Document:

Exhibit 4.5

 

THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE “1933 ACT”) OR THE SECURITIES LAWS OF ANY STATE, AND MAY NOT
BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS PURSUANT TO SEC
RULE 144 OR UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
1933 ACT AND THE SECURITIES LAWS OF ANY STATE COVERING SUCH SECURITIES OR THE
COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THE SECURITIES
REASONABLY SATISFACTORY TO THE COMPANY, STATING THAT SUCH SALE, TRANSFER,
ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS
DELIVERY REQUIREMENTS OF THE 1933 ACT AND THE SECURITIES LAWS OF ANY STATE.

 

ETELOS, INCORPORATED

 

6% CONVERTIBLE SUBORDINATED NOTE DUE ON THE SECOND
ANNIVERSARY OF THE ISSUE DATE

 

	
  $88,000.00

  	
  Seattle, Washington

  August 28, 2007

  

 

ETELOS, INCORPORATED, a Washington corporation (the “Company”),
for value received hereby promises to pay to Enable Opportunity Partners LP
or their registered assigns (the “Holder”), the sum of Eighty Eight Thousand
Dollars ($88,000.00), or such lesser amount as shall then equal the outstanding
principal amount hereof and any unpaid accrued interest hereon, as set forth
below, on the second anniversary of the issue date of this Note (the “Maturity
Date”).  Payment for all amounts due
hereunder shall be made by mail to the registered address of the Holder, or, if
requested in writing by the Holder, by wire transfer in accordance with the
Holder’s instructions.  This Note is
issued in connection with the transactions described in that certain Securities
Purchase Agreement of August 28, 2007 herewith, by and among the Company
and the Purchasers described therein, as the same may be amended, modified or
supplemented from time to time (the “Securities Purchase Agreement”).  The Holder is subject to certain
restrictions, and is entitled to certain rights and privileges, set forth in
the Securities Purchase Agreement.  This
Note is one of the Notes referred to as the “Notes” in the Securities Purchase
Agreement.

 

The following is a
statement of the rights of the Holder and the conditions to which this Note is
subject, and to which the Holder, by the acceptance of this Note, agrees:

 

1.                                      Principal
and Interest.  Unless this Note is
sooner prepaid or converted pursuant to Section 3 hereof, the principal of
and all accrued and unpaid interest on this Note shall be paid in full on the
Maturity Date.  This Note may be prepaid
at any time, without premium or penalty upon thirty (30) days’ prior written
notice.

 

1

 

Commencing on February 1,
2008, and on the last day of each calendar quarter thereafter, until the
earlier of (a) the payment in full of all outstanding principal of and all
accrued and unpaid interest on this Note, or (b) the conversion of this
Note pursuant to Section 3 hereof, the Company shall pay interest on this
Note, computed on the basis of a 365-day year, from the date of this Note, on
the unpaid balance of the outstanding principal amount of this Note, at six
percent (6%) per annum (the “Coupon Rate”).

 

Commencing on September 1, 2008, and on the last day of each
calendar quarter thereafter, until the earlier of (a) the payment in full
of all outstanding principal of and all accrued and unpaid interest on this
Note, or (b) the conversion of this Note pursuant to Section 3
hereof, the Company shall make 4 equal principal payments on this Note,
computed by dividing the original principal of this Note by 12 and multiplying
by 3.

 

2.                                      Events
of Default.

 

(a)                                  Definition.
Other than on terms approved beforehand by Holders of at least a majority in
principal amount of all then outstanding Notes (exclusive of Notes held by the
Company or its subsidiaries or affiliates) issued pursuant to the Securities
Purchase Agreement, an Event of Default with respect to this Note shall mean
the following:

 

i.                  Any default in
the payment of (A) the principal amount of any Note or (B) interest,
liquidated damages an d other amounts owing to a Holder on any Note, as and when
the same shall become due and payable (whether on a Conversion Date or the
Maturity Date or by acceleration or otherwise) which default, solely in the
case of an interest payment or other default, solely in the case of an interest
payment or other defaulty under clause (B) above, is not cured within five
business days;

 

ii.               The Company shall
fail to observe or perform any other covenant or agreement contained in the
Notes (other than a breach by the Company of its obligations to deliver shares
of Common Stock to the Holder upon conversion) which failure is not cured, if
possible to cure, within the earlier to occur of (A) seven days after notice of
such failure sent by the Holder or by any other Holder and (B) twelve days
after the Company has become or should have become aware of such failure;

 

iii.            A default or event of
default (subject to any grace or cure period provided in the applicable
agreement, document or instrument) shall occur under (A) any of the
Transaction Document or (B) any other material agreement, lease, document
or instrument to which the Company or any Subsidiary is obligated (and not
covered by section (vi) below;

 

2

 

iv.           Any representation or
warranty made in this Note, any other Transaction Document, any written
statement pursuant hereto or thereto or any other report, financial statement
or certificate made or delivered to the Holder or any other Holder shall be
untrue or incorrect in any material respect as of the date when made or deemed
made;

 

v.              The Company or any
Significant Subsidiary shall be subject to a Bankruptcy Event;

 

1.               A “Bankruptcy Event”
means any of the following events: (a) the company or any Significant
Subsidiary thereof commences a case or other proceeding under any bankruptcy,
reorganization, arrangement, adjustment of deby, relief of debtors,
dissolution, insolvency or liquidation or similar law of any jurisdiction
relating to the Company or any Significant Subsidiary thereof; (b) there
is commenced against the Company or any Significant Subsidiary thereof any such
case or proceeding that is not dismissed within sixty days (60) after
commencement; (c) the Company or any Significant Subsidiary thereof is
adjudicated insolvent or bankrupt or any order of relief or other order
approving any such case or proceeding is entered;(d) the Company or any
Significant Subsidiary thereof  suffers
any appointment of any custodian or the like for it or any substantial part of
its property that is not discharged or stayed within sixty (60) calendar days
after such appointment; (e) the Company or any Significant Subsidiary
thereof makes a general assignment for the benefit of creditors; (f) the
Company or any Significant Subsidiary thereof calls a meeting of its creditors
with a view to arranging a composition, adjustment or restructuring of its
debts; or (g) the Company or any Significant Subsidiary thereof, by any
act or failure to act, expressly indicates its consent to , approval of or
acquiescence in any of the foregoing or takes any corporate or other action for
the purpose of effecting any of the foregoing.

 

vi.           The Company or any
Subsidiary shall default on any of it obligations under any mortgage, credit
agreement or other facility, indenture agreement, factoring agreement or other
instrument under which there my be issued, or by which there may be secured or
evidenced, any indebtedness for borrowed money or money due under any long term
leasing or factoring arrangement that (a) involves an obligation greater
than $450,000, whether such indebtedness now exists or shall hereafter be
created, and (b) results 

 

3

 

in such
indebtedness becoming or being declared due and payable prior to the date on
which it would otherwise become due and payable;

 

vii.  The
Company shall fail for any reason to deliver certificates to a Holder prior to
the seventh day after a Conversion Date or any Forced Conversion Date pursuant
to this Note or the Company shall provide at any time notice to the Holder, including
by way of public announcement, of the Company’s intention to not honor requests
for conversions of any Notes in accordance with the terms hereof; or

 

viii. Any
monetary judgment, writ or similar final process shall be entered or filed
against the Company, any Subsidiary or any of their respective property or
other assets for more than $250,000, and such judgment, writ or similar final
process shall remain unvacated, unbonded or unstayed for a period of 45
calendar days.

