiaries or to any material compensation following termination of
employment with the Company or any of its Subsidiaries. Except as set forth on Schedule 4.14,
the Company is not aware that any officer, key employee or group of employees
intends to terminate his, her or their employment with the Company or any of
its Subsidiaries, nor does the Company or any of its Subsidiaries have a
present intention to terminate the employment of any officer, key employee or
group of employees.

 

4.15         Registration Rights
and Voting Rights. Except for registration rights previously granted to
Purchaser and except as disclosed in Exchange Act Filings, neither the Company
nor any of its Subsidiaries is presently under any obligation, and neither the
Company nor any of its Subsidiaries has granted any rights, to register any of
the Company’s or its Subsidiaries’ presently outstanding securities or any of
its securities that may hereafter be issued. Except as set forth on Schedule 4.15
and except as disclosed in Exchange Act Filings, to the Company’s knowledge, no
stockholder of the Company or any of its Subsidiaries has entered into any
agreement with respect to the voting of equity securities of the Company or any
of its Subsidiaries.

 

4.16         Compliance with Laws;
Permits. Neither the Company nor any of its Subsidiaries is in violation of
any provision of the Sarbanes-Oxley Act of 2002 or any SEC related regulation
or rule or any rule of the Principal Market (as hereafter defined)
promulgated thereunder or any other applicable statute, rule, regulation, order
or restriction of any domestic or foreign government or any instrumentality or
agency thereof in respect of the conduct of its business or the ownership of
its properties which has had, or could reasonably be expected to have, either
individually or in the aggregate, a Material Adverse Effect. No governmental
orders, permissions, consents, approvals or authorizations are required to be
obtained and no registrations or declarations are required to be filed in
connection with the execution and delivery of this Agreement or any other
Related Agreement and the issuance of any of the Securities, except such as
have been duly and validly obtained or filed, or with respect to any filings
that must be made after the Closing, as will be filed in a timely manner. Each
of the Company and its Subsidiaries has all material franchises, permits,
licenses and any similar authority necessary for

 

10

 

the conduct of
its business as now being conducted by it, the lack of which could, either
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect.

 

4.17         Environmental and
Safety Laws. Neither the Company nor any of its Subsidiaries is in
violation of any applicable statute, law or regulation relating to the
environment or occupational health and safety, and to its knowledge, no
material expenditures are or will be required in order to comply with any such
existing statute, law or regulation. No Hazardous Materials (as defined below)
are used or have been used, stored, or disposed of by the Company or any of its
Subsidiaries or, to the Company’s knowledge, by any other person or entity on
any property owned, leased or used by the Company or any of its Subsidiaries. For
the purposes of the preceding sentence, “Hazardous Materials” shall mean:

 

(a)           materials which are
listed or otherwise defined as “hazardous” or “toxic” under any applicable
local, state, federal and/or foreign laws and regulations that govern the
existence and/or remedy of contamination on property, the protection of the
environment from contamination, the control of hazardous wastes, or other
activities involving hazardous substances, including building materials; or

 

(b)           any petroleum products
or nuclear materials.

 

4.18         Valid Offering. Assuming
the accuracy of the representations and warranties of the Purchaser contained
in this Agreement, the offer, sale and issuance of the Securities will be
exempt from the registration requirements of the Securities Act of 1933, as
amended (the “Securities Act”), and will have been registered or qualified (or
are exempt from registration and qualification) under the registration, permit
or qualification requirements of all applicable state securities laws.

 

4.19         Full Disclosure. Each
of the Company and each of its Subsidiaries has provided the Purchaser with all
information requested by the Purchaser in connection with its decision to
purchase the Note and Warrant, including all information the Company and its
Subsidiaries believe is reasonably necessary to make such investment decision. Neither
this Agreement, the Related Agreements, the exhibits and schedules hereto and
thereto nor any other document delivered by the Company or any of its
Subsidiaries to Purchaser or its attorneys or agents in connection herewith or
therewith or with the transactions contemplated hereby or thereby, contain any
untrue statement of a material fact nor omit to state a material fact necessary
in order to make the statements contained herein or therein, in light of the circumstances
in which they are made, not misleading. Any financial projections and other
estimates provided to the Purchaser by the Company or any of its Subsidiaries
were based on the Company’s and its Subsidiaries’ experience in the industry
and on assumptions of fact and opinion as to future events which the Company or
any of its Subsidiaries, at the date of the issuance of such projections or
estimates, believed to be reasonable.

 

4.20         Insurance. Each of
the Company and each of its Subsidiaries has general commercial, product
liability, fire and casualty insurance policies with coverages, which the
Company believes, are customary for companies similarly situated to the Company
and its Subsidiaries in the same or similar business.

 

11

 

4.21         SEC Reports. Except
as set forth on Schedule 4.21, the Company has filed all proxy statements,
reports and other documents required to be filed by it under the Securities
Exchange Act 1934, as amended (the “Exchange Act”). The Company has furnished
the Purchaser copies of:  (i) its
Annual Reports on Form 10-K for its fiscal years ended December 31,
2004, 2003 and 2002; and (ii) its Quarterly Reports on Form 10-QSB
for its fiscal quarter ended September 30, 2005, and the Form 8-K
filings which it has made during the fiscal year 2005 and 2006 to date
(collectively, the “SEC Reports”). Except as set forth on Schedule 4.21,
each SEC Report was, at the time of its filing, in substantial compliance with
the requirements of its respective form and none of the SEC Reports, nor
the financial statements (and the notes thereto) included in the SEC Reports,
as of their respective filing dates, contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading.

 

4.22         Listing. The
Company’s Common Stock is listed or quoted, as applicable, on a Principal
Market (as hereafter defined) and satisfies and at all times hereafter will
satisfy, all requirements for the continuation of such listing or quotation, as
applicable. Except as set forth on Schedule 4.22, the Company has not
received any notice that its Common Stock will be delisted from, or no longer
quoted on, as applicable, the Principal Market or that its Common Stock does
not meet all requirements for such listing or quotation, as applicable. For
purposes hereof, the term “Principal Market” means the NASD Over The Counter Bulletin
Board, NASDAQ Capital Market, NASDAQ National Markets System, American Stock
Exchange or New York Stock Exchange (whichever of the foregoing is at the time
the principal trading exchange or market for the Common Stock).

