Document:

Form of Promissory Note Secured by Pledge of Stock isssued to Netlogic

 EXHIBIT 10.12 
  
 Promissory Note Secured by Pledge of Stock 
  
                                       
      , 200     
  

			
	 Mountain View, California
	 	$                    

  
 The undersigned,
«Name»», (the “Purchaser”) for value received, promises to pay to NetLogic Microsystems, Inc. (the “Company”) or any person or entity to whom this Note has been endorsed
for payment, or order (collectively the “Holder”), the principal sum of «Dollars»» Dollars ($«Total»») (the “principal sum”) and interest on the
principal sum from time to time remaining unpaid hereon from the date of this Note until paid in full at the rate of              percent
(            %), compounded annually. The principal sum and all accrued interest shall be due and payable in full on or before the [fourth] anniversary of the date of this
Note. In no event shall the interest rate on the principal sum exceed the maximum rate allowed by law. 
  
 Principal and interest will be paid in lawful money of the United States of America at the address of the Holder of this Note as shown on the books of the
Company. Purchaser shall have the right to prepay all or any portion of the indebtedness represented hereby without premium or penalty upon ten days’ notice. 
  
 The following is a statement of the rights of the Holder of this Note and the conditions to which this Note is subject, to
which the Holder hereof, by the acceptance of this Note, agrees: 
  
 1. Attorney’s Fees. If the indebtedness represented hereby is not paid in full when due, Purchaser promises to pay all costs of collection, including, but not limited to, reasonable attorneys’ fees. 
  
 2. Replacement. On receipt of evidence reasonably satisfactory to
Purchaser of the loss, theft, destruction or mutilation of this Note and, in the case of loss, theft or destruction, on delivery of an indemnity agreement or bond reasonably satisfactory in form and amount to the Company, or in the case of
mutilation, on surrender and cancellation of this Note, Purchaser, at his or her expense, will execute and deliver, in lieu of this Note, a new Note of like tenor. 
  
 3. Right to Accelerate Payment. This Note shall become immediately due and payable in the full amount of the
principal sum then unpaid, together with all accrued and unpaid interest thereon, at the option of the Holder of this Note without notice or demand, upon the occurrence of any of the following events: 
  
 (a) Purchaser becomes insolvent in that either a petition is
filed by or against Purchaser under any bankruptcy law, or he or she is unable to pay his or her debts as they fall due, or he or she makes a general assignment for the benefit of his or her creditors or takes any other action to take advantage of
any insolvency laws; 
  
 (b) Purchaser fails to
make payment when due of any part or installment of principal or interest, and such default is not cured within 10 days of the Holder’s giving notice of such default to Purchaser; 
  

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 (c) Purchaser’s employment, or consulting or other relationship with the Company is
terminated for any reason whatsoever, including death, in which case the Company shall have the right, upon 30 days prior written notice to Purchaser, or Purchaser’s legal representative or successor, to accelerate the full payment of the
Promissory Note, in which event such payment shall be due and payable to the Company after 30 days from the date of said notice, unless the provisions of paragraphs (a), (b) and (c) of this Section 3 apply on the date such notice is sent, in which
case the provisions regarding acceleration of the Promissory note contained in Section 5 of the Pledge and Security Agreement shall apply; or 
  
 (d) any default by Purchaser under the terms of the Early Exercise Notice and Restricted Stock Purchase Agreement (“Restricted
Stock Purchase Agreement”) or the Pledge and Security Agreement (“Security Agreement”), described below, which is not otherwise specified in paragraphs (a), (b) or (c) above. 
  
 4. Modification. This Note and any of its terms may be changed, waived
or terminated only by a written instrument signed by the party against which enforcement of that change, waiver or termination is sought. 
  
 5. Security. This Note is given pursuant to the terms of the Restricted Stock Purchase Agreement and is secured under the terms of a Security
Agreement of even date herewith made between the undersigned and the Company. The Holder shall be entitled to all the benefits of the security as provided in the Security Agreement, provided that the Holder shall not be obligated to proceed first
against the collateral, but may proceed directly on this Note. In the event the Holder proceeds against the collateral and the proceeds of same are inadequate to pay any amounts due on this Note, the undersigned shall remain liable for any
deficiency. Under certain conditions stated in the Security Agreement and in the Restricted Stock Purchase Agreement, the entire amount of this Note may become payable prior to the maturity date stated herein. 
  
 6. Transfer. The rights and obligations of the Holder and the
Purchaser under this Note and the Security Agreement shall be binding upon and benefit their respective successors, assigns, heirs, administrators and transferees. 
  
 7. Governing Law. This Note shall be governed by and construed and enforced in accordance with the laws of the State
of California. 
  
 8. Notices. All notices and other
communications required or permitted hereunder shall be in writing and shall be deemed effectively given upon personal delivery or on the day sent by facsimile transmission if a true and correct copy is sent the same day by first class mail, postage
prepaid, or by dispatch by an internationally recognized express courier service, or at such other address as any party may designate by 10 days’ advance written notice to the other party. 
  
 9. Severability. If any provision of this Note should be found to be
invalid or unenforceable, all other provisions shall nevertheless remain in full force and effect to the maximum extent permitted by law. 
  

	
	Purchaser
	
	 
	

	 

  

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 EXHIBIT D 
  

Pledge and Security Agreement 
  
 THIS PLEDGE AND SECURITY AGREEMENT (the “Security Agreement”) is made and entered into this
             day of
                            , 200    , by and between
                                    
(“Purchaser”) and NetLogic Microsystems, Inc., a Delaware corporation (the “Company”). 
  
 RECITALS: 
  
 A. Purchaser has purchased from the Company
             (            ) shares of the Company’s Common Stock (the “Shares”)
pursuant to a Early Exercise Notice and Restricted Stock Purchase Agreement of even date herewith (the “Restricted Stock Purchase Agreement”). 
  
 B. The Company has accepted Purchaser’s promissory note of even date herewith (the “Note”) in
payment for the Shares. 
  
 C. In consideration of the sale of the
Shares and as security for the payment of the Note, Purchaser has agreed to execute this Security Agreement. 
  
 NOW, THEREFORE, it is agreed as follows: 
  

	1.	Pledge. 

  
 (a) Purchaser hereby assigns, transfers and pledges the Shares to the Company as security for payment of the Note. 
  
 (b) Purchaser agrees that Purchaser will deposit with Bingham McCutchen LLP,
as agent for the Company (the “Escrow Agent”), the certificate representing the Shares, along with two executed stock assignments (with date and number of shares blank), accompanied by such documents of transfer as may be
necessary to authorize the Company or its transfer agent to transfer the Shares to the Company if required to do so by the provisions of this Security Agreement; such documents are to be held by the Escrow Agent and delivered to the Escrow Agent
pursuant to the Joint Escrow Instructions of the Company and the Purchaser set forth in Attachment 1 and incorporated herein by this reference, which instructions shall also be delivered to the Escrow Agent upon execution of this Security Agreement.

  
 (c) Purchaser shall have the right to execute all stock rights
and rights to subscribe, and to receive all liquidating dividends, cash dividends, shares, new securities or other property which the Purchaser is or may hereafter become entitled to receive on account of the Shares pledged hereunder; provided,
however, that in the event the Purchaser receives any such property, other than cash dividends, he or she will immediately deliver such property to the Company to be held as collateral in the same manner as the Shares originally pledged hereunder.
As used in this Security Agreement, the term “Shares” refers to all the Shares assigned, transferred, and pledged hereunder, and all other property received in respect thereof, other than cash dividends. 
  

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 (d) In the event the Company is involved in a merger reorganization, exchange reorganization,
sale-of-assets reorganization or other event requiring the transfer of a part or all of the Shares, Purchaser shall, within ten days after demand by the Company, execute any documents necessary to insure the continued secured status of the Note by
the Shares, any securities or property issued in respect thereto. 
  
 (e) As used in this Security Agreement, the term “Collateral” refers to the Shares. 
  

	2.	Rights in the Collateral. 

  
 Unless and until the ownership of the Collateral is transferred to the Company pursuant to the provisions hereof, the Company shall collect and receive
all property, other than cash dividends distributed in respect of the Shares and other than rents or interest payable with respect to the Substitute Collateral. The Company shall hold the same as Collateral under this Security Agreement. Purchaser
shall retain all incidents of ownership in the Collateral not specifically limited herein and not in derogation of the Company’s security interest in the Collateral, including the right to vote the Shares or other stock held as Collateral, the
right to lease any real property used as Substitute Collateral, subject to the terms of this Security Agreement, the right to receive all notices sent with respect to the Collateral, and the right to grant subordinate secured interests in the
Collateral with the Company’s prior written consent, which may be withheld for any reason. 
  

	3.	Taxes, Charges and Expenses. 

  
 (a) Purchaser agrees to pay, prior to delinquency, all taxes, charges, liens and assessments against the Collateral. In the event Purchaser fails to make
any such payment, the Company may at its option pay any such charges and shall be the sole judge of the legality or validity thereof and the amount necessary to discharge the same. 
  
 (b) Purchaser will defend the Collateral against any and all claims and demands of all persons at any time claiming an
interest therein. 
  
 (c) All advances, charges, taxes,
assessments, costs and expenses, including reasonable attorneys’ fees, incurred or paid by the Company in exercising any right, power or remedy conferred by this Security Agreement, or any enforcement thereof, or to preserve the value of the
Collateral, shall become a part of the indebtedness secured hereunder and shall be paid to the Company by Purchaser immediately upon demand. 
  

	4.	Default. 

  
 The occurrence of any of the following shall be a default under this Security Agreement: 
  
 (a) Purchaser fails to make payment when due of any part or installment of principal or interest, and such default is not
cured within 10 days of the Company’s giving notice of such default to Purchaser; 
  
 (b) Purchaser becomes insolvent in that either a petition is filed by or against Purchaser under any bankruptcy law, or he or she is unable to pay his or her debts as they fall due, or he makes a general assignment
for the benefit of his or her creditors or takes any other action to take advantage of any insolvency laws; 
  

 D-2 

 (c) Purchaser fails to perform any of his or her obligations or to comply with any of the terms under the
Restricted Stock Purchase Agreement; 
  
 (d) Purchaser fails to
perform any of his or her obligations under the Note; or 
  
 (e)
Purchaser is in default under or fails to comply with the provisions of any agreement, instrument, decree, judgment, order, obligation, covenant, bond, lien, encumbrance, security interest, article of incorporation or bylaw pertaining to the
Collateral or affecting Purchaser’s or the Company’s rights in the Collateral. 
  