 

(b)                                  Notice
of Events of Default.  The Company
covenants that it will give notice to each holder of any Note of the occurrence
of any Event of Default within five (5) business days after the discovery
of such an event by an officer of the Company, specifying the nature thereof,
the period of existence thereof and what action it proposes to take with
respect thereto.

 

(c)                                  Right
of Acceleration.  If an Event of
Default shall occur and be continuing pursuant to items 2(a) above, then
the Holder, acting alone, may accelerate payment of this Note.

 

(d)                                  Default
Rate of Interest.  If any payment due
hereunder, including those due upon acceleration, is not paid within fifteen
(15) days after its due date, the entire balance of this Note shall bear
interest from the date of default until such payment (including all accrued
interest through the date of payment) is paid, at the per annum rate of
interest equal to the Coupon Rate plus 2%; provided, however,
that in no event shall such interest rate exceed the maximum rate permitted by
law.

 

3.                                      Conversion.  The outstanding principal amount of and any
accrued but unpaid interest under this Note shall be convertible into capital
stock of the Company (the “Conversion Shares”), as follows:

 

(a)                                  Optional
Conversion.  At any time prior
to (i) full repayment, (ii) Mandatory Conversion by  the Company, as described herebelow in this
section, or (iii) the date which is five (5) business days after the
Maturity Date, the Holder shall have the right at the Holder’s option to
convert the outstanding principal amount and accrued interest of this Note into
fully paid nonassessable shares of a series of preferred stock (“Preferred
Shares”), with rights and preferences equivalent to those of the Company’s
Certificate of Designation for 

 

4

 

Series D Preferred
Stock (see attached).  The conversion
price shall be $0.25 per Preferred Stock subject to adjustment herein.

 

(b)                                  Mandatory
Conversion Upon Closing of Preferred Stock Offering.  Upon the closing (not later than January 31,
2008) of the sale of a series of preferred stock (the “Series E Shares”)
having aggregate gross proceeds to the Company of not less than $5,000,000,
exclusive of proceeds to the Company in connection with the Securities Purchase
Agreement dated July, 2007, the outstanding principal amount and accrued
interest of this Note shall be converted automatically, without any further act
of the Company or its shareholders, into fully paid nonassessable Series D
Shares, pursuant to the terms and conditions of this Section 3, at a
conversion price equal to the per share purchase price (the “Offering Price”),
less a ten percent discount (10%), paid by investors in the Series D
Offering.

 

(c)                                  Mandatory
Conversion Upon Public Offering.  Notwithstanding
anything in this Section 3 to the contrary, in the event of the closing of
a Public Offering by the Company (as defined at Section 3(m) below),
the outstanding principal amount and accrued interest of this Note shall be
converted automatically, without any further act of the Company or its
shareholders, into fully paid nonassessable Preferred Shares, pursuant to the
terms and conditions of this Section 3, at a conversion price equal to the
Note Conversion Price.

 

(d)                                  Mandatory
Conversion or Repayment Upon Change of Control.  Notwithstanding anything in this Section 3
to the contrary, in the event of the change of control of forty percent (40%)
of the outstanding capital stock of the Company, the Holder of the Note has the
option to have the outstanding principal amount and accrued interest of this
Note converted automatically, without any further act of the Company or its
shareholders, into fully paid nonassessable Preferred Shares, pursuant to the
terms and conditions of this Section 3, at a conversion price equal to the
Note Conversion Price, or to receive full payment of any outstanding principal
and accrued interest.

 

(e)                                  Mechanics
of Conversion.  Upon closing (the “Closing
Date”) of the Preferred Stock Offering, a Public Offering, or a Change of
Control the outstanding principal amount and accrued interest of this Note
shall be converted automatically without any further action by the Holder and
whether or not this Note is surrendered to the Company; provided,
however, that the Company shall not be obligated to issue to the
Holder a certificate that evidences the Conversion Shares unless this Note is
delivered to the Company.  The Company
may exercise the optional conversion rights specified in Section 3(a) as
to any part of this Note by giving Notice to the Holder that the Company is
surrendering to the Company this Note, accompanied by written notice stating
that the Company elects to convert all or a specified portion of this
Note.  Conversion of this Note shall be
deemed to have been effected (the “Conversion Date”) on: (i) the closing
date of the Preferred Stock Offering; (ii) the date when delivery of
notice of an election to convert pursuant to Section 3(a) is made; or
(iii) on the closing of a Public Offering (in which event conversion of
the Conversion Shares into shares of the Company’s Common Stock in accordance
with the terms of the Preferred Shares shall take place immediately after
conversion of the Notes).  As promptly as
practicable thereafter 

 

5

 

(and after surrender of
this Note to the Company), the Company shall issue and deliver to the Holder a
certificate for the number of full Conversion Shares to which the Holder is
entitled and a check or cash with respect to any fractional interest in a
Conversion Share as provided in Section 3(e).  The person in whose name the certificate for
Conversion Shares are to be issued shall be deemed to have become a holder of
record of such shares on the Conversion Date. 
Upon conversion of only a portion of the principal amount of this Note
(in the case of optional conversion pursuant to Section 3(a)), the Company
shall issue and deliver to the Holder, at the expense of the Company, a new
Note covering the principal amount of the unconverted portion of this Note.

 

(f)                                    Fractional
Shares.  No fractional Conversion
Shares or scrip shall be issued upon conversion of this Note.  Instead of any fractional Conversion Shares
which would otherwise be issuable upon conversion of this Note, the Company
shall pay a cash adjustment in respect of such fractional interest in an amount
equal to that fractional interest of the Offering Price or the Note Conversion
Price, as applicable.

 

(g)                                 Stock
Dividends and Stock Splits. If the
Company, at any time while this Note is outstanding: (A) pays a stock
dividend or otherwise makes a distribution or distributions payable in shares
of Common Stock on shares of Common Stock or any Common Stock Equivalents
(which, for avoidance of doubt, shall not include any shares of Common Stock
issued by the Company upon conversion of, or payment of interest on, the
Notes); (B) subdivides outstanding shares of Common Stock into a larger
number of shares; (C) combines (including by way of a reverse stock split)
outstanding shares of Common Stock into a smaller number of shares; or (D) issues,
in the event of a reclassification of shares of the Common Stock, any shares of
capital stock of the Company, then the Conversion Price shall be multiplied by
a fraction of which the numerator shall be the number of shares of Common Stock
(excluding any treasury shares of the Company) outstanding immediately before
such event and of which the denominator shall be the number of shares of Common
Stock outstanding immediately after such event.  Any adjustment made
pursuant to this Section shall become effective immediately after the
record date for the determination of stockholders entitled to receive such
dividend or distribution and shall become effective immediately after the
effective date in the case of a subdivision, combination or
re-classification.

