Document:

Exhibit 10.25

 

SECURITIES PURCHASE AGREEMENT

 

By and Between

 

ANDOVER MEDICAL, INC.

 

and

 

VICIS CAPITAL MASTER FUND

 

DATED March 28, 2008

 

 

SECURITIES PURCHASE AGREEMENT

 

This SECURITIES PURCHASE
AGREEMENT (the “Agreement”), dated this 28th day of March, 2008, is made by and
between ANDOVER MEDICAL, INC., a Delaware corporation (the “Company”), and
VICIS CAPITAL MASTER FUND (the “Purchaser”), a series of the Vicis Capital
Master Trust, a trust formed under the laws of the Cayman Islands.

 

R E C I T A L S

 

WHEREAS, pursuant to the terms
and conditions of this Agreement, the Company wishes to issue and sell to the
Purchaser the following securities (collectively, the “Securities”): (a) 2,000,000
shares (the “Preferred Shares”) of the Company’s Series D Convertible
Preferred Stock, par value $.001 per share (the “Series D Preferred Stock”),
with such terms, rights and preferences as are set forth in the Certificate of
Designation for the Series D Preferred Stock set forth on Exhibit A
attached hereto; and (b) a Series E Warrant to purchase an aggregate
of 17,142,858 shares of common stock, par value $.001 per share (the “Common Stock”),
of the Company initially at an exercise price of $0.35 per share in the form
attached hereto as Exhibit B (the “Series E Warrant” or “Warrant”).

 

WHEREAS, the Purchaser desires
to purchase such Securities from the Company according to the terms hereinafter
set forth.

 

NOW,
THEREFORE, the Company and the Purchaser hereby agree as follows:

 

ARTICLE
I

PURCHASE AND SALE OF THE SECURITIES

 

1.1                               Purchase and Sale of the Securities.  Subject to the terms and conditions hereof
and in reliance on the representations and warranties contained herein, or made
pursuant hereto, the Company will issue and sell to the Purchaser, and the
Purchaser will purchase from the Company at the closing of the transactions
contemplated hereby (the “Closing”), the Securities for $2,000,000 (the “Purchase
Price”) in cash.

 

1.2                               Closing.  The Closing shall be deemed to occur at the
offices of Quarles & Brady, LLP, 411 East Wisconsin Avenue, Milwaukee,
Wisconsin, at 5:00 p.m. CDT on March 28, 2008, or at such other
place, date or time as mutually agreeable to the parties (the “Closing Date”).

 

1.3                               Closing Matters. On the Closing
Date, subject to the terms and conditions hereof, the following actions shall
be taken:

 

(a)                                  The Company, against delivery of payment of the Purchase Price in
accordance with Section 1.3(b), will deliver to the Purchaser the
documents set forth in Section 4.4 hereof.

 

(b)                                 The Purchaser shall deliver to the Company the Purchase Price, subject
to the fee owed to Purchaser pursuant to Section 10.9 hereof, in
immediately available funds by wire transfer of immediately available funds in
accordance with the instructions of the Company.

 

 

1.4                               Most Favored Nations Exchange.   If the Company completes a
private equity or equity-linked financing at any time while any share of Series D
Preferred Stock is outstanding, the Purchaser will have the right to exchange
all or any such shares at their stated value, plus all accrued but unpaid
dividends thereon, for securities in such financing.

 

1.5                               Subsequent Financings.

 

(a)                                  Other than in connection with a Permitted Financing (defined
below),  for the twelve-month period
following the Closing Date, the Purchaser shall have the right to participate  up to 100% of each such subsequent financing that involves
the sale of securities of the Company (each such financing, a “Subsequent
Financing”).  At least 10 days prior to the making or accepting of an
offer for a Subsequent Financing, the Company shall deliver to the Purchaser a
written notice of its intention to effect a Subsequent Financing and the
details of such Subsequent Financing (a “Subsequent Financing Notice”). The
Subsequent Financing Notice shall describe in reasonable detail the proposed
terms of such Subsequent Financing, the amount of proceeds intended to be
raised thereunder and the Person with whom such Subsequent Financing is
proposed to be effected, and shall include, as an attachment thereto, a term
sheet or similar document relating thereto, if any exists.    If
the Purchaser elects to participate in the Subsequent Financing, the closing of
such Subsequent Financing shall be as mutually agreed between the parties
participating in such Subsequent Financing. 
If by 6:30 p.m. (Eastern Time) on the tenth day after the Purchaser
has received the Subsequent Financing Notice, the Purchaser fails to notify the
Company of its election to participate or elects to participate in an amount
that is less than the total amount of the Subsequent Financing, then the
Company may effect the remaining portion of such Subsequent Financing on the
terms and with the Persons set forth in the Subsequent Financing Notice. 
The Company must provide the Purchaser with a second Subsequent Financing
Notice, and the Purchaser will again have the right of participation set forth
above in this Section 1.5(a), if the Subsequent Financing subject to the
initial Subsequent Financing Notice is not consummated for any reason on the
terms set forth in such Subsequent Financing Notice within 90 days after the
date of the initial Subsequent Financing Notice.

 

(b)                                 Notwithstanding the foregoing, Section 1.5(a) shall not apply
in respect to the issuance of the following (each, a “Permitted Financing”):  (i) shares of Common Stock or Common
Stock options, warrants or other rights to purchase Common Stock issued to
employees, officers, directors, consultants or advisors of the Company pursuant
to any stock, option, equity incentive or similar plan duly adopted by the
Board of Directors of the Company or shares of Common Stock issued upon
exercise of any option or warrant or conversion of any convertible security
issued pursuant to any stock, option, equity incentive or similar plan duly
adopted by the Board of Directors of the Company, (ii) securities issued
upon the exercise of or conversion of any securities issued pursuant to this
Agreement, (iii) Common Stock issued upon the exercise or conversion of
options, warrants, preferred stock or convertible debt instruments issued and
outstanding on the date of this Agreement; provided that, such securities have
not been amended since the date of this Agreement (A) to increase the
number of such securities or underlying Common Stock or (B) to decrease the
exercise or conversion price of any such security, (iv) Common Stock
issued or issuable to financial institutions, or lessors, pursuant to a
commercial credit arrangement, equipment financing transaction, accounts
receivable factoring, or a similar transaction, or (v) securities issued
pursuant to mergers, acquisitions or strategic transactions, provided any such
issuance shall only be to a Person which is, itself or through its 

 

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subsidiaries, an operating company in a business
synergistic with the business of the Company and in which the Company receives
benefits in addition to the investment of funds, but shall not include an
issuance or transaction in which the Company is issuing securities primarily
for the purpose of raising capital or to an entity whose primary business is
investing in securities.

 

1.6                                 Company Security Agreement.  All of the obligations of the Company under
the  Preferred Shares shall be secured by
a lien on all the personal property and assets of the Company now existing or
hereinafter acquired granted pursuant to a security agreement dated of even
date herewith between the Company and the Purchaser in the form attached hereto
as Exhibit C (the “Security Agreement”).

 

ARTICLE
II

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

 

The
Company hereby represents and warrants to the Purchaser as of the date of this
Agreement as follows:

 

2.1                               Organization and Qualification.  The Company is a corporation duly organized
and validly existing and in good standing under the laws of the jurisdiction in
which it is incorporated, and has all requisite corporate power and authority
to carry on its business as now conducted.  
The Company is duly qualified as a foreign corporation to do business
and is in good standing in every jurisdiction in which its ownership of
property or the nature of the business conducted by it makes such qualification
necessary, except to the extent that the failure to be so qualified or be in
good standing would not have a Material Adverse Effect. As used in this
Agreement, “Material Adverse Effect”
means any material adverse effect on the business, properties, assets,
operations, results of operations, or condition (financial or otherwise) of the
Company and its Subsidiaries, taken as a whole, or on the transactions
contemplated hereby or by the agreements and instruments to be entered into in
connection herewith, or on the authority or ability of the Company to perform
its obligations in all material respects under the Transaction Documents (as
defined in Section 2.6 hereof).

 

2.2                               Subsidiaries.  The Company has no subsidiaries other than as
disclosed on Schedule 2.2 attached hereto (each a “Subsidiary”, and
collectively, the “Subsidiaries’).  The
Company owns, directly or indirectly, all of the capital stock of each
Subsidiary, free and clear of any and all liens, and all the issued and
outstanding shares of capital stock of each Subsidiary are validly issued and
are fully paid, non-assessable and free of preemptive and similar rights.  Each Subsidiary is a corporation duly
organized and validly existing and in good standing under the laws of the
jurisdiction in which it is incorporated, and has all requisite corporate power
and authority to carry on its business as now conducted.   Each Subsidiary is duly qualified as a
foreign corporation to do business and is in good standing in every
jurisdiction in which its ownership of property or the nature of the business
conducted by it makes such qualification necessary, except to the extent that
the failure to be so qualified or be in good standing would not have a Material
Adverse Effect.

 

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2.3                               Compliance.

 

(a)                                  Except as disclosed in Schedule 2.3(a) attached hereto,
either the Company nor any Subsidiary (i) is in default under or in
violation of (and no event has occurred that has not been waived that, with
notice or lapse of time or both, would result in a default by the Company or
any Subsidiary under), nor has the Company or any Subsidiary received notice of
a claim that it is in default under or that it is in violation of, any
indenture, loan or credit agreement or any other agreement or instrument to
which it is a party or by which it or any of its properties is bound, except
such that, individually or in the aggregate, such default(s) and
violations(s) would not have a Material Adverse Effect, (ii) is in
violation of any order of any court, arbitrator or governmental body, or (iii) is
in violation of any of the provisions of its certificate or articles of
incorporation, bylaws or other organizational or charter documents.

 

(b)                                 The business of the Company and each Subsidiary is presently being
conducted in accordance with all applicable foreign, federal, state and local
governmental laws, rules, regulations and ordinances (including, without
limitation, rules and regulations of each governmental and regulatory
agency, self regulatory organization and Trading Market applicable to the
Company or any Subsidiary), except such that, individually or in the aggregate,
the noncompliance therewith would not have a Material Adverse Effect.  The Company has all franchises, permits,
licenses, consents and other governmental or regulatory authorizations and approvals
necessary for the conduct of its business as now being conducted by it unless
the failure to possess such franchises, permits, licenses, consents and other
governmental or regulatory authorizations and approvals, individually or in the
aggregate, would not have a Material Adverse Effect, and the Company has not
received any written notice of proceedings relating to the revocation or
modification of any of the foregoing.  
For purposes of this Agreement, “Trading Market” means the following
markets or exchanges on which the Common Stock is listed or quoted for trading
on the date in question: the NYSE Arca, OTC Bulletin Board, the American Stock
Exchange, the New York Stock Exchange, the Nasdaq Global Select Market, Nasdaq
Global Market or the Nasdaq Capital Market.

 

2.4                               Capitalization.

 

(a)                                  The authorized capital stock of the Company, the number of shares of
such capital stock issued and outstanding, and the number of shares of capital
stock reserved for issuance upon the exercise or conversion of all outstanding
warrants, stock options, and other securities issued by the Company, as of the
date hereof, are set forth on Schedule 2.4(a) attached
hereto.  All of such outstanding shares
have been, or upon issuance will be, validly issued, are fully paid and
nonassessable.

 

(b)                                 Except for the Securities, or as disclosed in Schedule 2.4(b) attached
hereto:

 

(i)                                     no holder of shares of the Company’s capital stock has any preemptive
rights or any other similar rights or has been granted or holds any Liens or
encumbrances suffered or permitted by the Company;

 

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(ii)                                  there are no outstanding options, warrants, scrip, rights to subscribe
to, calls or commitments of any character whatsoever relating to, or securities
or rights convertible into, or exercisable or exchangeable for, any shares of
capital stock of the Company or any Subsidiary, or contracts, commitments,
understandings or arrangements by which the Company or any Subsidiary is or may
become bound to issue additional shares of capital stock of the Company or any
Subsidiary or options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into, or exercisable or exchangeable for, any shares of capital
stock of the Company or any Subsidiary;

 

(iii)                               there are no outstanding debt securities, notes, credit agreements,
credit facilities or other agreements, documents or instruments evidencing
Indebtedness (as defined in Section 2.13 hereof) of the Company or any
Subsidiary in excess of $100,000 or by which the Company or any Subsidiary is
or may become bound and involves Indebtedness in excess of $100,000;

 

(iv)                              there are no financing statements securing obligations in any material
amounts, either singly or in the aggregate, filed in connection with the
Company or its Subsidiaries;

 

(v)                                 there are no agreements or arrangements under which the Company or any
Subsidiary is obligated to register the sale of any of their securities under
the Securities Act of 1933, as amended (the “Securities Act”);

 

(vi)                              there are no outstanding securities or instruments of the Company or any
Subsidiary that contain any redemption or similar provisions, and there are no
contracts, commitments, understandings or arrangements by which the Company or
any Subsidiary is or may become bound to redeem a security of the Company or a
Subsidiary;

 

(vii)                           there are no securities or instruments containing antidilution or
similar provisions that will be triggered by the issuance of the Securities;
and

 

(viii)                        the Company does not have any stock appreciation rights or “phantom
stock” plans or agreements or any similar plan or agreement.

 

2.5                               Issuance of Securities.

 

(a)                                  The Securities to be issued hereunder are duly authorized and, upon
payment and issuance in accordance with the terms hereof, shall be free from
all taxes, Liens and charges with respect to the issuance thereof. As of the
Closing Date, the Company has authorized and has reserved free of preemptive
rights and other similar contractual rights of stockholders, a number of its
authorized but unissued shares of Common Stock equal to one hundred percent
(100%) of the aggregate number of shares of Common Stock to effect the
conversion of the Preferred Shares (the “Conversion Shares”) and one hundred
percent (100%) of the aggregate number of shares of Common Stock to effect the
exercise of the Warrant (the “Warrant Shares”).

 

(b)                                 The Conversion Shares and Warrant Shares, when issued and paid for upon
conversion of the Preferred Shares and exercise of the Warrant, as the case may
be, will be validly issued, fully paid and nonassessable and free from all
taxes, Liens and charges with 

 

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respect to the issue thereof, with the holders being
entitled to all rights accorded to a holder of the Common Stock.

 

(c)                                  Assuming the accuracy of each of the representations and warranties made
by the Purchaser and set forth in Article III hereof (and assuming no
change in applicable law and no unlawful distribution of the Securities by the
Purchaser or other Persons), the issuance by the Company to the Purchaser of
the Securities is exempt from registration under the Securities Act.

 

2.6                               Authorization; Enforcement; Validity.
The Company has the requisite corporate power and authority to enter into and
perform its obligations under this Agreement, the Registration Rights Agreement
to be entered into between the Company and the Purchaser on even date herewith
in the form attached hereto as Exhibit D (the “Registration Rights
Agreement”), the Certificate of Designation for the Series D Preferred
Stock, and the Warrant, and each of the other agreements or instruments entered
into by the parties hereto in connection with the transactions contemplated by
this Agreement (collectively, the “Transaction
Documents”) and to issue the Securities (including without limitation,
the Conversion Shares and Warrant Shares) in accordance with the terms hereof
and thereof. The execution and delivery of the Transaction Documents by the
Company and the consummation by the Company of the transactions contemplated
hereby and thereby, including, without limitation, the issuance of the
Preferred Shares and the Warrant, have been duly authorized by the Board, and
no further consent or authorization is required by the Company, the Board or
its stockholders. This Agreement and the other Transaction Documents have been
duly executed and delivered by the Company, and constitute the legal, valid and
binding obligations of the Company enforceable against the Company in
accordance with their respective terms, except (i) as limited by general
equitable principles and applicable bankruptcy, insolvency, reorganization,
moratorium, fraudulent conveyance and other laws of general application
affecting enforcement of creditors’ rights and remedies generally, (ii) as
limited by laws relating to the availability of specific performance,
injunctive relief or other equitable remedies and (iii) insofar as
indemnification and contribution provisions may be limited by applicable law or
by principles of public policy thereunder.

 

2.7                               Dilutive Effect. The Company
understands and acknowledges that its obligation to issue the Conversion Shares
and Warrant Shares upon conversion of the Preferred Shares and exercise of the
Warrant, as the case may be, is absolute and unconditional regardless of the
dilutive effect that such issuance may have on the ownership interests of other
stockholders of the Company.

 

2.8                               No Conflicts. The execution, delivery
and performance of the Transaction Documents by the Company and the
consummation by the Company of the transactions contemplated hereby and thereby
(including, without limitation, the reservation for issuance of the Conversion
Shares and Warrant Shares) will not (i) result in a violation of any articles
or certificate of incorporation, any certificate of designation, preferences
and rights of any outstanding series of preferred stock or bylaws of the
Company or any Subsidiary or (ii) conflict with, or constitute a default
(or an event which with notice or lapse of time or both would become a default)
under, or give to others any rights of termination, amendment, acceleration or
cancellation of, any material agreement, indenture or instrument to which the
Company or any 

 

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Subsidiary is a party (except where such defaults,
conflicts, rights of termination, amendment, acceleration or cancellation have
been waived or postponed until the fulfillment of the Company’s obligations
under the Transaction Documents), or (iii) result in a violation of any
federal, state, local or foreign statute, rule, regulation, order, judgment or
decree (including federal and state securities laws and regulations and rules and
regulations of any governmental or any regulatory agency, self-regulatory
organization, or Trading Market applicable to the Company) or by which any
property or asset of the Company are bound or affected, except in the case of
clauses (ii) and (iii), for such breaches, violations or defaults as would
not be reasonably expected to have a Material Adverse Effect.

 

2.9                               Governmental Consents.
Except for (i) filings required under the Securities Exchange Act of 1934,
as amended (the “Exchange Act”) to disclose the existence of the transactions
contemplated by this Agreement, (ii) the filing of a registration
statement pursuant to the Registration Rights Agreement (as defined in Section 2.6),
(iii) application(s) to each Trading Market for the listing of the
Conversion Shares and Warrant Shares for trading thereon in the time and manner
required thereby, and (iv) the filing of Form D with the Commission
and such filings as are required to be made under applicable state securities
laws, the Company is not required to obtain any consent, authorization or order
of, or make any filing or registration with, any court, governmental or any
regulatory agency, self-regulatory organization or any other Person (as defined
in Section 2.13) in order for it to execute, deliver or perform any of its
obligations under or contemplated by the Transaction Documents, in each case,
in accordance with the terms hereof or thereof. The Company is unaware of any
facts or circumstances relating to the Company or its Subsidiaries which might
prevent the Company from obtaining or effecting any of the foregoing.