	5.	Remedies of Company. 

  
 (a) Should any default, as provided in paragraph 4 above, continue for a period of five days or more, the Note shall become immediately due and payable at
the option of the Company, without notice or demand, the Company shall have the right to take possession and proceed against the Collateral in accordance with this Security Agreement or the Restricted Stock Purchase Agreement, and the Company shall
have all the rights and remedies provided by law, particularly the provisions of the Commercial Code of the State of Delaware — “Investment Securities” and “Secured Transactions.” 
  
 (b) Purchaser waives the benefit of any statute of limitations affecting his
or her liability under this Security Agreement, the Restricted Stock Purchase Agreement or the Note, or the enforcement thereof, and agrees that any payment of any indebtedness or other act which shall toll any statute of limitations applicable
thereto shall similarly operate to toll such statute of limitations applicable to this Security Agreement, the Restricted Stock Purchase Agreement or the Note. Purchaser waives all presentments, demands for performance, notices of non-performance,
protests, notices of protest, notices of dishonor and notices of acceptance of this Security Agreement or the Note, with respect to any default and liability under this Security Agreement and the Note. 
  
 (c) Should the Company proceed against all or any part of the Collateral, it
may proceed to do so by sale, public or private, and in the market or in private or negotiated sale or sales, and subject to such terms and conditions, all as the Company in its sole discretion deems proper; provided, however, that should the
Company purchase all or part of the Collateral at a private sale, it is expressly agreed by Purchaser that fair market value of the Collateral may be established by the Company using the most recent sales price for shares of its similarly restricted
stock or the initial purchase price of the Collateral, whichever is greater. It is agreed and understood that sale of the Shares under investment letter is a commercially reasonable disposition. The aggregate proceeds of such sale or sales shall be
applied by the Company as follows: 
  
 (i) The
Company shall first pay itself all reasonable costs and expenses of preparing for and conducting such sale or sales, including without limitation its legal expenses and fees incurred; 
  
 (ii) The unpaid balance of the Note plus ten percent (10%) per annum simple interest on such balance for the
period between default on the Note and the date the Company consummates the sale, shall be paid to the Company; 
  
 (iii) Any further balance shall be applied. to other indebtedness, d any, then owing from Purchaser to the Company; and 
  

 D-3 

 (iv) The remaining balance, if any, after application of items (i), (ii) and (iii) above
shall be paid and set over to Purchaser. 
  

	6.	Release of Collateral. 

  
 The Company shall release the Collateral from this pledge upon the payment by the Purchaser to Company of the full amount owing under the Note as therein
provided. 
  

	7.	Non-Waiver. 

  
 The rights, powers and remedies given to the Company by this Security Agreement will be in addition to all rights, powers and remedies given the Company
by virtue of any statute or rule or law. The Company shall have the right to enforce one or more of such remedies, successively or concurrently, and any action to enforce the same shall not bar the Company from pursuing any further remedy which it
may have hereunder, under the Restricted Stock Purchase Agreement or the Note, or otherwise as provided by law, including, without limitation, the absolute right on the part of the Company to commence an action against Purchaser or his or her spouse
for a judgment in the amount of all sums due and collectible under this Security Agreement and the Note without first foreclosing on the security interest granted hereunder and selling the Collateral. Any forbearance, failure or delay by the Company
in the exercise of any right, power or remedy hereunder, or under the Note, or under the Restricted Stock Purchase Agreement shall not be deemed to be a waiver of such right, power or remedy and any single or partial exercise of any right, power or
remedy shall not preclude the further exercise thereof. Every right, power and remedy of the Company shall continue in full force and effect until the same is specifically waived by an instrument in writing executed by the Company. 
  

	8.	Binding Effect. 

  
 The rights and remedies of this Security Agreement shall inure to the benefit of, and be binding upon, the heirs, successors and assigns of the parties.
Purchaser agrees that the Company can assign its security interest hereunder and all its rights, including its rights to receive payment, under the Restricted Stock Purchase Agreement and the Note to any natural person or entity. In the event of
such assignment, Purchaser agrees that he will not assert against the assignee any claim or defense which he may have against the Company if the assignee takes such assignment for value, in good faith and without notice of such claim or defense.

  
 IN WITNESS WHEREOF, this Security Agreement has been executed
at                                 , California on the date first above written.

  

									
	 NetLogic Microsystems, Inc.
 as Secured Party
	 	 	 	 	 	Purchaser
					
	By	 	 	 	 	 	 	 	 
	 	 	
	 	 	 	 	 	 
	 Its
	 	 	 	 	 	 	 	 
	 	 	
	 	 	 	 	 	

  

 D-4 

 ATTACHMENT 1 
  
 Joint Escrow Instructions 
  
                                 , 200    

  
 Bingham McCutchen LLP 
 1900 University Ave. 
 East Palo Alto, CA 94303 
  
 Attn: Alan B. Kalin 
  
 Gentlemen: 
  
 As Escrow Agent for both NetLogic
Microsystems, Inc., a Delaware corporation (the “Company”), and the undersigned purchaser of common stock (the “Shares”) of the Company (the “Purchaser”), you are hereby
authorized and directed to hold the documents delivered to you pursuant to the terms of that certain Early Exercise Notice and Restricted Stock Purchase Agreement (the “Agreement”), dated as of the date hereof, to which a
copy of these Joint Escrow Instructions is attached, in accordance with the following instructions: 
  
 1. In the event the Company and/or any assignee of the Company (referred to collectively for convenience herein as the
“Company”) shall elect to exercise the Repurchase Option set forth in the Agreement, the Company shall give to Purchaser and you a written notice specifying the number of Shares to be purchased, the purchase price, and the
time for a closing hereunder at the principal office of the Company. Purchaser and the Company hereby irrevocably authorize and direct you to close the transaction contemplated by such notice in accordance with the terms of said notice. 

 
 2. At the closing, you are directed (a) to date the stock
assignments necessary for the transfer in question, (b) to fill in the number of Shares being transferred, and (c) to deliver same, together with the certificates evidencing the Shares to be transferred, to the Company against the simultaneous
delivery to you of the purchase price (by check or evidence of cancellation of indebtedness of Purchaser to the Company) for the number of Shares being purchased pursuant to the exercise of the Repurchase Option. 
  
 3. Purchaser irrevocably authorizes the Company to deposit
with you any certificates evidencing the Shares to be held by you hereunder and any additions and substitutions to said Shares as defined in the Agreement. Purchaser does hereby irrevocably constitute and appoint you as his attorney-in-fact and
agent for the term of this escrow to execute with respect to such securities all stock certificates, stock assignments, or other documents necessary or appropriate to make such securities negotiable and complete any transaction herein contemplated.
Subject to the provisions of this Section 3, Purchaser shall exercise all rights and privileges of a shareholder of the Company while the Shares are held by you. 
  
 4. This escrow shall terminate at such time as there are no longer any Shares subject to the Repurchase
Option. 
  

 D-5 

 5. If at the time of termination of this escrow you should have in your possession any
documents, securities, or other property belonging to Purchaser, you shall deliver all of same to Purchaser and shall be discharged of all further obligations hereunder. 
  
 6. Your duties hereunder may be altered, amended, modified or revoked only by a writing signed by all of the
parties hereto. 
  
 7. You shall be obligated only
for the performance of such duties as are specifically set forth herein and may rely and shall be protected in relying or refraining from acting on any instrument reasonably believed by you to be genuine and to have been signed or presented by the
proper party or parties. You shall not be personally liable for any act you may do or omit to do hereunder as Escrow Agent or as attorney-in-fact for Purchaser while acting in good faith and in the exercise of your own good judgment, and any act
done or omitted by you pursuant to the advice of your own attorneys shall be conclusive evidence of such good faith. 
  
 8. You are hereby expressly authorized to disregard any and all warnings given by any of the parties hereto or by any other person or
company, excepting only orders or process of courts of law, and are hereby expressly authorized to comply with and obey orders, judgments or decrees of any court. In case you obey or comply with any such order, judgment or decree of any court, you
shall not be liable to any of the parties hereto or to any other person, firm or company by reason of such compliance, notwithstanding any such order, judgment or decree being subsequently reversed, modified, annulled, set aside, vacated or found to
have been entered without jurisdiction. 
  
 9. You
shall not be liable in any respect on account of any failure to confirm the identity, authorities or rights of the parties executing or delivering or purporting to execute or deliver the Agreement or any documents or papers deposited or called for
hereunder. 
  
 10. You shall not be liable for the
outlawing of any rights under the Statute of Limitations with respect to these Joint Escrow Instructions or any documents deposited with you. 
  
 11. You shall be entitled to employ such legal counsel and other experts as you may deem necessary or proper to advise you in connection
with your obligations hereunder, may rely upon the advice of such counsel, and may pay such counsel reasonable compensation therefore 
  
 12. Your responsibilities as Escrow Agent hereunder shall terminate if you shall cease to be counsel to the Company or if you shall resign
by written notice to each party. In the event of any such termination, the Company shall appoint a successor Escrow Agent. 
  
 13. If you reasonably require other or further instructions in connection with these Joint Escrow Instructions or obligations in respect
hereto, the necessary parties hereto shall join in furnishing such instruments. 
  
 14. It is understood and agreed that should any dispute arise with respect to the delivery and/or ownership or rights of possession of the
securities held by you hereunder, you are authorized and directed to retain in your possession without liability to anyone all or any part of said securities until such dispute shall have been settled either by mutual written agreement of the
parties concerned or by a final order, decree, or judgment of a court of competent jurisdiction after the time for appeal has expired and no appeal has been perfected, but you shall be under no duty whatsoever to institute or defend any such
proceedings. 
  

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 15. Any notice required or permitted hereunder shall be given in writing and shall be
deemed effectively given upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail with postage and fees prepaid, addressed to each of the other parties entitled to such notice at the following
addresses, or at such other addresses as a party may designate by ten days’ advance written notice to each of the other parties hereto. 
  

			
	 Company:
	  	NetLogic Microsystems, Inc.
	 	  	450 National Avenue
	 	  	Mountain View, CA 94043
	 Purchaser:
	  	 
	 	  	 
	 	  	 
	 Escrow Agent:
	  	Bingham McCutchen LLP
	 	  	1900 University Ave.
	 	  	East Palo Alto, CA 94303
	 	  	Attn: Alan B. Kalin

  
 16. By
signing these Joint Escrow Instructions, you become a party hereto only for the purpose of said Joint Escrow Instructions; you do not become a party to the Agreement. 
  