 

(h)                                 Combination
of Conversion Shares.  If the number
of Conversion Shares (or shares issuable upon conversion thereof) outstanding
at any time after the Issue Date is decreased by a combination or
reclassification of the outstanding Conversion Shares (or shares issuable upon
conversion thereof), then, immediately after the effective date of such
combination or reclassification, the Offering Price or the Note Conversion
Price, as applicable, shall be increased appropriately so that the Holder shall
be entitled to receive the number of Conversion Shares (or shares issuable upon
conversion thereof) which it would have owned immediately following such action
had this Note been converted immediately prior thereto.

 

(i)                                    Capital
Reorganization or Reclassification. 
If the Conversion Shares shall be changed into the same or different
number of shares of any class or classes of stock, 

 

6

 

whether by capital
reorganization, reclassification or otherwise (other than a subdivision or
combination of shares or stock dividend provided for in Sections 3(f) and
(g)), then in each such event the Holder shall have the right thereafter to
convert this Note into the kind and amount of shares of stock and other
securities and property receivable upon such reorganization, reclassification
or other change by the Holder of the number of Conversion Shares into which
this Note might have been converted immediately prior to such reorganization,
reclassification or change, all subject to further adjustment as provided
herein.

 

(j)                                    Merger
or Consolidation.  If at any time or
from time to time there shall be an acquisition of the Company by another
entity by means of merger, consolidation or otherwise, resulting in the exchange
of the outstanding Conversion Shares for securities or consideration issued or
caused to be issued by the acquiring entity or any of its affiliates, then, as
a part of such acquisition, provision shall be made so that the Holder shall
thereafter be entitled to receive, upon conversion of this Note, the number of
shares of stock or other securities or property of the acquiring corporation
resulting from such acquisition to which the Holder would have been entitled if
the Holder had converted this Note immediately prior to such acquisition.  In any such case appropriate adjustments
shall be made in the application of the provisions of this Section 3(i) with
respect to the rights of the Holder after such acquisition to the end that the
provisions of this Section 3(i) shall be applicable after that event
in as nearly equivalent a manner as may be practicable.

 

(k)                                Notice
to Holders.  In the event the Company
shall propose to take any action of the type described in Sections 3(f),
(g), (h), or (i), the Company shall give notice to the Holder, which notice
shall specify the record date, if any, with respect to any such action and the
approximate date on which such action is to take place.  Such notice shall also set forth such facts
with respect thereto as shall be reasonably necessary to indicate the effect of
such action (to the extent such effect may be known at the date of such notice)
on the Offering Price or the Note Conversion Price, as applicable, and the
number, kind or class of shares or other securities or property which shall be
deliverable or purchasable upon the occurrence of such action or deliverable
upon conversion of this Note.  In the
case of any action which would require the fixing of a record date, such notice
shall be given at least fifteen (15) days prior to the date so fixed, and in
case of all other action, such notice shall be given at least twenty (20) days
prior to the taking of such proposed action. 
Failure to give such notice, or any defect therein, shall not affect the
legality or validity of any such action.

 

(l)                                    Costs.  The Company shall pay all documentary, stamp,
transfer or other transactional taxes attributable to the issuance or delivery
of Conversion Shares upon conversion of this Note; provided,
however, that the Company shall not be required to pay any taxes
which may be payable in respect of any transfer involved in the issuance or
delivery of any certificate for such shares in a name other than that of the
Holder.

 

(m)                              Reservation
of Shares.  The Company shall take
all necessary action to reserve, and, at such time as such action has been
taken, shall reserve at all times so long as any principal amount under this
Note remains outstanding, free from preemptive rights, out of its authorized
but unissued Conversion Shares, solely for the purpose of effecting the 

 

7

 

conversion of this Note,
sufficient Conversion Shares to provide for the conversion of this Note.

 

(n)                                 Public
Offering.  For purposes of this Section 3,
a “Public Offering” shall mean the closing of an initial firm commitment
underwritten public offering pursuant to an effective registration statement
under the Securities Act of 1933, as amended, covering the sale of the Company’s
Common Stock by a nationally recognized underwriter, at a price per share equal
to or exceeding the greater of: (i) the stock price threshold established
for mandatory conversion in the event of an initial public offering as part of
the closing of the Series E Offering, or (ii) three (3) times
the Note Conversion Price, if the Series E Preferred Offering has not yet
closed by the time of such public offering, as applicable, and from which the
proceeds to the Company (after deduction of underwriter’s commissions and
expenses) are not less than $10,000,000.

 

4.                                      Subordination.  The payment of principal of and interest on
this Note expressly is subordinated to all existing indebtedness of the Company
(as noted in Exhibit A), and is a Secured obligation of the Company under Article 9
of the Uniform Commercial Code.

 

(a)                                  Default.  If there should occur any receivership,
insolvency, assignment for the benefit of creditors, bankruptcy, reorganization
or arrangement with creditors (whether or not pursuant to bankruptcy or other
insolvency laws), sale of all or substantially all of the assets, dissolution,
liquidation or any other marshaling of the assets and liabilities of the
Company, or if this Note shall be declared due and payable upon the occurrence
of an Event of Default with respect to any indebtedness senior to this Note (“Senior
Indebtedness”), then: (i) no amount shall be paid by the Company in
respect of the principal of (or premium, if any) or interest on this Note at
the time outstanding, unless and until the principal of and interest on the
Senior Indebtedness then outstanding shall be paid in full; and (ii) no
claim or proof of claim shall be filed with the Company by or on behalf of the
Holder that shall assert any right to receive any payments in respect of the
principal of and the interest on this Note, except subject to the payment in
full of the principal of and interest on all of the Senior Indebtedness then
outstanding.  The Company shall not make
any payment upon or in respect of this Note if there occurs an event of default
that continues beyond the applicable grace period with respect to non payment
of any principal of or interest on any Senior Indebtedness, or the instrument
under which any Senior Indebtedness is outstanding.  If there occurs any other event of default
that continues beyond the applicable grace period with respect to any Senior
Indebtedness, or the instrument under which any Senior Indebtedness is
outstanding, permitting the holder of such Senior Indebtedness to accelerate
the maturity thereof, then, unless and until such event of default shall have
been cured or waived or shall have ceased to exist, or all Senior Indebtedness
shall have been paid in full, no payment shall be made upon or in respect of
the principal of (or premium, if any) or interest on this Note for a period of
179 days from the date on which the Company receives notice (a “Payment Stoppage Notice”)
of any such default.  Only one Payment
Stoppage Notice may be delivered in any one 365-day period.

 

(b)                                  Effect
of Subordination.  Subject to the
rights, if any, of the holders of Senior Indebtedness under this Section 4
to receive cash, securities or other properties 

 

8

 

otherwise payable or
deliverable to the Holder, nothing contained in this Section 4 shall
impair, as between the Company and the Holder, the obligation of the Company,
subject to the terms and conditions of this Section 4, to pay to the
Holder the principal hereof and interest hereon as and when the same become due
and payable, or shall prevent the Holder, upon default hereunder, from
exercising all rights, powers and remedies otherwise provided herein or by
applicable law.