 

4.23         No Integrated Offering.
Neither the Company, nor any of its Subsidiaries or 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 (other than
securities issued to Purchaser on August 25, 2005 and on February 10,
2006) under circumstances that would cause the offering of the Securities
pursuant to this Agreement or any of the Related Agreements to be integrated
with prior offerings by the Company for purposes of the Securities Act which
would prevent the Company from selling the Securities pursuant to Rule 506
under the Securities Act, or any applicable exchange-related stockholder
approval provisions, nor will the Company or any of its affiliates or
Subsidiaries take any action or steps that would cause the offering of the
Securities to be integrated with other offerings.

 

4.24         Stop Transfer. The
Securities are restricted securities as of the date of this Agreement. Neither
the Company nor any of its Subsidiaries will issue any stop transfer order or
other order impeding the sale and delivery of any of the Securities at such
time as the Securities are registered for public sale or an exemption from
registration is available, except as required by state and federal securities
laws.

 

4.25         Dilution. The
Company specifically acknowledges that its obligation to issue the shares of
Common Stock upon exercise of the Warrant is binding upon the Company and
enforceable regardless of the dilution such issuance may have on the ownership
interests of other shareholders of the Company.

 

12

 

4.26         Patriot Act.            The
Company certifies that, to the best of Company’s knowledge, neither the Company
nor any of its Subsidiaries has been designated, nor is or shall be owned or
controlled, by a “suspected terrorist” as defined in Executive Order 13224. The
Company hereby acknowledges that the Purchaser seeks to comply with all
applicable laws concerning money laundering and related activities. In furtherance
of those efforts, the Company hereby represents, warrants and covenants
that:  (i) none of the cash or
property that the Company or any of its Subsidiaries will pay or will
contribute to the Purchaser has been or shall be derived from, or related to,
any activity that is deemed criminal under United States law; and (ii) no
contribution or payment by the Company or any of its Subsidiaries to the
Purchaser, to the extent that they are within the Company’s and/or its
Subsidiaries’ control shall cause the Purchaser to be in violation of the
United States Bank Secrecy Act, the United States International Money
Laundering Control Act of 1986 or the United States International Money
Laundering Abatement and Anti-Terrorist Financing Act of 2001. The Company
shall promptly notify the Purchaser if any of these representations, warranties
or covenants ceases to be true and accurate regarding the Company or any of its
Subsidiaries. The Company shall provide the Purchaser all additional
information regarding the Company or any of its Subsidiaries that the Purchaser
deems necessary or convenient to ensure compliance with all applicable laws
concerning money laundering and similar activities. The Company understands and
agrees that if at any time it is discovered that any of the foregoing
representations, warranties or covenants are incorrect, or if otherwise
required by applicable law or regulation related to money laundering or similar
activities, the Purchaser may undertake appropriate actions to ensure
compliance with applicable law or regulation, including but not limited to
segregation and/or redemption of the Purchaser’s investment in the Company. The
Company further understands that the Purchaser may release confidential
information about the Company and its Subsidiaries and, if applicable, any
underlying beneficial owners, to proper authorities if the Purchaser, in its
sole discretion, determines that it is in the best interests of the Purchaser
in light of relevant rules and regulations under the laws set forth in subsection (ii) above.

 

4.27         ERISA. Based upon
the Employee Retirement Income Security Act of 1974 (“ERISA”), and the
regulations and published interpretations thereunder:  (i) neither the Company nor any of its
Subsidiaries has engaged in any Prohibited Transactions (as defined in Section 406
of ERISA and Section 4975 of the Internal Revenue Code of 1986, as amended
(the “Code”)); (ii) each of the Company and each of its
Subsidiaries has met all applicable minimum funding requirements under Section 302
of ERISA in respect of its plans; (iii) neither the Company nor any of its
Subsidiaries has any knowledge of any event or occurrence which would cause the
Pension Benefit Guaranty Corporation to institute proceedings under Title IV of
ERISA to terminate any employee benefit plan(s); (iv) neither the Company
nor any of its Subsidiaries has any fiduciary responsibility for investments
with respect to any plan existing for the benefit of persons other than the
Company’s or such Subsidiary’s employees; and (v) neither the Company nor
any of its Subsidiaries has withdrawn, completely or partially, from any
multi-employer pension plan so as to incur liability under the Multiemployer
Pension Plan Amendments Act of 1980.

 

13

 

5.             Representations
and Warranties of the Purchaser. The Purchaser hereby represents and
warrants to the Company as follows (such representations and warranties do not
lessen or obviate the representations and warranties of the Company set forth
in this Agreement):

 

5.1           No Shorting. The
Purchaser or any of its affiliates and investment partners has not, will not
and will not cause any person or entity, to directly engage in “short sales” of
the Company’s Common Stock as long as the Note shall be outstanding.

 

5.2           Requisite Power and
Authority. The Purchaser has all necessary power and authority under all
applicable provisions of law to execute and deliver this Agreement and the
Related Agreements and to carry out their provisions. All corporate action on
the Purchaser’s part required for the lawful execution and delivery of
this Agreement and the Related Agreements have been or will be effectively
taken prior to the Closing. Upon their execution and delivery, this Agreement
and the Related Agreements will be valid and binding obligations of the
Purchaser, enforceable in accordance with their terms, except:

 

(a)           as limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other laws of
general application affecting enforcement of creditors’ rights; and

 

(b)           as limited by general
principles of equity that restrict the availability of equitable and legal
remedies.

 

5.3           Investment
Representations. The Purchaser understands that the Securities are being
offered and sold pursuant to an exemption from registration contained in the
Securities Act based in part upon the Purchaser’s representations
contained in this Agreement, including, without limitation, that the Purchaser
is an “accredited investor” within the meaning of Regulation D under the
Securities Act of 1933, as amended (the “Securities Act”). The Purchaser
confirms that it has received or has had full access to all the information it
considers necessary or appropriate to make an informed investment decision with
respect to the Note and the Warrant to be purchased by it under this Agreement
and the Warrant Shares acquired by it upon the exercise of the Warrant. The
Purchaser further confirms that it has had an opportunity to ask questions and
receive answers from the Company regarding the Company’s and its Subsidiaries’
business, management and financial affairs and the terms and conditions of the
Offering, the Note, the Warrant and the Securities and to obtain additional
information (to the extent the Company possessed such information or could
acquire it without unreasonable effort or expense) necessary to verify any
information furnished to the Purchaser or to which the Purchaser had access.

 

5.4           The Purchaser Bears
Economic Risk. The Purchaser has substantial experience in evaluating and
investing in private placement transactions of securities in companies similar
to the Company so that it is capable of evaluating the merits and risks of its
investment in the Company and has the capacity to protect its own interests. The
Purchaser must bear the economic risk of this investment until the Securities
are sold pursuant to: (i) an effective registration statement under the
Securities Act; or (ii) an exemption from registration is available with
respect to such sale.