 

2.10                         Registration and Approval of Sale of Securities.  Based in material part upon the
representations and warranties herein (and in the other Transaction Documents)
of the Purchaser, the Company has complied and will comply with all applicable
federal and state securities laws in connection with the offer, issuance and
sale of the Securities hereunder (except in the case of state securities laws,
for any failures to comply that, individually or in the aggregate, will not
have a Material Adverse Effect). 
Assuming the accuracy of the representations and warranties in Article III
hereof (and assuming no change in applicable law and no unlawful distribution
of the Securities by the Purchaser or other Persons), no registration under the
Securities Act is required for the offer and sale of the Securities by the
Company to the Purchaser as is contemplated hereby. Neither the Company nor any
Person acting on its behalf, directly or indirectly, has or will sell, offer to
sell or solicit offers to buy any of the Securities or similar securities to,
or solicit offers with respect thereto from, or enter into any negotiations
relating thereto with, any Person, or has taken or will take any action so as
to either (a) bring the issuance and sale of any of the Securities under
the registration provisions of the Securities Act or applicable state
securities laws, or (b) trigger shareholder approval provisions under the rules or
regulations of any Trading Market. 
Neither the Company nor any of its affiliates that it controls, nor any
Person acting on its or their behalf, has: (x) engaged in any form of
general solicitation or general advertising (within the meaning of Regulation D
under the Securities Act) in connection with the offer or sale of any of the
Securities; or (y) directly or indirectly made any offers or sales of any
security or solicited any offers to buy any security under circumstances that
would cause the offering of the Securities pursuant to this Agreement to be
integrated with prior offerings by the Company for purposes of the Securities
Act in a manner that would prevent the Company from selling the 

 

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Securities pursuant to Regulation D and Rule 506
thereof under the Securities Act, nor will the Company or any of its affiliates
that it controls or Persons acting on its or their behalf engage in any form of
general solicitation or take any action or steps that would cause the offering
of the Securities to be integrated with other offerings.

 

2.11                         Placement Agent’s Fees.  No brokerage or finder’s fee or commission
are or will be payable to any Person with respect to the transactions
contemplated by this Agreement based upon arrangements made by the Company or
any of its affiliates.  The Company
agrees that it shall be responsible for the payment of any placement agent’s
fees, financial advisory fees, or brokers’ commissions (other than for Persons
engaged by the Purchaser or any of its affiliates) relating to or arising out
of the transactions contemplated hereby. The Company shall pay, and hold the
Purchaser harmless against, any liability, loss or expense (including, without
limitation, reasonable attorney’s fees and out-of-pocket expenses) arising in
connection with any claim for any such fees or commissions.

 

2.12                         Litigation.  Except as disclosed in Schedule 2.12
attached hereto or as disclosed in the SEC Documents (as defined in Section 2.14),
there is no action, suit, written notice of violation, or written notice of any
proceeding pending or, to the knowledge of the Company, threatened against or
affecting the Common Stock or the Company, any Subsidiary or any of their
respective executive officers, directors or properties before or by any court,
arbitrator, governmental or administrative agency, regulatory authority  (federal, state, county, local or foreign),
self regulatory authority or Trading Market 
(collectively, an “Action”) which (i) adversely affects or
challenges the legality, validity or enforceability of any of the Transaction
Documents or the Securities or (ii) would, if there were an unfavorable
decision, have or reasonably be expected to result in a Material Adverse
Effect.  To the Company’s knowledge,
neither the Company nor any Subsidiary, nor any director or executive officer
thereof (in his/her capacity as such), is or, within the last five years, has
been the subject of any Action involving a claim of violation of or liability
under federal or state securities laws or a claim of breach of fiduciary duty.  To the knowledge of the Company, there has
not been, and there is not pending or threatened in writing, any investigation
by the United States Securities and Exchange Commission (the “Commission” or “SEC”)
involving the Company or any current director or executive officer of the
Company.  The Commission has not issued
any stop order or other order suspending the effectiveness of any registration
statement filed by the Company under the Exchange Act or the Securities Act.  There is no action, suit, claim,
investigation, arbitration, alternate dispute resolution proceeding or other
proceeding pending or, to the knowledge of the Company, threatened in writing
against or involving the Company or any of its properties or assets, which
individually or in the aggregate, would reasonably be expected to have a
Material Adverse Effect.  There are no
outstanding orders, judgments, injunctions, awards or decrees of any court,
arbitrator or governmental or regulatory body against the Company or any
executive officers or directors of the Company in their capacities as such,
which individually or in the aggregate, would reasonably be expected to have a
Material Adverse Effect.

 

2.13                         Indebtedness and Other Contracts.
Except as disclosed in Schedule 2.13 attached hereto or as disclosed in
the SEC Documents, neither the Company nor any Subsidiary (a) has any
outstanding Indebtedness (as defined below in this Section 2.13), (b) is
a party to any contract, agreement or instrument, the violation of which, or
default under, by any other party to such contract, agreement or instrument
would result in a Material Adverse Effect, (c) is in 

 

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violation of any term of or in default under any
contract, agreement or instrument relating to any Indebtedness, except where
such violations and defaults would not result, individually or in the
aggregate, in a Material Adverse Effect, or (d) is a party to any
contract, agreement or instrument relating to any Indebtedness, the performance
of which, in the judgment of the Company’s officers, has or is expected to have
a Material Adverse Effect.  For purposes
of this Agreement: (x) “Indebtedness”
of any Person means, without duplication (i) all indebtedness for borrowed
money, (ii) all obligations issued, undertaken or assumed as the deferred
purchase price of property or services (other than trade payables entered into
in the ordinary course of business), (iii) all reimbursement or payment
obligations with respect to letters of credit, surety bonds and other similar instruments,
(iv) all obligations evidenced by notes, bonds, debentures or similar
instruments, including obligations so evidenced incurred in connection with the
acquisition of property, assets or businesses, (v) all indebtedness
created or arising under any conditional sale or other title retention
agreement, or incurred as financing, in either case with respect to any
property or assets acquired with the proceeds of such indebtedness (even though
the rights and remedies of the seller or bank under such agreement in the event
of default are limited to repossession or sale of such property), (vi) all
monetary obligations under any leasing or similar arrangement which, in
connection with generally accepted accounting principles, consistently applied
for the periods covered thereby, is classified as a capital lease, (vii) all
indebtedness referred to in clauses (i) through (vi) above secured by
(or for which the holder of such Indebtedness has an existing right, contingent
or otherwise, to be secured by) any mortgage, Lien, pledge, change, security
interest or other encumbrance upon or in any property or assets (including
accounts and contract rights) owned by any Person, even though the Person which
owns such assets or property has not assumed or become liable for the payment
of such indebtedness, and (viii) all Contingent Obligations in respect of
indebtedness or obligations of others of the kinds referred to in clauses (i) through
(vii) above; (y) ‘Contingent Obligation” means, as to any Person, any
direct or indirect liability, contingent or otherwise, of that Person with
respect to any indebtedness, lease, dividend or other obligation of another
Person if the primary purpose or intent of the Person incurring such liability,
or the primary effect thereof, is to provide assurance to the obligee of such
liability that such liability will be paid or discharged, or that any
agreements relating thereto will be complied with, or that the holders of such
liability will be protected (in whole or in part) against loss with respect
thereto; and (z) “Person” means
an individual, a limited liability company, a partnership, a joint venture, a
corporation, a trust, an unincorporated organization and a government or any
department or agency thereof.

 

2.14                         Financial Information; SEC Documents.  The Company has filed all reports required to
be filed by it under the Exchange Act, including pursuant to Section 13(a) or
15(d) thereof, since August 31, 2006 (the foregoing materials,
including the exhibits thereto, being collectively referred to herein as the “SEC
Documents”)  on a timely basis or has
received a valid extension of such time of filing and has filed any such SEC
Documents prior to the expiration of any such extension.  As of their respective dates, the SEC
Documents complied in all material respects with the requirements of the
Securities Act and the Exchange Act and the rules and regulations of the
Commission promulgated thereunder, and none of the SEC Documents, when filed,
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading; provided, however, that the Company makes no representation as
to the information included in any SEC Documents prepared by third parties and
included therein, and the Company makes no representation as to 

 

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the accuracy of information contained in third party
studies and reports cited in the SEC Documents. 
Each registration statement and any amendment thereto filed by the
Company since August 31, 2006, pursuant to the Securities Act and the rules and
regulations thereunder, as of the date such statement or amendment became
effective, complied as to form in all material respects with the Securities Act
and did not contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements made therein not misleading; provided, however, that the Company
makes no representation as to the information included in any SEC Documents
prepared by third parties and included therein, and the Company makes no
representation as to the accuracy of information contained in third party
studies and reports cited in the SEC Documents; and each prospectus filed
pursuant to Rule 424(b) under the Securities Act, as of its issue
date and as of the closing of any sale of securities pursuant thereto did not contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements made
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that the Company makes no representation as to
the information included in any SEC Documents prepared by third parties and
included therein and the Company makes no representation as to the accuracy of
information contained in third party studies and reports cited in the SEC
Documents. The financial statements of the Company included in the SEC
Documents comply in all material respects with applicable accounting
requirements and the rules and regulations of the Commission with respect
thereto as in effect at the time of filing. 
Such financial statements have been prepared in accordance with United
States generally accepted accounting principles applied on a consistent basis
during the periods involved (“GAAP”), except as may be otherwise specified in
such financial statements or the notes thereto and except that unaudited
financial statements may not contain all footnotes required by GAAP and remain
subject to year end adjustments, and fairly present in all material respects
the financial position of the Company and its consolidated subsidiaries as of
and for the dates thereof and the results of operations and cash flows for the
periods then ended, subject, in the case of unaudited statements, to normal
year-end audit adjustments.

 

2.15                         Absence of Certain Changes or Developments.  Except as disclosed in Schedule
2.15 attached hereto or as disclosed in the SEC Documents or as
contemplated herein and in the Transaction Documents, since September 30,
2007:

 

(a)                                  there has been no Material Adverse Effect, and no event or circumstance
has occurred or exists with respect to the Company or its businesses,
properties, operations or financial condition, which, under the Exchange Act,
Securities Act, or rules or regulations of any Trading Market, requires
public disclosure or announcement by the Company, but which has not been so
publicly announced or disclosed;

 

(b)                                 the Company has not:

 

(i)                                     issued any stock, bonds or other corporate securities or any right,
options or warrants with respect thereto, except pursuant to the exercise or
conversion of securities outstanding as of such date;

 

(ii)                                  borrowed any amount in excess of $250,000 or incurred or become subject
to any other liabilities in excess of $250,000 (absolute or contingent) except
current 

 

10

 

liabilities incurred in the ordinary course of
business which are comparable in nature and amount to the current liabilities
incurred in the ordinary course of business during the comparable portion of
its prior fiscal year, as adjusted to reflect the current nature and volume of
the business of the Company;

 

(iii)                               discharged or satisfied any Lien or encumbrance in excess of $250,000 or
paid any obligation or liability (absolute or contingent) in excess of $250,000,
other than current liabilities paid in the ordinary course of business and
payments of principal for any already completed acquisition;

 

(iv)                              declared or made any payment or distribution of cash or other property
to stockholders with respect to its stock, or purchased or redeemed, or made
any agreements so to purchase or redeem, any shares of its capital stock, in
each case in excess of $50,000 individually or $100,000 in the aggregate;

 

(v)                                 sold, assigned or transferred any other tangible assets, or canceled any
debts or claims, in each case in excess of $250,000, except in the ordinary
course of business;

 

(vi)                              sold, assigned or transferred any patent rights, trademarks, trade
names, copyrights, trade secrets or other intangible assets or intellectual property
rights in excess of $250,000, or disclosed any proprietary confidential
information to any person except to customers in the ordinary course of
business;

 

(vii)                           suffered any material losses or waived any rights of material value,
whether or not in the ordinary course of business, or suffered the loss of any
material amount of prospective business;

 

(viii)                        made any changes in employee compensation except in the ordinary course
of business and consistent with past practices;

 

(ix)                                made capital expenditures or commitments therefor that aggregate in
excess of $250,000;

 

(x)                                   entered into any material transaction, whether or not in the ordinary
course of business that has not been disclosed in the SEC Documents;

 

(xi)                                made charitable contributions or pledges in excess of $10,000;

 

(xii)                             suffered any material damage, destruction or casualty loss, whether or
not covered by insurance;

 

(xiii)                          experienced any material problems with labor or management in connection
with the terms and conditions of their employment;

 

(xiv)                         altered its method of accounting, except to the extent required by GAAP;

 

11

 

(xv)                            issued any equity securities to any officer, director or affiliate (as
such term is defined in Rule 144 of the Securities Act), except pursuant
to existing Company stock, option, equity incentive or similar incentive plans;
or

 

(xvi)                         entered into an agreement, written or otherwise, to take any of the
foregoing actions.

 

2.16                         Solvency.  The Company has not taken, nor does it have
any intention to take, any steps to seek protection pursuant to any bankruptcy
or similar law.  The Company does not
have any actual knowledge nor has it received any written notice that its
creditors intend to initiate involuntary bankruptcy proceedings or any actual
knowledge of any fact that, as of the date hereof, would reasonably lead a
creditor to do so. After giving effect to the transactions contemplated hereby
to occur at the Closing, the Company will not be Insolvent (as hereinafter defined).
For purposes of this Agreement, “Insolvent”
means (i) the present fair saleable value of the Company’s assets is less
than the amount required to pay the Company’s total Indebtedness, contingent or
otherwise, (ii) the Company is unable to pay its debts and liabilities,
subordinated, contingent or otherwise, as such debts and liabilities become
absolute and matured, (iii) the Company intends to incur or believes that
it will incur debts that would be beyond its ability to pay as such debts
mature or (iv) the Company has unreasonably small capital with which to
conduct the business in which it is engaged as such business is now conducted
and is proposed to be conducted.

 

2.17                         Off-Balance Sheet Arrangements.  There is no transaction, arrangement, or other
relationship between the Company and an unconsolidated or other off-balance
sheet entity that is required to be disclosed by the Company in its Exchange
Act filings and is not so disclosed or that if made or not made would be
reasonably likely to have a Material Adverse Effect.

 

2.18                         Foreign Corrupt Practices.  None of the Company, any Subsidiary, nor any
of their respective directors, officers, agents, employees or other Persons
acting on behalf of such subsidiaries has, in the course of their respective
actions for or on behalf of the Company or any of its subsidiaries (a) used
any corporate funds for any unlawful contribution, gift, entertainment or other
unlawful expenses relating to political activity, (b) made any direct or
indirect unlawful payment to any foreign or domestic government official or
employee from corporate funds, (c) violated or is in violation of any
provision of the U.S. Foreign Corrupt Practices Act of 1977, as amended or (d) made
any unlawful bribe, rebate, payoff, influence payment, kickback or other
unlawful payment to any foreign or domestic government official or employee.

 

2.19                         Transactions With Affiliates.  Except as set forth in the SEC Documents or
as disclosed in Schedule 2.19 attached hereto, none of the officers,
directors or employees of the Company is presently a party to any transaction
with the Company or any Subsidiary (other than for ordinary course services as
employees, officers or directors), including any contract, agreement or other
arrangement providing for the furnishing of services to or by, providing for
rental of real or personal property to or from, or otherwise requiring payments
to or from any such officer, director or employee or, to the knowledge of the
Company, any corporation, partnership, trust or other entity in which any such
officer, director, or employee has a substantial interest or is an officer,
director, trustee or partner.

 

12

 

 

2.20                         Insurance.   Except as disclosed in Schedule 2.20
attached hereto, the Company and each Subsidiary are insured by insurers of
recognized financial responsibility against such losses and risks and in such
amounts as management of the Company believes to be prudent and customary in
the businesses in which the Company and each Subsidiary are engaged. Neither
the Company nor any Subsidiary has been refused any insurance coverage sought
or applied for and neither the Company nor any Subsidiary has any reason to
believe that it will not be able to renew its existing insurance coverage as
and when such coverage expires or to obtain similar coverage from similar
insurers as may be necessary to continue its business at a cost that would not
have a Material Adverse Effect.

 

2.21                         Employee Relations.  Neither the Company nor any Subsidiary is a
party to any collective bargaining agreement or employs any member of a union.
No Executive Officer of the Company (as defined in Rule 501(f) of the
Securities Act) has notified the Company that such officer intends to leave the
Company or otherwise terminate such officer’s employment with the Company. No
Executive Officer of the Company, to the knowledge of the Company, is, or is
now, in violation of any material term of any employment contract,
confidentiality, disclosure or proprietary information agreement,
non-competition agreement, or any other contract or agreement or any
restrictive covenant, and, to the actual knowledge of the Company, the
continued employment of each such executive officer does not subject the
Company or any Subsidiary to any liability with respect to any of the foregoing
matters. The Company and each Subsidiary are in compliance with all federal,
state, local and foreign laws and regulations respecting employment and
employment practices, terms and conditions of employment and wages and hours,
except where failure to be in compliance would not, either individually or in
the aggregate, reasonably be expected to result in a Material Adverse Effect.

 

2.22                         Title.  Except as set forth in the SEC Documents or Schedule
2.22, the Company and each Subsidiary have good and marketable title to all
personal property owned by them which is material to their respective business,
in each case free and clear of all Liens. Any real property and facilities held
under lease by the Company or any Subsidiary are held by them under valid,
subsisting and enforceable leases with such exceptions as are not material and
do not interfere with the use made and proposed to be made of such property and
buildings by the Company or any Subsidiary.

 

2.23                         Intellectual Property Rights.  The Company and its Subsidiaries own or
possess the rights to use all patents, trademarks, domain names (whether or not
registered) and any patentable improvements or copyrightable derivative works
thereof, websites and intellectual property rights relating thereto, service
marks, trade names, copyrights, licenses and authorizations which are necessary
for the conduct of its business as now conducted (collectively, the “Intellectual
Property Rights”) without any conflict with the rights of others, except any
failures as, individually or in the aggregate, are not reasonably likely to
have a Material Adverse Effect.  Neither
the Company nor any Subsidiary has received a written notice that the
Intellectual Property Rights used by the Company or any Subsidiary violates or
infringes upon the rights of any Person. 
To the knowledge of the Company, all such Intellectual Property Rights
are enforceable and there is no existing infringement by another Person of any
of the Intellectual Property Rights. The Company and its Subsidiaries have
taken reasonable measures to protect the value of the Intellectual Property
Rights.

 

13

 

2.24                         Environmental Laws.  The Company and each of its Subsidiaries (a) are
in compliance with any and all Environmental Laws (as hereinafter defined), (b) have
received all permits, licenses or other approvals required of them under
applicable Environmental Laws to conduct their respective businesses and (c) are
in compliance with all terms and conditions of any such permit, license or
approval where, in each of the foregoing clauses (a), (b) and (c), the
failure to so comply could be reasonably expected to have, individually or in
the aggregate, a Material Adverse Effect. The term “Environmental Laws” means
all federal, state, local or foreign laws relating to pollution or protection
of human health or the environment (including, without limitation, ambient air,
surface water, groundwater, land surface or subsurface strata), including,
without limitation, laws relating to emissions, discharges, releases or
threatened releases of chemicals, pollutants, contaminants, or toxic or
hazardous substances or wastes (collectively, “Hazardous Materials”) into the
environment, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
Hazardous Materials, as well as all authorizations, codes, decrees, demands or
demand letters, injunctions, judgments, licenses, notices or notice letters,
orders, permits, plans or regulations issued, entered, promulgated or approved
thereunder.

 

2.25                         Tax Matters.  The Company and each of its Subsidiaries (a) have
made or filed all federal and state income and all other tax returns, reports
and declarations required by any jurisdiction to which it is subject, (b) have
paid all taxes and other governmental assessments and charges that are material
in amount, shown or determined to be due on such returns, reports and
declarations, except those being contested in good faith and (c) have set
aside on its books reasonably adequate provision for the payment of all taxes
for periods subsequent to the periods to which such returns, reports or
declarations apply, except where such failure would not have a Material Adverse
Effect. There are no unpaid taxes in any material amount claimed to be due by
the taxing authority of any jurisdiction, and the officers of the Company know
of no basis for any such claim.