 17. This instrument shall be binding upon and inure to the benefit of the parties hereto, and their
respective successors and permitted assigns. 
  

			
	NetLogic Microsystems, Inc.
		
	By:	 	 
	 	 	

	 Title:
	 	 
	 	 	

  

	
	Purchaser
	
	 
	

	 

  

	
	Escrow Agent
	
	 
	

	Alan B. Kalin, Escrow Agent

  

 D-7Exhibit 10.1

 Exhibit B 
  

SECURITIES PURCHASE AGREEMENT 
  
 SECURITIES PURCHASE AGREEMENT (“Agreement”) dated as of April 15, 2004, between STAR SCIENTIFIC, INC., a Delaware corporation (the
“Company”), ELLIOTT ASSOCIATES, L.P., a Delaware limited partnership (“EALP”) and ELLIOTT INTERNATIONAL, L.P., a Cayman Islands limited partnership (“EILP” and together with
“EALP,” the “Purchasers”). 
  
 W I T N E S S E T H: 
  
 WHEREAS, the Company desires to sell and issue to the Purchasers, and the Purchasers wish to purchase from the Company: (i) an aggregate of
1,000,000 shares (the “Common Shares”) of the Company’s common stock, par value $0.0001 per share (“Common Stock”), for a per share purchase price of $3.50 per share ( the “Per Share Purchase
Price”); 
  
 WHEREAS, this Agreement provides for
an option (the “Option”) to the Purchasers to purchase an additional 938,338 shares (the “Option Shares” and together with the Common Shares, the “Shares”) of Common Stock at a per share price equal
to the Exercise Price (as defined below) and on the terms and conditions set forth herein; and 
  
 WHEREAS, the Purchasers will have registration rights with respect to the Shares pursuant to the terms of that certain Registration Rights Agreement to be entered into between the Company, and the Purchasers
substantially in the form of Exhibit A hereto (“Registration Rights Agreement”). 
  
 NOW, THEREFORE, in consideration of the foregoing premises and the covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 
  
 ARTICLE I 
  
 Purchase
and Sale of Common Shares 
  
 Section 1.1 Issuance of
Common Shares. Upon the following terms and conditions, the Company shall issue and sell to each Purchaser, and each Purchaser shall purchase from the Company, the number of Common Shares set forth below each Purchaser’s name on the
signature page to this Agreement. 
  
 Section 1.2 Purchase
Price. The aggregate purchase price for the Common Shares and the Option to be acquired by each Purchaser (the “Purchase Price”) shall be the Purchase Price below such Purchaser’s name set forth on the signature page to
this Agreement. 
  
 Section 1.3 The Closing. 
  
 (a) Timing. Subject to the fulfillment or waiver of the conditions
set forth in Article V hereof, the purchase and sale of the Common Shares shall take place at a closing (the “Closing”), on or about the date hereof or such other date as the Purchaser and the Company may agree upon (the
“Closing Date”). 

 (b) Form of Payment and Closing. On the Closing Date, the Company shall deliver to the Purchasers
all of the Common Shares purchased hereunder, issued in the name of the Purchasers in the amount set forth on the signature page. On the Closing Date the Purchasers shall deliver the Purchase Price by wire transfer of immediately available funds to
an account designated in writing by the Company. In addition, each party shall deliver all documents, instruments and writings required to be delivered by such party pursuant to this Agreement at or prior to the Closing. Subject to the payment of
the Purchase Price in accordance with this Agreement, the Common Shares will be fully paid for by the Purchasers as of the Closing Date. 
  
 Section 1.4 Option 
  
 (a) Each Purchaser shall have the option to purchase up to a number of Option Shares equal to the amount set forth on the signature page (provided that
such number shall be appropriately adjusted for any stock splits, reverse stock splits, stock dividends, recapitalization or similar event), at a price per share equal to $3.73 (the “Exercise Price”) (provided that such price shall
be appropriately adjusted for any stock splits, reverse splits, stock dividends, recapitalization or similar events). 
  
 (b) This option (the “Option”) may be exercised in whole or in part, at any time and from time to time commencing on the effective date
of Registration Statement covering the Common Shares until 30 days after such date (the “Exercise Period”); provided, however, that each such exercise must be for an amount equal to at least $500,000. Upon delivery of a
notice by a Purchaser exercising its Option hereunder (“Option Notice”), the Company shall be obligated to sell, issue and delivery to the Purchaser, and the Purchaser shall be obligated to purchase, the Option Shares, specified in
the option exercise notice, subject to the terms of this Section 1.4. Closing of any such purchase and sale (each an “Option Closing”) shall take place in the same manner as the Closing. At the Option Closing, the Company shall
deliver certificates evidencing the Option Shares being purchased against the payment of the purchase price therefor, which Option Closing shall occur within five (5) Trading Days of delivery of the Option Notice by Purchaser. As provided therein,
the Registration Rights Agreement shall apply to the Option Shares. 
  
 (i) 4.99% Limitation. Notwithstanding anything to the contrary contained herein, the number of shares of Common Stock that may be acquired by each Purchaser upon exercise of its Option pursuant to the terms hereof shall not exceed a
number that, when added to the total number of shares of Common Stock deemed beneficially owned by such Purchaser (other than by virtue of the ownership of securities or rights to acquire securities (including the Option) that have limitations on
the Holder’s right to convert, exercise or purchase similar to the limitation set forth herein), as determined pursuant to the rules and regulations promulgated under Section 13(d) of the Exchange Act, including all shares of Common Stock
deemed beneficially owned at such time (other than by virtue of the ownership of securities or rights to acquire securities that have limitations on the right to convert, exercise or purchase similar to the limitation set forth herein) by persons
that would be aggregated for purposes of determining whether a group under Section 13(d) of the Exchange Act, exists, would exceed 4.99% of the total issued and outstanding shares of the Common Stock (the “Restricted Ownership
Percentage”). Each Purchaser shall have the right (w) at any time and from time to time to reduce its Restricted Ownership Percentage immediately upon notice to the Company 
  

 2 

 and (x) (subject to waiver) at any time and from time to time, to increase its Restricted Ownership Percentage
immediately in the event of the announcement as pending or planned, of a Change in Control Transaction (as defined in the Company’s 8% Senior Convertible Debentures (the “Debentures”)). 
  
 (ii) Principal Market Regulation. The Company shall not be obligated
to issue any shares of Common Stock upon exercise of the Option if the issuance of such shares of Common Stock would exceed that number of shares of Common Stock which the Company may issue (A) as Common Shares pursuant hereto, (B) upon exercise of
the Option, (C) upon conversion of the Company’s 8% Senior Convertible Debentures Due March 25, 2006 issued to Manchester Securities Corp. (the “Debentures”), (D) upon exercises of the Warrants (as defined in the Debentures),
(E) upon exercises of the Common Stock Purchase Warrants dated March 25, 2004 issued to Financial West Group, Robert Schacter and Thomas Griesel (the issuances upon such exercises, the “Reedland Issuances”) and (F) in connection
with any other sale, issuance or potential issuance of Common Stock by the Company that may be considered by the Principal Market (as defined below) to be the same “transaction,” for purposes of NASD Rule 4350(i)(1)(D), as the issuance of
Common Stock upon exercise of the Option (such other sales, issuances or potential issuances, the “Other Related Offerings”), each without breaching the Company’s obligations under the rules or regulations of the Principal
Market (the “Principal Market Cap”), which amount shall be calculated for all the Option as the amount of the Principal Market Cap less the aggregate number of shares of Common Stock issued or to be issued as contemplated by clauses
(A) and (C) through (F) above, except that such limitation shall not apply in the event that the Company (x) obtains the Shareholder Approval or (y) obtains a written opinion from outside counsel to the Company that such approval is not required,
which opinion shall be reasonably satisfactory to the Purchaser. For purposes of the preceding sentence, the term “Shareholder Approval” shall mean the approval of the stockholders of the Company, in accordance with NASD Rule
4350(i) (or the equivalent thereof under the rules of the Principal Market), of the transactions described in the Transaction Documents (for purposes of this sentence only, as such term is used in the Debentures) the Reedland Issuances, the
transactions described in this Agreement and the Other Related Offerings. Until such approval or written opinion is obtained, the Purchaser shall not be issued, upon exercise of the Option, shares of Common Stock in violation of this Section
1.4(b)(ii).  
  
 (iii) Not Transferable. The Option
may not be transferred by any of the Purchasers. 
  
 (iv) No
Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of the Option. As to any fraction of a share which the Purchasers would otherwise be entitled to purchase upon such
exercise, the Company shall pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Exercise Price. 
  
 (v) Charges, Taxes and Expenses. Issuances of certificates for the Option Shares shall be made without charge to the Purchasers for any issue tax
or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Purchasers. 
  

 3 

 (vi) No Rights as Shareholder until Exercise. The Option does not entitle the Purchasers to any
voting rights or other rights as a shareholder of the Company prior to the exercise hereof. Upon surrender of the Option and the payment of the purchase price therefor, the Option Shares so purchased shall be and be deemed to be issued to the
Purchasers as the record owner of such shares as of the close of business on the later of the date of such surrender or payment and this Option shall no longer be issuable with respect to such Option Shares. 
  
 (vii) Blackout or Suspension. In the event that the use of the
Registration Statement (as defined in the Registration Rights Agreement) or the Prospectus contained therein is suspended during the Exercise Period, the Exercise Period shall be extended by the length of any such suspension. 
  
 (viii) Buy-In. In addition to any other rights available to a
Purchaser, if the Company improperly fails to deliver to the Purchaser a certificate or certificates representing the Option Shares pursuant to an exercise by the fifth Trading Day after the date of exercise the Option, and if after such fifth
Trading Day the Purchaser is required by its broker to purchase (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the Purchaser of the Option Shares which the Purchaser anticipated receiving
upon such exercise (a “Buy-In”), then the Company shall (1) pay in cash to the Purchaser the amount by which (x) the Purchaser’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so
purchased exceeds (y) the amount obtained by multiplying (A) the number of Option Shares that the Company was required to deliver to the Purchaser in connection with the exercise at issue by (B) the price at which the sell order giving rise to such
purchase obligation was executed, and (2) at the option of the Purchaser, either reinstate the portion of the Option and equivalent number of Option Shares for which such exercise was not honored (including the Purchaser’s right to exercise the
Option) or deliver to the Purchaser the number of shares of Common Stock that would have been issued had the Company timely complied with its exercise and delivery obligations hereunder. For example, if the Purchaser purchases Common Stock having a
total purchase price of $501,000 to cover a Buy-In with respect to an attempted exercise of shares of Common Stock with an aggregate sale price giving rise to such purchase obligation of $500,000, under clause (1) of the immediately preceding
sentence the Company shall be required to pay the Purchaser $1,000. The Purchaser shall provide the Company written notice indicating the amounts payable to the Purchaser in respect of the Buy-In, together with applicable confirmations and other
evidence reasonably requested by the Company. Nothing herein shall limit a Purchaser’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or
injunctive relief with respect to the Company’s failure to timely deliver certificates representing shares of Common Stock upon exercise of the Option as required pursuant to the terms hereof. 
  