 

14

 

5.5           Acquisition for Own
Account. The Purchaser is acquiring the Note, the Warrant and the Warrant
Shares for the Purchaser’s own account for investment only, and not as a
nominee or agent and not with a view towards or for resale in connection with
their distribution.

 

5.6           The Purchaser Can
Protect Its Interest. The Purchaser represents that by reason of its, or of
its management’s, business and financial experience, the Purchaser has the
capacity to evaluate the merits and risks of its investment in the Note, the
Warrant and the Securities and to protect its own interests in connection with
the transactions contemplated in this Agreement and the Related Agreements. Further,
the Purchaser is aware of no publication of any advertisement in connection
with the transactions contemplated in the Agreement or the Related Agreements.

 

5.7           Accredited Investor.
The Purchaser represents that it is an accredited investor within the meaning
of Regulation D under the Securities Act.

 

5.8           Patriot Act. The
Purchaser certifies that, to the best of its knowledge, the Purchaser has not
been designated, and is not owned or controlled, by a “suspected terrorist” as
defined in Executive Order 13224. The Purchaser seeks to comply with all
applicable laws concerning money laundering and related activities. In
furtherance of those efforts, the Purchaser hereby represents, warrants and
covenants that:  (i) none of the
cash or property that the Purchaser will use to make the Loans has been or
shall be derived from, or related to, any activity that is deemed criminal
under United States law; and (ii) no disbursement by the Purchaser to any
Company to the extent within the Purchaser’s control, shall cause the Purchaser
to be in violation of the United States Bank Secrecy Act, the United States
International Money Laundering Control Act of 1986 or the United States
International Money Laundering Abatement and Anti-Terrorist Financing Act of
2001. The Purchaser shall promptly notify the Company Agent if any of these
representations ceases to be true and accurate regarding the Purchaser. The
Purchaser agrees to provide the Company any additional information regarding
the Purchaser that the Company deems necessary or convenient to ensure
compliance with all applicable laws concerning money laundering and similar
activities. The Purchaser understands and agrees that if at any time it is
discovered that any of the foregoing representations are incorrect, or if
otherwise required by applicable law or regulation related to money laundering
similar activities, The Purchaser may undertake appropriate actions to
ensure compliance with applicable law or regulation, including but not limited
to segregation and/or redemption of the Purchaser’s investment in the Company. The
Purchaser further understands that the Company may release information
about the Purchaser and, if applicable, any underlying beneficial owners, to
proper authorities if the Company, in its sole discretion, determines that it
is in the best interests of the Company in light of relevant rules and
regulations under the laws set forth in subsection (ii) above

 

5.9           Legends.

 

(a)           The Note shall bear
substantially the following legend:

 

“THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY APPLICABLE STATE SECURITIES

 

15

 

LAWS. THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS
NOTE UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO IWT TESORO CORPORATION THAT SUCH
REGISTRATION IS NOT REQUIRED.”

 

(b)           The Warrant Shares, if
not issued by DWAC system (as hereinafter defined), shall bear a legend which shall
be in substantially the following form until such shares are covered by an
effective registration statement filed with the SEC:

 

“THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE
SECURITIES LAWS. THESE SHARES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED
OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO
UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO IWT TESORO CORPORATION THAT SUCH REGISTRATION IS NOT
REQUIRED.”

 

(c)           The Warrant shall bear
substantially the following legend:

 

“THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS
WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR ANY APPLICABLE STATE SECURITIES LAWS. THIS WARRANT AND THE COMMON SHARES
ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
AS TO THIS WARRANT OR THE UNDERLYING SHARES OF COMMON STOCK UNDER SAID ACT AND
APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO IWT TESORO CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED.”

 

6.             Covenants of the Company.
The Company covenants and agrees with the Purchaser as follows:

 

6.1           Stop-Orders. The
Company will advise the Purchaser, promptly after it receives notice of
issuance by the SEC, any state securities commission or any other regulatory
authority of any stop order or of any order preventing or suspending any
offering of any securities of the Company, or of the suspension of the
qualification of the Common Stock of the

 

16

 

Company for
offering or sale in any jurisdiction, or the initiation of any proceeding for
any such purpose.

 

6.2           Listing. The
Company shall promptly secure the listing or quotation, as applicable, Common
Stock issuable upon exercise of the Warrant on the Principal Market upon which
shares of Common Stock are listed or quoted for trading, as applicable (subject
to official notice of issuance) and shall maintain such listing or quotation,
as applicable, so long as any other shares of Common Stock shall be so listed
or quoted, as applicable. The Company will maintain the listing or quotation,
as applicable, of its Common Stock on the Principal Market, and will comply in
all material respects with the Company’s reporting, filing and other
obligations under the bylaws or rules of the National Association of
Securities Dealers (“NASD”) and such exchanges, as applicable.

 

6.3           Market Regulations.
The Company shall notify the SEC, NASD and applicable state authorities, in
accordance with their requirements, of the transactions contemplated by this Agreement,
and shall take all other necessary action and proceedings as may be
required and permitted by applicable law, rule and regulation, for the
legal and valid issuance of the Securities to the Purchaser and promptly
provide copies thereof to the Purchaser.

 

6.4           Reporting
Requirements. The Company shall timely file with the SEC all reports
required to be filed pursuant to the Exchange Act and refrain from terminating
its status as an issuer required by the Exchange Act to file reports thereunder
even if the Exchange Act or the rules or regulations thereunder would
permit such termination.

 

6.5           Use of Funds. The
Company shall use the proceeds of the sale of the Note and the Warrant for
general working capital purposes only.

 

6.6           Access to Facilities.
Intentionally omitted.

 

6.7           Taxes. Each of
the Company and each of its Subsidiaries will promptly pay and discharge, or
cause to be paid and discharged, when due and payable, all taxes, assessments
and governmental charges or levies imposed upon the income, profits, property
or business of the Company and its Subsidiaries; provided, however, that any
such tax, assessment, charge or levy need not be paid currently if (i) the
validity thereof shall currently and diligently be contested in good faith by
appropriate proceedings, (ii) such tax, assessment, charge or levy shall
have no effect on the lien priority of the Purchaser in any property of the
Company or any of its Subsidiaries and (iii) if the Company and/or such
Subsidiary shall have set aside on its books adequate reserves with respect
thereto in accordance with GAAP; and provided, further, that the Company and
its Subsidiaries will pay all such taxes, assessments, charges or levies
forthwith upon the commencement of proceedings to foreclose any lien which may have
attached as security therefor.