 

(c)                                  Subrogation.  Subject to payment in full of all Senior
Indebtedness and until this Note shall be paid in full, the Holder shall be
subrogated to the rights of the holders of Senior Indebtedness (to the extent
of payments or distributions previously made to such holders of Senior
Indebtedness pursuant to the provisions of Section 4(b) above) to
receive payments or distributions of assets of the Company applicable to the
Senior Indebtedness.  No such payments or
distributions applicable to the Senior Indebtedness, as between the Company and
its creditors, other than the holders of Senior Indebtedness and the Holder,
shall be deemed to be a payment by the Company to or on account of this Note;
and for the purposes of such subrogation, no payments or distributions to the
holders of Senior Indebtedness to which the Holder would be entitled except for
the provisions of this Section 4, as between the Company and its
creditors, other than the holders of Senior Indebtedness and the Holder, shall
be deemed to be a payment by the Company to or on account of the Senior
Indebtedness.

 

(d)                                  Undertaking.  By its acceptance of this Note, the Holder
agrees to execute and deliver such documents as may be reasonably requested
from time to time by the Company or the lender of any Senior Indebtedness in
order to implement the foregoing provisions of this Section 4.

 

5.                                      Assignment.  Subject to the restrictions on transfer
described in Section 7 below, the rights and obligations of the Company
and the Holder shall be binding upon and benefit the successors, assigns,
heirs, administrators and transferees of the parties.

 

6.                                      Waiver
and Amendment.  Any provision of this
Note may be amended, waived or modified upon the written consent of the Company
and holders of at least sixty six and two-thirds percent (66 2/3%) in principal
amount of all then outstanding Notes (exclusive of Notes held by the Company or
its subsidiaries or affiliates) issued pursuant to the Securities Purchase
Agreement.  Notwithstanding the
foregoing, without the consent of the Holder, an amendment or waiver may not:

 

(a)                                  reduce the principal
of or extend the Maturity Date of this Note;

 

(b)                                  reduce the rate of or
extend the time for payment of interest, including defaulted interest, on this
Note;

 

(c)                                  waive a default in
the payment of the principal of or the interest on, or principal or other
payment with respect to, this Note;

 

9

 

(d)                                  make this Note
payable in money or other than that stated in this Note; or

 

(e)                                  alter the provisions
of the Securities Purchase Agreement so as to increase or decrease the
percentage of holders of Notes required to consent to any amendment thereof or
of the Notes or to waive compliance with any term thereof or of the Notes.

 

7.                                      Transfer
of this Note.  The Holder understands
that the Company will instruct any transfer agent not to register the transfer
of this Note (or the Conversion Shares issued upon conversion of this Note)
unless the conditions specified in the legend above are satisfied.

 

8.                                      Notices.
All notices and other communications required or permitted hereunder shall be
in writing and shall be deemed effectively given upon personal delivery; upon
confirmed transmission by facsimile; or by e-mail delivery of a “.pdf” format data file,
such signature shall create a valid and binding obligation of the party
executing (or on whose behalf such signature is executed) with the same force
and effect as if such facsimile or “.pdf” signature page were an original
thereof; or upon deposit with the United States Post Office, by
first-class mail, postage prepaid, or otherwise delivered by hand or by
messenger, addressed (a) if to a Purchaser, at the Purchaser’s address or
email address as set forth on Exhibit “A” or at such other address as such
Purchaser shall have furnished to the Company in writing, or (b) if to the
Company, one copy shall be sent to its address or be email set forth above and
addressed to the attention of the President, and another copy shall be sent or
emailed to Desmond Kolke, Secretary/Treasurer for Etelos, Incorporated, P.O. Box
605, Enumclaw, WA  98022, or at such
other addresses as the Company shall have furnished to the Purchasers.

 

9.                                      No
Rights of a Shareholder.  Nothing
contained in this Note shall be construed as conferring upon the Holder or any
other person the right to vote or consent or to receive notice as a shareholder
in respect of meetings of shareholders for the election of directors of the
Company or any other matters or any rights whatsoever as a shareholder of the
Company prior to the time that this Note is converted into Conversion Shares
pursuant to Section 3.

 

10.                               Governing
Law; Venue.  This Note shall be
governed by and construed in accordance with the laws of the State of
Washington, and venue for any action taken in connection herewith or related
hereto shall exclusively reside in King County, Washington.

 

(the remainder of this page has been
intentionally left blank)

 

10

 

SUBORDINATED NOTE

SIGNATURE PAGE

 

This Note has been
executed and delivered as of the date first above written.

 

	
   

  	
  ETELOS,
  INCORPORATED

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Jeffery Garon,
  Chief Executive Officer

  

 

	
  Accepted and
  agreed by Holder:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  (signature)

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  Brendan O’Neil,
  Enable Opportunity

  	
   

  
	
  Partners LP

  	
   

  
	
  (print name)

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  Principal and
  Portfolio Manager

  	
   

  
	
  (title of
  representative, if applicable)

  	
   

  
	
   

  	
   

  
	
  Address:

  	
  One Ferry
  Building, Suite 255

  	
   

  
	
  San Francisco,
  CA

  	
  94111

  	
   

  
	
   

  	
   

  	
   

  
	
  Telephone:

  	
      415-677-1578

  	
   

  
	
   

  	
   

  	
   

  
	
  Facsimile

  	
        415-677-1578

  	
   

  
						

 

11Exhibit 10.10

 

SECURITIES PURCHASE AGREEMENT

 

This Securities Purchase
Agreement (this “Agreement”) is dated as of April 22, 2008 between
Etelos, Incorporated, a Washington corporation (the “Company”), and each
purchaser identified on the signature pages hereto (each, including its
successors and assigns, a “Purchaser” and collectively the “Purchasers”).

 

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

 

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

 

ARTICLE I.

DEFINITIONS

 

1.1           Definitions.  In addition to the terms defined elsewhere in
this Agreement: (a) capitalized terms that are not otherwise defined
herein have the meanings given to such terms in the Debentures (as defined
herein), and (b) the following terms have the meanings set forth in this Section 1.1:

 

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

 

“Affiliate”
means any Person that, directly or indirectly through one or more
intermediaries, controls or is controlled by or is under common control with a
Person, as such terms are used in and construed under Rule 405 under the
Securities Act.  With respect to a
Purchaser, any investment fund or managed account that is managed on a
discretionary basis by the same investment manager as such Purchaser will be
deemed to be an Affiliate of such Purchaser.

 

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

 

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

 

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

 

“Closing
Date” means the Trading Day when all of the Transaction Documents have been
executed and delivered by the applicable parties thereto, and all conditions 

 

 

precedent to (i) the
Purchasers’ obligations to pay the Subscription Amount and (ii) the
Company’s obligations to deliver the Securities have been satisfied or waived.

 

“Commission”
means the Securities and Exchange Commission.

 

“Common
Stock” means the common stock of the Company, no par value, and any other
class of securities into which such securities may hereafter be reclassified or
changed into.

 

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

 

“Company
Counsel” means Duane Morris LLP, with offices located at 101 West Broadway,
Suite 900, San Diego, California, 92101.

 

“Conversion
Price” shall have the meaning ascribed to such term in the Debentures.

 

“Debentures”
means the 6% Secured Convertible Debentures due, subject to the terms therein, April 30,
2010, issued by the Company to the Purchasers hereunder, in the form of Exhibit A
attached hereto.

 

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

 

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

 

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

 

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

 

“Exchange Act Date” shall have the
meaning ascribed to such term in Section 4.3.