 4 

 ARTICLE II 
  

Representations and Warranties 
  
 Section 2.1 Representations and Warranties of the Company. The Company hereby makes the following representations and warranties to the Purchaser
as of the date hereof and the Closing Date: 
  
 (a)
Organization and Qualification; Material Adverse Effect. The Company is a corporation duly incorporated and existing in good standing under the laws of the State of Delaware and has the requisite corporate power to own its properties and to
carry on its business as now being conducted. The Company does not have any subsidiaries (defined as an entity which the Company has at least a 50% ownership interest in and control) other than the subsidiaries listed on Schedule 2.1(a)
attached hereto (“Subsidiaries”). Except where specifically indicated to the contrary, all references in this Agreement to subsidiaries shall be deemed to refer to all direct and indirect subsidiaries of the Company. Each of the
Company and its Subsidiaries is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary other than
those in which the failure so to qualify would not reasonably be expected to have a Material Adverse Effect. “Material Adverse Effect” means any adverse effect on the business, operations, properties, or financial condition of the
Company and its Subsidiaries, and which is (either alone or together with all other adverse effects) material to the Company and its Subsidiaries, if any, taken as a whole. 
  
 (b) Authorization; Enforcement. (i) The Company has all requisite corporate power and authority to enter into and
perform this Agreement, and the Registration Rights Agreement (the “Transaction Documents”) and to issue the Shares in accordance with the terms hereof, (ii) the execution and delivery of the Transaction Documents by the Company and the
consummation by it of the transactions contemplated thereby, including the issuance of the Shares, have been duly authorized by all necessary corporate action, and no further consent or authorization of the Company or its Board of Directors (or any
committee or subcommittee thereof) or stockholders is required, (iii) the Transaction Documents have been, or at the Closing will be, duly executed and delivered by the Company, (iv) assuming they have been duly executed and delivered by the
Purchasers, the Transaction Documents constitute, or at the Closing will constitute, valid and binding obligations of the Company enforceable against the Company in accordance with their terms, except (A) as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally the enforcement of creditors’ rights and remedies or by other equitable principles of general application, and (B) to
the extent the indemnification provisions contained in this Agreement and the Registration Rights Agreement may be limited by applicable federal or state securities laws and (v) the Shares have been duly authorized and, upon issuance thereof and
payment therefor in accordance with the terms of this Agreement, the Shares will be validly issued and free and clear of any and all liens, claims and encumbrances for claims of the Company. 
  
 (c) Capitalization. Except as set forth on Schedule 2.1(c), as of the
date hereof, the authorized capital stock of the Company consists of (i) 100,000,000 shares of Common Stock, of which as of the date hereof, 59,893,091 shares are issued and outstanding, 8,629,062 shares are issuable and reserved for issuance
pursuant to the Company’s stock option plans or securities exercisable or exchangeable for, or convertible into, shares of Common Stock, and (ii) 100,000 shares of preferred stock, of which as of the date hereof no shares are issued. All of
such outstanding shares have been, or upon issuance will be, validly issued, fully paid and nonassessable. As of the date hereof, except as described in this Section 2.1(c) or disclosed in Schedule 2.1(c), (i) no shares of the Company’s
capital stock are subject to preemptive rights or any other similar rights or any liens or encumbrances suffered or permitted by the Company, (ii) there are no outstanding options, warrants, scrip, rights to subscribe to, calls or commitments of

  

 5 

 any character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of the
Company or any of its Subsidiaries, or contracts, commitments, understandings or arrangements by which the Company or any of its Subsidiaries is or may become bound to issue additional shares of capital stock of the Company or any of its
subsidiaries or options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of the Company or any of its Subsidiaries, (iii)
there are no agreements or arrangements under which the Company or any of its Subsidiaries is obligated to register the sale of any of their securities under the Securities Act of 1933, as amended (“Securities Act” or “1933
Act”) (except the Registration Rights Agreement and except for the Registration Rights Agreement, dated as of March 25, 2004 between the Company and Manchester Securities Corp.), (iv) there are no outstanding securities of the Company
(other than the Debentures) or any of its Subsidiaries which contain any redemption or similar provisions, and there are no contracts, commitments, understandings or arrangements by which the Company or any of its Subsidiaries is or may become bound
to redeem a security of the Company or any of its Subsidiaries, (v) there are no securities or instruments containing anti-dilution or similar provisions that will be triggered by the issuance or exercise of the Shares or the Option as described in
this Agreement and (vi) the Company does not have any stock appreciation rights or “phantom stock” plans or agreements or any similar plan or agreement. The Company disclosed in its SEC Documents or has furnished to the Purchasers true and
correct copies of the Company’s Certificate of Incorporation, as amended and as in effect on the date hereof (the “Certificate of Incorporation”), and the Company’s By-laws, as in effect on the date hereof (the
“By-laws”), and the terms of all securities convertible or exchangeable into or exercisable for Common Stock and the material rights of the holders thereof in respect thereto. 
  
 (d) Issuance of Shares. Upon issuance in accordance with this
Agreement (including the payment therefor in accordance with the terms of this Agreement), the Shares will be duly authorized, validly issued, fully paid and nonassessable and free from all taxes (other than transfer taxes where the Shares have been
transferred and other than any taxes due because of actions by a Purchaser), liens and charges with respect to the issue thereof and, subject to applicable securities laws (i) the Shares will be entitled to be traded on the Principal Market (as
defined below) or the New York Stock Exchange, the American Stock Exchange or the Nasdaq Small Cap Market (each an “Approved Market”), and (ii) the holders of such Shares shall be entitled to all rights and preferences accorded to a
holder of Common Stock. As of the date of this Agreement, the outstanding shares of Common Stock are currently listed on the Principal Market. 
  
 (e) No Conflicts. Except as disclosed in Schedule 2.1(e), 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 and issuance of the Shares will not (i) result in a violation of the Certificate of Incorporation, any certificate of designations, preferences and
rights of any outstanding series of preferred stock of the Company or the By-laws; (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 agreement, indenture or instrument to which the Company or any of its Subsidiaries is a party, except as would not reasonably be expected to have a Material Adverse Effect or (iii) result
in a violation of any law, rule, regulation, order, judgment or decree (including United States federal and state securities laws 
  

 6 

 and regulations and the rules and regulations of the Nasdaq National Market (“Principal Market”) or
other principal securities exchange or trading market on which the Common Stock is traded or listed) applicable to the Company or any of its Subsidiaries or by which any property or asset of the Company or any of its Subsidiaries is bound or
affected. Except as disclosed in Schedule 2.1(e), neither the Company nor its Subsidiaries is in violation of any term of, or in default under, (x) its certificate of incorporation, any certificate of designations, preferences and rights of
any outstanding series of preferred stock or By-laws or their organizational charter or by-laws, respectively, (y) any material contract, agreement, mortgage, indebtedness, indenture, instrument, or (z) any judgment, decree or order or any statute,
rule or regulation applicable to the Company or its Subsidiaries, the non-compliance with which (in the case of (x), (y) or (z)) would reasonably be expected to have a Material Adverse Effect. Except as specifically contemplated by this Agreement
and as required under the 1933 Act, the Company is not required to obtain any consent, authorization or order of, or make any filing or registration with, any court, governmental agency or any regulatory or self-regulatory agency in order for it to
execute, deliver or perform any of its obligations under, or contemplated by, the Transaction Documents or the issuance of the Shares, in accordance with the terms hereof or thereof. Except as disclosed in Schedule 2.1(e), all consents,
authorizations, orders, filings and registrations which the Company is required to obtain pursuant to the preceding sentence have been obtained or effected on or prior to the date hereof. The Company complies with and is not in violation of the
listing requirements of the Principal Market. 
  
 (f) SEC
Documents; Financial Statements. Since January 1, 2003, the Company as well as its majority owned Subsidiaries have filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC pursuant to the
reporting requirements of the Securities Exchange Act of 1934, as amended (the “1934 Act”) (all of the foregoing filed prior to the date hereof and all exhibits and schedules thereto and documents incorporated by reference therein
being hereinafter referred to as the “SEC Documents”). The Company has delivered to the Purchaser or its representatives true and complete copies of any SEC Documents that were not filed electronically via EDGAR. As of their
respective dates, the SEC Documents complied in all material respects with the requirements of the 1934 Act and the rules and regulations of the SEC promulgated thereunder applicable to the SEC Documents, and none of the SEC Documents, at the time
they were filed with the SEC, 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. As of their respective dates, the financial statements of the Company included in the SEC Documents complied as to form in all material respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto. Such financial statements have been prepared in accordance with generally accepted accounting principles, consistently applied, during the periods involved (except (i) as may be otherwise indicated in
such financial statements or the notes thereto, or (ii) in the case of unaudited interim statements, to the extent they may exclude footnotes or may be condensed or summary statements) and fairly present in all material respects the financial
position of the Company as of the dates thereof and the results of its operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). 
  
 (g) Absence of Certain Changes. Except as disclosed in Schedule
2.1(g), the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 (the “Company’s 10-K”), or any other SEC Document filed since March 31, 2004 there has been no 
  

 7 

 adverse change or adverse development in the business, properties, assets, operations, financial condition, prospects,
liabilities or results of operations of the Company or its Subsidiaries which has had or, to the knowledge of the Company or its Subsidiaries, is reasonably likely to have a Material Adverse Effect. The Company has not taken any steps, and does not
currently expect to take any steps, to seek protection pursuant to any bankruptcy law nor does the Company or its Subsidiaries have any knowledge or reason to believe that its creditors intend to initiate involuntary bankruptcy proceedings.

  
 (h) Absence of Litigation. To the Company’s
knowledge, there are no material pending or threatened legal proceedings, other than routine litigation incidential to the Company’s business, to which the Company or any of its Subsidiaries is a party or of which any of their property is the
subject, (i) except as set forth in SEC Documents which were filed at least 10 days before the date hereof, (ii) except as set forth in the Company’s 10-K, and (iii) except which individually and in the aggregate, respectively, would not be
reasonably likely to result in liability to the Company in excess of $50,000 and $100,000, respectively. 
  