 

6.8           Insurance. Each
of the Company and its Subsidiaries will keep its assets which are of an
insurable character insured by financially sound and reputable insurers against
loss or damage by fire, explosion and other risks customarily insured against
by companies in similar business similarly situated as the Company and its
Subsidiaries; and the Company and its

 

17

 

Subsidiaries
will maintain, with financially sound and reputable insurers, insurance against
other hazards and risks and liability to persons and property to the extent and
in the manner which the Company reasonably believes is customary for companies
in similar business similarly situated as the Company and its Subsidiaries and
to the extent available on commercially reasonable terms. The Company, and each
of its Subsidiaries, will jointly and severally bear the full risk of loss from
any loss of any nature whatsoever with respect to the assets pledged to the
Purchaser as security for their respective obligations hereunder and under the
Related Agreements. At the Company’s and each of its Subsidiaries’ joint and
several cost and expense in amounts and with carriers reasonably acceptable to
the Purchaser, each of the Company and each of its Subsidiaries shall (i) keep
all its insurable properties and properties in which it has an interest insured
against the hazards of fire, flood, sprinkler leakage, those hazards covered by
extended coverage insurance and such other hazards, and for such amounts, as is
customary in the case of companies engaged in businesses similar to the Company’s
or the respective Subsidiary’s including business interruption insurance; (ii) maintain
a bond in such amounts as is customary in the case of companies engaged in
businesses similar to the Company’s or the respective Subsidiary’s insuring
against larceny, embezzlement or other criminal misappropriation of insured’s
officers and employees who may either singly or jointly with others at any
time have access to the assets or funds of the Company or any of its
Subsidiaries either directly or through governmental authority to draw upon
such funds or to direct generally the disposition of such assets; (iii) maintain
public and product liability insurance against claims for personal injury,
death or property damage suffered by others; (iv) maintain all such worker’s
compensation or similar insurance as may be required under the laws of any
state or jurisdiction in which the Company or the respective Subsidiary is
engaged in business; and (v) furnish the Purchaser with (x) copies of all
policies and evidence of the maintenance of such policies at least thirty (30)
days before any expiration date, (y) excepting the Company’s workers’
compensation policy, endorsements to such policies naming the Purchaser as “co-insured”
or “additional insured” and appropriate loss payable endorsements in form and
substance satisfactory to the Purchaser, naming the Purchaser as loss payee,
and (z) evidence that as to the Purchaser the insurance coverage shall not be
impaired or invalidated by any act or neglect of the Company or any Subsidiary
and the insurer will provide the Purchaser with at least thirty (30) days
notice prior to cancellation. The Company and each Subsidiary shall instruct
the insurance carriers that in the event of any loss thereunder, the carriers
shall make payment for such loss to the Company and/or the Subsidiary and the
Purchaser jointly. In the event that as of the date of receipt of each loss
recovery upon any such insurance, the Purchaser has not declared an event of
default with respect to this Agreement or any of the Related Agreements, then
the Company and/or such Subsidiary shall be permitted to direct the application
of such loss recovery proceeds toward investment in property, plant and
equipment that would comprise “Collateral” secured by the Purchaser’s security
interest pursuant to the Master Security Agreement or such other security
agreement as shall be required by the Purchaser, with any surplus funds to be
applied toward payment of the obligations of the Company to the Purchaser. In
the event that the Purchaser has properly declared an event of default with
respect to this Agreement or any of the Related Agreements, then all loss
recoveries received by the Purchaser upon any such insurance thereafter may be
applied to the obligations of the Company hereunder and under the Related
Agreements, in such order as the Purchaser may determine. Any surplus
(following satisfaction of all Company obligations to the Purchaser) shall be
paid by the Purchaser to the Company or

 

18

 

applied as may be
otherwise required by law. Any deficiency thereon shall be paid by the Company
or the Subsidiary, as applicable, to the Purchaser, on demand.

 

6.9           Intellectual
Property. Each of the Company and each of its Subsidiaries shall maintain
in full force and effect its existence, rights and franchises and all licenses
and other rights to use Intellectual Property owned or possessed by it and
reasonably deemed to be necessary to the conduct of its business.

 

6.10         Properties. Each
of the Company and each of its Subsidiaries will keep its properties in good
repair, working order and condition, reasonable wear and tear excepted, and
from time to time make all needful and proper repairs, renewals, replacements,
additions and improvements thereto; and each of the Company and each of its
Subsidiaries will at all times comply with each provision of all leases to which
it is a party or under which it occupies property if the breach of such
provision could, either individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect.

 

6.11         Confidentiality. The
Company will not, and will not permit any of its Subsidiaries to, disclose, and
will not include in any public announcement, the name of the Purchaser, unless
expressly agreed to by the Purchaser or unless and until such disclosure is
required by law or applicable regulation, and then only to the extent of such
requirement. Notwithstanding the foregoing, the Company may disclose the
Purchaser’s identity and the terms of this Agreement to its current and
prospective debt and equity financing sources.

 

6.12         Required Approvals.
Subject to the provisions of that certain Second Amended and Restated Loan and
Security Agreement dated as of December 31, 2004 among Fleet Capital
Corporation, the Company, International Wholesale Tile, Inc. (“IWT”), The
Tile Club, Inc. (“Tile Club”) and Import Flooring Group, Inc. (“Import”)
(as amended, modified or supplemented from time to time, the “Working
Capital Lender Loan Agreement”) and all agreements, instruments,
documents,  mortgages, pledges, powers of
attorney, consents, assignments, contracts, notice, security agreements, trust
agreements and guarantees executed in connection with the Working Capital
Lender Loan Agreement (all such documents, as each may be amended,
supplemented or modified, the “Working Capital Lender Loan Documents”).