 

2.26                         Sarbanes-Oxley Act; Internal
Accounting and Disclosure Controls. 
The Company is in compliance in all material respects with the
requirements of the Sarbanes-Oxley Act of 2002 that are effective as of the
date hereof and applicable to it, and any and all rules and regulations
promulgated by the SEC thereunder that are effective and applicable to it as of
the date hereof.  The Company maintains a
system of internal accounting controls sufficient, in the judgment of the
Company’s board of directors, to provide reasonable assurance that (i) transactions
are executed in accordance with management’s general or specific
authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with GAAP and to maintain
asset accountability, (iii) access to assets is permitted only in
accordance with management’s general or specific authorization and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate actions are taken with respect to any
differences. The Company has established
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the Company and designed such disclosure controls and procedures
to ensure that material information relating to the Company, including its
Subsidiaries, is made known to the certifying officers by others within those
entities, particularly during the period in which the Company’s most recently filed
periodic report under the Exchange Act, as the case may be, is being
prepared.  The Company’s certifying
officers have evaluated the effectiveness of the Company’s controls and
procedures as of the date prior to the filing date of the most recently filed
periodic report under the Exchange Act (such date, the 

 

14

 

“Evaluation Date”).  The Company presented in its most recently
filed periodic report under the Exchange Act the conclusions of the certifying
officers about the effectiveness of the disclosure controls and procedures
based on their evaluations as of the Evaluation Date.  Since the Evaluation Date, there have been no
significant changes in the Company’s internal controls (as such term is defined
in Item 307(c) of Regulation S-K under the Exchange Act) or, to the
Company’s knowledge, in other factors that could significantly affect the
Company’s internal controls.  The Company maintains and will continue to maintain a standard system of
accounting established and administered in accordance with United States GAAP
and the applicable requirements of the Exchange Act.

 

2.27                         Investment Company Status.  The Company is not, and immediately after
receipt of payment for the Securities will not be, an “investment company,” an “affiliated
person” of, “promoter” for or “principal underwriter” for, or an entity “controlled”
by an “investment company,” within the meaning of the Investment Company Act.

 

2.28                         Material Contracts.  Each contract of the Company that involves
expenditures or receipts in excess of $500,000 (each, a “Material Contract”) is
in full force and effect and is valid and enforceable in accordance with its
terms. The Company is and has been in material compliance with all applicable
terms and requirements of each Material Contract and no event has occurred or
circumstance exists that (with or without notice or lapse of time) may
contravene, conflict with or result in a violation or breach of, or give the
Company or any other entity the right to declare a default or exercise any
remedy under, or to accelerate the maturity or performance of, or to cancel,
terminate or modify any Material Contract. The Company has not given or
received from any other Person any notice or other communication (whether oral
or written) regarding any actual, alleged, possible or potential violation or
breach of, or default under, any Material Contract.

 

2.29                         Inventory.  All inventory of the Company consists of a
quality and quantity usable and salable in the ordinary course of business,
except for obsolete items and items of below-standard quality, all of which
have been or will be written off or written down to net realizable value on the
unaudited consolidated balance sheet of the Company and its Subsidiaries as of September 30,
2007.  The quantities of each type of
inventory (whether raw materials, work-in-process, or finished goods) are not
excessive, but are reasonable and warranted in the present circumstances of the
Company.

 

2.30                         No Disagreements with Accountants. There
are no disagreements of any kind presently existing, or reasonably anticipated
by the Company to arise, between the Company and the accountants formerly or
presently employed by the Company.

 

2.31                         Ranking of Series D Preferred Stock.  No capital stock of the Company is senior to
the Series D Preferred Stock in right of payment, whether with respect of
payment of redemptions, interest, damages or upon liquidation or dissolution or
otherwise.

 

2.32                         Manipulation of Price.  The Company has not, and to its knowledge no
one acting on its behalf has, taken, directly or indirectly, any action
designed to cause or to result or that could reasonably be expected to cause or
result, in the stabilization or manipulation of the price of any security of
the Company to facilitate the sale or resale of any of the Securities.

 

15

 

2.33                         Listing and Maintenance Requirements.   The Company has not, in the 12 months
preceding the date hereof, received notice from any Trading Market on which the
Common Stock is or has been listed or quoted to the effect that the Company is
not in compliance with the listing or maintenance requirements of such Trading
Market. The Company is in compliance with all such maintenance requirements.

 

2.34                         Application of Takeover Protections.  The Company and its Board of Directors have
taken all necessary action, if any, in order to render inapplicable any control
share acquisition, business combination, poison pill (including any
distribution under a rights agreement) or other similar anti-takeover provision
under the Company’s Certificate of Incorporation (or similar charter documents)
or the laws of its state of incorporation (exclusive of Section 203 of the
Delaware General Corporation Law which is currently inapplicable to the
Company) that is or could become applicable to the Purchaser as a result of the
Purchaser and the Company fulfilling their obligations or exercising their
rights under the Transaction Documents, including without limitation the Company’s
issuance of the Securities and the Purchaser’s ownership of the Securities.

 

2.35                         Disclosure. All written disclosure provided to the Purchaser regarding the
Company, its business and the transactions contemplated hereby, including the
Schedules to this Agreement, furnished by or on behalf of the Company are true
and correct and do not contain any untrue statement of a material fact or omit
to state any material fact necessary in order to make the statements made
therein, in light of the circumstances under which they were made, not
misleading; provided however, the Company makes no representation as to studies
and reports prepared by third parties not engaged by the Company and included
in the materials delivered to Purchaser.

 

ARTICLE
III

REPRESENTATIONS AND WARRANTIES OF THE PURCHASER

 

The Purchaser hereby represents and warrants to the Company as of the
date of this Agreement as follows:

 

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

 

16

 

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

 

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

 

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

 

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

 

ARTICLE IV

CONDITIONS TO CLOSING OF THE PURCHASER

 

The obligation of the Purchaser to purchase
the Securities at the Closing is subject to the fulfillment to the Purchaser’s
satisfaction on or prior to the Closing Date of each of the following
conditions, any of which may be waived by such Purchaser:

 

4.1                               Representations and Warranties Correct.  The representations and  warranties in Article II hereof shall be
true and correct when made, and shall be true and correct on the Closing Date
with the same force and effect as if they had been made on and as of the
Closing Date.

 

4.2                               Performance.  All covenants, agreements and conditions
contained in this Agreement to be performed or complied with by the Company on
or prior to the Closing Date shall have been performed or complied with by the
Company in all material respects.

 

4.3                               No Impediments.  Neither the Company nor the Purchaser shall
be subject to any order, decree or injunction of a court or administrative
agency of competent jurisdiction that prohibits the transactions contemplated
hereby or would impose any material limitation on the 

 

17

 

ability of such Purchaser to exercise full rights of
ownership of the Securities.  At the time
of the Closing, the purchase of the Securities to be purchased by the Purchaser
hereunder shall be legally permitted by all laws and regulations to which the
Purchaser and the Company are subject.

 

4.4                               Other Agreements and Documents.  The Company shall have delivered the
following agreements and documents:

 

(a)                                  Certificates, registered in the name of the Purchaser, representing the
Preferred Shares;

 

(b)                                 The Series E Warrant in the form of Exhibit B attached
hereto, duly executed by the Company;

 

(c)                                  The Security Agreement in the form of Exhibit C hereto, duly
executed by the Company;

 

(d)                                 The Registration Rights Agreement in the form of Exhibit D
hereto, duly executed by the Company;

 

(e)                                  An opinion of counsel to the Company, dated the date of the Closing,
substantially in the form of Exhibit E hereto, with such exceptions
and limitations as shall be reasonably acceptable to counsel to the Purchaser;

 

(f)                                    The Irrevocable Transfer Agent Instructions, substantially in the form
of Exhibit F attached hereto, shall have been delivered to the
Company’s transfer agent.

 

(g)                                 A Certificate of Good Standing from the state of incorporation of the
Company and each Subsidiary;

 

(h)                                 A certificate of the Company’s CEO, dated the Closing Date, certifying (i) the
fulfillment of the conditions specified in Sections 4.1 and 4.2 of this
Agreement, (ii) the Board resolutions approving this Agreement and the
transactions contemplated hereby, and (iii) other matters as the Purchaser
shall reasonably request; and

 

(i)                                     Financing Statements on Form UCC-1 with respect to all personal
property and assets of the Company.

 

4.5                               Certificate of Designation.  The Company shall have filed the Certificate
of Designation for the Series D Preferred Stock in the form attached
hereto as Exhibit A with the Delaware Secretary of State.

 

4.6                               Trading Markets.  The listing or trading of the Conversion
Shares and Warrant Shares on each Trading Market shall have been approved by
such Trading Market authority.

 

4.7                               Due Diligence Investigation.  No fact shall have been discovered, whether
or not reflected in the Schedules hereto, which in the Purchaser’s
determination would make the 

 

18

 

consummation of the transactions contemplated by this
Agreement not in the Purchaser’s best interests.

 

4.8                               Termination of
Investment Banking Relationship.  The Company must present evidence reasonably
satisfactory to the Purchaser that Meyers Associates L.P. declined to exercise its right
of first refusal upon presentation of a term sheet for the transactions
contemplated hereby and agreed to terminate its right of first refusal and
investment banking relationship upon the Closing.

 

4.9                               Lock Up and Leak
Out Agreements.  The persons set forth on Schedule
4.9 shall have executed and delivered to Purchaser a Lock-Up Leak-Out
Agreement with respect to the Common Stock of the Company owned by them in a
form reasonably satisfactory to the Purchaser.

 

ARTICLE
V

CONDITIONS TO CLOSING OF THE COMPANY

 

The Company’s obligation to sell the Securities at the Closing is
subject to the fulfillment to its satisfaction on or prior to the Closing Date
of each of the following conditions:

 

5.1                               Representations.  The representations made by the Purchaser
pursuant to Article III hereof shall be true and correct when made and
shall be true and correct on the Closing Date.

 

5.2                               No Impediments.  Neither the Company nor the Purchaser shall
be subject to any order, decree or injunction of a court or administrative
agency of competent jurisdiction that prohibits the transactions contemplated
hereby or would impose any material limitation on the ability of the Purchaser
to exercise full rights of ownership of the Securities.  At the time of the Closing, the purchase of
the Securities to be purchased by the Purchaser hereunder shall be legally
permitted by all laws and regulations to which the Purchaser and the Company
are subject.

 

ARTICLE
VI

AFFIRMATIVE COVENANTS

 

The Company hereby covenants and agrees, so
long as any Preferred Share remains outstanding, as follows:

 

6.1                               Maintenance of Corporate Existence.  The Company shall and shall cause its subsidiaries
to, maintain in full force and effect its corporate existence, rights and
franchises and all material terms of licenses and other rights to use licenses,
trademarks, trade names, service marks, copyrights, patents or processes owned
or possessed by it and necessary to the conduct of its business, except where
the failure to maintain such corporate existence, rights, franchises, licenses
and rights to use licenses, trademarks, trade names, service marks, copyrights,
patents or processes would not (a) result in a Material Adverse Effect or (b) materially
adversely affect the rights of Purchaser under any Transaction Document.

 

19

 

6.2                               Maintenance of Properties.  The Company shall and shall cause its subsidiaries
to, keep each of its properties necessary to the conduct of its business 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 the Company shall and
shall cause its subsidiaries to at all times comply with each material
provision of all material leases to which it is a party or under which it
occupies property.

 

6.3                               Payment of Taxes.  The Company shall and shall cause its
subsidiaries to, promptly pay and discharge, or cause to be paid and discharged
when due and payable, all lawful taxes, assessments and governmental charges or
levies imposed upon the income, profits, assets, property or business of the Company
and its subsidiaries; provided, however, that any such tax, assessment, charge
or levy need not be paid if the validity thereof shall be contested timely and
in good faith by appropriate proceedings, if the Company or its subsidiaries
shall have set aside on its books adequate reserves with respect thereto, and
the failure to pay shall not be prejudicial in any material respect to the
holders of the Securities, and provided, further, that the Company or its
subsidiaries will pay or cause to be paid any such tax, assessment, charge or
levy forthwith upon the commencement of proceedings to foreclose any Lien which
may have attached as security therefor.

 

6.4                                 Payment of Indebtedness.  The Company shall, and shall cause its
subsidiaries to, pay or cause to be paid when due all Indebtedness incident to
the operations of the Company or its subsidiaries (including, without
limitation, claims or demands of workmen, materialmen, vendors, suppliers,
mechanics, carriers, warehousemen and landlords) which, if unpaid might become
a Lien (except for Permitted Liens) upon the assets or property of the Company
or its subsidiaries, except where the Company (or its subsidiary, as the case
may be) disputes the payment of such Indebtedness in good faith by appropriate
proceedings.

 

6.5                               Reservation of Common Stock.  The Company shall continue to reserve, free
of preemptive rights and other similar contractual rights of stockholders, a
number of its authorized but unissued shares of Common Stock not less than one
hundred percent (100%) of the aggregate number of shares of Common Stock to
effect the conversion of the Preferred Shares and one hundred percent (100%) of
the aggregate number of shares of Common Stock to effect the exercise of the
Warrant.

 

6.6                               Maintenance of Insurance.  The Company shall and shall cause its
subsidiaries to, keep its assets which are of an insurable character insured by
financially sound and reputable insurers against loss or damage by theft, fire,
explosion and other risks customarily insured against by companies in the line
of business of the Company or its subsidiaries, in amounts sufficient to
prevent the Company and its subsidiaries from becoming a co-insurer of the
property insured; and the Company shall and shall cause its subsidiaries to 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
customary for companies in similar businesses similarly situated or as may be
required by law, including, without limitation, general liability, fire and
business interruption insurance, and product liability insurance as may be
required pursuant to any license agreement to which the Company or its
subsidiaries is a party or by which it is bound.

 

20

 

6.7                               Notice of Adverse Change.  The Company shall promptly give notice to all
holders of any Securities (but in any event within seven (7) days) after
becoming aware of the existence of any condition or event which constitutes, or
the occurrence of, any of the following:

 

(a)                                  any event of noncompliance by the Company or its subsidiaries under this
Agreement in any material respect;

 

(b)                                 the institution of an action, suit or proceeding against the Company or
any subsidiary before any court, administrative agency or arbitrator,
including, without limitation, any action of a foreign government or
instrumentality, which, if adversely decided, would result in a Material
Adverse Effect whether or not arising in the ordinary course of business; or

 

(c)                                  any information relating to the Company or any subsidiary which would
reasonably be expected to result in a material adverse effect on its inability
to perform its obligations of under any Transaction  Document.

 

Any notice given under this Section 6.7
shall specify the nature and period of existence of the condition, event,
information, development or circumstance, the anticipated effect thereof and
what actions the Company has taken and/or proposes to take with respect
thereto.

 

6.8                               Compliance With Agreements.  The Company shall and shall cause its
subsidiaries to comply in all material respects, with the terms and conditions
of all material agreements, commitments or instruments to which the Company or
any of its subsidiaries is a party or by which it or they may be bound.

 

6.9                               Other Agreements.  The Company shall not enter into any
agreement in which the terms of such agreement would restrict or impair the
right or ability to perform of the Company under any Transaction Document.

 

6.10                         Compliance With Laws.  The Company shall and shall cause each of its
subsidiaries to duly comply in all material respects with any material laws,
ordinances, rules and regulations of any foreign, federal, state or local
government or any agency thereof, or any writ, order or decree, and conform to
all valid requirements of governmental authorities relating to the conduct of
their respective businesses, properties or assets.

 

6.11                         Protection of Licenses, etc.  The Company shall and shall cause its
subsidiaries to, maintain, defend and protect to the best of their ability
licenses and sublicenses (and to the extent the Company or a subsidiary is a
licensee or sublicensee under any license or sublicense, as permitted by the
license or sublicense agreement), trademarks, trade names, service marks,
patents and applications therefor and other proprietary information owned or
used by it or them, (except where the failure to defend and protect such
licenses and sublicenses would not (a) result in a Material Adverse Effect
or (b) materially adversely affect the rights of Purchaser under any
Transaction Document) and shall keep duplicate copies of any licenses,
trademarks, service marks or patents owned or used by it, if any, at a secure
place selected by the Company.

 

21

 

6.12                         Accounts and Records; Inspections.

 

(a)                                  The Company shall keep true records and books of account in which full,
true and correct entries will be made of all dealings or transactions in
relation to the business and affairs of the Company and its subsidiaries in
accordance with GAAP applied on a consistent basis.

 

(b)                                 The Company shall permit each holder of any Securities or any of such
holder’s officers, employees or representatives during regular business hours
of the Company, upon reasonable notice and as often as such holder may
reasonably request, to visit and inspect the offices and properties of the
Company and its subsidiaries and to make extracts or copies of the books,
accounts and records of the Company or its subsidiaries at such holder’s
expense.

 

(c)                                  Nothing contained in this Section 6.12 shall be construed to limit
any rights which a holder of any Securities may otherwise have with respect to
the books and records of the Company and its subsidiaries, to inspect its
properties or to discuss its affairs, finances and accounts.

 

6.13                         Maintenance of Office.  The Company will maintain its principal
office at the address of the Company set forth in Section 10.6 of this Agreement
where notices, presentments and demands in respect of this Agreement and any of
the Securities may be made upon the Company, until such time as the Company
shall notify the holders of the Securities in writing, at least thirty (30)
days prior thereto, of any change of location of such office.

 

6.14                         Payment of the Preferred Share Dividends.  The Company shall pay the dividends on, and
redeem, the Preferred Shares, in the time, the manner and the form as provided
in the Certificate of Designation for the Series D Preferred Stock.

 

6.15                         SEC Reporting Requirements.  For so
long as the Purchaser beneficially owns any of the Securities, and until such
time as all the Conversion Shares and Warrant Shares are saleable by the
Purchaser without restriction as to volume or manner of sale under Rule 144
under the Securities Act, the Company shall timely file all reports required to
be filed with the Commission pursuant to the Exchange Act, and the Company
shall not terminate its status as an issuer required to file reports under the
Exchange Act even if the Exchange Act or the rules and regulations
thereunder would permit such termination. 
As long as the Purchaser owns Securities, Conversion Shares or Warrant
Shares, the Company will prepare and furnish to the Purchaser and make publicly
available in accordance with Rule 144 or any successor rule such
information as is required for the Purchaser to sell the Securities under Rule 144
without regard to the volume and manner of sale limitations.  The Company further covenants that it will
take such further action as any holder of Securities, Conversion Shares or
Warrant Shares may reasonably request, all to the extent required from time to
time to enable such Person to sell such Securities, Conversion Shares or Warrant
Shares without registration under the Securities Act within the limitation of
the exemptions provided by Rule 144.

 

6.16                         Listing Maintenance.  The Company hereby agrees to use best efforts
to maintain the listing or trading of the Common Stock on a Trading Market. The
Company further agrees, if the Company applies to have the Common Stock traded
on any other Trading Market, it will 

 

22

 

include in such application all of the Conversion
Shares and Warrant Shares, and will take such other action as is necessary to
cause all of the Conversion Shares and Warrant Shares to be listed on such
other Trading Market as promptly as possible. 
The Company will take all action reasonably necessary to continue the
listing and trading of its Common Stock on, and will comply in all respects
with the Company’s reporting, filing and other obligations under the bylaws or rules of,
each such Trading Market on which the Company’s Common Stock is listed or
trades.