 (i) Acknowledgment Regarding Purchaser’s Purchase of Shares. The Company acknowledges and agrees that each Purchaser is acting solely in the
capacity of arm’s length purchaser with respect to the Transaction Documents and the transactions contemplated hereby and thereby. The Company further acknowledges that each Purchaser is not acting as a financial advisor or fiduciary of the
Company (or in any similar capacity) with respect to the Transaction Documents and the transactions contemplated hereby and thereby. The Company further represents to each Purchaser that the Company’s decision to enter into the Transaction
Documents has been based solely on the independent evaluation by the Company and its representatives. 
  
 (j) No Integrated Offering. Except as set forth in Schedule 2.1(j), neither the Company, nor any of its affiliates, nor any person acting
on its or their behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under circumstances that would cause this offering of the Option and Shares to the Purchaser to be integrated
with prior offerings by the Company for purposes of the 1933 Act or any applicable shareholder approval provisions, including, without limitation, under the rules and regulations of the Principal Market or other Approved Market (as defined below),
nor will the Company or any of its Subsidiaries take any action or steps that would cause the offering of the Option and Shares to be integrated with other offerings. 
  
 (k) Employee Relations. Neither the Company nor any of its Subsidiaries is involved in any labor dispute nor, to the
knowledge of the Company or any of its Subsidiaries, is any such dispute threatened, the effect of which would be reasonably likely to result in a Material Adverse Effect. Neither the Company nor any of its Subsidiaries is a party to a collective
bargaining agreement. No executive officer (as defined in Rule 501(f) of the 1933 Act) whose departure would be adverse to the Company has notified the Company in writing that such officer intends to leave the Company or otherwise terminate such
officer’s employment with the Company. 
  
 (l)
Intellectual Property Rights. The Company and its Subsidiaries own or possess adequate rights or licenses to use all trademarks, trade names, service marks, service mark registrations, service names, patents, patent rights, copyrights,
inventions, licenses, 
  

 8 

 approvals, governmental authorizations, trade secrets and rights necessary to conduct their respective businesses as now
conducted, except as would not reasonably expect to have a Material Adverse Effect. Except as set forth on Schedule 2.1(l) or in the Company’s 10-K, none of the Company’s trademarks, trade names, service marks, service mark
registrations, service names, patents, patent rights, copyrights, inventions, licenses, approvals, government authorizations, trade secrets or other intellectual property rights have expired or terminated, or are expected to expire or terminate
within two (2) years from the date of this Agreement, except as would not be reasonably expected to have a Material Adverse Effect. The Company and its Subsidiaries do not have any knowledge of any infringement by the Company or its Subsidiaries of
trademark, trade name rights, patents, patent rights, copyrights, inventions, licenses, service names, service marks, service mark registrations, trade secret or other similar rights of others, or of any such development of similar or identical
trade secrets or technical information by others. 
  
 (m)
Environmental Laws. The Company and its Subsidiaries (i) are in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous
or toxic substances or wastes, pollutants or contaminants (“Environmental Laws”), (ii) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective
businesses and (iii) are in compliance with all terms and conditions of any such permit, license or approval where such noncompliance or failure to receive permits, licenses or approvals referred to in clauses (i), (ii) or (iii) above would
reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. 
  
 (n) Title. The Company and its Subsidiaries have good and marketable title in fee simple to all real property and good and marketable title to all personal property owned by them which is material to the
business of the Company and its Subsidiaries, in the ordinary course of business as currently conducted, in each case free and clear of all liens, encumbrances and defects except such as are described in Schedule 2.1(n) or such as do not
materially interfere with the use of such property by the Company or any of its Subsidiaries in the ordinary course of business as currently conducted. Any material real property and facilities held under lease by the Company or any of its
Subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as do not materially interfere with the use made of such property and buildings by the Company and its Subsidiaries in the ordinary course of business
as currently conducted. 
  
 (o) Regulatory Permits. The
Company and its Subsidiaries possess all material certificates, authorizations and permits issued by the appropriate federal, state or foreign regulatory authorities, necessary to conduct their respective businesses, and neither the Company nor any
such Subsidiary has received any written notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit except as would reasonably be expected to have a Material Adverse Effect. 
  
 (p) Internal Accounting Controls. The Company and each of 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 generally accepted accounting principles and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management’s general

  

 9 

 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. 
  
 (q) Foreign Corrupt Practices Act. Except as would not reasonably be expected to have a Material Adverse Effect, neither the Company, nor any director, officer, agent, employee or other person acting on behalf
of the Company or any Subsidiary has, in the course of acting for, or on behalf of, the Company, directly or indirectly used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expenses relating to political
activity; directly or indirectly made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds; violated or is in violation of any provision of the U.S. Foreign Corrupt Practices Act of
1977, as amended, or any similar treaties of the United States; or directly or indirectly made any bribe, rebate, payoff, influence payment, kickback or other unlawful payment to any foreign or domestic government or party official or employee.

  
 (r) Tax Status. Except as set forth in the
Company’s 10-K, the Company and each of its Subsidiaries has made or filed all United States federal and state income and all other tax returns, reports and declarations required by any jurisdiction to which it is subject and (i) has paid all
taxes and other governmental assessments and charges, shown or determined to be due on such returns, reports and declarations, except those being contested in good faith and (ii) has set aside on its books provisions reasonably adequate for the
payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid taxes claimed to be due by the taxing authority of any jurisdiction, and the Company is not aware of any basis for
any such claim. 
  
 (s) Certain Transactions. Except as
set forth on Schedule 2.1(s), the Company 10-K, or the SEC Documents filed on EDGAR at least thirty (30) Trading Days prior to the date hereof and except for arm’s length transactions pursuant to which the Company makes payments in the
ordinary course of business upon terms no less favorable than the Company could obtain from third parties and other than the grant of stock options disclosed on Schedule 2.1(c) or the Company’s 10-K, none of the officers, directors or
employees of the Company is presently a party to any transaction with the Company or any of its Subsidiaries (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the
furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any corporation, partnership, trust
or other entity in which any officer, director or any such employee has a substantial interest or is an officer, director, trustee or partner. 
  
 (t) Disclosure. The Company confirms that, neither the Company nor any other Person acting on its behalf has provided any of the Purchasers or
their agents or counsel with any information that constitutes or might constitute material, non-public information other than information which has subsequently been publicly disclosed. The Company understands and confirms that the Purchasers will
rely on the foregoing representations and covenants in effecting transactions in securities of the Company. 
  

 10 

 (u) Application of Takeover Protections. There are no anti-takeover provisions contained in the
Company’s Certificate of Incorporation or otherwise which will or would reasonably be expected to be triggered as a result of the transactions contemplated by this Agreement, including, without limitation, the Company’s issuance of the
Common Shares and the Purchaser’s ownership of the Common Shares. 
  
 (v) Rights Plan. Neither the Company nor any of its Subsidiaries has adopted a shareholder rights plan or similar arrangement relating to accumulations of beneficial ownership of Common Stock or a change in control of the Company.

  
 (w) Obligations. Except to the extent (if any)
specifically set forth in the Transaction Documents, the Company’s obligations thereunder are not subject to any right of set off, counterclaim, delay or reduction. 
  
 (x) Form S-3. The Company is eligible to file the Registration Statement (as defined in the Registration Rights
Agreement) for secondary offerings on Form S-3 (as in effect on the date of this Agreement) under the 1933 Act and rules promulgated thereunder. 
  
 (y) No MFN or Variable Rate Transactions. The Company has no outstanding securities or other instruments issued pursuant to any MFN or Variable
Rate Transaction. 
  
 “MFN Transaction” shall
mean a transaction in which the Company issues or sells any securities in a capital raising transaction or series of related transactions (the “MFN Offering”) which grants to the investor (the “MFN Investor”) the
right to receive additional securities based upon future capital raising transactions of the Company on terms more favorable than those granted to the MFN Investor in the MFN Offering. 
  
 “Variable Rate Transaction” shall mean a transaction in which the Company issues or sells, on or
subsequent to the Closing Date (a) any debt or equity securities that are convertible into, exchangeable or exercisable for, or include the right to receive additional shares of Common Stock either (x) at a conversion, exercise or exchange rate or
other price that is based upon and/or varies with the trading prices of or quotations for the Common Stock at any time after the initial issuance of such debt or equity securities, or (y) with a fixed conversion, exercise or exchange price that is
subject to being reset at some future date after the initial issuance of such debt or equity security or upon the occurrence of specified or contingent events directly or indirectly related to the business of the Company or the market for the Common
Stock (but excluding standard stock split anti-dilution provisions), or (b) any securities of the Company pursuant to an “equity line” structure which provides for the sale, from time to time, of securities of the Company which are
registered for resale pursuant to the 1933 Act. 
  
 (z)
Indebtedness. 
  
 Except as disclosed in Schedule
2.1(z) or in the Company’s 10-K, neither the Company nor any of its Subsidiaries has any outstanding Indebtedness (as defined below). For purposes of this Agreement: (i) “Indebtedness” of any Person means, without duplication (A)
all indebtedness for borrowed money, (B) all obligations issued, undertaken or assumed as 
  

 11 

 the deferred purchase price of property or services, (C) all reimbursement or payment obligations with respect to letters
of credit, surety bonds and other similar instruments, (D) 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, (E) 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), (F) all monetary obligations under any leasing or similar arrangement which, in accordance with
GAAP, is classified as a capital lease, (G) all indebtedness referred to in clauses (A) through (F) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any lien 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 (H) all Contingent Obligations
in respect of indebtedness or obligations of others of the kinds referred to in clauses (A) through (G) above; and (ii) “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. 
  
 (aa) Sarbanes-Oxley Act. The Company is in compliance with any and
all applicable requirements of the Sarbanes-Oxley Act of 2002 and any and all applicable rules and regulations promulgated by the SEC thereunder, except where such noncompliance would not have, individually or in the aggregate, a Material Adverse
Effect. 
  
 (bb) Investment Company Status. The Company is
not, and immediately after receipt of payment for the Debentures issued under this Agreement will not be, and “investment company” or an entity “controlled” by an “investment company” within the
meaning of the Investment Company Act of 1940, as amended (the “Investment Company Act”), and shall conduct its business in a manner so that it will not become subject to the Investment Company Act. 
  