 

6.13         (I)  For so long as twenty-five percent (25%) of
the principal amount of the Note is outstanding, the Company, without the prior
written consent of the Purchaser, shall not, and shall not permit any of its
Subsidiaries to:

 

(a)           (i) directly or
indirectly declare or pay any dividends, other than dividends paid to the
Company or any of its wholly-owned Subsidiaries, (ii) issue any preferred
stock that is manditorily redeemable prior to the one year anniversary of the
Maturity Date (as defined in the Note) or (iii) redeem any of its
preferred stock or other equity interests;

 

(b)           liquidate, dissolve or
effect a material reorganization (it being understood that in no event shall
the Company or any of its Subsidiaries dissolve, liquidate or merge with any
other person or entity (unless, in the case of such a merger, the Company or,
in

 

19

 

the case of merger not involving the Company, such Subsidiary, as
applicable, is the surviving entity);

 

(c)           become subject to
(including, without limitation, by way of amendment to or modification of) any
agreement or instrument which by its terms would (under any circumstances)
restrict the Company’s or any of its Subsidiaries, right to perform the
provisions of this Agreement, any Related Agreement or any of the agreements
contemplated hereby or thereby;

 

(d)           materially alter or
change the scope of the business of the Company and its Subsidiaries taken as a
whole; or

 

(e)           (i) create, incur,
assume or suffer to exist any indebtedness (exclusive of trade debt and debt
incurred to finance the purchase of equipment (not in excess of five percent
(5%) of the fair market value of the Company’s and its Subsidiaries’ assets))
whether secured or unsecured other than (x) the Company’s obligations owed to
the Purchaser, (y) indebtedness set forth on Schedule 6.12(e) attached
hereto and made a part hereof and any refinancings or replacements thereof
on terms no less favorable to the Purchaser than the indebtedness being
refinanced or replaced, and (z) any indebtedness incurred in connection with
the purchase of assets (other than equipment) in the ordinary course of
business, or any refinancings or replacements thereof on terms no less
favorable to the Purchaser than the indebtedness being refinanced or replaced, so
long as any lien relating thereto shall only encumber the fixed assets so
purchased and no other assets of the Company or any of its Subsidiaries; (ii) cancel
any indebtedness owing to it in excess of $100,000 in the aggregate during any
12 month period; (iii) assume, guarantee, endorse or otherwise become
directly or contingently liable in connection with any obligations of any other
person or entity, except the endorsement of negotiable instruments by the
Company or any Subsidiary thereof for deposit or collection or similar
transactions in the ordinary course of business or guarantees of indebtedness
otherwise permitted to be outstanding pursuant to this clause (e); and

 

(II) The Company, without the prior written consent of the Purchaser,
shall not, and shall not permit any of its Subsidiaries to, create or acquire
any Subsidiary after the date hereof unless (i) such Subsidiary is a
wholly-owned Subsidiary of the Company and (ii) such Subsidiary becomes a
party to the Security Agreement, the Subsidiary Security Agreement and the
Continuing Guaranty (either by executing a counterpart thereof or an
assumption or joinder agreement in respect thereof) and, to the extent required
by the Purchaser, satisfies each condition of this Agreement and the Related Agreements
as if such Subsidiary were a Subsidiary on the Closing Date.

 

(III)         Required
Approvals. Subject to the provisions of that certain Amended and Restated
Loan and Security Agreement dated as of December 31, 2004 among Fleet
Capital Corporation, the Company, International Wholesale Tile, Inc. (“IWT”),
The Tile Club, Inc. (“Tile Club”) and Import Flooring Group, Inc. (“Import”)
(as amended, modified or supplemented from time to time, the “Working
Capital Lender Loan Agreement”) and all agreements, instruments,
documents,  mortgages, pledges, powers of
attorney, consents, assignments, contracts, notice, security agreements, trust
agreements and guarantees executed in

 

20

 

connection with the Working Capital Lender Loan Agreement (all such
documents, as each may be amended, supplemented or modified, the “Working
Capital Lender Loan Documents”).

 

6.14         Reissuance of
Securities. The Company agrees to undertake to have certificates reissued
representing the Securities without the legends set forth in Section 5.8
above at such time as:

 

(a)           the holder thereof is
permitted to dispose of such Securities pursuant to Rule 144(k) under the
Securities Act; or

 

(b)           upon resale subject to
an effective registration statement after such Securities are registered under
the Securities Act.

 

The Company agrees to cooperate with the Purchaser in connection with
all resales pursuant to Rule 144(d) and Rule 144(k) and provide
legal opinions necessary to allow such resales provided the Company and its
counsel receive reasonably requested representations from the Purchaser and
broker, if any.

 

6.15         Opinion. On the
Closing Date, the Company will deliver to the Purchaser an opinion acceptable
to the Purchaser from the Company’s external legal counsel. The Company will
provide, at the Company’s expense, such other legal opinions in the future as
are deemed reasonably necessary by the Purchaser (and acceptable to the
Purchaser) in connection with the exercise of the Warrant.

 

6.16         Margin Stock.       The
Company will not permit any of the proceeds of the Note or the Warrant to be
used directly or indirectly to “purchase” or “carry” “margin stock” or to repay
indebtedness incurred to “purchase” or “carry” “margin stock” within the
respective meanings of each of the quoted terms under Regulation U of the Board
of Governors of the Federal Reserve System as now and from time to time
hereafter in effect.

 

6.17         Financing Right of
First Refusal.

 

(a)           The Company hereby
grants to the Purchaser a right of first refusal to provide any Additional
Financing (as defined below) to be issued by the Company and/or any of its
Subsidiaries, subject to the following terms and conditions. From and after the
date hereof,  prior to the incurrence of
any additional indebtedness and/or the sale or issuance of any equity interests
of the Company or any of its Subsidiaries (an “Additional Financing”), the
Company and/or any Subsidiary of the Company, as the case may be, shall
notify the Purchaser of its intention to enter into such Additional Financing. In
connection therewith, the Company and/or the applicable Subsidiary thereof
shall submit a fully executed term sheet (a “Proposed Term Sheet”) to the
Purchaser setting forth the terms, conditions and pricing of any such Additional
Financing (such financing to be negotiated on “arm’s length” terms and the
terms thereof to be negotiated in good faith) proposed to be entered into by
the Company and/or such Subsidiary. The Purchaser shall have the right, but not
the obligation, to deliver its own proposed term sheet (the “Purchaser Term
Sheet”) setting forth the terms and conditions upon which the Purchaser

 

21

 

would be willing to provide such Additional Financing to the Company
and/or such Subsidiary. The Purchaser Term Sheet shall contain terms no less
favorable to the Company and/or such Subsidiary than those outlined in Proposed
Term Sheet. The Purchaser shall deliver such Purchaser Term Sheet within ten
business days of receipt of each such Proposed Term Sheet. If the provisions of
the Purchaser Term Sheet are at least as favorable to the Company and/or such
Subsidiary, as the case may be, as the provisions of the Proposed Term
Sheet, the Company and/or such Subsidiary shall enter into and consummate the
Additional Financing transaction outlined in the Purchaser Term Sheet.

 

(b)           The Company will not,
and will not permit its Subsidiaries to, agree, directly or indirectly, to any
restriction with any person or entity which limits the ability of the Purchaser
to consummate an Additional Financing with the Company or any of its
Subsidiaries.

 

6.18         Authorization and
Reservation of Shares. The Company shall at all times have authorized and
reserved a sufficient number of shares of Common Stock to provide for the
exercise of the Warrants.