 

“Exempt Issuance” means the issuance
of (a) shares of Common Stock or options to employees, officers or
directors of the Company pursuant to any stock or option plan duly adopted for
such purpose by a majority of the non-employee members of the Board of
Directors or a majority of the members of a committee of non-employee directors
established for such purpose, (b) securities upon the exercise or exchange
of or conversion of any Securities issued hereunder and/or other securities
exercisable or exchangeable for or convertible into shares of Common Stock
issued and outstanding on the date of this Agreement, provided that such
securities have not been amended since the 

 

2

 

date of this Agreement to increase the number
of such securities or to decrease the exercise, exchange or conversion price of
such securities, (c) securities issued pursuant to acquisitions or
strategic transactions approved by a majority of the disinterested directors of
the Company, provided that any such issuance shall only be to a Person which
is, itself or through its subsidiaries, an operating company in a business
synergistic with the business of the Company and in which the Company receives
benefits in addition to the investment of funds, but shall not include a
transaction in which the Company is issuing securities primarily for the purpose
of raising capital or to an entity whose primary business is investing in
securities, (d) shares of Common Stock issued in lieu of the cash payment
of principal or accrued interest pursuant to the terms of the Debentures
provided that all such issuances are made proportionally to the holders of such
Debentures, and (e) securities issued pursuant to the sale of additional
debentures and warrants on the same terms and conditions as the sale of
Debentures and Warrants pursuant to this Agreement, for the aggregate purchase
equal to up to $5,000,000.

 

“GAAP”
means United States generally accepted accounting principles.

 

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

 

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

 

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

 

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

 

“LS”
means Lowenstein Sandler PC with offices located at 1251 Avenue of the
Americas; 18th Floor, New York, New York 10020.

 

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

 

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

 

“Maximum
Rate” shall have the meaning ascribed to such term in Section 5.17.

 

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

 

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

 

“Pre-Notice”
shall have the meaning ascribed to such term in Section 4.12.

 

3

 

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

 

“Purchaser
Party” shall have the meaning ascribed to such term in Section 4.10.

 

“Registration
Rights Agreement” means the Registration Rights Agreement dated January 31,
2008, among the Company and the Purchasers, as amended.

 

“Registration
Rights Agreement Amendment” means the amendment to the Registration Rights
Agreement entered into among the Company and the Purchasers, in the form of Exhibit B
attached hereto.

 

“Registration
Statement” means a registration statement meeting the requirements set
forth in the Registration Rights Agreement and covering the resale of the
Underlying Shares by each Purchaser as provided for in the Registration Rights
Agreement.

 

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

 

“Required
Minimum” means, as of any date, the maximum aggregate number of shares of
Common Stock then issued or potentially issuable in the future pursuant to the
Transaction Documents, including any Underlying Shares issuable upon exercise
or conversion in full of all Warrants and Debentures (including Underlying
Shares issuable as payment of interest), ignoring any conversion or exercise
limits set forth therein, and assuming that the Conversion Price is at all
times on and after the date of determination 75% of the then Conversion Price
on the Trading Day immediately prior to the date of determination.

 

“Reverse
Merger” shall have the meaning ascribed to such term in Section 4.15.

 

“Reverse
Merger Date” shall mean the effective date of the consummation of the
reverse merger of the Company into Tripath.

 

 “Reverse Merger Deadline” shall have
the meaning ascribed to such term in Section 4.15.

 

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

 

“Securities”
means the Debentures, the Warrants and the Underlying Shares.

 

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

 

4

 

“Security Agreement” shall have the
meaning ascribed to such term in Section 4.19.

 

“Security
Documents” shall mean the Security Agreement, the Subsidiary Guarantees and
any other documents and filing required thereunder in order to grant the
Purchasers a first priority security interest in the assets of the Company and
the Subsidiaries as provided in the Security Agreement, including all UCC-1
filing receipts.

 

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

 

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

 

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

 

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

 

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

 

“Trading
Day” means a day on which the principal Trading Market is open for trading.

 

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

 

 “Transaction Documents” means this
Agreement, the Debentures, the Warrants, the Registration Rights Agreement, the
Security Agreement, all exhibits and schedules thereto and hereto and any other
documents or agreements executed in connection with the transactions
contemplated hereunder.

 

“Transfer
Agent” means the current transfer agent of the Company, and any successor
transfer agent of the Company.

 

“Tripath”
means Tripath Technology, Inc., a Delaware corporation.

 

“Underlying
Shares” means the shares of Common Stock issued and issuable upon
conversion or redemption of the Debentures and upon exercise of the Warrants
and 

 

5

 

issued and issuable in lieu of
the cash payment of interest on the Debentures in accordance with the terms of
the Debentures.

 

“Variable
Rate Transaction” shall have the meaning ascribed to such term in Section 4.13(b).

 

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

 

“Warrants”
means, collectively, the Common Stock purchase warrants delivered to the
Purchasers at the Closing in accordance with Section 2.2(a) hereof,
which Warrants shall be exercisable immediately and have a term of exercise
equal to 3 years, in the form of Exhibit C attached hereto.

 

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

 

ARTICLE II.

PURCHASE
AND SALE

 

2.1           Closing.  On the Closing Date and immediately following
the effective time of the Reverse Merger, upon the terms and subject to the
conditions set forth herein, substantially concurrent with the execution and
delivery of this Agreement by the parties hereto, the Company agrees to sell,
and the Purchasers, severally and not jointly, agree to purchase, up to an
aggregate of $3,500,000 in principal amount of the Debentures.  Each Purchaser shall deliver to the Company,
via wire transfer or a certified check, immediately available funds equal to
its Subscription Amount and the Company shall deliver to each Purchaser its
respective Debenture and a Warrant, as determined pursuant to Section 2.2(a),
and the Company and each Purchaser shall deliver the other items set forth in Section 2.2
deliverable at the Closing.  Upon
satisfaction of the conditions set forth in Sections 2.2 and 2.3, the Closing
shall occur at the offices of LS or such other location as the parties shall
mutually agree.

 

6

 

2.2                                 Deliveries.

 

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

 

(i)            this Agreement duly executed by the
Company;

 

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

 

(iii)          a Debenture with a principal amount equal to
such Purchaser’s Subscription Amount, registered in the name of such Purchaser;

 

(iv)          a Warrant registered in the name of such
Purchaser to purchase up to a number of shares of Common Stock equal to 15% of
such Purchaser’s Subscription Amount divided by the initial Conversion Price,
with an exercise price equal to $0.60, subject to adjustment therein;

 

(v)           an officer’s certificate from the Chief
Executive Officer, dated as of the Closing Date, certifying and setting forth (i) the
names, signatures and positions of the Persons authorized to execute this
Agreement and any other Transaction Documents to which the Company is a party, (ii) a
copy of the resolutions of the Company authorizing the execution, delivery and
performance of this Agreement, and (iii) certifying that the
representations and warranties of the Company are true and correct as of the
Closing Date and that the Company has satisfied all of the conditions to the
Closing; and

 

(vi)          the Registration Rights Agreement Amendment
duly executed by the Company.