 (cc) Listing and Maintenance Requirements. Since January 1, 2003, the
Company has been in compliance with all listing and maintenance requirements for the Principal Market except, in each case, as could not reasonably be expected to result in a Material Adverse Effect. Since January 1, 2003, the Company has not
received any communication, written or oral, from the SEC or the Principal Market regarding the suspension or delisting of the Common Stock from the Principal Market. 
  
 Section 2.2 Representations and Warranties of the Purchaser. Each Purchaser hereby makes the following
representations and warranties to the Company as of the date hereof and the Closing Date: 
  
 (a) Accredited Investor Status; Sophisticated Purchaser. The Purchaser is an “accredited investor” as that term is defined in Rule 501(a) of Regulation D 
  

 12 

 under the 1933 Act and is able to bear the risk of its investment in the Option and Shares. The Purchaser has such
knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the purchase of the Option and Shares. 
  
 (b) Information. The Purchaser and its advisors, if any, have been furnished with all materials relating to the business, finances and operations
of the Company which have been requested and materials relating to the offer and sale of the Option and Shares which have been requested by the Purchaser. The Purchaser and its advisors, if any, have been afforded the opportunity to ask questions of
the Company. Neither such inquiries nor any other due diligence investigations conducted by the Purchaser or its advisors, if any, or its representatives shall modify, amend or affect the Purchaser’s right to rely on the Company’s
representations and warranties contained in Section 2.1 above. The Purchaser understands that its purchase of the Option and Shares involves a high degree of risk. The Purchaser has sought such accounting, legal and tax advice as it has considered
necessary to make an informed investment decision with respect to its acquisition of the Option and Shares. 
  
 (c) No Governmental Review. The Purchaser understands that no United States federal or state agency or any other government or governmental agency
has passed on or made any recommendation or endorsement of the Option and Shares or the fairness or suitability of the investment in the Option and Shares nor have such authorities passed upon or endorsed the merits thereof. 
  
 (d) Legends. The Company shall issue the Shares to the Purchaser
without any legend except as described in Article VI below. The Purchaser covenants that, in connection with any transfer of Shares by the Purchaser pursuant to the registration statement contemplated by the Registration Rights Agreement, it will
comply with the applicable prospectus delivery requirements of the 1933 Act, provided that copies of a current prospectus relating to such effective registration statement are or have been supplied to the Purchaser. 
  
 (e) Authorization; Enforcement. Each of this Agreement and the
Registration Rights Agreement have been duly and validly authorized, executed and delivered on behalf of the Purchaser and is a valid and binding agreement of the Purchaser enforceable against the Purchaser in accordance with their terms, subject as
to enforceability to general principles of equity and to applicable bankruptcy, insolvency, reorganization, moratorium, liquidation and other similar laws relating to, or affecting generally, the enforcement of applicable creditors’ rights and
remedies. The Purchaser has the requisite corporate power and authority to enter into and perform its obligations under this Agreement, the Security Agreement and the Registration Rights Agreement and each other agreement entered into by the parties
hereto in connection with the transactions contemplated by this Agreement. 
  
 (f) No Conflicts. The execution, delivery and performance of this Agreement and the Registration Rights Agreement by the Purchaser and the consummation by the Purchaser of the transactions contemplated hereby
and thereby will not (i) result in a violation of the certificate of incorporation, by-laws or other documents of organization of the Purchaser, (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 others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Purchaser is bound, or (iii) result in a violation of any law, rule, regulation
or decree applicable to the Purchaser. 
  

 13 

 (g) Purchase Representation. The Purchaser is purchasing the Option and Common Shares for its own
account and not with a view to distribution in violation of any securities laws. The Purchaser has been advised and understands that neither the Shares nor the Option have been registered under the 1933 Act or under the “blue sky” laws of
any jurisdiction and may be resold only if registered pursuant to the provisions of the 1933 Act or if an exemption from registration is available, except under circumstances where neither such registration nor such an exemption is required by law.
The Purchaser has been advised and understands that the Company, in issuing the Shares, is relying upon, among other things, the representations and warranties of the Purchaser contained in this Section 2.2 in concluding that such issuance is a
“private offering” and is exempt from the registration provisions of the 1933 Act. 
  
 (h) Rule 144. The Purchaser understands that the Shares must be held indefinitely unless and until the Shares are registered under the 1933 Act or an exemption from registration is available. The Purchaser has
been advised or is aware of the provisions of Rule 144 promulgated under the 1933 Act. 
  
 (i) Brokers. The Purchaser has taken no action which would give rise to any claim by any person for brokerage commissions, finder’s fees or similar payments by the Company or the Purchaser relating to this
Agreement or the transactions contemplated hereby. 
  
 (j)
Reliance by the Company. The Purchaser understands that the Option and Shares are being offered and sold in reliance on a transactional exemption from the registration requirements of Federal and state securities laws and that the Company is
relying upon the truth and accuracy of the representations, warranties, agreements, acknowledgments and understandings of the Purchaser set forth herein in order to determine the applicability of such exemptions and the suitability of the Purchaser
to acquire the Option and the Shares. 
  
 (k) Except as set forth
in Section 2.1 of this Agreement, the Purchaser is not relying on any information provided by, or representations or warranties made by, the Company or its Subsidiaries or their respective directors, officers, employees or representatives.

  
 (l) Residency. Each Purchaser is a resident of the
jurisdiction set forth on the signature page hereto. 
  
 ARTICLE
III 
  
 Covenants 
  
 Section 3.1 Securities Compliance. The Company shall notify the SEC
and the Principal Market, in accordance with their requirements, of the transactions contemplated by this Agreement, and the Registration Rights 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 Shares. 
  
 Section 3.2 [Intentionally Omitted] 
  

 14 

 Section 3.3 Reservation of Shares. The Company shall at all times reserve and keep available out
of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the exercise of the Option, such number of its shares of Common Stock as shall from time to time be sufficient to effect the exercise of the Option in full,
and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the exercise of the Option, the Company will take such corporate action as may be necessary to expeditiously increase its authorized
but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose, including without limitation engaging in best efforts to obtain the requisite shareholder approval. 
  
 Section 3.4 Best Efforts. The parties shall use their best efforts to
satisfy timely each of the conditions described in Article V of this Agreement. 
  
 Section 3.5 Blue Sky Laws. The Company shall take such actions as it reasonably determines are required to comply with all “blue sky” laws applicable to the sale of the Option and Shares hereunder;
provided, however, that the Company shall not be required in connection therewith to register or qualify as a foreign corporation in any jurisdiction where it is not so qualified or to take any action that would subject it to service of process in
suits or taxation, in each case, in any jurisdiction where it is no so subject. 
  
 Section 3.6 Publicity. The Company shall, immediately upon the Closing: (i) issue a press release with respect to such transactions, in the form of the press release attached as Exhibit B hereto
and (ii) file a Report on 8-K with the SEC, which shall describe the transactions contemplated herein and which shall include the Transaction Documents as exhibits. 
  
 Section 3.7 Shareholder Rights Plan. None of the acquisitions of the Shares nor the deemed beneficial ownership of
shares of Common Stock prior to, or the acquisition of such shares pursuant to, this Agreement will in any event under any circumstances trigger the “poison pill” provisions of any stockholders’ rights or similar agreements, or a
substantially similar occurrence under any successor or similar plan. 
  
 Section 3.8 Non-Public Information. The Company covenants and agrees that neither it nor any other Person acting on its behalf will provide any Purchaser or its agents or counsel with any information that the Company believes
constitutes material non-public information, unless prior thereto such Purchaser shall have executed a written agreement regarding the confidentiality and use of such information. The Company understands and confirms that each Purchaser shall be
relying on the foregoing representations in effecting transactions in securities of the Company. 
  
 Section 3.9 Purchaser Undertaking in Connection with Legend Removal. Each Purchaser covenants that it shall not sell, transfer, assign, hypothecate
or pledge in any way any Shares issued without a Securities Legend in accordance with Article V except for sales (A) in accordance with the terms of the Plan of Distribution section of the prospectus contained in the Registration Statement and in
compliance with prospectus delivery requirements or (B) in compliance with the requirements of Rule 144 under the 1933 Act. Each Purchaser further undertakes to indemnify the Company against any loss, cost or expense, including reasonable legal
fees, incurred as a result of such legend removal on such Purchaser’s behalf. 
  

 15 

 ARTICLE IV 
  
 Conditions to Closings 
  

Section 4.1 Conditions Precedent to the Obligation of the Company to Sell. The obligation hereunder of the Company to issue and/or sell the
Common Shares at the Closing is subject to the satisfaction, at or before the Closing, of each of the applicable conditions set forth below. These conditions are for the Company’s sole benefit and may be waived by the Company at any time in its
sole discretion. 
  
 (a) Accuracy of the Purchaser’s
Representations and Warranties. The representations and warranties of the Purchasers will be true and correct in all material respects as of the date when made and as of the Closing Date, as though made at that time. 
  
 (b) Performance by the Purchasers. Each Purchaser shall have
performed all agreements and satisfied all conditions required to be performed or satisfied by the Purchaser at or prior to the Closing, including payment of the Purchase Price to the Company as provided herein. 
  
 (c) No Injunction. No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction which prohibits the consummation of any of the transactions contemplated by the Transaction
Documents. 
  
 (d) Amendment to Debentures and Warrants.
The amendments to the 8% Senior Convertible Debentures Due March 25, 2006 and Warrants purchased by Manchester Securities Corp pursuant to a Securities Purchase Agreement dated as of March 25, 2004 shall be amended in the form of the amendments
attached hereto as Exhibit D.  
  
 Section 4.2
Conditions Precedent to the Obligation of the Purchasers to Purchase. The obligation hereunder of each Purchaser, to acquire and pay for the Common Shares at the Closing is subject to the satisfaction, at or before the Closing, of each of the
applicable conditions set forth below. These conditions are for such Purchaser’s benefit and may be waived by the Purchaser at any time in its sole discretion. 
  
 (a) Accuracy of the Company’s Representations and Warranties. The representations and warranties of the Company
shall be true and correct in all material respects as of the date when made and as of the Closing Date as though made at that time (except for representations and warranties as of an earlier date, which shall be true and correct in all material
respects as of such date). 
  
 (b) Performance by the
Company. The Company shall have performed all agreements and satisfied all conditions required to be performed or satisfied by the Company at or prior to the Closing, including, without limitation, delivery of the Common Shares to the Purchaser.

  
 (c) Nasdaq Trading. From the date hereof to the
Closing Date, trading in the Company’s Common Stock shall not have been suspended by the SEC and trading in securities generally as reported by the Principal Market (or other Approved Market) shall not have been suspended or limited, and the
Common Stock shall be listed on the Principal Market or another Approved Market. 
  