 

6.17                         Disclosure of Transaction.  The Company shall issue a press release
describing the material terms of the transactions contemplated hereby (the
“Press Release”) and shall also file with the Commission a Current Report on Form 8-K
(the “Form 8-K”) describing the material terms of the transactions
contemplated hereby (and attaching as exhibits thereto this Agreement, the
Registration Rights Agreement, the Security Agreement, the Guaranty Agreements,
the Guarantor Security Agreements, each form of Warrant and the Press Release)
as soon as practicable following the Closing Date but in no event more than
four (4) Trading Days (defined below) following the Closing Date, which
Press Release and Form 8-K shall be subject to prior review and reasonable
comment by the Purchaser.  For purposes
of this Agreement, “Trading Day” means any day during which the principal
Trading Market on which the Common Stock is listed or traded shall be open for
trading.

 

6.18                           Further Assurances.  From time to time the Company shall execute
and deliver to the Purchaser and the Purchaser shall execute and deliver to the
Company such other instruments, certificates, agreements and documents and take
such other action and do all other things as may be reasonably requested by the
other party in order to implement or effectuate the terms and provisions of
this Agreement and any of the Securities.

 

6.19                         Use of Proceeds. 
The Company shall use all the proceeds received from the sale of the
Securities pursuant to this Agreement first for the repayment of all of its
Indebtedness for borrowed money, including without limitation, Indebtedness to
TD Bank North, and then to the extent any proceeds remain, such proceeds may be
used for growth, capital initiatives and general corporate purposes.

 

6.20                         Implementation of Series D Preferred Stockholders’ Rights to Elect
Directors.  Promptly after Closing, the Company shall
take the following actions:

 

(a)                                  amend its bylaws and take such other action at
any such time as necessary to implement
the rights of holders of Series D Preferred Stock to nominate and elect a
majority of the members of the board of directors as set forth in the
Certificate of Designation for the Series D Preferred Stock beginning with
the first meeting of the shareholders of the Company following Closing;

 

(b)                                 expand the current size of the board from four (4) to seven (7) members
and appoint persons, who will be designated by the Purchaser, to fill the
newly-created vacancies; provided that, the Company shall
not be obligated to appoint a designee if (i) the nomination of such
designee would violate rules, regulations or other standards of the Commission
or the Trading Market, or (ii) the designee does not meet the Company’s
written director qualification standards.

 

23

 

For purposes of Articles VI–VIII, the term “subsidiary” shall be deemed
to include each Subsidiary and any subsidiary of the Company acquired or formed
after the date hereof.

 

ARTICLE
VII

NEGATIVE COVENANTS

 

The Company hereby covenants and agrees, so long as any Preferred Share
remains outstanding, it will not (and not allow any subsidiary to), without the
prior written consent of the holder(s) of more than 50% of the number of
shares of Series D Preferred Stock outstanding (the “Majority Holders”),
directly or indirectly:

 

7.1                               Distributions and Redemptions.  (i) Except with respect to the Series A,
B, C, or D Preferred Stock, or forward stock splits in the form of a dividend,
declare or pay any dividends or make any distributions to any holder(s) of
any shares of capital stock of the Company or (ii) purchase, redeem or
otherwise acquire for value, directly or indirectly, any shares of Common Stock
of the Company or warrants or rights to acquire such Common Stock, except as
may be required by the terms of the Series D Preferred Stock; or (iii) purchase,
redeem or otherwise acquire for value, directly or indirectly, any shares of
preferred stock of the Company or warrants or rights to acquire such stock,
except as may be required by the terms of such preferred stock.

 

7.2                               Reclassification.  Effect any reclassification, combination or
reverse stock split of the Common Stock.

 

7.3                               Indebtedness.  Create, incur, assume, suffer, permit to
exist, or guarantee, directly or indirectly, any Indebtedness, excluding,
however, from the operation of this covenant:

 

(a)                                  Indebtedness to the extent disclosed in the SEC Documents filed prior to
the date hereof and otherwise existing on the date hereof; debt incurred in
connection with any acquisition not to exceed $1,000,000, and
any replacement Indebtedness to existing Indebtedness;

 

(b)                                 Indebtedness which may, from time to time be incurred or guaranteed by
the Company which in the aggregate principal amount does not exceed $500,000;

 

(c)                                  the endorsement of instruments for the purpose of deposit or collection
in the ordinary course of business;

 

(d)                                 Indebtedness relating to contingent obligations of the Company and its
subsidiaries under guaranties in the ordinary course of business of the
obligations of suppliers, customers, and licensees of the Company and its
subsidiaries;

 

(e)                                  Indebtedness relating to loans from the Company to its subsidiaries;

 

(f)                                    Indebtedness relating to any one capital lease in an amount not to
exceed $500,000;

 

24

 

(g)                                 accounts or notes
payable arising out of the purchase of merchandise, supplies, equipment,
software, computer programs or services in the ordinary course of business;

 

(h)                                 Common Stock issued or issuable to financial institutions, or lessors,
pursuant to a commercial credit arrangement, equipment financing transaction, accounts receivable factoring, or a similar transaction.

 

The foregoing Indebtedness described in
subsections (a) – (h) above shall be referred to as “Permitted Indebtedness”.

 

7.4                               Capital Stock.  Except for issuances to the Purchaser and
issuances required by securities issued and outstanding on the date hereof,
issue any equity security that is senior to or ranks pari passu
with the Series D Preferred Stock, whether with respect to right of
payment of redemptions, interest, damages or upon liquidation or dissolution or
otherwise.

 

7.5                               Liquidation or Sale.  Sell, transfer, lease or otherwise dispose of
20% or more of its consolidated assets (as shown on the most recent financial
statements of the Company or the subsidiary, as the case may be) in any single
transaction or series of related transactions (other than the sale of inventory
in the ordinary course of business), or liquidate, dissolve, recapitalize or
reorganize in any form of transaction.

 

7.6                               Change of Control Transaction.  Except as disclosed in Schedule 7.6
attached hereto, enter into a Change in Control Transaction. For purposes of
this Agreement, “Change in Control Transaction” means the occurrence of (a) an
acquisition by an individual or legal entity or “group” (as described in Rule 13d-5(b)(1) promulgated
under the Exchange Act) of effective control (whether through legal or
beneficial ownership of capital stock of the Company, by contract or otherwise)
of in excess of fifty percent (50%) of the voting securities of the Company, (b) a
replacement at one time or over time of more than one-half of the members of
the Board of the Company which is not approved by a majority of those
individuals who are members of the Board on the date hereof (or by those
individuals who are serving as members of the Board on any date whose
nomination to the Board was approved by a majority of the members of the Board
who are members on the date hereof), (c) the merger or consolidation of
the Company or any subsidiary of the Company in one or a series of related
transactions with or into another entity (except in connection with a merger
involving the Company solely for the purpose, and with the sole effect, of
reorganizing the Company under the laws of another jurisdiction; provided that
the certificate of incorporation and bylaws (or similar charter or
organizational documents) of the surviving entity are substantively identical
to those of the Company and do not otherwise adversely impair the rights of the
Purchaser), or (d) the execution by the Company of an agreement to which
the Company is a party or by which it is bound, providing for any of the events
set forth above in (a), (b) or (c).

 

7.7                               Amendment of Charter Documents.  The Company shall not amend or waive any
provision of the Certificate of Incorporation or Bylaws of the Company in any
way that materially adversely affects the rights of the Purchaser without the
prior written consent of the Purchaser.

 

25

 

7.8                               Transactions with Affiliates.

 

(a)                                  Except as set forth on Schedule 7.8(a) attached hereto,
engage in any transaction with any of the officers, directors, employees or
affiliates of the Company or of its subsidiaries, except on terms no less
favorable to the Company or the subsidiary as could be obtained in an arm’s
length transaction.

 

(b)                                 Divert (or permit anyone to divert) any business or opportunity of the
Company or subsidiary to any other corporate or business entity.

 

7.9                               Registration Statements.  Except as set forth on Schedule 7.9
attached hereto, without the consent of the Purchaser, file any registration
statement with the Commission until the earlier of: (i) 60 Trading Days
following the date that a registration statement or registration statements
registering all the Conversion Shares, Warrant Shares and other Registrable
Securities is declared effective by the Commission; and (ii) the date the
Conversion Shares and Warrant Shares are saleable by Purchaser under Rule 144
under the Securities Act without limitation as to volume or manner of sale;
provided that this Section shall not prohibit the Company from filing a
registration statement on Form S-4 or other applicable form for securities
to be issued in connection with acquisitions of businesses by the Company or
its subsidiaries, or post effective amendments to registration statements that
were declared effective prior to the date hereof or to a registration statement
filed with the Commission on Forms S-4 or S-8.

 

ARTICLE
VIII

CERTIFICATE LEGENDS

 

8.1                               Legend.  Each certificate representing the Securities
shall be stamped or otherwise imprinted with a legend substantially in the
following form (in addition to any legend required by applicable state
securities or “blue sky” laws):

 

NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS
CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE
STATE SECURITIES LAWS.  THE SECURITIES MAY NOT
BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL, IN A FORM REASONABLY
ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS
SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT.  NOTWITHSTANDING THE FOREGOING, THE SECURITIES
MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN
OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.

 

26

 

The Company shall issue irrevocable
instructions to its transfer agent, and any subsequent transfer agent, to issue
certificates, registered in the name of each Purchaser or its respective
nominee(s), for the Conversion Shares and the Warrant Shares in such amounts as
specified from time to time by each Purchaser to the Company upon conversion of
the Preferred Shares or exercise of the Warrant in the form of Exhibit I
attached hereto (the “Irrevocable Transfer Agent Instructions”).  Prior to registration of the Conversion
Shares and the Warrant Shares under the Securities Act, all such certificates
shall bear the restrictive legend specified in this Section 8.1.
Certificates evidencing the Conversion Shares and Warrant Shares shall not
contain any legend (including the legend set forth in Section 8.1 hereof),
(i) while a registration statement (including the Registration Statement)
covering the resale of such security is effective under the Securities Act, or (ii) following
any sale of such Conversion Shares or Warrant Shares pursuant to Rule 144,
or (iii) if such Conversion Shares or Warrant Shares are eligible for sale
under Rule 144 by the Purchaser without limitation as to volume or manner
of sale, or (iv) if such legend is not required under applicable
requirements of the Securities Act (including judicial interpretations and
pronouncements issued by the Staff of the Commission).  The Company shall cause its counsel to issue
a legal opinion to the Company’s transfer agent promptly after the effective
date of a registration statement covering such Conversions Shares or Warrant
Shares, if required by the Company’s transfer agent, to effect the removal of
the legend hereunder.  If all or any
portion of the Preferred Shares or a Warrant is exercised at a time when there
is an effective registration statement to cover the resale of the Conversion
Shares or the Warrant Shares, such Conversions Shares and Warrant Shares, as
the case may be, shall be issued free of all legends.  The Company agrees that following the
effective date of the registration statement covering Conversion Shares or
Warrant Shares or at such time as such legend is no longer required under this Section 8.1,
it will, no later than five (5) Trading Days following the delivery by the
Purchaser to the Company or the Company’s transfer agent of a certificate
representing Conversion Shares or Warrant Shares, as the case may be, issued
with a restrictive legend (such date, the “Delivery Date”), deliver or cause to
be delivered to the Purchaser a certificate representing such Securities that
is free from all restrictive and other legends. 
The Company may not make any notation on its records or give instructions
to any transfer agent of the Company that enlarge the restrictions on transfer
set forth in this Section. Whenever a certificate representing the Conversion
Shares or Warrant Shares is required to be issued to the Purchaser without a
legend, in lieu of delivering physical certificates representing the Conversion
Shares or Warrant Shares, provided the Company’s transfer agent is
participating in the Depository Trust Company (“DTC”) Fast Automated Securities Transfer program, the Company
shall use its reasonable best efforts to cause its transfer agent to
electronically transmit the Conversion Shares or Warrant Shares to the
Purchaser by crediting the account of such Purchaser’s Prime Broker with DTC
through its Deposit Withdrawal Agent Commission (“DWAC”) system (to the extent
not inconsistent with any provisions of this Agreement).

 

8.2                               Liquidated Damages.  The Company understands that a delay in the
delivery of unlegended certificates for the Conversion Shares or the Warrant
Shares as set forth in Section 8.1 hereof beyond the Delivery Date could
result in economic loss to the Purchaser. 
If the Company fails to deliver to a Purchaser such shares via DWAC or a
certificate or certificates pursuant to this Section hereunder by the
Delivery Date, the Company shall pay to the Purchaser, in cash, as partial
liquidated damages and not as a penalty, for each $500 of Conversion Shares or
Warrant Shares (based on the closing price of the Common Stock reported by the
principal Trading Market on the date such Securities are submitted to the
Company’s transfer agent)

 

27

 

subject to Section 8.1, $5 per Trading Day for
each Trading Day after the Legend Removal Date until such certificate is
delivered.  Nothing herein shall limit
the Purchaser’s right to pursue actual damages for the Company’s failure to
deliver certificates representing any Securities as required by the Transaction
Documents, and the Purchaser shall have the right to pursue all remedies
available to it at law or in equity including, without limitation, a decree of
specific performance and/or injunctive relief.

 

8.3                               Sales by the Purchaser.  The Purchaser agrees that the removal of the
restrictive legend from certificates representing Securities as set forth in Section 8.1
is predicated upon the Company’s reliance that the Purchaser will sell any
Securities pursuant to either the registration requirements of the Securities
Act, including any applicable prospectus delivery requirements, or an exemption
therefrom.

 

ARTICLE
IX

INDEMNIFICATION

 

9.1                               Indemnification by the Company.  The Company agrees to defend, indemnify and
hold harmless the Purchaser and shall reimburse the Purchaser for, from and
against each claim, loss, liability, cost and expense (including without
limitation, interest, penalties, costs of preparation and investigation, and
the actual fees, disbursements and expenses of attorneys, accountants and other
professional advisors) (collectively, “Losses”) directly or indirectly relating
to, resulting from or arising out of (a) any untrue representation,
misrepresentation, breach of warranty or non-fulfillment of any covenant,
agreement or other obligation by or of the Company contained in any Transaction
Document or in any certificate, document, or instrument
delivered by the Company to the Purchaser; or (b) any action
instituted against the Purchaser or its affiliates, by any stockholder of the
Company who is not an affiliate of the Purchaser, with respect to any of the
transactions contemplated by the Transaction Documents (unless such action is
based upon a breach of the Purchaser’s representations, warranties or covenants
under the Transaction Documents or any agreements or understandings the
Purchaser may have with any such stockholder or any violations by the Purchaser
of state or federal securities laws or any conduct by the Purchaser which
constitutes fraud, gross negligence, willful misconduct or malfeasance).

 

9.2                               Procedure.

 

(a)                                  The indemnified party shall promptly notify the indemnifying party of
any claim, demand, action or proceeding for which indemnification will be
sought under this Agreement; provided, that the failure of any party entitled
to indemnification hereunder to give notice as provided herein shall not
relieve the indemnifying party of its obligations under this Article IX
except to the extent that the indemnifying party is actually prejudiced by such
failure to give notice.

 

(b)                                 In case any such action, proceeding or claim is brought against an
indemnified party in respect of which indemnification is sought hereunder, the
indemnifying party shall be entitled to participate in and, unless in the
reasonable, good-faith judgment of the indemnified party a conflict of interest
between it and the indemnifying party exists with respect to such action,
proceeding or claim (in which case the indemnifying party shall be responsible
for

 

28

 

the reasonable fees and expenses of one separate
counsel for the indemnified party), to assume the defense thereof with counsel
reasonably satisfactory to the indemnified party. If the indemnifying party
elects to defend any such action or claim, then the indemnified party shall be
entitled to participate in such defense (but not control) with counsel of its
choice at its sole cost and expense (except that the indemnifying party shall
remain responsible for the reasonable fees and expenses of one separate counsel
for the indemnified party in the event in the reasonable, good-faith judgment
of the indemnified party a conflict of interest between it and the indemnifying
party exists).

 

(c)                                  In the event that the indemnifying party advises an indemnified party
that it will contest such a claim for indemnification hereunder, or fails,
within thirty (30) days of receipt of any indemnification notice to notify, in
writing, such person of its election to defend, settle or compromise, at its
sole cost and expense, any action, proceeding or claim (or discontinues its
defense at any time after it commences such defense), then the indemnified
party may, at its option, defend, settle or otherwise compromise or pay such
action or claim.  In any event, unless
and until the indemnifying party elects in writing to assume and does so assume
the defense of any such claim, proceeding or action, the indemnified party’s
costs and expenses arising out of the defense, settlement or compromise of any
such action, claim or proceeding shall be Losses subject to indemnification
hereunder.

 

(d)                                 The parties shall cooperate fully with each other in connection with any
negotiation or defense of any such action or claim and shall furnish to the
other party all information reasonably available to such party which relates to
such action or claim.  Each party shall
keep the other party fully apprised at all times as to the status of the
defense or any settlement negotiations with respect thereto.

 

(e)                                  Notwithstanding anything in this Article IX to the contrary, the
indemnifying party shall not, without the indemnified party’s prior written
consent, settle or compromise any claim or consent to entry of any judgment in
respect thereof which imposes any future obligation on the indemnified party or
which does not include, as an unconditional term thereof, the giving by the
claimant or the plaintiff to the indemnified party of a release from all
liability in respect of such claim.  The
indemnification obligations to defend the indemnified party required by this Article IX
shall be made by periodic payments of the amount thereof during the course of
investigation or defense, as and when the Loss is incurred, so long as the
indemnified party shall refund such moneys if it is ultimately determined by a
court of competent jurisdiction that such party was not entitled to
indemnification.  The indemnity agreements
contained herein shall be in addition to (i) any cause of action or
similar rights of the indemnified party against the indemnifying party or
others, and (ii) any liabilities the indemnifying party may be subject to
pursuant to the law.

 

ARTICLE
X

MISCELLANEOUS

 

10.1                         Governing Law.  This Agreement and the rights of the parties
hereunder shall be governed in all respects by the laws of the State of New
York wherein the terms of this Agreement were negotiated.

 

29

 

10.2                         Survival.  Except as specifically provided herein, the
representations, warranties, covenants and agreements made herein shall survive
the Closing.

 

10.3                         Amendment.  This Agreement may not be amended, discharged
or terminated (or any provision hereof waived) without the written consent of
the Company and the Purchaser.

 

10.4                         Successors and Assigns.  Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon and enforceable by and against, the successors, assigns, heirs, executors
and administrators of the parties hereto. 
The Purchaser may assign its rights hereunder, and the Company may not
assign its rights or obligations hereunder without the consent of the
Purchaser.

 

10.5                         Entire Agreement.  This Agreement, the Transaction Documents and
the other documents delivered pursuant hereto and simultaneously herewith
constitute the full and entire understanding and agreement between the parties
with regard to the subject matter hereof and thereof.