 

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

 

(i)            this Agreement duly executed by such
Purchaser;

 

(ii)           such Purchaser’s Subscription Amount by wire
transfer to the account as specified in writing by the Company; and

 

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

 

2.3           Closing Conditions.

 

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

 

(i)            the accuracy in all material respects when
made and on the Closing 

 

7

 

Date of the representations and warranties of the Purchasers contained
herein;

 

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

 

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

 

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

 

(i)            the accuracy in all material respects when
made and on the Closing Date of the representations and warranties of the
Company contained herein (except for representations and warranties qualified
by materiality or Material Adverse Effect which shall be accurate in all
respects);

 

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

 

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

 

(iv)          there shall
have been no Material Adverse Effect with respect to the Company since the date
hereof;

 

(v)           the
certificate of merger related to the Reverse Merger shall have been filed with
the Delaware Secretary of State; and

 

(vi)          from the date hereof to the Closing Date,
trading in securities generally as reported by Bloomberg L.P., if any, shall
not have been suspended or limited, or minimum prices shall not have been
established on securities whose trades are reported by such service, or on any
Trading Market, nor shall a banking moratorium have been declared either by the
United States or New York State authorities nor shall there have occurred any
material outbreak or escalation of hostilities or other national or
international calamity of such magnitude in its effect on, or any material
adverse change in, any financial market which, in each case, in the reasonable
judgment of each Purchaser, makes it impracticable or inadvisable to purchase
the Securities at the Closing.

 

ARTICLE III.

REPRESENTATIONS AND WARRANTIES

 

3.1           Representations and Warranties of the Company.  Except
as set forth in the Disclosure Schedules, which Disclosure Schedules shall be
deemed a part hereof and shall qualify any representation or otherwise made
herein to the extent of the disclosure contained in 

8

 

the corresponding section of the
Disclosure Schedules, the Company hereby makes the representations and
warranties set forth below to each Purchaser:

 

(a)           Subsidiaries.  All of the direct and indirect subsidiaries
of the Company are set forth on Schedule 3.1(a).  The Company owns, directly or indirectly, all
of the capital stock or other equity interests of each Subsidiary free and
clear of any Liens, and all of the issued and outstanding shares of capital
stock of each Subsidiary are validly issued and are fully paid, non-assessable
and free of preemptive and similar rights to subscribe for or purchase
securities.  If the Company has no
subsidiaries, all other references to the Subsidiaries or any of them in the
Transaction Documents shall be disregarded.

 

(b)           Organization and Qualification.  The Company and each of the Subsidiaries is
an entity duly incorporated or otherwise organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation or
organization (as applicable), with the requisite power and authority to own and
use its properties and assets and to carry on its business as currently
conducted.  Neither the Company nor any
Subsidiary is in violation or default of any of the provisions of its
respective certificate or articles of incorporation, bylaws or other
organizational or charter documents. 
Each of the Company and the Subsidiaries is duly qualified to conduct
business and is in good standing as a foreign corporation or other entity in
each jurisdiction in which the nature of the business conducted or property
owned by it makes such qualification necessary, except where the failure to be
so qualified or in good standing, as the case may be, could not have or
reasonably be expected to result in (i) a material adverse effect on the
legality, validity or enforceability of any Transaction Document, (ii) a
material adverse effect on the results of operations, assets, business or
condition (financial or otherwise) of the Company and the Subsidiaries, taken
as a whole, or (iii) a material adverse effect on the Company’s ability to
perform in any material respect on a timely basis its obligations under any
Transaction Document (any of (i), (ii) or (iii), a “Material Adverse
Effect”) and no Proceeding has been instituted in any such jurisdiction
revoking, limiting or curtailing or seeking to revoke, limit or curtail such
power and authority or qualification.

 

(c)           Authorization; Enforcement.  The Company has the requisite corporate power
and authority to enter into and to consummate the transactions contemplated by
each of the Transaction Documents and otherwise to carry out its obligations
hereunder and thereunder.  The execution
and delivery of each of the Transaction Documents by the Company and the
consummation by it of the transactions contemplated hereby and thereby have
been duly authorized by all necessary action on the part of the Company and no
further action is required by the Company, the Board of Directors or the
Company’s stockholders in connection therewith other than in connection with
the Required Approvals.  Each Transaction
Document has been (or upon delivery will have been) duly executed by the
Company and, when delivered in accordance with the terms hereof and thereof,
will constitute the valid and binding obligation of the Company enforceable
against the Company in accordance with its terms, except (i) as limited by
general equitable principles and applicable bankruptcy, insolvency,
reorganization, moratorium and other laws of general application affecting
enforcement of creditors’

 

9

 

rights generally, (ii) as limited by laws relating to the
availability of specific performance, injunctive relief or other equitable
remedies and (iii) insofar as indemnification and contribution provisions
may be limited by applicable law.

 

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

 

(e)           Filings, Consents
and Approvals.  The Company is not
required to obtain any consent, waiver, authorization or order of, give any
notice to, or make any filing or registration with, any court or other federal,
state, local or other governmental authority or other Person in connection with
the execution, delivery and performance by the Company of the Transaction
Documents, other than (i) filings required pursuant to Section 4.6, (ii) the
filing with the Commission of the Registration Statement, (iii) the notice
and/or application(s) to each applicable Trading Market for the issuance
and sale of the Securities and the listing of the Underlying Shares for trading
thereon in the time and manner required thereby and (iv) the filing of Form D
with the Commission and such filings as are required to be made under
applicable state securities laws (collectively, the “Required Approvals”).

 

(f)            Issuance of the
Securities.  The Securities are duly
authorized and, when issued and paid for in accordance with the applicable
Transaction Documents, will be duly and validly issued, fully paid and
nonassessable, free and clear of all Liens imposed by the Company other than
restrictions on transfer provided for in the Transaction Documents.  The Underlying Shares, when issued in
accordance with the terms of the Transaction Documents, will be validly issued,
fully paid and nonassessable, free and clear of all Liens imposed by the Company
other than restrictions on transfer provided for in the Transaction
Documents.  The Company has reserved from
its duly authorized capital stock a number of shares of Common Stock for
issuance of the Underlying Shares at least equal to the Required Minimum on the
date hereof.

 

10

 

(g)           Capitalization.  The capitalization of the Company is as set
forth on Schedule 3.1(g), which Schedule 3.1(g) shall also
include the number of shares of Common Stock owned beneficially, and of record,
by Affiliates of the Company as of the date hereof. The Company has not issued
any capital stock since its most recently filed
periodic report under the Exchange Act, other than pursuant to the
exercise of employee stock options under the Company’s stock option plans, the
issuance of shares of Common Stock to employees pursuant to the Company’s
employee stock purchase plans and pursuant to the conversion or exercise of
Common Stock Equivalents outstanding as of the date of the most recently filed
periodic report under the Exchange Act. 
No Person has any right of first refusal, preemptive right, right of
participation, or any similar right to participate in the transactions
contemplated by the Transaction Documents. 
Except as a result of the purchase and sale of the Securities, there are
no outstanding options, warrants, scrip rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities, rights or
obligations convertible into or exercisable or exchangeable for, or giving any
Person any right to subscribe for or acquire, any shares of Common Stock, or
contracts, commitments, understandings or arrangements by which the Company or
any Subsidiary is or may become bound to issue additional shares of Common
Stock or Common Stock Equivalents. The issuance and sale of the Securities will
not obligate the Company to issue shares of Common Stock or other securities to
any Person (other than the Purchasers) and will not result in a right of any
holder of Company securities to adjust the exercise, conversion, exchange or
reset price under any of such securities. All of the outstanding shares of
capital stock of the Company are validly issued, fully paid and nonassessable,
have been issued in compliance with all federal and state securities laws, and
none of such outstanding shares was issued in violation of any preemptive
rights or similar rights to subscribe for or purchase securities.  No further approval or authorization of any
stockholder, the Board of Directors or others is required for the issuance and
sale of the Securities.  There are no
stockholders agreements, voting agreements or other similar agreements with
respect to the Company’s capital stock to which the Company is a party or, to
the knowledge of the Company, between or among any of the Company’s
stockholders.