 

7.             Covenants of the
Purchaser. The Purchaser covenants and agrees with the Company as follows:

 

7.1           Confidentiality.
The Purchaser will not and will not permit any of its affiliates to, disclose,
and will not include in any public announcement, the name of the Company,
unless expressly agreed to by the Company or unless and until such disclosure
is required by law or applicable regulation, and then only to the extent of
such requirement.

 

7.2           Public Information.
The Purchaser will not effect any sales in the shares of the Company’s Common
Stock while in possession of material, non-public information regarding the
Company if such sales would violate applicable securities law.

 

7.3           Limitation on
Acquisition of Common Stock of the Company. Notwithstanding anything to the
contrary contained in this Agreement, any Related Agreement or any document,
instrument or agreement entered into in connection with any other transactions
between the Purchaser and the Company, the Purchaser may not acquire stock
in the Company (including, without limitation, pursuant to a contract to
purchase, by exercising an option or warrant, by converting any other security
or instrument, by acquiring or exercising any other right to acquire, shares of
stock or other security convertible into shares of stock in the Company, or
otherwise, and such contracts, options, warrants, conversion or other rights
shall not be enforceable or exercisable) to the extent such stock acquisition
would cause any interest (including any original issue discount) payable by the
Company to the Purchaser not to qualify as “portfolio interest” within the
meaning of Section 881(c)(2) of the Code, by reason of Section 881(c)(3) of
the Code, taking into account the constructive ownership rules under Section 871(h)(3)(C) of
the Code (the “Stock Acquisition Limitation”).

 

22

 

8.             Covenants of the
Company and the Purchaser Regarding Indemnification.

 

8.1           Company
Indemnification. The Company agrees to indemnify, hold harmless, reimburse
and defend the Purchaser, each of the Purchaser’s officers, directors, agents,
affiliates, control persons, and principal shareholders, against all claims,
costs, expenses, liabilities, obligations, losses or damages (including
reasonable legal fees) of any nature, incurred by or imposed upon the Purchaser
which result, arise out of or are based upon: (i) any misrepresentation by
the Company or any of its Subsidiaries or breach of any warranty by the Company
or any of its Subsidiaries in this Agreement, any other Related Agreement or in
any exhibits or schedules attached hereto or thereto; or (ii) any breach
or default in performance by Company or any of its Subsidiaries of any covenant
or undertaking to be performed by Company or any of its Subsidiaries hereunder,
under any other Related Agreement or any other agreement entered into by the
Company and/or any of its Subsidiaries and the Purchaser relating hereto or
thereto.

 

8.2           Purchaser’s Indemnification.
The Purchaser agrees to indemnify, hold harmless, reimburse and defend the
Company and each of the Company’s officers, directors, agents, affiliates,
control persons and principal shareholders, at all times against any claims,
costs, expenses, liabilities, obligations, losses or damages (including
reasonable legal fees) of any nature, incurred by or imposed upon the Company
which result, arise out of or are based upon: 
(i) any misrepresentation by the Purchaser or breach of any
warranty by the Purchaser in this Agreement or in any exhibits or schedules
attached hereto or any Related Agreement; or (ii) any breach or default in
performance by the Purchaser of any covenant or undertaking to be performed by
the Purchaser hereunder, or any other agreement entered into by the Company and
the Purchaser relating hereto.

 

9.             THIS SECTION INTENTIALLY
OMITTED. 

 

10.           Registration Rights.

 

10.1         Registration Rights
Granted. The Company hereby grants registration rights to the Purchaser
pursuant to the Registration Rights Agreement.

 

10.2         Offering Restrictions.
Except as previously disclosed in the SEC Reports or in the Exchange Act
Filings, or stock or stock options granted to employees or directors of the
Company (these exceptions hereinafter referred to as the “Excepted Issuances”),
neither the Company nor any of its Subsidiaries will, prior to the full
exercise by Purchaser of the Warrants, (x) enter into any equity line of credit
agreement or similar agreement or (y) issue, or enter into any agreement to
issue, any securities with a variable/floating conversion and/or pricing
feature which are or could be (by conversion or registration) free-trading
securities (i.e. common stock subject to a registration statement).

 

23

 

11.           Miscellaneous.

 

11.1         Governing Law,
Jurisdiction and Waiver of Jury Trial.

 

(a)           THIS AGREEMENT AND THE
OTHER RELATED AGREEMENTS SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE
AND PERFORMED IN SUCH STATE, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS.

 

(b)           THE COMPANY HEREBY
CONSENTS AND AGREES THAT THE STATE OR FEDERAL COURTS LOCATED IN THE COUNTY OF
NEW YORK, STATE OF NEW YORK SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND
DETERMINE ANY CLAIMS OR DISPUTES BETWEEN THE COMPANY, ON THE ONE HAND, AND THE
PURCHASER, ON THE OTHER HAND, PERTAINING TO THIS AGREEMENT OR ANY OF THE
RELATED AGREEMENTS OR TO ANY MATTER ARISING OUT OF OR RELATED TO THIS AGREEMENT
OR ANY OF THE OTHER RELATED AGREEMENTS; PROVIDED, THAT THE PURCHASER AND
THE COMPANY ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE
HEARD BY A COURT LOCATED OUTSIDE OF THE COUNTY OF NEW YORK, STATE OF NEW YORK;
AND FURTHER  PROVIDED, THAT, NOTHING IN THIS AGREEMENT
SHALL BE DEEMED OR OPERATE TO PRECLUDE THE PURCHASER FROM BRINGING SUIT OR
TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO COLLECT THE OBLIGATIONS,
TO REALIZE ON THE COLLATERAL (AS DEFINED IN THE MASTER SECURITY AGREEMENT) OR
ANY OTHER SECURITY FOR THE OBLIGATIONS (AS DEFINED IN THE MASTER SECURITY
AGREEMENT), OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF THE
PURCHASER. THE COMPANY EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH
JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND THE COMPANY
HEREBY WAIVES ANY OBJECTION THAT IT MAY HAVE BASED UPON LACK OF PERSONAL
JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS. THE COMPANY HEREBY
WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN
ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND
OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO THE
COMPANY AT THE ADDRESS SET FORTH IN SECTION 11.9 AND THAT SERVICE SO MADE
SHALL BE DEEMED COMPLETED UPON THE EARLIER OF THE COMPANY’S ACTUAL RECEIPT
THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE
PREPAID.