 

10.6                         Notices, etc.  All notices, demands or other communications
given hereunder shall be in writing and shall be sufficiently given if
delivered either personally, by facsimile, or by a nationally recognized
courier service marked for next business day delivery or sent in a sealed
envelope by first class mail, postage prepaid and either registered or
certified with return receipt, addressed as follows:

 

if to the Company:

 

Andover Medical, Inc.

510 Turnpike Street, Suite 204

North Andover, MA 01845

Attention: Chief Executive Officer

Tel. No.: (978) 557-1001

Fax No.: (978) 557-1004

 

with a copy to:

 

Phillips Nizer LLP

666 Fifth Avenue, 28th Floor

New York, NY 10103

Attn: Elliot H. Lutzker

Tel No.: (212) 841-0707

Fax No.: (212) 262-5152

 

if
to the Purchaser:

 

30

 

Vicis Capital Master Fund

Tower
56, Suite 700

126 E.
56th Street, 7th Floor

New
York, NY 10022

Phone:  (212) 909-4600

Fax:  (212) 909-4601

Attn: Shad Stastney

 

with a copy to:

 

Andrew D. Ketter, Esq.

Quarles & Brady LLP

411 East Wisconsin Avenue

Milwaukee, WI 53202

Phone: 
(414) 277-5629

Fax: 
(414) 978-8972

 

Such communications shall be effective
immediately if delivered in person or by confirmed facsimile, upon the date
acknowledged to have been received in return receipt, or upon the next business
day if sent by overnight courier service.

 

10.7                         Delays or Omissions.  No delay or omission to exercise any right,
power or remedy accruing to any holder of any Securities upon any breach or
default of the Company under this Agreement shall impair any such right, power
or remedy of such holder nor shall it be construed to be a waiver of any such
breach or default, or an acquiescence, therein, or of or in any similar breach
or default thereafter occurring; nor shall any waiver of any single breach or default
be deemed a waiver of any other breach or default theretofore or thereafter
occurring.  Any waiver, permit, consent
or approval of any kind or character on the part of any holder of any breach or
default under this Agreement, or any waiver on the part of any holder of any
provisions or conditions of this Agreement must be, made in writing and shall
be effective only to the extent specifically set forth in such writing.  All remedies, either under this Agreement or
by law or otherwise afforded to any holder, shall be cumulative and not
alternative.

 

10.8                         Severability.  The invalidity of any provision or portion of
a provision of this Agreement shall not affect the validity of any other
provision of this Agreement or the remaining portion of the applicable
provision.  It is the desire and intent
of the parties hereto that the provisions of this Agreement shall be enforced
to the fullest extent permissible under the laws and public policies applied in
each jurisdiction in which enforcement is sought.  Accordingly, if any particular provision of
this Agreement shall be adjudicated to be invalid or unenforceable, such
provision shall be deemed amended to delete therefrom the portion thus
adjudicated to be invalid or unenforceable, such deletion to apply only with
respect to the operation of such provision in the particular jurisdiction in
which such adjudication is made.

 

10.9                         Expenses.  The Company shall bear its own expenses and
legal fees incurred on its behalf with respect to the negotiation, execution
and consummation of the transactions contemplated by this Agreement and shall
pay all documentary stamp or similar taxes imposed by any authority upon the
transactions contemplated by this Agreement or any Transaction

 

31

 

Document.  Without requiring any
documentation therefor, the Company will reimburse the Purchaser $50,000 for
all fees and expenses incurred by it with respect to the negotiation, execution
and consummation of the transactions contemplated by this Agreement and the
transactions contemplated hereby and due diligence conducted in connection
therewith, including the fees and disbursements of counsel and auditors for the
Purchaser.  Such reimbursement shall be
paid on the Closing Date by the Purchaser deducting such $50,000 from the
Purchase Price. The Company shall pay all
reasonable, documented third-party fees and expenses incurred by the Purchaser
in connection with the enforcement of this Agreement or any of the other
Transaction Documents, including, without limitation, all actual reasonable
attorneys’ fees and expenses.

 

10.10                   Consent to Jurisdiction; Waiver of Jury Trial.  EACH OF THE PARTIES TO THIS
AGREEMENT HEREBY IRREVOCABLY AND UNCONDITIONALLY SUBMITS TO THE EXCLUSIVE
JURISDICTION OF THE STATE AND FEDERAL COURTS LOCATED IN THE STATE AND COUNTY OF
NEW YORK FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO
THIS AGREEMENT AND THE TRANSACTION DOCUMENTS. 
EACH OF THE PARTIES TO THIS AGREEMENT IRREVOCABLY WAIVES, TO THE FULLEST
EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH SUCH PARTY MAY NOW OR
HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN ANY
SUCH COURTS AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN ANY SUCH COURTS
HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. 
EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES, TO THE FULLEST EXTENT
PERMITTED BY LAW, ANY RIGHT TO TRIAL BY JURY IN ANY SUCH LEGAL PROCEEDING.  EACH OF THE PARTIES TO THIS AGREEMENT HEREBY
CONSENTS TO SERVICE OF PROCESS BY NOTICE IN THE MANNER SPECIFIED IN SECTION 10.6
AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION
SUCH PARTY MAY NOW OR HEREAFTER HAVE TO SERVICE OF PROCESS IN SUCH MANNER.

 

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

 

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

 

10.13                   Default
under this Agreement.

 

(a)                                  Events of Default. 
The occurrence and continuance of any of the following events shall
constitute an event of default under this Agreement (each, an “Event of Default”
and, collectively, “Events of Default”):

 

32

 

(i)                                     if the Company shall default in
the payment of any dividend on or redemption of any Preferred Share when the
same shall become due and payable; and in each case such default shall have
continued without cure for ten (10) Trading Days after written notice (a “Default
Notice”) is given to the Company of such default;

 

(ii)                                  if the Company shall default in
the performance of any of the covenants contained in Articles VI or VII hereof
and (a) such default shall have continued without cure for ten (10) Trading
Days after a Default Notice is given to the Company or (b) such default
shall have materially adversely affected the Purchaser regardless of any action
taken by the Company to cure such default;

 

(iii)                               subject to any grace periods and the ability of the Company
to delay the effectiveness of the Registration Statement pursuant the
Registration Rights Agreement, any registration statement (each, a “Registration
Statement”) providing for the resale of Conversion Shares and Warrant Shares is
not declared effective by the Commission on or prior to the date which is
thirty (30) days after the date required therefor by the Registration Rights
Agreement, unless the failure of such Registration Statement to become
effective results from the Commission’s refusal to grant effectiveness by
reason of its application of Rule 415 under the Securities Act and/or its
refusal to allow the registration statement to be filed on a timely basis
because of a pending Registration Statement, provided the Company has not
complied with the liquidated damages provisions of Section 7(e) of
the Registration Rights Agreement or the maximum amount of liquidated damages
thereunder has been paid and such default is continuing;

 

(iv)                              the suspension from listing,
without subsequent listing on any one of, or the failure of the Common Stock to
be listed or quoted on at least one of the following: the OTC Bulletin Board,
the American Stock Exchange, the Nasdaq Global Market, the Nasdaq Capital
Market or The New York Stock Exchange, Inc. for a period of ten (10) consecutive
Trading Days and such suspension from listing (or listing on an alternate
exchange or quotation system) is not cured within ten (10) days after the
tenth (10th) consecutive day of such suspension from listing;

 

(v)                                 the Company’s notice to the
Purchaser, including by way of public announcement, at any time, of its
inability to comply for any reason or its intention not to comply with proper
requests for issuance of, or its failure to timely deliver, Conversion Shares
upon conversion of Preferred Shares or issuance of Warrant Shares upon exercise
of the Warrant, provided the Company has not complied with the provisions of Section 2(c) of
the Certificate of Designation for the Preferred Shares and/or Section 1.6
of the Warrant;

 

(vi)                              [Intentionally Omitted]

 

(vii)                           while a Registration Statement is required to be maintained
effective pursuant to the terms of the Registration Rights Agreement, the
effectiveness of the Registration Statement lapses for any reason (including,
without limitation, the issuance of a stop order) or is unavailable to the
Purchaser for sale of the Registrable Securities (as defined in the
Registration Rights Agreement) in accordance with the terms of the Registration
Rights Agreement, and such lapse or unavailability continues for a period of
ten (10) consecutive

 

33

 

Trading Days, provided that the Company has not
exercised its rights pursuant to Section 3(n) of the Registration
Rights Agreement;

 

(viii)                        if the Company shall default in
the performance of any other material agreement, which has a material adverse
effect upon the Company, or covenant contained in this Agreement and such
default shall not have been remedied to the satisfaction of the Purchaser
within thirty-five (35) days after a Default Notice shall have been given to
the Company;

 

(ix)                                if any material representation or
warranty made in this Agreement, any Transaction Document or in or any
certificate delivered by the Company or its subsidiaries pursuant hereto or
thereto shall prove to have been incorrect in any material respect when made;

 

(x)                                   the Company shall (A) default
in any payment of any amount or amounts of principal of or interest on any
Indebtedness as defined in Section 2.13 above and (other than the
Indebtedness hereunder) the aggregate principal amount of which Indebtedness is
in excess of $250,000  or (B) default
in the observance or performance of any other agreement or condition relating
to any such Indebtedness or contained in any instrument or agreement
evidencing, securing or relating thereto, or any other event shall occur or
condition exist, the effect of which default or other event or condition is to
cause, or to permit the holder or holders or beneficiary or beneficiaries of
such Indebtedness to cause with the giving of notice if required, such
Indebtedness to become due prior to its stated maturity;

 

(xi)                                [Intentionally Omitted]

 

(xii)                             if a final judgment which, either
alone or together with other outstanding final judgments against the Company
and its subsidiaries, exceeds an aggregate of $250,000 shall be rendered
against the Company or any subsidiary and such judgment shall have continued
undischarged or unstayed for thirty-five (35) days after entry thereof;

 

(xiii)                          the Company or any subsidiary
shall (i) apply for or consent to the appointment of, or the taking of
possession by, a receiver, custodian, trustee or liquidator of itself or of all
or a substantial part of its property or assets, (ii) make a general
assignment for the benefit of its creditors, (iii) commence a voluntary
case under the United States Bankruptcy Code (as now or hereafter in effect) or
under the comparable laws of any jurisdiction (foreign or domestic), (iv) file
a petition seeking to take advantage of any bankruptcy, insolvency, moratorium,
reorganization or other similar law affecting the enforcement of creditors’
rights generally, (v) acquiesce in writing to any petition filed against
it in an involuntary case under United States Bankruptcy Code (as now or
hereafter in effect) or under the comparable laws of any jurisdiction (foreign
or domestic), or admit in writing its inability to pay its debts (vi) issue
a notice of bankruptcy or winding down of its operations or issue a press
release regarding same, or (vii) take any action under the laws of any
jurisdiction (foreign or domestic) analogous to any of the foregoing; or

 

(xiv)                         a proceeding or case shall be
commenced in respect of the Company or any of its subsidiaries, without its
application or consent, in any court of competent jurisdiction, seeking (i) the
liquidation, reorganization, moratorium, dissolution, winding up, or

 

34

 

composition or
readjustment of its debts, (ii) the appointment of a trustee, receiver,
custodian, liquidator or the like of it or of all or any substantial part of
its assets in connection with the liquidation or dissolution of the Company or
any of its subsidiaries or (iii) similar relief in respect of it under any
law providing for the relief of debtors, and such proceeding or case described
in clause (i), (ii) or (iii) shall continue undismissed, or unstayed
and in effect, for a period of sixty (60) days or any order for relief shall be
entered in an involuntary case under United States Bankruptcy Code (as now or
hereafter in effect) or under the comparable laws of any jurisdiction (foreign
or domestic) against the Company or any of its subsidiaries or action under the
laws of any jurisdiction (foreign or domestic) analogous to any of the
foregoing shall be taken with respect to the Company or any of its subsidiaries
and shall continue undismissed, or unstayed and in effect for a period of sixty
(60) days.

 

(b)                                 Remedies.

 

(i)                                     Upon the occurrence and
continuance of an Event of Default, the Purchaser may at any time (unless all
defaults shall theretofore have been remedied) at its option, by written notice
or notices to the Company require the Company to immediately redeem in cash all
or a portion of the Preferred Shares held by the Purchaser at a price per share
equal to one hundred fifteen percent (115%) of the Stated Value of the Series D
Preferred Stock plus all accrued and unpaid dividends thereon at the time of
such request.  The remedy conferred by
this Section shall not be exclusive of any other remedy provided by any
Transaction Document or now or hereafter available at law, in equity, by
statute or otherwise.

 

(ii)                                  The Purchaser, by written notice
or notices to the Company, may in its own discretion waive an Event of Default
and its consequences and rescind or annul such declaration; provided that, no
such waiver shall extend to or affect any subsequent Event of Default or impair
any right resulting therefrom. 

 

(iii)                               In case any one or more Events of
Default shall occur and be continuing, the Purchaser may proceed to protect and
enforce its rights by an action at law, suit in equity or other appropriate
proceeding, whether for the specific performance of any agreement contained
herein or in any Transaction Document or for an injunction against a violation
of any of the terms hereof or thereof, or in aid of the exercise of any power
granted hereby or thereby or by law.  In
case of a default in the payment of any dividend on or redemption of any
Preferred Share, the Company will pay to the Purchaser such further amount as
shall be sufficient to cover the cost and the expenses of collection,
including, without limitation, actual attorney’s fees, expenses and
disbursements.  No course of dealing and
no delay on the part of a Purchaser in exercising any rights shall operate as a
waiver thereof or otherwise prejudice such Purchaser’s rights.  No right conferred hereby or by any
Transaction Document upon the Purchaser shall be exclusive of any other right
referred to herein or therein or now available at law in equity, by statute or
otherwise.

 

[Signature Page Follows]

 

35

 

IN WITNESS WHEREOF, the parties hereto have duly executed this
Securities Purchase Agreement, as of the day and year first above written.

 

 

	
   

  	
  COMPANY:

  
	
   

  	
   

  
	
   

  	
  ANDOVER MEDICAL, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Edwin A. Reilly

  
	
   

  	
  Name: Edwin A. Reilly

  
	
   

  	
  Title: CEO

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  PURCHASER:

  
	
   

  	
   

  
	
   

  	
  VICIS CAPITAL MASTER FUND

  
	
   

  	
     By:
  Vicis Capital LLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Chris Phillips

  
	
   

  	
  Name: Chris Phillips

  
	
   

  	
  Title: Managing Director

  

 

36Exhibit 10.26

 

ANDOVER MEDICAL, INC.

 

(A Delaware corporation)

 

 

SUBSCRIPTION DOCUMENTS

 

100 UNITS OF

ANDOVER MEDICAL, INC.,

BEING OFFERED

AT $50,000 PER UNIT, TOTAL OFFERING $5,000,000

WITH AN OVER-SUBSCRIPTION OF $1,000,000

 

THE SECURITIES OFFERED HEREBY HAVE NOT BEEN
REGISTERED WITH OR APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.

 

ANDOVER MEDICAL, INC.

510 Turnpike Street, Suite 204

N. Andover, MA 01845

(978) 557-1001

 

 

 

ANDOVER MEDICAL, INC.

SUBSCRIPTION PROCEDURES

 

Andover Medical, Inc., a Delaware corporation (the “Company”), is
offering for sale to persons who are “Accredited Investors” (as hereinafter
defined) up to 100 units (the “Units”) at a price of $50,000 per Unit for a
maximum offering of $5,000,000 (the “Offering”) with an over-subscription of
$1,000,000.  Each Unit will consist of: (i) fifty
shares of Series A Convertible Preferred Stock of the Company (“Share” or “Series A
Preferred Stock”), with a Face Value of $1,000 per share, with each share
initially convertible into 2,857 shares, or an aggregate of 142,850 shares per
Unit, of common stock, $.001 par value (“Common Stock”) at $0.35 per share, (ii) warrants
to purchase 142,850 shares of Common Stock exercisable for a period of five
years at $0.45 per share (“Warrant A”), and (iii) warrants to purchase
142,850 shares of Common Stock exercisable for a period of five years at a
price of $0.60 per share (“Warrant B”, together with Warrant A, collectively
referred to herein as the “A and B Warrants”). 
The Company reserves the right to sell fractional Units at a
proportionately adjusted offering price. 
The Units, Shares, Common Stock issuable upon conversion of the Series A
Preferred Stock and exercise of the A and B Warrants, are hereafter
collectively referred to as the “Securities.” 
In order to subscribe for the Units, a prospective Investor must deliver
the following items to the Company:

 

1.             Two executed copies
of the Subscription Agreement, a copy of which is attached hereto, with
signatures properly completed;

 

2.             One completed and
signed copy of the appropriate Confidential Purchaser Questionnaire, a copy of
which is attached hereto;

 

3.             One executed copy of the
form of Registration Rights Agreement (included in this Subscription
Booklet);

 

4.             For individual investors, a
copy of one form of government issued picture identification (e.g. state issued
driver’s license or passport); and

 

5.             A personal or
business check or money order payable to Signature Bank (the “Agent”), contemporaneously with the
execution and delivery of the Subscription Agreement.  Subscribers
may also pay the subscription amount by following the wire transfer
instructions set forth below.

 

Send the funds for your participation either
by wire transfer or by check in accordance with the following instructions:

 

	
  · Wire Funds

  	
   

  	
  Wire the funds to Andover Medical, Inc. to the following
  account:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Signature Bank

  
	
   

  	
   

  	
  Escrow Account for Andover Medical, Inc.

  
	
   

  	
   

  	
  261 Madison Avenue

  
	
   

  	
   

  	
  New York, New York 10016

  

 

ii

 

	
   

  	
   

  	
  ABA Routing No. 026013576

  
	
   

  	
   

  	
  Non-interest bearing Escrow Account No.  1500835385

  
	
   

  	
   

  	
   

  
	
  · Check

  	
   

  	
  Make your check payable to “Signature Bank, Escrow
  Agent for Andover Medical, Inc.” and

  

 

RETURN CHECK AND ALL COMPLETED AND SIGNED
MATERIALS TO THE COMPANY’S FINANCIAL ADVISOR:

 

	
  Meyers Associates L.P.

  
	
  45 Broadway

  
	
  New York, NY 10006

  
	
  Attn: Eileen Slitkin

  

 

Non-Binding Subscription

 

Subscriptions are not binding on the Company until accepted by it.  The Company may refuse any subscription by
giving written notice to the subscriber by personal delivery or first-class
mail.  In its sole discretion, the
Company may establish a limit on the purchase of Units subscribed for by a
particular subscriber.

 

iii

 

SUBSCRIPTION AGREEMENT

 

THIS SUBSCRIPTION
AGREEMENT (this “Agreement”), dated as of November 14,
2006, by and among Andover Medical, Inc., a Delaware corporation (the “Company”),
and the subscribers identified on the signature page hereto (each a “Subscriber”
and collectively “Subscribers”).