 

(h)           Financial Statements.  The unaudited financial statements of the
Company and its Subsidiaries for its last two fiscal years and unaudited
financial statements for its most recent fiscal quarter are attached hereto as Schedule
3.1(h).  Such financial statements
have been prepared in accordance with the books and records of the Company and
fairly present in all material respects the financial position of the Company
and its consolidated Subsidiaries as of and for the dates thereof and the
results of operations and cash flows for the periods then ended.

 

(i)            Material Changes.  Since the date of the latest unaudited
financial statements attached hereto, (i) there has been no event,
occurrence or development that has had or that could reasonably be expected to
result in a Material Adverse Effect, (ii) the Company has not incurred any
liabilities (contingent or otherwise) other than (A) trade payables and
accrued expenses incurred in the ordinary course of business consistent with
past practice and (B) liabilities not required to be reflected in the
Company’s financial statements, (iii) the Company has not altered its
method of

 

11

 

accounting, (iv) the
Company has not declared or made any dividend or distribution of cash or other
property to its stockholders or purchased, redeemed or made any agreements to
purchase or redeem any shares of its capital stock and (v) the Company has
not issued any equity securities to any officer, director or Affiliate, except
pursuant to existing Company stock option plans.  Except for the issuance of the Securities
contemplated by this Agreement or as set forth on Schedule 3.1(i), no
event, liability or development has occurred or exists with respect to the
Company or its Subsidiaries or their respective business, properties,
operations or financial condition, that would be required to be disclosed by
the Company under applicable securities laws at the time this representation is
made or deemed made that has not been publicly disclosed at least one Trading
Day prior to the date that this representation is made.

 

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

 

(k)           Labor Relations.  No material labor dispute exists or, to the
knowledge of the Company, is imminent with respect to any of the employees of
the Company which could reasonably be expected to result in a Material Adverse
Effect.  None of the Company’s or its
Subsidiaries’ employees is a member of a union that relates to such employee’s
relationship with the Company or such Subsidiary, and neither the Company nor
any of its Subsidiaries is a party to a collective bargaining agreement, and
the Company and its Subsidiaries believe that their relationships with their
employees are good.  No executive
officer, to the knowledge of the Company, is, or is now expected to be, in
violation of any material term of any employment contract, confidentiality, disclosure
or proprietary information agreement or non-competition agreement, or any other
contract or agreement or any restrictive covenant in favor of any third party,
and the continued employment of each such executive officer does not subject
the Company or any of its Subsidiaries to any liability with respect to any of
the foregoing matters.  The Company and
its Subsidiaries are in compliance with all U.S. federal, state, local and
foreign laws and regulations relating to employment and employment practices,
terms and conditions of employment and wages and hours, except where the
failure to be in 

 

12

 

compliance could not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect.

 

(l)            Compliance.  Neither the Company nor any Subsidiary (i) is
in default under or in violation of (and no event has occurred that has not
been waived that, with notice or lapse of time or both, would result in a
default by the Company or any Subsidiary under), nor has the Company or any
Subsidiary received notice of a claim that it is in default under or that it is
in violation of, any indenture, loan or credit agreement or any other agreement
or instrument to which it is a party or by which it or any of its properties is
bound (whether or not such default or violation has been waived), (ii) is
in violation of any order of any court, arbitrator or governmental body, or (iii) is
or has been in violation of any statute, rule or regulation of any
governmental authority, including without limitation all foreign, federal,
state and local laws applicable to its business and all such laws that affect
the environment, except in each case as could not have or reasonably be
expected to result in a Material Adverse Effect.

 

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

 

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

 

(o)           Patents and Trademarks.  The Company and the Subsidiaries have, or
have rights to use, all patents, patent applications, trademarks, trademark
applications, service marks, trade names, trade secrets, inventions,
copyrights, licenses and other intellectual property rights and similar rights
used in connection with their respective businesses and which the failure to so
have could have a Material Adverse Effect (collectively, the “Intellectual
Property Rights”).  Neither the
Company nor any Subsidiary has received a notice (written or otherwise) that
any of the Intellectual Property Rights used by the Company or any Subsidiary
violates or infringes upon the rights of any Person. To the knowledge of the
Company, all such Intellectual Property Rights are enforceable and there is no
existing infringement by another Person of any of the Intellectual Property 

 

13

 

Rights.  The Company and its Subsidiaries have taken
reasonable security measures to protect the secrecy, confidentiality and value
of all of their intellectual properties, except where failure to do so could
not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect.

 

(p)           Insurance.  The Company and the Subsidiaries are insured
by insurers of recognized financial responsibility against such losses and
risks and in such amounts as are prudent and customary in the businesses in which
the Company and the Subsidiaries are engaged, including, but not limited to,
directors and officers insurance coverage at least equal to the aggregate
Subscription Amount.  Neither the Company
nor any Subsidiary has any reason to believe that it will not be able to renew
its existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business without a significant increase in cost.

 

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

 

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

 

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

 

14

 

(t)            Private Placement.  Assuming the accuracy of the Purchasers’
representations and warranties set forth in Section 3.2, no registration
under the Securities Act is required for the offer and sale of the Securities
by the Company to the Purchasers as contemplated hereby. The issuance and sale
of the Securities hereunder does not contravene the rules and regulations
of any applicable Trading Market.

 

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

 

(v)           Registration Rights.  Other than each of the Purchasers, no Person
has any right to cause the Company to effect the registration under the
Securities Act of any securities of the Company.

 

(w)          [RESERVED].

 

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

 

(y)           Disclosure.  Except with respect to the material terms and
conditions of the transactions contemplated by the Transaction Documents, the
Company confirms that neither it nor any other Person acting on its behalf has
provided any of the Purchasers or their agents or counsel with any information
that it believes constitutes or might constitute material, nonpublic
information.  The Company understands and
confirms that the Purchasers will rely on the foregoing representation in
effecting transactions in securities of the Company.  All disclosure furnished by or on behalf of
the Company to the Purchasers regarding the Company, its business and the
transactions contemplated hereby, including the Disclosure Schedules to this
Agreement, is true and correct and does not contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements made therein, in light of the circumstances under which they were
made, not misleading.   The press
releases disseminated by the Company during the twelve months preceding the
date of this Agreement taken as a whole did not, at the time they were issued,
contain any untrue statement of a material fact or omit 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 and when
made, not misleading.  The Company
acknowledges and agrees that no Purchaser makes or has made any representations
or warranties with respect to the 

 

15

 

transactions
contemplated hereby other than those specifically set forth in Section 3.2
hereof.