 

(c)           THE PARTIES DESIRE THAT
THEIR DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE,
TO ACHIEVE THE BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF
ARBITRATION, THE PARTIES HERETO WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY
ACTION, SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER ARISING IN
CONTRACT, TORT, OR OTHERWISE BETWEEN THE PURCHASER AND/OR THE COMPANY ARISING
OUT OF, CONNECTED WITH, RELATED OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED
BETWEEN THEM IN CONNECTION WITH THIS AGREEMENT,

 

24

 

ANY OTHER RELATED AGREEMENT OR THE TRANSACTIONS RELATED HERETO OR
THERETO.

 

11.2         Severability. Wherever
possible each provision of this Agreement and the Related Agreements shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement or any Related Agreement shall be
prohibited by or invalid or illegal under applicable law such provision shall
be ineffective to the extent of such prohibition or invalidity or illegality,
without invalidating the remainder of such provision or the remaining
provisions thereof which shall not in any way be affected or impaired thereby.

 

11.3         Survival. The
representations, warranties, covenants and agreements made herein shall survive
any investigation made by the Purchaser and the closing of the transactions
contemplated hereby to the extent provided therein. All statements as to
factual matters contained in any certificate or other instrument delivered by
or on behalf of the Company pursuant hereto in connection with the transactions
contemplated hereby shall be deemed to be representations and warranties by the
Company hereunder solely as of the date of such certificate or instrument. All
indemnities set forth herein shall survive the execution, delivery and
termination of this Agreement and the Note and the making and repayment of the
obligations arising hereunder, under the Note and under the other Related
Agreements.

 

11.4         Successors. Except
as otherwise expressly provided herein, the provisions hereof shall inure to
the benefit of, and be binding upon, the successors, heirs, executors and
administrators of the parties hereto and shall inure to the benefit of and be
enforceable by each person or entity which shall be a holder of the Securities
from time to time, other than the holders of Common Stock which has been sold
by the Purchaser pursuant to Rule 144 or an effective registration
statement. The Purchaser shall not be permitted to assign its rights hereunder
or under any Related Agreement to a competitor of the Company unless an Event
of Default (as defined in the Note) has occurred and is continuing.

 

11.5         Entire Agreement;
Maximum Interest. This Agreement, the Related Agreements, the exhibits and
schedules hereto and thereto and the other documents delivered pursuant hereto
constitute the full and entire understanding and agreement between the parties
with regard to the subjects hereof and no party shall be liable or bound to any
other in any manner by any representations, warranties, covenants and
agreements except as specifically set forth herein and therein. Nothing
contained in this Agreement, any Related Agreement or in any document referred
to herein or delivered in connection herewith shall be deemed to establish or
require the payment of a rate of interest or other charges in excess of the
maximum rate permitted by applicable law. In the event that the rate of
interest or dividends required to be paid or other charges hereunder exceed the
maximum rate permitted by such law, any payments in excess of such maximum
shall be credited against amounts owed by the Company to the Purchaser and thus
refunded to the Company.

 

11.6         Amendment and Waiver.

 

(a)           This Agreement may be
amended or modified only upon the written consent of the Company and the
Purchaser.

 

25

 

(b)           The obligations of the
Company and the rights of the Purchaser under this Agreement may be waived
only with the written consent of the Purchaser.

 

(c)           The obligations of the
Purchaser and the rights of the Company under this Agreement may be waived
only with the written consent of the Company.

 

11.7         Delays or Omissions.
It is agreed that no delay or omission to exercise any right, power or remedy
accruing to any party, upon any breach, default or noncompliance by another
party under this Agreement or the Related Agreements, shall impair any such
right, power or remedy, nor shall it be construed to be a waiver of any such
breach, default or noncompliance, or any acquiescence therein, or of or in any
similar breach, default or noncompliance thereafter occurring. All remedies,
either under this Agreement or the Related Agreements, by law or otherwise
afforded to any party, shall be cumulative and not alternative.

 

11.8         Notices. All
notices required or permitted hereunder shall be in writing and shall be deemed
effectively given:

 

(a)           upon personal delivery
to the party to be notified;

 

(b)           when sent by confirmed
facsimile if sent during normal business hours of the recipient, if not, then
on the next business day;

 

(c)           three (3) business
days after having been sent by registered or certified mail, return receipt
requested, postage prepaid; or

 

(d)           one (1) day after
deposit with a nationally recognized overnight courier, specifying next day
delivery, with written verification of receipt.

 

All communications shall be sent as follows:

 

	
  If to the Company
 to:

  	
   

  	
  IWT Tesoro Corporation 

  191 Post Road West 

  Westport, Connecticut 06880 

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Attention:

  	
  Henry J. Boucher, Jr., CEO

  
	
   

  	
   

  	
  Facsimile:

  	
  (203) 221-2797

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  with a copy to:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Rader and Coleman, P.L. 

  2101 N.W. Boca Raton Blvd., Suite 1 

  Boca Raton, Florida 33431

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Attention: 

  	
  Gayle Coleman, Esq.

  
	
   

  	
   

  	
  Facsimile:

  	
  (561) 367-1725

  

 

26

 

	
  If to the Purchaser,

  to:

  	
   

  	
  Laurus Master Fund, Ltd. 

  c/o M&C Corporate Services Limited 

  P.O. Box 309 GT 

  Ugland House 

  George Town 

  South Church Street 

  Grand Cayman, Cayman Islands 

  
	
   

  	
   

  	
  Facsimile:

  	
  345-949-8080

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  with a copy to:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  John E. Tucker, Esq. 

  825 Third Avenue 14th Floor 

  New York, NY 10022 

  
	
   

  	
   

  	
  Facsimile:

  	
  212-541-4434

  

 

or at such other address as the Company or the Purchaser may designate
by written notice to the other parties hereto given in accordance herewith.

 

11.9         Attorneys’ Fees. In
the event that any suit or action is instituted to enforce any provision in
this Agreement or any Related Agreement, the prevailing party in such dispute
shall be entitled to recover from the losing party all fees, costs and expenses
of enforcing any right of such prevailing party under or with respect to this
Agreement and/or such Related Agreement, including, without limitation, such
reasonable fees and expenses of attorneys and accountants, which shall include,
without limitation, all fees, costs and expenses of appeals.

 

11.10       Titles and Subtitles.
The titles of the sections and subsections of this Agreement are for
convenience of reference only and are not to be considered in construing this
Agreement.

 

11.11       Facsimile Signatures;
Counterparts. This Agreement may be executed by facsimile signatures
and in any number of counterparts, each of which shall be an original, but all
of which together shall constitute one agreement.