 

WHEREAS,
the Company and the Subscribers are executing and delivering this Agreement in
reliance upon an exemption from securities registration afforded by the
provisions of Section 4(2), Section 4(6) and/or Regulation D (“Regulation
D”) as promulgated by the United States Securities and Exchange Commission (the
“SEC”) under the Securities Act of 1933, as amended (the “1933 Act,”
collectively the “Offering Exemption”);

 

WHEREAS,
the parties desire that, upon the terms and subject to the conditions contained
herein, the Company shall issue and sell (the “Offering”) to the Subscribers,
at $50,000 per unit (the “Unit Purchase Price”) on a “best efforts” basis, up
to $5,000,000 of Units (defined below) with an over-subscription of
$1,000,000.  Each “Unit” will consist of (i) fifty
shares of Series A Convertible Preferred Stock of the Company (“Share,” or
“Series A Preferred Stock”), with a Face Value of $1,000 per share, with
each share initially convertible at the holder’s option (and under circumstances
in the sole discretion of the Company) into 2,857 shares of common stock, $.001
par value (“Common Stock”), or an aggregate of 142,850 shares per Unit, at
$0.35 per share (the “Conversion Price”), (ii) warrants to  purchase 142,850 shares of Common Stock
exercisable for a period of five years from the Effective Date (as defined
below) at a price of $0.35 per share (“A Warrant”), and (iii) warrants to
purchase 142,850 shares of Common Stock exercisable for a period of five years
from the Effective Date at a price of $0.35 per share (“B Warrant,” together
with the A Warrant, collectively referred to herein as the “A and B Warrants”
or the “Warrants”).  The Company reserves
the right to sell fractional Units at a proportionately adjusted offering
price.  The Units, Shares, Warrants and
Common Stock issuable upon conversion of the Shares and upon exercise of the
Warrants, are collectively referred to herein as the “Securities;” and

 

WHEREAS,
the holders of an aggregate of $673,000 of 10% promissory notes (the “Bridge
Note”) of the Company have the option to exchange their Bridge Notes (but not
the shares of Common Stock) issued in the September and October 2006
bridge offering  (the “Bridge Offering”)
for Units at the face amount of the Bridge Notes plus accrued interest thereon
in satisfaction of the Unit Purchase Price.

 

NOW, THEREFORE,
in consideration of the mutual covenants and other agreements contained in this
Agreement, the Company and the Subscribers hereby agree as follows:

 

1.             Purchase and Sale of Shares and
Warrants.  Subject to the
satisfaction (or waiver) of the terms and conditions of this Agreement, each
Subscriber hereby irrevocably agrees to purchase the full number of Units,
consisting of Shares and Warrants in the amounts designated on the signature page hereto
at the Unit Purchase Price and the Company shall sell such Shares and Warrants
to such Subscriber.

 

 

2.             Escrow Arrangements; Form of
Payment.  Upon execution hereof by
the parties and pursuant to the terms of an escrow agreement entered into
between the Company and Signature Bank (the “Escrow Agreement”), each
Subscriber agrees to make the deliveries required of such Subscriber as set
forth in the Escrow Agreement and the Company agrees to make the deliveries
required of the Company as set forth in the Escrow Agreement.

 

3.1           Conversion of the Shares.  Each Share will convert into 2,857 shares of
Common Stock at the holder’s sole discretion on 5 days’ prior written notice,
at any time at the Conversion Price of $.35 per share, subject to adjustment
under certain circumstances. The Series A Preferred Stock, pursuant to the
form of Certificate of Designations attached hereto as Exhibit A,
is also convertible at the Conversion Price at the Company’s sole discretion
any time after the effective date of the registration statement (the “Effective
Date”) covering the underlying shares of Common Stock, provided that the Common
Stock is trading above 500% of the Conversion Price per share for the 30
consecutive days ending not more than 15 days prior to the date of notice of
conversion.

 

3.2           Exercise Period and Price of the
Warrants.  Each A Warrant and B
Warrant, the forms of which are attached hereto as Exhibit B and Exhibit C,
respectively, will entitle the holder to purchase 2,857 shares of Common Stock
for a period of five (5) years from the Effective Date (the “Exercise
Period”), at an exercise price of $0.35 per share, subject to adjustment in
certain circumstances to prevent dilution. 
Each Unit will include A and B Warrants to each purchase 142,850 shares
of Common Stock or 200% Warrant coverage per Unit.

 

4.1           Closing.  At Closing of the purchase and sale of the
Units (the “Closing”), the Subscribers shall purchase, severally and not
jointly, and the Company shall sell and issue, in the aggregate, a maximum of
5,000 shares of  Series A Preferred
Stock with a Stated Value of $5,000,000. 
Each Unit shall include A Warrants to purchase an aggregate of 142,850
shares of Common Stock and B Warrants to purchase an aggregate of 142,850
shares of Common Stock.  Thus, in the
event the Maximum Offering of 100 Units is completed, the Company has reserved
for issuance A Warrants and B Warrants each exercisable for 14,285,000 shares
of Common Stock or an aggregate of 28,570,000 shares of Common Stock issuable
upon exercise of all A and B Warrants. 
Each Subscriber shall purchase from the Company, and the Company shall
issue and sell to each Subscriber, a number of Units equal to such Subscriber’s
subscription amount (the “Subscription Amount”) divided by the Unit Purchase
Price.  The Company reserves the right to
sell fractional units at a proportionately adjusted offering price.  Upon satisfaction of the conditions set forth
in Section 4.2, the Closing shall occur on or before February 12,
2007 at the offices of Phillips Nizer LLP, 666 Fifth Avenue, New York, NY
10103, Attn: Elliot H. Lutzker, or such other time and/or location as the
parties shall mutually agree (the “Closing Date”).

 

4.2                   Closing Conditions.

 

(a)           At
Closing the Company shall deliver or cause to be delivered to each Subscriber:

 

2

 

(i)            this Agreement duly executed by the Company;

 

(ii)           a certificate evidencing a number of shares of Series A
Preferred Stock equal to the product of (i) the Subscriber’s Subscription
Amount at Closing divided by the per Unit Purchase Price, and (ii) 50,
registered in the name of such Subscriber; and

 

(iii)          A and B Warrants, registered in the name of such
Subscriber, pursuant to which such Subscriber shall have the right to acquire,
with respect to each Warrant upon payment of the respective warrant exercise
price, up to the number of shares of Common Stock equal to the product of (i) the
Subscriber’s Subscription Amount at Closing divided by the per Unit Purchase price,
and (ii) 142,850.

 

(b)           At Closing each Subscriber shall deliver or cause to be
delivered to the Company the following:

 

(i)            this Agreement duly executed by such Subscriber;

 

(ii)           such Subscriber’s Subscription Amount by (a) check or
wire transfer to the Company pursuant to the wiring instructions provided to
the Subscribers by the Company or (b) tender of Bridge Notes;

 

(iii)          an executed and properly completed copy of the appropriate
Confidential Purchaser Questionnaire; and

 

(iv)          an executed and properly completed copy of the form of
Registration Rights Agreement.

 

(c)           All representations and warranties of the other party
contained herein shall remain true and correct as of the Closing.

 

(d)           As of Closing, there shall have been no Material Adverse
Effect (as defined below) with respect to the Company since the date hereof.

 

(e)           From the date hereof to Closing, trading in the Common
Stock shall not have been suspended by the SEC and, at any time prior to
Closing, trading in securities generally as reported by Bloomberg Financial
Markets shall not have been suspended or limited, or minimum prices shall not
have been established on securities whose trades are reported by such service,
or on any trading market, nor shall a banking moratorium have been declared
either by the United States or New York State authorities.

 

5.             Subscriber’s Representations and
Warranties.  Each Subscriber hereby
represents and warrants as of the date hereof and as of the Closing, to and
agrees with the Company as to such Subscriber and no other Subscriber that:

 

3

 

(a)           Information on Company.  The Subscriber has either obtained or has
access to (through the EDGAR website of the SEC or otherwise) the Company’s
Forms 8-K, as filed with the SEC on November 2, 2006, October 23,
2006 and September 7, 2006, together with the Company’s Form SB-2
Registration Statement declared effective on January 20, 2006, and all
other Forms 10-KSB, 10-QSB, 8-K, and any amendments thereto, including any exhibits
filed with such Forms, and all other filings previously made with the SEC
(hereinafter referred to collectively as the “Reports”).  In addition, the Subscriber has received in
writing from the Company such other information concerning its operations,
financial condition and other matters as the Subscriber has requested in
writing (such other information is collectively, the “Other Written Information”),
and considered all factors the Subscriber deems material in deciding on the
advisability of investing in the Securities.

 

(b)           Information on Subscriber.  The Subscriber is, and will be at the time of
conversion of the Shares and exercise of the Warrants, an “accredited investor”
as defined in Section 2(15)  of
the 1933 Act and Rule 501 promulgated thereunder. Such Subscriber is not
required to be registered as a broker-dealer under Section 15 of the
Securities Exchange Act of 1934, as amended (the “1934 Act”), is experienced in
investments and business matters, has made investments of a speculative nature,
understands that an investment in the Securities involves a high degree of
risk, has purchased securities of United States publicly-owned companies in
private placements in the past and, with its representatives, has such
knowledge and experience in financial, tax and other business matters as to
enable the Subscriber to utilize the information made available by the Company
to evaluate the merits and risks of and to make an informed investment decision
with respect to the proposed purchase, which represents a speculative
investment.  The Subscriber has the
authority and is duly and legally qualified to purchase and own the
Securities.  The Subscriber is able to
bear the risk of such investment for an indefinite period and to afford a
complete loss thereof.  The information
set forth on the signature page hereto regarding the Subscriber is
accurate.  The sale of the Securities to
the Subscriber as contemplated in this Subscription Agreement complies with or
is exempt from the applicable securities legislation of the jurisdiction of the
residence of the Subscriber.

 

(c)           Purchase of Shares and Warrants.  At Closing, the Subscriber will purchase the
Shares and Warrants as principal for its own account for investment only and
not as a nominee or agent and not with a view towards or for resale in
connection with the distribution of the Securities.

 

(d)           Compliance with Securities Act.  The Subscriber understands and agrees that
the Securities are “restricted securities” have not been registered under the
1933 Act or any applicable state securities laws, by reason of their issuance
in a transaction that does not require registration under the 1933 Act (based
in part on the accuracy of the representations and warranties of Subscriber
contained herein), and that such Securities must be held indefinitely unless a
subsequent disposition is registered under the 1933 Act or any applicable state
securities laws or is exempt from such registration.

 

4

 

(e)           Shares Legend. 
The Shares and the Warrants shall bear the following or similar legend:

 

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

 

(f)            Warrants Legend. 
The Warrants shall bear the following or similar legend:

 

“THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF
THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED.  THIS WARRANT AND THE SHARES OF
COMMON STOCK 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 UNDER SAID ACT OR ANY APPLICABLE
STATE SECURITIES LAW OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO
ANDOVER MEDICAL, INC. THAT SUCH REGISTRATION IS NOT REQUIRED.”

 

(g)           Communication of Offer.  The offer to sell the Securities was directly
communicated to the Subscriber by the Company. 
At no time was the Subscriber presented with or solicited by any
leaflet, newspaper or magazine article, radio or television advertisement, or
any other form of general advertising, or solicited or invited to attend a
promotional meeting otherwise than in connection and concurrently with such
communicated offer.

 

(h)           Organization; Authority.  Such Subscriber is an entity duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
organization with full right, corporate or partnership power and authority to
enter into and to consummate the transactions contemplated by the Offering and
otherwise to carry out its obligations thereunder.

 

(i)            Authority; Enforceability.  This Agreement and other agreements delivered
together with this Agreement or in connection herewith have been duly
authorized, executed and delivered by the Subscriber and are valid and binding
agreements 

 

5

 

enforceable in accordance with their terms,
subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability relating to or affecting
creditors’ rights generally and to general principles of equity; and Subscriber
has full corporate power and authority necessary to enter into this Agreement
and such other agreements and to perform its obligations hereunder and under
all other agreements entered into by the Subscriber relating hereto.

 

(j)            Correctness of Representations.  Each Subscriber represents that the foregoing
representations and warranties are true and correct as of the date hereof and,
unless a Subscriber otherwise notifies the Company prior to the Closing, shall
be true and correct as of Closing.  The
foregoing representations and warranties shall survive the Closing Date for a
period of three years.

 

(k)           No Tax or Legal Advice.  Such Subscriber understands that nothing in
this Agreement, any other agreement or any other materials presented to such
Subscriber in connection with the purchase and sale of the Units constitutes
legal, tax or investment advice and such information may not be
used, for the purpose of (i) avoiding tax-related penalties under the
Internal Revenue Code or (ii) promoting, marketing or recommending to
another party any tax-related matters addressed herein.  Such Subscriber has consulted such
legal, tax and investment advisors as it, in its sole discretion, has deemed
necessary or appropriate in connection with its purchase of Units.

 

Circular 230 disclosure:
pursuant to recently-enacted U.S. treasury department regulations, prospective
investors are advised that, unless otherwise expressly indicated, any federal
tax advice contained in this Agreement is not intended or written to be used,
and may not be used, for the purpose of (i) avoiding tax-related penalties
under the Internal Revenue Code or (ii) promoting, marketing or
recommending to another party any tax-related matters addressed herein.

 

6.             Company
Representations and Warranties.  The
Company represents and warrants to and agrees with each Subscriber that:

 

(a)           Due Incorporation. 
The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware and has the requisite
corporate power to own their properties and to carry on its business as now
being conducted.  The Company is duly
qualified as a foreign corporation to do business and is in good standing in
each jurisdiction where the nature of the business conducted or property owned
by it makes such qualification necessary, where the failure to be so qualified
or in good standing, as the case may be, would not have or reasonably be
expected to result in (i) a material adverse effect on the legality,
validity or enforceability of this Agreement or any other document in
connection with the Offering, (ii) a material adverse effect on the
results of operations, assets, business or financial condition of the Company,
or (iii) a material adverse effect on the Company’s ability to perform in
any material respect on a timely basis its obligations under this Agreement (any
of (i), (ii) or (iii), a “Material Adverse Effect”).

 

6

 

(b)           Outstanding Stock. 
All issued and outstanding shares of capital stock of the Company has
been duly authorized and validly issued and are fully paid and non-assessable.

 

(c)           Authority; Enforceability.  This Agreement and the Warrants have been
duly authorized, executed and delivered by the Company and are valid and
binding agreements enforceable in accordance with their terms, subject to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting creditors’
rights generally and to general principles of equity; and the Company has full
corporate power and authority necessary to enter into this Agreement, the
Warrants, the Escrow Agreement, a copy of which is attached hereto as Exhibit D,
and such other agreements and to perform its obligations hereunder and under
all other agreements entered into by the Company relating hereto.

 

(d)           Consents.  No
consent, approval, authorization or order of any court, governmental agency or
body or arbitrator having jurisdiction over the Company, or any of its
affiliates, the NASD, Inc., Nasdaq, the OTC Bulletin Board nor the Company’s
stockholders is required for execution of this Agreement and all other
agreements entered into by the Company relating thereto, including, without
limitation, the issuance and sale of the Securities, and the performance of the
Company’s obligations hereunder and under all such other agreements.

 

(e)           No Violation or Conflict.  Assuming the representations and warranties
of the Subscribers in Section 5 are true and correct, neither the
execution and delivery of this Agreement nor the issuance and sale of the Securities
nor the performance of the Company’s obligations under this Agreement and all
other agreements entered into by the Company relating thereto by the Company
will:

 

(i)            violate, conflict with, result in a material breach of,
or constitute a default (or an event which with the giving of notice or the
lapse of time or both would be reasonably likely to constitute a default) or
gives to others any rights of termination, amendment, acceleration or
cancellation under (A) the certificate of incorporation, charter or bylaws
of the Company, (B) any decree, judgment, order, law, treaty, rule,
regulation or determination applicable to the Company of any court,
governmental agency or body, or arbitrator having jurisdiction over the Company
or any of its affiliates (including federal and state securities laws and
regulations) or over the properties or assets of the Company or any of its
affiliates, (C) the terms of any bond, debenture, note or any other
evidence of indebtedness, or any agreement, stock option or other similar plan,
indenture, lease, mortgage, deed of trust or other instrument to which the
Company or any of its affiliates is a party, by which the Company or any of its
affiliates is bound or affected, or to which any of the properties or assets of
the Company or any of its affiliates is subject, or (D) the terms of any “lock-up”
or similar provision of any underwriting or similar agreement to which the
Company, or any of its affiliates is a party except the violation, conflict,
breach, or default of which would not have a Material Adverse Effect on the
Company; or

 

7

 

(ii)           result in the creation or imposition of any lien, charge
or encumbrance upon the securities or any of the assets of the Company or any
of its affiliates.

 

(f)           The Securities.  The Securities upon issuance:

 

(i)            are, or will be, free and clear of any security
interests, liens, claims or other encumbrances, subject to restrictions upon
transfer under the 1933 Act and any applicable state securities laws;

 

(ii)           have been, or will be, duly and validly authorized and on
the date of issuance will be duly and validly issued, fully paid and
nonassessable (and if registered pursuant to the 1933 Act, and resold pursuant
to an effective registration statement will be free trading and unrestricted,
provided that each Subscriber complies with the prospectus delivery
requirements of the 1933 Act and any state securities laws);

 

(iii)          will not have been issued or sold in violation of any
preemptive or other similar rights of the holders of any securities of the
Company; and

 

(iv)          will not subject the holders thereof to personal liability
by reason of being such holders.

 

(g)           Litigation. 
There is no pending or, to the best knowledge of the Company, threatened
action, suit, proceeding inquiry, notice of violation, or investigation before
any court, governmental or administrative agency or regulatory body (federal,
state, county, local or foreign), or arbitrator having jurisdiction over the
Company, or any of its affiliates that would challenge the legality, validity
or enforceability of this Agreement and/or the Offering, or otherwise affect
the execution by the Company or the performance by the Company of its
obligations under this Agreement, and all other agreements entered into by the
Company relating hereto.  Except as
disclosed in the Reports or Other Written Information, there is no pending or,
to the best knowledge of the Company, threatened action, suit, proceeding or
investigation before any court, governmental agency or body, or arbitrator
having jurisdiction over the Company, or any of its affiliates which litigation
if adversely determined could have a Material Adverse Effect on the Company.

 

(h)           Reporting Company. 
The Company is subject to reporting obligations pursuant to Section 15(d) of
the 1934 Act.  Pursuant to the provisions
of the 1934 Act, the Company has filed all reports and other materials required
to be filed thereunder with the SEC during the preceding twelve months.

 

(i)            No Market Manipulation.  The Company has not taken, and will not take,
directly or indirectly, any action designed to, or that might reasonably be
expected to, cause or result in stabilization or manipulation of the price of
the Common Stock of the Company to facilitate the sale or resale of the
Securities or affect the price at which the Securities may be issued or resold.

 

8

 

(j)            Information
Concerning Company.  The Reports
contain all material information relating to the Company and its operations and
financial condition from August 31, 2006 through their respective dates
for which information is required to be disclosed therein.  Since the date of the financial statements
included in the Reports, and except as modified in the Other Written
Information or in the Schedules hereto, there has been no Material Adverse
Effect in the Company’s business, financial condition or affairs not disclosed
in the Reports.  The Reports do not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading in light of the circumstances when made.  The
Company has not incurred any liabilities (contingent or otherwise) other than (A) trade
payables and accrued expenses incurred in the ordinary course of business
consistent with past practice and (B) liabilities not required to be
reflected in the Company’s financial statements pursuant to GAAP or required to
be disclosed in filings made with the SEC. The Company has not altered its
method of accounting. The Company has not declared or made any dividend or
distribution of cash or other property to its stockholders or purchased,
redeemed or made any agreements to purchase or redeem any shares of its capital
stock. The Company does not have pending before the SEC any request for
confidential treatment of information.