 16 

 (d) No Injunction. No statute, rule, regulation, executive order, decree, ruling or injunction
shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction which prohibits the consummation of any of the transactions contemplated by the Transaction Documents. The Nasdaq shall not
have objected or indicated that it may object to the consummation of any of the transactions contemplated by this Agreement. 
  
 (e) Opinion of Counsel. At the Closing, the Purchaser shall have received an opinion of counsel to the Company in the form attached hereto as
Exhibit C and such other opinions, certificates and documents as the Purchaser or their counsel shall reasonably require incident to the Closing. 
  

(f) Registration Rights Agreement. The Company and the Purchaser shall have executed and delivered the Registration Rights Agreement in the
form and substance of Exhibit A attached hereto. 
  
 (g) Officer’s Certificates. The Company shall have delivered to the Purchaser a certificate in form and substance satisfactory to the Purchaser and the Purchaser’s counsel, executed by an officer of the Company, certifying
as to satisfaction of closing conditions, incumbency of signing officers, and the true, correct and complete nature of the Certificate of Incorporation, By-Laws, good standing and authorizing resolutions of the Company. 
  
 (h) Amendment to Debentures and Warrants. The amendments to the 8%
Senior Convertible Debentures Due March 25, 2006 and Warrants purchased by Manchester Securities Corp pursuant to a Securities Purchase Agreement dated as of March 25, 2004 shall be amended in the form of the amendments attached hereto as
Exhibit D. 
  
 ARTICLE V 
  
 Legend and Stock 
  
 Upon payment therefor as provided in this Agreement, the Company will issue
one or more Shares in the name of each Purchaser and in such denominations to be specified by the Purchaser prior to (or from time to time subsequent to) Closing. Each certificate representing Shares prior to such Shares being registered under the
1933 Act for resale or available for resale under Rule 144(k) under the 1933 Act, shall be stamped or otherwise imprinted with a legend in substantially the following form: 
  
 NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED WITH THE
SECURITIES AND EXCHANGE COMMISSION IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE 
  

 17 

 SECURITIES ACT OR AFTER RECEIPT BY THE COMPANY OF AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT. 
  
 THESE
SECURITIES REPRESENTED HEREBY ARE ALSO SUBJECT TO RIGHTS AND OBLIGATIONS AS SET FORTH IN A SECURITIES PURCHASE AGREEMENT DATED AS OF APRIL 14, 2004, AND A REGISTRATION RIGHTS AGREEMENT DATED AS OF APRIL 14, 2004, IN EACH CASE AMONG STAR SCIENTIFIC,
INC. AND CERTAIN OTHER PARTIES THERETO AS SUCH MAY BE AMENDED FROM TIME TO TIME. 
  
 The Company agrees to issue Shares, without the first legend set forth above with respect to the Securities Act (the “Securities Legend”), at such time as (i) the holder thereof is permitted to dispose of
such Shares pursuant to Rule 144(k) under the 1933 Act, or (ii) such securities have been registered under the 1933 Act, subject to the undertaking in Section 3.9 above by the Purchasers; provided that in the case of clause (i) or (ii) the Company
also agrees, upon request of a Purchaser to reissue Shares without the legend set forth above with respect to rights and obligations under this Agreement and the Registration Rights Agreement (the “Rights and Obligations Legend”
and, together with the Securities Legend, the “Stock Legends”). 
  
 Upon the Registration Statement, or registration statement covering the Option Shares, becoming effective, the Company agrees to promptly, but no later than three (3) Trading Days thereafter, issue new certificates
representing such Common Shares or Option Shares, as the case may be, without such Securities Legend. Any Shares issued after such registration statement has become effective shall be free and clear of any Securities Legends. Notwithstanding the
removal of such Securities Legend, the Purchasers agree to comply with Section 3.9. 
  
 Subject to Section 3.9, nothing herein shall limit the right of any holder to pledge these securities pursuant to a bona fide margin account or lending arrangement entered into in compliance with law, including
applicable securities laws. 
  
 ARTICLE VI 
  
 Termination 
  
 Section 6.1 Termination. This Agreement, may be terminated by action
of the Board of Directors of the Company or by the Purchaser at any time if the Closing shall not have been consummated by the second business day following the date of this Agreement; provided, however, that the party (or parties) prepared to close
shall retain its (or their) right to sue for any breach by the other party (or parties). 
  

 18 

 ARTICLE VII 
  
 Indemnification 
  
 Section 7.1 Indemnification by the Company. In consideration of the Purchaser’s execution and delivery of the this Agreement, and the
Registration and acquiring the Shares hereunder and in addition to all of the Company’s other obligations under the Transaction Documents, the Company shall defend, protect, indemnify and hold harmless each Purchaser and all of its partners,
officers, directors, employees, members and direct or indirect investors and any of the foregoing person’s agents or other representatives (including, without limitation, those retained in connection with the transactions contemplated by this
Agreement) (collectively, the “Purchaser Indemnitees”) from and against any and all actions, causes of action, suits, claims, losses, costs, penalties, fees, liabilities and damages, and expenses in connection therewith
(irrespective of whether any such Indemnitee is a party to the action for which indemnification hereunder is sought), and including reasonable attorneys’ fees and disbursements (the “Purchaser Indemnified Liabilities”),
incurred by any Indemnitee as a result of, or arising out of, or relating to (a) any misrepresentation or breach of any representation or warranty made by the Company in the Transaction Documents or any other certificate or document contemplated
hereby or thereby, (b) any breach of any covenant, agreement or obligation of the Company contained in the Transaction Documents or any other certificate or document contemplated hereby or thereby, (c) any cause of action, suit or claim brought or
made against such Purchaser Indemnitee by a third party and arising out of or resulting from (i) the execution, delivery, performance, breach by the Company or enforcement of the Transaction Documents or any other certificate, instrument or document
contemplated hereby or thereby or, (ii) any transaction financed or to be financed in whole or in part, directly or indirectly, with the proceeds of the issuance of the Shares and (d) the enforcement of this Section. Notwithstanding the foregoing,
Purchaser Indemnified Liabilities shall not include any liability of any Indemnitee arising solely out of such Purchaser Indemnitee’s willful misconduct or fraudulent action(s). To the extent that the foregoing undertaking by the Company may be
unenforceable for any reason, the Company shall make the maximum contribution to the payment and satisfaction of each of the Purchaser Indemnified Liabilities which is permissible under applicable law. Notwithstanding the foregoing, to the extent
this Section overlaps with Section 6(a) of the Registration Rights Agreement, the amount of the Company’s indemnification shall not exceed the limitation contained in such provision. 
  
 Section 7.2 Indemnification by Purchaser. In consideration of the Company’s execution and delivery of the this
Agreement and the Registration Rights Agreement and in addition to all of each Purchaser’s other obligations under the Transaction Documents, each Purchaser shall defend, protect, indemnify and hold harmless the Company and all of its partners,
officers, directors, employees, members and direct or indirect investors and any of the foregoing person’s agents or other representatives (including, without limitation, those retained in connection with the transactions contemplated by this
Agreement) (collectively, the “Company Indemnitees”) from and against any and all actions, causes of action, suits, claims, losses, costs, penalties, fees, liabilities and damages, and expenses in connection therewith (irrespective of
whether any such Company Indemnitee is a party to the action for which indemnification hereunder is sought), and including reasonable attorneys’ fees and disbursements (the “Company Indemnified Liabilities”), incurred by any Company
Indemnitee as a result of, or arising out of, or relating to (a) any misrepresentation or breach of any representation or warranty made by the Purchaser in the Transaction Documents or any other certificate or document contemplated hereby or
thereby, or (b) any breach of any covenant, agreement or obligation of the Purchaser contained in the Transaction Documents or any other certificate or document contemplated hereby or thereby. Notwithstanding the foregoing, 
  

 19 

 Company Indemnified Liabilities shall not include any liability of any Company Indemnitee arising solely out of such
Company Indemnitee’s willful misconduct or fraudulent action(s). To the extent that the foregoing undertaking by the Purchaser may be unenforceable for any reason, the Purchaser shall make the maximum contribution to the payment and
satisfaction of each of the Company Indemnified Liabilities which is permissible under applicable law. Notwithstanding the foregoing, to the extent that this Section overlaps with Section 6(b) of the Registration Rights Agreement, the amount of the
Purchaser’s indemnification shall not exceed the limitation contained in such provision. 
  
 Section 7.3 Procedure. Each party entitled to indemnification under this Article 7 (the “Indemnified Party”) shall give notice to the party required to provide indemnification (the
“Indemnifying Party”) promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim in any litigation
resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or any litigation resulting therefrom, shall be approved by the Indemnified Party (whose approval shall not be unreasonably withheld),
and the Indemnified Party may participate in such defense at its own expense, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this
Article 7 except to the extent that the Indemnifying Party is materially and adversely affected by such failure to provide notice. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each
Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to
such claim or litigation. Each Indemnified Party shall furnish such non-privileged information regarding itself or the claim in question as an Indemnifying Party may reasonably request in writing and as shall be reasonably required in connection
with the defense of such claim and litigation resulting therefrom. 
  
 ARTICLE VIII 
  
 Governing Law;
Miscellaneous 
  
 Section 8.1 Governing Law. THIS
AGREEMENT SHALL BE GOVERNED BY AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE PRINCIPLES OF CONFLICT OF LAWS. EACH PARTY HEREBY IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL
COURTS SITTING IN THE CITY OF NEW YORK, BOROUGH OF MANHATTAN, FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR WITH ANY TRANSACTION CONTEMPLATED HEREBY OR DISCUSSED HEREIN, AND HEREBY IRREVOCABLY WAIVES, AND AGREES NOT TO
ASSERT IN ANY SUIT, ACTION OR PROCEEDING, ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF ANY SUCH COURT, THAT SUCH SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE VENUE OF SUCH SUIT, ACTION OR
PROCEEDING IS IMPROPER. EACH PARTY HEREBY IRREVOCABLY WAIVES PERSONAL SERVICE OF PROCESS AND CONSENTS TO PROCESS BEING SERVED IN ANY SUCH SUIT, ACTION OR PROCEEDING BY MAILING A COPY THEREOF TO 
  

 20 

 SUCH PARTY AT THE ADDRESS FOR SUCH NOTICES TO IT UNDER THIS AGREEMENT AND AGREES THAT SUCH SERVICE SHALL CONSTITUTE GOOD
AND SUFFICIENT SERVICE OF PROCESS AND NOTICE THEREOF. NOTHING CONTAINED HEREIN SHALL BE DEEMED TO LIMIT IN ANY WAY ANY RIGHT TO SERVE PROCESS IN ANY MANNER PERMITTED BY LAW. IF ANY PROVISION OF THIS AGREEMENT SHALL BE INVALID OR UNENFORCEABLE IN ANY
JURISDICTION, SUCH INVALIDITY OR UNENFORCEABILITY SHALL NOT AFFECT THE VALIDITY OR ENFORCEABILITY OF THE REMAINDER OF THIS AGREEMENT IN THAT JURISDICTION OR THE VALIDITY OR ENFORCEABILITY OF ANY PROVISION OF THIS AGREEMENT IN ANY OTHER JURISDICTION.
EACH PARTY HERETO IRREVOCABLY WAIVES ANY RIGHT TO TRIAL BY JURY. 
  