 

11.12       Broker’s Fees. Except
as set forth on Schedule 11.12 hereof, each party hereto represents and
warrants that no agent, broker, investment banker, person or firm acting on
behalf of or under the authority of such party hereto is or will be entitled to
any broker’s or finder’s fee or any other commission directly or indirectly in
connection with the transactions contemplated herein. Each party hereto further
agrees to indemnify each other party for any claims, losses or expenses
incurred by such other party as a result of the representation in this Section 11.13
being untrue.

 

11.13       Construction. Each
party acknowledges that its legal counsel participated in the preparation of
this Agreement and the Related Agreements and, therefore, stipulates that the rule of
construction that ambiguities are to be resolved against the drafting party
shall not be applied in the interpretation of this Agreement or any Related
Agreement to favor any party against the other.

 

27

 

[THE REMAINDER OF THIS PAGE IS
INTENTIONALLY LEFT BLANK

 

28

 

IN WITNESS WHEREOF, the parties hereto have executed the SECURITIES
PURCHASE AGREEMENT as of the date set forth in the first paragraph hereof.

 

	
  COMPANY:

  	
  PURCHASER:

  
	
   

  	
   

  
	
  IWT TESORO CORPORATION

  	
  LAURUS MASTER FUND, LTD.

  
	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
  By:

  	
   

  	
   

  
	
  Name:

  	
   

  	
   

  	
  Name:

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  	
  Title:

  	
   

  	
   

  
										

 

29

 

EXHIBIT A

 

FORM OF NOTE

 

A-1

 

EXHIBIT B

 

FORM OF WARRANT

 

B-1

 

EXHIBIT C

 

FORM OF OPINION

 

The form of opinion will be in substantially the same form as
the Borrower’s Counsel opinion provided by Rader and Coleman P.L. on August 25,
2005, as follows:

 

Based upon the foregoing and and subject to other qualifications,
limitations and assumptions set forth herein, we are of the opinion that:

 

1.     Tesoro
has been formed as a corporation under the laws of Nevada and its status is
active.

 

2.     IWT
has been formed as a corporation under the laws of Florida and its status is
active.

 

3.     Transport
has been formed as a corporation under the laws of Florida and its status is
active.

 

4.     International
has been formed as a Bermuda exempt company under the laws of Bermuda and its
status is active.

 

5.     IFG
has been formed as a corporation under the laws of Delaware and its status is
active.

 

6.     TTC
has been formed as a corporation under the laws of Delaware and its status is
active.

 

7.     The
Company and its Subsidiaries each has the corporate power and authority to own
and lease its properties and to carry on its respective business as presently
conducted.

 

8.     The
execution and delivery of the Agreement and the Related Agreements by the
Company and its Subsidiaries to which each is a party and the observance and
performance by the Company and its Subsidiaries of its respective obligations
thereunder, have been duly authorized by requisite actions by the Company and
its Subsidiaries. Each of the Agreement and the Related Agreements delivered by
the Company and its Subsidiaries to Purchaser on the Closing Date is based upon
adequate consideration and constitutes, and each of the other Agreement and the
Related Agreements to which the Company and its Subsidiaries is a party, when
duly executed and delivered will constitute, legal, valid and binding
obligations of the Company and its Subsidiaries and is enforceable in
accordance with their respective terms. Our opinion concerning the validity,
binding effect and enforceability of the Agreement and the Related Agreements
to which the Company and its Subsidiaries is a party means that (a) the
Agreement and the Related Agreements constitute effective contracts under
Florida Law, (b) the Agreement and the Related Agreements are not invalid
because of a specific statutory prohibition or public policy and are not
subject in their entirety to a contractual defense, and (c) subject to the
last sentence of this paragraph, some remedy is available if a Company or a
Subsidiary is in material default under the Agreement and the Related
Agreements to which it is a party. This opinion does not mean that (a) any
particular remedy is available upon a material default or (b) every
provision of the Agreement and the Related Agreements to which the Company or a
Subsidiary is a party will be upheld

 

D-1

 

or enforced in any or each circumstance by a court. Furthermore, the
validity, binding effect and enforceability of the Agreement and the Related
Agreements to which the Company or a Subsidiary is a party may be limited
or otherwise affected by:  (a) bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance or other similar
statutes, rules, regulations or other laws affecting the enforcement of
creditors’ rights and remedies generally; and (b) the unavailability of,
or limitation on the availability of, a particular right or remedy (whether in
a proceeding in equity or at law) because of an equitable principle or a
requirement as to commercial reasonableness, conscionability or good faith.

 

9.     The
execution and delivery by the Company and its Subsidiaries of the Agreement and
the Related Agreements delivered or to be delivered by each party and
observance and performance by the Company and its Subsidiaries of each of their
respective obligations thereunder, do not:

 

a.     Violate
the provisions of their respective Charter or bylaws; or

 

b.     Violate
any judgment, decree, order or award of any court binding upon the Company or
any of its subsidiaries; or

 

c.     Violate
any Florida or federal law.

 

10.   There
is no action, suit, proceeding or investigation pending or, to such counsel’s
knowledge, currently threatened against the Company or any of its Subsidiaries
that prevents the right of the Company or any of its Subsidiaries to enter into
this Agreement or any Related Agreement, or to consummate the transactions
contemplated thereby. To such counsel’s knowledge, the Company is not a party
or subject to the provisions of any order, writ, injunction, judgment or decree
of any court or government agency or instrumentality; nor is there any action,
suit, proceeding or investigation by the Company currently pending or which the
Company intends to initiate.

 

11.   The
shares of Common Stock of Tesoro issuable upon exercise of the Warrants (the “Warrant
Shares”), when issued pursuant to and in accordance with the terms of the Agreement
and the Related Agreements and upon delivery shall, in each case, be validly
issued and outstanding, fully paid and non assessable.

 

12.   To
our knowledge, the issuance of the Warrant and the subsequent exercise of the
Warrant for Warrant Shares are not subject to any preemptive rights or, to our
knowledge, rights of first refusal that have not been properly waived or
complied with.

 

13.   Assuming
the accuracy of the representations and warranties of Purchaser contained in
the Agreement, the offer, sale and issuance of the Note and the Warrant (the “Securities”)
will be exempt from the registration requirements of the Securities Act. To the
best of such counsel’s knowledge, neither Tesoro, 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 and security
under circumstances that would cause the issuance of the Securities pursuant to
the Agreement and the Related Agreements to be integrated with prior offerings
by Tesoro for purposes of the Securities Act which would

 

2

 

prevent Tesoro from selling the Securities pursuant to Rule 506
under the Securities Act, or any applicable exchange-related stockholder
approval provisions.

 

3

 

EXHIBIT D

 

FORM OF ESCROW AGREEMENT

 

4

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