 

(k)           SEC
Action; Stop Transfers.  To the
Company’s best knowledge, there has not been, there is not pending or
contemplated, any investigation by the SEC involving the Company.  The SEC
has not issued any stop order or other order suspending the effectiveness of
any registration statement filed by the Company or any subsidiary under the
1933 Act or the 1934 Act.  The
Securities, when issued, will be restricted securities.  The Company will not issue any stop transfer
order or other order impeding the sale, resale or delivery of any of the
Securities, except as may be required by any applicable federal or state
securities laws.  Except as described in
this Agreement, the Company will not issue any stop transfer or other order
impeding the sale, resale or delivery of the Securities unless contemporaneous
notice of such instruction is given to the Subscriber.

 

(l)            Defaults.  The Company is not in violation of its
Certificate of Incorporation or ByLaws. 
The Company is (i) not in default under or in violation of any
other material agreement or instrument to which it is a party or by which it or
any of its properties are bound or affected, which default or violation would
have a Material Adverse Effect on the Company, (ii) not in default with
respect to any order of any court, arbitrator or governmental body or subject
to or party to any order of any court or governmental authority arising out of
any action, suit or proceeding under any statute or other law respecting
antitrust, monopoly, restraint of trade, unfair competition or similar matters,
or (iii) to its knowledge in violation of any statute, rule or
regulation of any governmental authority which violation would have a Material
Adverse Effect on the Company.

 

(m)          No
General Solicitation.  Neither the
Company, nor any of its affiliates, nor to the Company’s knowledge, any person
acting on its or their behalf, has since August 31, 2006, directly or
indirectly made any offers or sales of any security or solicited any offers to
buy any security, except as described in the Company’s selling 

 

9

 

stockholder registration statement on Form SB-2 (No. 333-128526)
declared effective by the SEC on January 20, 2006, that would cause the
offer of the Securities pursuant to this Agreement to be integrated with prior
offerings by the Company for purposes of the 1933 Act or any applicable
stockholder approval provisions. The Company or any of its affiliates will not
take any action or steps that would cause the offer of the Securities to be
integrated with other offerings if such integration would eliminate the
Offering Exemption.  The Company will not
conduct any offering other than the transactions contemplated hereby that will
be integrated with the offer or issuance of the Securities, unless otherwise
advised by Nasdaq or the SEC.

 

(n)           Listing.  The Company’s Common Stock is listed for
trading on the Over-The-Counter Bulletin Board (“OTCBB”). Except for prior
notices, which as of the date hereof have been satisfied, and as provided for
in Section 10(b) below, the Company has not received any oral or
written notice that its Common Stock will be delisted from the OTCBB nor that
its Common Stock does not meet all requirements for the continuation of such
quotation and the Company satisfies the requirements for the continued listing
of its Common Stock on the OTCBB.

 

(o)           No
Undisclosed Liabilities.  The Company
has no liabilities or obligations which are material, individually or in the
aggregate, which are not disclosed in the Reports and/or Other Written Information,
other than those incurred in the ordinary course of the Company’s businesses
since the August 31, 2006 change in control of the Company and which,
individually or in the aggregate, would reasonably be expected to have a
Material Adverse Effect on the Company’s financial condition, other than as set
forth in Schedule 6(o), or as described in the Reports.

 

(p)           No
Undisclosed Events or Circumstances. 
There has been no event or circumstance that has occurred or exists with
respect to the Company or its businesses, properties, operations or financial
condition, that, under applicable law, rule or regulation, requires public
disclosure or announcement prior to the date hereof by the Company but which
has not been so publicly announced or disclosed in the Reports.

 

(q)           Capitalization.  The authorized and outstanding capital stock
of the Company as of the date of this Agreement and each Closing are set forth
on Schedule 6(q).  No person has
any right of first refusal, preemptive right, right of participation, or any
similar right to participate in the transactions contemplated by this Offering
except as set forth on Schedule 6(q), or as described in the
Reports.  Except as set forth on Schedule 6(q) concerning proposed
acquisitions and as described in the Reports and/or as a result of the purchase
and sale of the Securities and except for employee stock options under the
Company’s stock option plans and except for employee rights under the Company’s
employee stock purchase plan, there are no outstanding options, warrants,
script rights to subscribe to, calls or commitments of any character whatsoever
relating to, or securities, rights or obligations convertible into or
exchangeable for, or giving any person any right to subscribe for or acquire,
any shares of Common Stock, or contracts, commitments, understandings or
arrangements by which the Company or any subsidiary is or may become bound to
issue additional shares of Common Stock, or securities or 

 

10

 

rights convertible or exchangeable into shares of Common Stock. 
Except as required by agreements filed as exhibits to the Reports, the issue
and sale of the Units will not obligate the Company to issue shares of Series A
Preferred Stock or other securities to any person (other than the Subscribers)
and will not result in a right of any holder of Company securities to adjust
the exercise, conversion, exchange or reset price under such securities.

 

(r)            Correctness
of Representations.  The Company
represents that the foregoing representations and warranties are true and
correct as of the date hereof in all material respects The foregoing
representations and warranties shall survive until the earlier of:  one year after the Closing Date, or the
Subscribers own less than an aggregate of 10% shares of Series A Preferred
Stock.

 

(s)           Title
to Assets.  Except as disclosed in the Reports, the Company has good
and marketable title in fee simple to all real property owned by it that is
material to the business of the Company, and good and marketable title in all
personal property owned by them that is material to the business of the
Company, in each case free and clear of all liens, charges, security interests,
encumbrances, rights of first refusal or other restrictions (collectively “Liens”)
except for Liens as do not materially affect the value of such property and do
not materially interfere with the use made and proposed to be made of such
property by the Company and Liens for the payment of federal, state or other
taxes, the payment of which is neither delinquent nor subject to
penalties.  Any real property and facilities held under lease by the
Company are held by them under valid, subsisting and enforceable leases with
which the Company is in material compliance.

 

(t)            Disclosure. 
The Company confirms that, neither the Company nor any other person acting on
its behalf has provided any of the Subscribers or their agents or counsel with
any information that constitutes or might constitute material, non-public
information.   The Company understands and confirms that the
Subscribers will rely on the foregoing representations and covenants in
effecting transactions in securities of the Company. All disclosure provided to
the Subscribers regarding the Company, its business and the transactions
contemplated hereby, including the disclosure schedules to this Agreement (the “Disclosure
Schedules”), furnished by or on behalf of the Company are true and correct and
do not contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements made therein, in light
of the circumstances under which they were made, not misleading.

 

(u)           Internal
Accounting Controls.  The Company and its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance that (i) transactions
are executed in accordance with management’s general or specific
authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with GAAP and to maintain
asset accountability, (iii) access to assets is permitted only in
accordance with management’s general or specific authorization, and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences. The Company has established disclosure controls and
procedures (as defined 

 

11

 

in the 1934 Act Rules 13a-14 and 15d-14) for the Company and
designed such disclosure controls and procedures to ensure that material
information relating to the Company (but not any proposed acquisition), and
each subsidiary, is made known to the certifying officers by others within
those entities, particularly during the period in which the Company’s Form 10-KSB
or 10-QSB, as the case may be, is being prepared.

 

(v)           Registration
Rights.  Except as set forth in the
Reports or on Schedule 6(v), no person has any right to cause the
Company to effect the registration under the 1933 Act of any securities of the
Company.

 

(w)          Dilution.   The Company’s executive officers and
directors understand the nature of the Securities being sold hereby and
recognize that the issuance of the Securities will have a potential dilutive
effect on the equity holdings of other holders of the Company’s equity or
rights to receive equity of the Company. 
The board of directors of the Company has concluded, in its good faith
business judgment, that the issuance of the Securities is in the best interests
of the Company.  The Company specifically
acknowledges that its obligation to issue the Shares upon conversion of the Series A
Preferred Stock, and the Warrant Shares upon exercise of the Warrants 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 or parties entitled to receive equity of the Company.

 

(x)            No
Disagreements with Accountants and Lawyers. 
There are no disagreements of any kind presently existing, or reasonably
anticipated by the Company to arise, between the Company and the accountants
and lawyers formerly or presently employed by the Company, including but not
limited to disputes or conflicts over payment owed to such accountants and
lawyers.

 

(y)           DTC
Status.   The Company’s transfer
agent is a participant in and the Common Stock is eligible for transfer
pursuant to the Depository Trust Company Automated Securities Transfer Program.
The name, address, telephone number, fax number, contact person and email
address of the Company’s transfer agent is set forth on Schedule 6(y) hereto.

 

7.             Regulation
D Offering.  This Offering is being
made pursuant to the exemption from the registration provisions of the 1933 Act
afforded by Section 4(2) or Section 4(6) of the 1933 Act
and/or Rule 506 of Regulation D promulgated thereunder.  On the Closing Date, the Company will provide
an opinion reasonably acceptable to Subscriber from the Company’s legal counsel
opining on the availability of an exemption from registration under the 1933
Act as it relates to the offer and issuance of the Securities, exclusive of the
issue of integration with prior offerings of the Company.  The Company will provide, at the Company’s
expense, such other legal opinions in the future as are reasonably necessary
for the conversion of the Series A Preferred Stock, exercise of the
Warrants, and resale of the shares of Common Stock underlying such securities.

 

12

 

8.             Reissuance
of Securities.  The Company agrees to
reissue certificates representing the Shares and the Warrant Shares without the
legends set forth in Sections 5(e) and 5(f) above at such time as (a) the
holder thereof is permitted to and disposes of the Securities pursuant to Rule 144(d) and/or
Rule 144(k) under the 1933 Act in the opinion of counsel reasonably
satisfactory to the Company, or (b) upon resale subject to an effective
registration statement after the shares of Common Stock underlying the Series A
Preferred Stock and the Warrants are registered under the 1933 Act.  The Company agrees to cooperate with each
Subscriber in connection with all resales pursuant to Rule 144(d) and
Rule 144(k) and provide legal opinions at the Company’s expense necessary
to allow such resales provided the Company and its counsel receive reasonably
requested written representations from each Subscriber and selling broker, if
any.  Provided each Subscriber provides
required certifications and representation letters, if any, if the Company
fails to remove any legend as required by this Section 8 (a “Legend
Removal Failure”), then beginning on the tenth (10th) day following
the date that each Subscriber has requested the removal of the legend and
delivered all items reasonably required by the Company to be delivered by each
Subscriber, that the Company continues to fail to remove such legend, the
Company shall pay to each Subscriber or assignee holding shares of Common Stock
underlying the Shares and Warrants, subject to a Legend Removal Failure, as
liquidated damages and not a penalty an amount equal to ten percent (10%) of
the purchase price of the Shares and shares of Common Stock underlying the
Shares subject to a Legend Removal Failure for each 15-day period or part thereof
that such failure continues.  If during
any twelve (12) month period, the Company fails to remove any legend as
required by this Section 8 for an aggregate of thirty (30) days, each
Subscriber or assignee holding Securities subject to a Legend Removal Failure
may, at its option, require the Company to purchase all or any portion of the
Shares or shares of Common Stock underlying the Shares and Warrants subject to
a Legend Removal Failure held by each Subscriber or assignee at a price per
share equal to 110% of the purchase price of such Shares.

 

9.             NASD Member Firm Compensation.

 

(a)           Cash.  The Company on the one hand, and each
Subscriber on the other hand, agree to indemnify the other against and hold the
other harmless from any and all liabilities to any persons claiming brokerage
commissions other than Meyers Associates, L.P. on account of services purported
to have been rendered on behalf of the indemnifying party in connection with
this Agreement or the transactions contemplated hereby and arising out of such
party’s actions.  The Company agrees that
it will pay any NASD member firm that participates in this Offering, a cash fee
equal to 10% of the purchase price solely on the Securities issued at the
Closing (as defined herein) and a non-accountable expense allowance equal to
three (3%) percent of the gross proceeds in connection with the Offering.

 

(b)           The
Company agrees that, for a period of two (2) years from the date hereof,
it shall not solicit any offer to buy from or offer to sell to any person
introduced to the Company by the broker in connection with the Offering,
directly or indirectly, any securities of the Company or of any other entity,
or provide the name of any such person to any other securities broker or dealer
or selling agent.  In the event that the
Company or any of its affiliates, directly or indirectly, solicits, offers to
buy from or offers to sell to any such person any such securities, or provides
the name of any such person to any other 

 

13

 

securities broker or dealer or selling agent and such person purchases
such securities or purchases securities from any other broker or dealer or
selling agent, the Company shall pay to the broker an amount equal to 10% of
the aggregate purchase price of the securities so purchased by such person.

 

(c)           Warrants
to NASD Member Firms. Participating NASD member firms will receive warrants
to purchase up to 10% of the Units sold in the Offering, exercisable at the
Conversion Price for five years from the Effective Date of the Registration
Statement.

 

10.           Covenants
of the Company.  The Company
covenants and agrees with the Subscribers that from the Closing Date until the
earlier of (i) the Subscribers own less than 20% of the aggregate Series A
Preferred Stock issued in the Offering, or (ii) two years from the Closing
as follows:

 

(a)           Stop
Orders.  The Company will advise the
Subscribers, 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
Company for offering or sale in any jurisdiction, or the initiation of any
proceeding for any such purpose.

 

(b)           Listing.  If applicable, the Company shall use its
reasonable best efforts to promptly secure the listing of the shares of Common
Stock to be purchased hereunder and the Warrant Shares upon each national
securities exchange, or automated quotation system, if any, upon which shares
of Common Stock are then listed (subject to official notice of issuance) and
shall use its reasonable best efforts to maintain such listing so long as any
Securities are outstanding.  The Company
shall use its reasonable best efforts to maintain the listing of its Common
Stock on the American Stock Exchange, Nasdaq Capital Market, Nasdaq Global
Market, OTC Bulletin Board, or New York Stock Exchange (whichever of the
foregoing is at the time the principal trading exchange or market for the
Common Stock (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 Principal Market, as applicable.  The Company will provide the Subscribers
copies of all notices it receives notifying the Company of the threatened and
actual delisting of the Common Stock from any Principal Market.

 

(c)           Market
Regulations.  If required, the
Company shall notify the SEC, the Principal Market and applicable state
authorities, in accordance with their requirements, if any, 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
Subscribers and promptly provide copies thereof to Subscriber.

 

(d)           Reporting
Requirements.  The Company will (i) cause
its Common Stock to become registered under Section 12(b) or 12(g) of
the 1934 Act following the 

 

14

 

completion of the Offering, (ii) comply in all respects with its
reporting and filing obligations under the 1934 Act, (iii) comply with all
reporting requirements that are applicable to an issuer with a class of shares
registered pursuant to Section 15(d) of the 1934 Act, as applicable,
and (iv) comply with all requirements related to any registration
statement filed pursuant to this Agreement. 
The Company will use its best efforts not to take any action or file any
document (whether or not permitted by the 1933 Act or the 1934 Act or the rules thereunder)
to terminate or suspend such registration or to terminate or suspend its
reporting and filing obligations under said acts.  Until the earlier of the resale of the
Shares, and shares of Common Stock underlying the Shares and the Warrants by
each Subscriber or at least two (2) years after the Shares have been
converted and the Warrants have been exercised, the Company will use reasonable
efforts to continue the listing or quotation of the Common Stock on the
Principal Market and will comply in all respects with the Company’s reporting,
filing and other obligations under the bylaws or rules of the Principal
Market.

 

(e)           Use
of Proceeds.  The Purchase Price will
be used by the Company for working capital and acquisitions and may not and
will not be used for accrued and unpaid officer and director salaries, payment
of financing related debt, redemption of redeemable notes or equity instruments
of the Company.

 

(f)            Reservation
of Common Stock.  The Company
undertakes to reserve from its authorized but unissued Common Stock, at all
times that Shares and Warrants remain outstanding, a number of shares of Common
Stock equal to the amount of Common Stock issuable upon conversion of the
Shares and exercise of the Warrants.

 

(g)           Taxes.  The Company will promptly pay and discharge,
or cause to be paid and discharged, when due and payable, all lawful taxes,
assessments and governmental charges or levies imposed upon the income,
profits, property or business of the Company; provided, however, that any such
tax, assessment, charge or levy need not be paid if the validity thereof shall
currently be contested in good faith by appropriate proceedings and if the
Company shall have set aside on its books adequate reserves with respect
thereto, and provided, further, that the Company 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 therefore.

 

(h)           Insurance.  The Company is insured by insurers of
recognized financial responsibility against such losses and risks and in such
amounts as are prudent and customary in the businesses in which the Company is
engaged.  The Company has no reason to believe that it will not be able to
renew its existing insurance coverage as and when such coverage expires or to
obtain similar coverage from similar insurers as may be necessary to continue
its business without a significant increase in cost.  The Company 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 the Company’s line of business, in amounts sufficient
to prevent the Company from becoming a co-insurer and not in any event less
than 100% of the insurable value of the property insured; and the Company will
maintain, with 

 

15

 

financially sound and reputable insurers, insurance against other
hazards and risks and liability to persons and property to the extent and in
the manner customary for companies in similar businesses similarly situated and
to the extent available on commercially reasonable terms.

 

(i)            Books
and Records.  The Company will keep
true records and books of account in which full, true and correct entries will
be made of all dealings or transactions in relation to its business and affairs
in accordance with generally accepted accounting principles applied on a
consistent basis.

 

(j)            Governmental
Authorities.  The Company shall duly
observe and conform in all material respects to all valid requirements of
governmental authorities relating to the conduct of its business or to its
properties or assets.

 

(k)           Intellectual
Property.  To the knowledge of the
Company, the Company has, or has rights to use, all patents, patent
applications, trademarks, trademark applications, service marks, trade names,
copyrights, licenses necessary to conduct business and other similar rights
that are necessary or material for use in connection with its business as
described in the Reports and which the failure to so have could have or reasonably
be expected to result in a Material Adverse Effect (collectively, the “Intellectual
Property Rights”).  The Company has not received a written notice that
the Intellectual Property Rights used by the Company or any subsidiary violates
or infringes the rights of any person.  The Company shall maintain in full
force and effect its corporate existence, rights and franchises and all
licenses necessary to conduct business and other rights to use intellectual
property owned or possessed by it and reasonably deemed to be necessary to the
conduct of its business.

 

(l)            Properties.  The Company 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 the Company 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 material provision could reasonably be
expected to have a Material Adverse Effect.

 

(m)          Confidentiality.  The Company agrees that it will not disclose
publicly or privately the identity of the Subscribers unless expressly agreed
to in writing by a Subscriber or only to the extent required by law; provided,
however, the Subscribers consent to being named in the Form 8-K filed by
the Company in connection with the sale of the Securities.

 

(n)           Press
Release; Form 8-K.  The Company
shall issue a press release through a national news service on the morning immediately
following the Closing.  Such press
release shall be issued in compliance with Rule 135(c) under the 1933
Act.  Such press release, along with all
other material information, shall be filed on a timely basis with the SEC on a
current report on Form 8-K.