 Section 8.2 Counterparts. This Agreement may be executed in two or more identical counterparts, all of which 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; provided that a facsimile signature shall be considered due execution and shall be binding upon the signatory thereto with the same force and effect as if the signature were an original, not a facsimile signature.

  
 Section 8.3 Headings. The headings of this Agreement
are for convenience of reference and shall not form part of, or affect the interpretation of, this Agreement. 
  
 Section 8.4 Severability. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction. 
  

 21 

 Section 8.5 Entire Agreement; Amendments; Waivers. 
  
 (a) This Agreement supersedes all other prior oral or written agreements
between the Purchasers, the Company, their affiliates and persons acting on their behalf with respect to the matters discussed herein, and this Agreement and the instruments referenced herein (including the other Transaction Documents) contain the
entire understanding of the parties with respect to the matters covered herein and therein and, except as specifically set forth herein or therein, neither the Company nor the Purchasers makes any representation, warranty, covenant or undertaking
with respect to such matters. No provision of this Agreement may be amended other than by an instrument in writing signed by the Company and the Purchaser, and no provision hereof may be waived other than by an instrument in writing signed by the
party against whom enforcement is sought. 
  
 (b) Each Purchaser
may, as to itself only, at any time elect, by notice to the Company, to waive (whether permanently or temporarily, and subject to such conditions, if any, as the Purchaser may specify in such notice) any of its rights under any of the Transaction
Documents to acquire shares of Common Stock from the Company, in which event such waiver shall be binding against the Purchaser in accordance with its terms; provided, however, that the voluntary waiver contemplated by this sentence may not reduce
the Purchaser’s obligations to the Company under the Transaction Documents. 
  
 Section 8.6 Notices. Any notices, consents, waivers or other communications required or permitted to be given under the terms of this Agreement must be in writing, must be delivered by (i) courier, mail or hand
delivery or (ii) facsimile, and will be deemed to have been delivered upon receipt. The addresses and facsimile numbers for such communications shall be: 
  
 If to the Company: 
  

			
	 Star Scientific, Inc.

	 801 Liberty Way

	 Chester, Virginia 23836

	 Telephone:
	 	 (804) 530-0535

	 Facsimile:
	 	 (804) 530-8474

	 Attention:
	 	 Chief Financial Officer

  
 With a copy to:

  

			
	 Star Scientific, Inc.

	 7475 Wisconsin Ave.

	 Suite 850

	 Bethesda, Maryland 20814

	 Telephone:
	 	 (301) 654-8300

	 Facsimile:
	 	 (301) 654-9308

	 Attention:
	 	 Robert Pokusa, Esq.

  

 22 

 If to the Purchasers: 
  

			
	 c/o Elliott Management Corporation

	 712 Fifth Avenue

	 New York, New York 10019

	 Telephone:
	 	 (212) 974-6000

	 Facsimile:
	 	 (212) 974-2092

	 Attention:
	 	 Brett Cohen

  
 With a copy to:

  

			
	 Kleinberg, Kaplan, Wolff & Cohen, P.C.

	 551 Fifth Avenue

	 New York, New York 10176

	 Telephone:
	 	 (212) 986-6000

	 Facsimile:
	 	 (212) 986-8866

	 Attention:
	 	 Lawrence Hui, Esq.

  
 Each party shall
provide five (5) days prior written notice to the other party of any change in address, telephone number or facsimile number. Written confirmation of receipt (A) given by the recipient of such notice, consent, waiver or other communication, (B)
mechanically or electronically generated by the sender’s facsimile machine containing the time, date, recipient facsimile number and an image of the first page of such transmission or (C) provided by a nationally recognized overnight delivery
service, shall be rebuttable evidence of personal service, receipt by facsimile or receipt from a nationally recognized overnight delivery service in accordance with clause (i), (ii) or (iii) above, respectively. 
  
 Section 8.7 Successors and Assigns. Except as otherwise provided
herein, this Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns, including any Permitted Assignee (as defined below). The Company shall not assign this Agreement or any rights or
obligations hereunder without the prior written consent of the Purchaser, including by merger or consolidation. Each Purchaser may assign some or all of its rights hereunder to any permitted assignee of the Shares to the extent such assignee signs a
counterpart signature page to this Agreement or a joinder agreement, in form and substance satisfactory to the Company, assuming the obligations of Purchaser under this Agreement, including, without limitation, Section 3.9 hereof (in each case, a
“Permitted Assignee”); provided, however, that any such assignment shall not release the Purchaser from its obligations hereunder unless such obligations are assumed by such assignee and the Company has consented to such
assignment and assumption. Notwithstanding anything to the contrary contained in the Transaction Documents, subject to Section 3.9, the Purchaser shall be entitled to pledge the Shares in connection with a bona fide margin account. 
  
 Section 8.8 No Third Party Beneficiaries. This Agreement is intended
for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other person. 
  
 Section 8.9 Survival. The representations, warranties and agreements of the Company and the Purchaser contained in
the Agreement shall survive the Closing. 
  

 23 

 Section 8.10 Further Assurances. Each party shall do and perform, or cause to be done and
performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of
this Agreement and the consummation of the transactions contemplated hereby. 
  
 Section 8.11 No Strict Construction. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be
applied against any party. 
  
 Section 8.12 Remedies. Each
Purchaser and each Permitted Assignee shall have all rights and remedies set forth in the Transaction Documents and all rights and remedies which such holders have been granted at any time under any other agreement or contract and all of the rights
which such holders have under any law. Any person having any rights under any provision of the Transaction Documents shall be entitled to enforce such rights specifically (without posting a bond or other security), to recover damages by reason of
any breach of any provision of the Transaction Documents and to exercise all other rights granted by law. Each Purchaser and each Permitted Assignee without prejudice may withdraw, revoke or suspend its pursuit of any remedy at any time prior to its
complete recovery as a result of such remedy. 
  
 Section 8.13
Payment Set Aside. To the extent that the Company makes a payment or payments to the Purchasers under the Transaction Documents or the Purchasers enforce or exercise their rights hereunder or thereunder, and such payment or payments or the
proceeds of such enforcement or exercise or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside, recovered from, disgorged by or are required to be refunded, repaid or otherwise restored to the
Company, a trustee, receiver or any other person under any law (including, without limitation, any bankruptcy law, state or federal law, common law or equitable cause of action), then to the extent of any such restoration the obligation or part
thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred. 
  
 Section 8.14 Days. Unless the context refers to “business days” or “Trading Days”, all references
herein to “days” shall mean calendar days. 
  
 Section
8.15 Rescission and Withdrawal Right. Notwithstanding anything to the contrary contained in (and without limiting any similar provisions of) the Transaction Documents, wherever a Purchaser exercises a right, election, demand or option under a
Transaction Document and the Company or applicable Subsidiary does not fully perform its respective related obligations within the periods therein provided, then such Purchaser in its sole discretion may rescind or withdraw from time to time any
relevant notice, demand or election in whole or in part without prejudice to its future actions and rights. 
  

 24 

 Section 8.16 Fees and Expenses. On the Closing Date, the Company shall pay the legal fees and
expenses of counsel of Purchasers reasonably incurred in connection with the preparation, execution, and delivery of the Transaction Documents, and performance of the Purchasers’ obligations hereunder up to a maximum amount of $10,000.

  
 * * * * * 
  
 [Signature Page Follows] 
  

 25 

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

									
	 COMPANY:
	 	 	 	 PURCHASERS:

			
	 STAR SCIENTIFIC, INC.
	 	 	 	 ELLIOTT ASSOCIATES, L.P.

					
	 	 	 	 	 	 	 By:
	 	 Elliott Capital Advisors, L.P.,
     as general partner

					
	 	 	 	 	 	 	 By:
	 	 Braxton Associates, Inc.,
     as
general partner

					
	 By:
	 	 /s/  Paul L. Perito

	 	 	 	 By:
	 	 /s/  Elliot Greenberg

	 Name:
	 	Paul L. Perito	 	 	 	 Name:
	 	 Elliot Greenberg

	 Title:
	 	 Chairman, President & C.O.O.
	 	 	 	 Title:
	 	 Vice President

  

			
	 	  	 Purchase Price: $1,400,000

		
	 	  	 Number of Common Shares Purchased: 400,000

		
	 	  	 Maximum Number of Option Shares: 375,335

		
	 	  	 Residency: New York

  

					
	ELLIOTT INTERNATIONAL, L.P.
		
	 By:
	 	 Elliott International Capital Advisors, Inc.

	 	 	 Attorney-in-Fact

			
	 	 	 By:
	 	 /s/  Elliot Greenberg

	 	 	 Name:
	 	 Elliot Greenberg

	 	 	 Title:
	 	 Vice President

  

			
	 	  	 Purchase Price: $2,100,000

		
	 	  	 Number of Common Shares Purchased: 600,000

		
	 	  	 Maximum Number of Option Shares: 563,003

		
	 	  	 Residency: Cayman Islands

 List of Schedules 
  

			
	 Schedule 2.1(a)
	  	 Subsidiaries

	 Schedule 2.1(c)
	  	 Capitalization

	 Schedule 2.1(e)
	  	 No Conflicts

	 Schedule 2.1(g)
	  	 Certain Changes

	 Schedule 2.1(j)
	  	 Other Transactions

	 Schedule 2.1(l)
	  	 Intellectual Property Rights

	 Schedule 2.1(n)
	  	 Title

	 Schedule 2.1(s)
	  	 Certain Transactions

  
 List of Exhibits

  

			
	 EXHIBIT A
	  	 Registration Rights Agreement

	 EXHIBIT B
	  	 Form of Press Release

	 EXHIBIT C
	  	 Opinion of Counsel

	 EXHIBIT D
	  	 Amendments to the Debentures and Warrants

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