 

16

 

11.           Covenants
of the Company and Subscriber Regarding Indemnification.

 

(a)           The
Company agrees to indemnify, hold harmless, reimburse and defend the
Subscribers, the Subscribers’ officers, directors, agents, affiliates, control
persons, and principal shareholders, against any claim, cost, expense,
liability, obligation, loss or damage (including reasonable legal fees) of any
nature, incurred by or imposed upon the Subscriber or any such person which
results, arises out of or is based upon (i) any material misrepresentation
by Company or breach of any warranty by Company in this Agreement or in any
Exhibits or Schedules attached hereto, or other agreement delivered pursuant
hereto; or (ii) after any applicable notice and/or cure periods, any
breach or default in performance by the Company of any covenant or undertaking
to be performed by the Company hereunder, or any other agreement entered into
by the Company and Subscriber relating hereto.

 

(b)           Each
Subscriber agrees to indemnify, hold harmless, reimburse and defend the Company
and each of the Company’s officers, directors, agents, affiliates, control
persons against any claim, cost, expense, liability, obligation, loss or damage
(including reasonable legal fees) of any nature, incurred by or imposed upon
the Company or any such person which results, arises out of or is based upon (i) any
material misrepresentation by such Subscriber in this Agreement or in any
Exhibits or Schedules attached hereto, or other agreement delivered pursuant
hereto; or (ii) after any applicable notice and/or cure periods, any
breach or default in performance by such Subscriber of any covenant or
undertaking to be performed by such Subscriber hereunder, or any other agreement
entered into by the Company and Subscribes relating hereto.

 

(c)           The
procedures set forth in Section 12.6 shall apply to the indemnifications
set forth in Sections 11(a) and 11(b) above.

 

12.1         Registration Rights. 
The Company shall file an initial registration statement (the “Registration
Statement”) registering the shares of Common Stock underlying the Series A
Preferred Stock, the A and B Warrants and the shares of Common Stock underlying
the units offered in the Bridge Offering (collectively, “Registrable Securities”),
within 30 days following the final closing date of the Offering (the “Scheduled
Filing Date”), and use its best efforts to have the Registration Statement
declared effective by the SEC within 120 days of the Scheduled Filing Date (the
“Effective Date”).

 

Notwithstanding
the foregoing, the obligations of the Company under this Section 12.1
shall terminate as to any Subscriber at such time as (i) all Registrable
Securities held by such Subscriber can be sold within a single three-month period
pursuant to Rule 144 under the 1933 Act (or any successor provision of
such 1933 Act, and (ii) the number of shares of Common stock held by such
Subscriber and issuable upon conversion of the Shares and exercise of the
Warrants held by such Subscriber is less than one percent of the outstanding
capital stock of the Company on an as converted basis (adjusted for stock
dividends, stock splits, reverse stock splits, combinations and the like
occurring after the date hereof).

 

17

 

 

With
a view of making available to the Subscriber the benefits of Rule 144
promulgated under the 1933 Act or any other similar rule or regulation of
the SEC that may at any time permit the Subscriber to sell securities of the
Company to the public without registration during the registration period, the
Company for a period of two years which period shall commence on the date
hereof, agrees to:

 

(a)           make and keep public information available, as those terms
are understood and defined in Rule 144.

 

(b)           file with the SEC in a timely manner all reports and other
documents required of the Company under the 1933 Act and the 1934 Act so long
as the Company remains subject to such requirements and the filing of such
reports and other documents as required for the applicable provisions of Rule 144;  and

 

(c)           furnish to each Subscriber so long as such Subscriber owns
Registrable Securities, promptly upon request, (i) a written statement by
the Company that it has complied with the reporting requirements of Rule 144,
the 1933 Act and the 1934 Act, (ii) a copy of the most recent annual or
quarterly report of the Company and such other reports and documents so filed
by the Company, and (iii) such other information as may be reasonably
requested to permit the Subscribers to sell such securities pursuant to Rule 144
without registration.

 

12.2         Registration
Procedures. With respect to the registration of the Securities as required
by Section 12.1, the Company will, as expeditiously as possible:

 

(a)           subject to the timelines provided in this Agreement,
prepare and file with the SEC the Registration Statement required by Section 12,
with respect to such securities and use its reasonable best efforts to cause
such Registration Statement to become and remain effective for the period of
the distribution contemplated hereby, and promptly provide to the holders of
Registrable Securities (the “Sellers”) copies of all filings;

 

(b)           prepare and file with the SEC such amendments and
supplements to the Registration Statement and the prospectus used in connection
therewith as may be necessary to keep such Registration Statement effective for
a period of two (2) years, or the Subscribers no longer own the
Securities, whichever is earlier, and comply with the provisions of the 1933
Act with respect to the disposition of all of the Registrable Securities
covered by the Registration Statement in accordance with the Seller’s intended
method of disposition set forth in the Registration Statement for such period;

 

(c)           furnish to the Seller, at the Company’s expense, such
number of copies of the Registration Statement and the prospectus included
therein (including each preliminary prospectus) as such persons reasonably may
request in order to facilitate the public sale or their disposition of the securities
covered by such Registration Statement;

 

(d)           use its best efforts to register or qualify the Seller’s
Registrable Securities covered by such Registration Statement under the
securities or “blue sky” laws of such 

 

18

 

jurisdictions as the Seller
shall request, provided, however, that the Company shall not for any such
purpose be required to qualify generally to transact business as a foreign
corporation in any jurisdiction where it is not so qualified or to consent to
general service of process in any such jurisdiction;

 

(e)           if applicable, list the Registrable Securities covered by
such registration statement with any securities exchange on which the Common
Stock of the Company is then listed; and

 

(f)            immediately notify the Seller when a prospectus relating
thereto is required to be delivered under the 1933 Act, of the happening of any
event of which the Company has knowledge as a result of which the prospectus
contained in such Registration Statement, as then in effect, includes an untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein not misleading in
light of the circumstances then existing.

 

12.3.        Provision of Documents.  In connection with the registration described
in this Section 12, the Seller will furnish to the Company in writing such
information and representation letters with respect to itself and the proposed
distribution by it as reasonably shall be necessary in order to assure
compliance with federal and applicable state securities laws.

 

12.4.        Non-Registration Events.  In the event the Registration Statement is
not filed on or before the Scheduled Filing Date or declared effective within
120 days from the Scheduled Filing Date, the Company shall pay investors,
within 5 calendar days of the end of each month the Company is in violation of
the foregoing, liquidated damages of two (2%) percent of the dollar amount
invested (pro-rated for partial months) for a maximum of eight (8) months
commencing on the Scheduled Filing Date and/or 120 days thereafter.  The payments may be made in cash or Common
Stock at the Company’s sole discretion. 
The Company agrees to keep the Registration Statement effective until
expiration of the A and B Warrants.

 

12.5.        Expenses.  All expenses incurred by the Company in
complying with Section 12, including, without limitation, all registration
and filing fees, printing expenses, fees and disbursements of counsel and
independent public accountants for the Company, fees and expenses (including
reasonable counsel fees) incurred in connection with complying with state
securities or “blue sky” laws, fees of the NASD, transfer taxes, fees of
transfer agents and registrars, and costs of insurance are called “Registration
Expenses”.  Notwithstanding anything to
the contrary herein, the Seller shall pay the fees of its own additional
counsel, if any.  The Company will pay
all Registration Expenses in connection with the Registration Statement.

 

12.6.        Indemnification and Contribution.

 

(a)           In connection with the registration of Registrable
Securities, the Company will, to the extent permitted by law, indemnify and
hold harmless the Seller, each officer of the Seller, each director of the Seller,
each underwriter of such Registrable Securities thereunder and each other
person, if any, who controls such Seller or underwriter within the 

 

19

 

meaning of the 1933 Act,
against any losses, claims, damages or liabilities, joint or several, to which
the Seller, or such underwriter or controlling person may become subject under
the 1933 Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
the Registration Statement under which such Registrable Securities were
registered under the 1933 Act pursuant to Section 12, any preliminary
prospectus or final prospectus contained therein, or any amendment or
supplement thereof, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading in light of the
circumstances when made, and will, subject to the provisions of Section 12.6(c),
reimburse the Seller, each such underwriter and each such controlling person
for any legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the Company shall not be liable to the Seller to the
extent that any such damages arise out of or are based upon an untrue statement
or omission made in any preliminary prospectus if (i) the Seller failed to
send or deliver a copy of the final prospectus delivered by the Company to the
Seller with or prior to the delivery of written confirmation of the sale by the
Seller to the person asserting the claim from which such damages arise, (ii) the
final prospectus would have corrected such untrue statement or alleged untrue
statement or such omission or alleged omission, or (iii) to the extent
that any such loss, claim, damage or liability arises out of or is based upon
an untrue statement or alleged untrue statement or omission or alleged omission
so made in conformity with information furnished by any such Seller, or any
such controlling person in writing specifically for use in such Registration
Statement or prospectus, and provided, however, that the liability of the
Company hereunder shall be limited to the gross proceeds received by the
Company from the sale of Securities covered by such Registration Statement.

 

(b)           Upon registration of the Registrable Securities, the
Seller will, to the extent permitted by law, indemnify and hold harmless the
Company, and each person, if any, who controls the Company within the meaning
of the 1933 Act, each officer of the Company who signs the Registration
Statement, each director of the Company, each underwriter and each person who
controls any underwriter within the meaning of the 1933 Act, against all
losses, claims, damages or liabilities, joint or several, to which the Company
or such officer, director, underwriter or controlling person may become subject
under the 1933 Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
the Registration Statement under which such Registrable Securities were
registered under the 1933 Act pursuant to Section 12, any preliminary
prospectus or final prospectus contained therein, or any amendment or
supplement thereof, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading in light of the
circumstances when made, and will, subject to the provisions of Section 12.6(c),
reimburse the Company and each such officer, director, underwriter and
controlling person for any legal or other expenses reasonably incurred by them
in connection with investigating or defending any such loss, claim, damage, liability
or action, provided, however, that the Seller will be 

 

20

 

liable hereunder in any such
case if and only to the extent that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in reliance upon and in conformity with
information pertaining to such Seller, as such, furnished in writing to the
Company by such Seller specifically for use in such Registration Statement or
prospectus, and provided, further, however, that the liability of the Seller
hereunder shall be limited to the gross proceeds received by the Seller from
the sale of Registrable Securities covered by such Registration Statement.

 

(c)           Promptly after receipt by an indemnified party hereunder
of notice of the commencement of any action, such indemnified party shall, if a
claim in respect thereof is to be made against the indemnifying party
hereunder, notify the indemnifying party in writing thereof, but the omission
so to notify the indemnifying party shall not relieve it from any liability
which it may have to such indemnified party other than under this Section 12.6(c) and
shall only relieve it from any liability which it may have to such indemnified
party under this Section 12.6(c), except and only if and to the extent the
indemnifying party is prejudiced by such omission. In case any such action
shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate in and, to the extent it shall wish, to assume and
undertake the defense thereof with counsel reasonably satisfactory to such
indemnified party, and, after notice from the indemnifying party to such
indemnified party of its election so to assume and undertake the defense
thereof, the indemnifying party shall not be liable to such indemnified party
under this Section 12.6(c) for any legal expenses subsequently
incurred by such indemnified party in connection with the defense thereof,
provided, however, that, if the defendants in any such action include both the
indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that there may be reasonable defenses available to it
which are different from or additional to those available to the indemnifying
party or if the interests of the indemnified party reasonably may be deemed to
conflict with the interests of the indemnifying party, the indemnified parties,
as a group, shall have the right to select one separate counsel and to assume
such legal defenses and otherwise to participate in the defense of such action,
with the reasonable expenses and fees of such separate counsel and other expenses
related to such participation to be reimbursed by the indemnifying party as
incurred.

 

(d)           In order to provide for just and equitable contribution in
the event of joint liability under the 1933 Act in any case in which either (i) the
Seller, or any controlling person of the Seller, makes a claim for
indemnification pursuant to this Section 12.6 but it is judicially
determined (by the entry of a final judgment or decree by a court of competent
jurisdiction and the expiration of time to appeal or the denial of the last
right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that this Section 12.6 provides for
indemnification in such case, or (ii) contribution under the 1933 Act may
be required on the part of the Seller or controlling person of the Seller in
circumstances for which indemnification is not provided under this Section 12.6;
then, and in each such case, the Company and the Seller will contribute to the
aggregate losses, claims, damages or liabilities to which they may be subject
(after contribution from others) in such proportion so that the Seller is
responsible only for the portion represented by the percentage

 

21

 

that the public offering
price of its securities offered by the Registration Statement bears to the
public offering price of all securities offered by such Registration Statement
provided, however, that, in any such case, (x) the Seller will not be
required to contribute any amount in excess of the public offering price of all
such securities offered by it pursuant to such Registration Statement; and (y) no
person or entity guilty of fraudulent misrepresentation (within the meaning of Section 10(f) of
the 1933 Act) will be entitled to contribution from any person or entity who
was not guilty of such fraudulent misrepresentation.  Notwithstanding anything to the contrary in
this Section 12.6, the liability of the Company hereunder shall be limited
to the gross proceeds received by the Company from the sale of Securities
covered by such Registration Statement.

 

12.7         Delivery of Unlegended Shares.

 

(a)           Within five (5) business days (such fifth business
day, the “Delivery Date”) after the business day on which the Company has
received (i) a notice that Registrable Securities have been sold, (ii) a
representation that the prospectus delivery requirements, if applicable, have
been satisfied, and (iii) the original share certificates representing the
shares of Common Stock that have been sold, the Company at its expense, (i) shall
deliver, and shall cause legal counsel selected by the Company to deliver, to
its transfer agent (with copies to Subscriber) an appropriate instruction and
opinion of such counsel, for the delivery of unlegended shares of Common Stock
issuable pursuant to any effective and current Registration Statement described
in Section 12 of this Agreement (the “Unlegended Shares”); and (ii) cause
the transmission of the certificates representing the Unlegended Shares
together with a legended certificate representing the balance of the unsold
shares of Common Stock, if any, to the Subscriber at the address specified in
the notice of sale, via express courier, by electronic transfer or otherwise on
or before the Delivery Date.

 

(b)           In lieu of delivering physical certificates representing
the Unlegended Shares, if the Company’s transfer agent is participating in the
Depository Trust Company (“DTC”) Fast Automated Securities Transfer program,
upon request of a Subscriber and its compliance with the provisions contained
in this paragraph, so long as the certificates therefore do not bear a legend
and the Subscriber is not obligated to return such certificate for the
placement of a legend thereon, the Company shall cause its transfer agent to
electronically transmit the Unlegended Shares by crediting the account of
Subscriber’s prime Broker with DTC through its Deposit Withdrawal Agent
Commission system.

 

13.           Miscellaneous.

 

(a)           Notices.  All notices, demands, requests, consents,
approvals, and other communications required or permitted hereunder shall be in
writing and, unless otherwise specified herein, shall be (i) personally
served, (ii) deposited in the mail, registered or certified, return
receipt requested, postage prepaid, (iii) delivered by reputable air
courier service with charges prepaid, or (iv) transmitted by hand
delivery, telegram, or facsimile, addressed as set forth below or to such other
address as such party shall have specified most recently by written
notice.  Any notice or other communication
required or permitted to be given hereunder shall be deemed effective (a) upon
hand delivery or 

 

22

 

delivery by facsimile, with accurate confirmation
generated by the transmitting facsimile machine, at the address or number
designated below (if delivered on a business day during normal business hours
where such notice is to be received), or the first business day following such
delivery (if delivered other than on a business day during normal business
hours where such notice is to be received) or (b) on the second business
day following the date of mailing by express courier service, fully prepaid,
addressed to such address, or upon actual receipt of such mailing, whichever
shall first occur.  The addresses for
such communications shall be: (i) if to the Company, to: Andover Medical, Inc.,
510 Turnpike Street, Suite 204, N. Andover, MA 01845, Attn: Edwin A.
Reilly, President, telecopier: (978) 557-1004, (ii) if to the Subscribers,
to: the address and facsimile number indicated on the signature page hereto,
with a copy by facsimile only to: Elliot H. Lutzker, Esq., Phillips Nizer
LLP, 666 Fifth Avenue, New York, NY 10103, 
telecopier: (212) 262-5152, and (iii) if to the Financial Advisor,
to: Meyers Associates, L.P., 45 Broadway, 2nd Floor, New York, New
York 10006, telecopier: (212) 742-4222.

 

(b)           Entire
Agreement; Assignment.  This
Agreement and other documents delivered in connection herewith represent the
entire agreement between the parties hereto with respect to the subject matter
hereof and may be amended only by a writing executed by both parties.  Neither the Company nor the Subscribers have
relied on any representations not contained or referred to in this Agreement
and the documents delivered herewith.  No
right or obligation of either party shall be assigned by that party without
prior notice to and the written consent of the other party.

 

(c)           Execution.  This Agreement may be executed by facsimile
transmission, and in counterparts, each of which will be deemed an original.

 

(d)           Law
Governing this Agreement.  This
Agreement shall be governed by and construed in accordance with the laws of the
State of New York without regard to principles of conflicts of laws.  Any action brought by either party against
the other concerning the transactions contemplated by this Agreement shall be
brought only in the state courts of New York or in the federal courts located
in the state of New York.  Both parties
and the individuals executing this Agreement and other agreements on behalf of
the Company agree to submit to the jurisdiction of such courts and waive trial
by jury.  In the event that any provision
of this Agreement or any other agreement delivered in connection herewith is
invalid or unenforceable under any applicable statute or rule of law, then
such provision shall be deemed inoperative to the extent that it may conflict
therewith and shall be deemed modified to conform with such statute or rule of
law.  Any such provision which may prove
invalid or unenforceable under any law shall not affect the validity or
enforceability of any other provision of any agreement.

 

(e)           Specific
Enforcement, Consent to Jurisdiction. 
The Company and Subscriber acknowledge and agree that irreparable damage
would occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise
breached.  It is accordingly agreed that
the parties shall be entitled to an injunction or injunctions to prevent or cure
breaches of the provisions of this Agreement and to enforce specifically the
terms and provisions hereof or thereof, this 

 

23

 

being in addition to any
other remedy to which any of them may be entitled by law or equity.  Subject to Section 13(d) hereof,
each of the Company and Subscriber hereby waives, and agrees not to assert in
any such suit, action or proceeding, any claim that it is not personally
subject to the jurisdiction of such court, that the suit, action or proceeding
is brought in an inconvenient forum or that the venue of the suit, action or
proceeding is improper.  Nothing in this Section shall
affect or limit any right to serve process in any other manner permitted by
law.

 

24

 

SIGNATURE PAGE TO
SUBSCRIPTION AGREEMENT

 

Please acknowledge your acceptance of the foregoing
Subscription Agreement by signing and returning a copy to the undersigned
whereupon it shall become a binding agreement between us.

 

	
   

  	
  ANDOVER
  MEDICAL, INC.

  
	
   

  	
  A
  Delaware corporation

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
	
   

  	
   

  	
   

  
	
   

  	
  Dated:
   

  	
  November 14,
  2006

  
					

 

	
  SUBSCRIBER

  	
   

  	
  PURCHASE

  PRICE

  	
   

  	
  SHARES

  ($1,000/SH.)

  	
   

  	
  A WARRANTS

  	
   

  	
  B WARRANTS

  
	
   

  	
   

  	
  $

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (Signature) 

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Name and Address(Signature) 

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

25

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