 

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

 

(aa)         Solvency.  Based on the consolidated financial condition
of the Company as of the Closing Date after giving effect to the receipt by the
Company of the proceeds from the sale of the Securities hereunder, (i) the
fair saleable value of the Company’s assets exceeds the amount that will be
required to be paid on or in respect of the Company’s existing debts and other
liabilities (including known contingent liabilities) as they mature, (ii) the
Company’s assets do not constitute unreasonably small capital to carry on its
business as now conducted and as proposed to be conducted including its capital
needs taking into account the particular capital requirements of the business
conducted by the Company, and projected capital requirements and capital
availability thereof, and (iii) the current cash flow of the Company,
together with the proceeds the Company would receive, were it to liquidate all
of its assets, after taking into account all anticipated uses of the cash,
would be sufficient to pay all amounts on or in respect of its liabilities when
such amounts are required to be paid. 
The Company does not intend to incur debts beyond its ability to pay
such debts as they mature (taking into account the timing and amounts of cash
to be payable on or in respect of its debt). 
The Company has no knowledge of any facts or circumstances which lead it
to believe that it will file for reorganization or liquidation under the
bankruptcy or reorganization laws of any jurisdiction within one year from the
Closing Date.  Schedule 3.1(aa)
sets forth as of the date hereof all outstanding secured and unsecured
Indebtedness of the Company or any Subsidiary, or for which the Company or any
Subsidiary has commitments.  For the
purposes of this Agreement, “Indebtedness” means (a) any
liabilities for borrowed money or amounts owed in excess of $50,000 (other than
trade accounts payable incurred in the ordinary course of business), (b) all
guaranties, endorsements and other contingent obligations in respect of
indebtedness of others, whether or not the same are or should be reflected in
the Company’s balance sheet (or the notes thereto), except guaranties by
endorsement of negotiable instruments for deposit or collection or similar
transactions in the ordinary course of business; and (c) the present value
of any lease payments in excess of $50,000 due under leases required to be
capitalized in accordance with GAAP. 
Neither the Company nor any Subsidiary is in default with respect to any
Indebtedness.

 

(bb)         Tax Status.  Except for matters that would not,
individually or in the aggregate, have or reasonably be expected to result in a
Material Adverse Effect, the Company and each Subsidiary has filed all
necessary federal, state and foreign income 

 

16

 

and franchise
tax returns and has paid or accrued all taxes shown as due thereon, and the
Company has no knowledge of a tax deficiency which has been asserted or
threatened against the Company or any Subsidiary.

 

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

 

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

 

(ee)         Accountants.  The Company’s accounting firm is set forth on
Schedule 3.1(ee) of the Disclosure Schedule.  To the knowledge and belief of the Company,
such accounting firm (i) is a registered public accounting firm as
required by the Exchange Act and (ii) shall express its opinion with
respect to the financial statements to be included in the Registration
Statement.

 

(ff)           Seniority.  As of the Closing Date, no Indebtedness or
other claim against the Company is senior to the Debentures in right of
payment, whether with respect to interest or upon liquidation or dissolution,
or otherwise, other than indebtedness secured by purchase money security
interests (which is senior only as to underlying assets covered thereby) and
capital lease obligations (which is senior only as to the property covered thereby).

 

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

 

(hh)         Acknowledgment Regarding Purchasers’
Purchase of Securities.  The Company
acknowledges and agrees that each of the Purchasers is acting solely in the
capacity of an arm’s length purchaser with respect to the Transaction Documents
and the transactions contemplated thereby. 
The Company further acknowledges that no Purchaser is acting as a
financial advisor or fiduciary of the Company (or in any similar capacity) with
respect to the Transaction Documents and the transactions contemplated 

 

17

 

thereby and
any advice given by any Purchaser or any of their respective representatives or
agents in connection with the Transaction Documents and the transactions
contemplated thereby is merely incidental to the Purchasers’ purchase of the
Securities.  The Company further
represents to each Purchaser that the Company’s decision to enter into this
Agreement and the other Transaction Documents has been based solely on the
independent evaluation of the transactions contemplated hereby by the Company
and its representatives.

 

(ii)           Acknowledgment Regarding
Purchasers’ Trading Activity. 
Notwithstanding anything in this Agreement or elsewhere herein to the
contrary, it is understood and acknowledged by the Company that (i) none
of the Purchasers has been asked to agree by the Company, nor has any Purchaser
agreed, to desist from purchasing or selling, long and/or short, securities of
the Company, or “derivative” securities based on securities issued by the
Company or to hold the Securities for any specified term, (ii) past or
future open market or other transactions by any Purchaser, specifically
including, without limitation, Short Sales or “derivative” transactions, before
or after the closing of this or future private placement transactions, may
negatively impact the market price of the Company’s publicly-traded securities,
(iii) any Purchaser, and counter-parties in “derivative” transactions to
which any such Purchaser is a party, directly or indirectly, may presently have
a “short” position in the Common Stock, and (iv) each Purchaser shall not
be deemed to have any affiliation with or control over any arm’s length
counter-party in any “derivative” transaction.  The Company further understands
and acknowledges that (a) one or more Purchasers may engage in hedging
activities at various times during the period that the Securities are
outstanding, including, without limitation, during the periods that the value
of the Underlying Shares deliverable with respect to Securities are being
determined, and (b) such hedging activities (if any) could reduce the
value of the existing stockholders’ equity interests in the Company at and
after the time that the hedging activities are being conducted.  The
Company acknowledges that such aforementioned hedging activities do not constitute
a breach of any of the Transaction Documents.

 

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

 

(kk)         U.S.
Real Property Holding Corporation. 
The Company is not, nor has it ever been, a U.S. real property holding
corporation within the meaning of Section 897 of the Internal Revenue Code
of 1986, as amended, and the Company shall so certify upon any Purchaser’s
request.

 

18

 

(ll)           Bank
Holding Company Act.  Neither the
Company nor any of its Subsidiaries is subject to the Bank Holding Company Act
of 1956, as amended (the “BHCA”) and to regulation by the Board of
Governors of the Federal Reserve System (the “Federal Reserve”).  Neither the Company nor any of its
Subsidiaries or Affiliates owns or controls, directly or indirectly, five
percent (5%) or more of the outstanding shares of any class of voting
securities or twenty-five (25%) or more of the total equity of a bank or
any  equity that is subject to the BHCA
and to regulation by the Federal Reserve. 
Neither the Company nor any of its Subsidiaries or affiliates exercises
a controlling influence over the management or policies of a bank or any entity
that is subject to the BHCA and to regulation by the Federal Reserve.

 

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

 

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

 

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

 

19

 

(c)           Purchaser Status.  At the time such Purchaser was offered the
Securities, it was, and at the date hereof it is, and on each date on which it
exercises any Warrants or converts any Debentures it will be either: (i) an
“accredited investor” as defined in Rule 501(a)(1), (a)(2), (a)(3), (a)(7) or
(a)(8) under the Securities Act or (ii) a “qualified institutional
buyer” as defined in Rule 144A(a) under the Securities Act.  Such Purchaser is not required to be
registered as a broker-dealer under Section 15 of the Exchange Act.

 

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

 

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

 

ARTICLE IV.

OTHER AGREEMENTS OF THE PARTIES

 

4.1           Transfer
Restrictions.

 

(a)           The Securities may only
be disposed of in compliance with state and federal securities laws.  In connection with any transfer of Securities
other than pursuant to an effective registration statement or Rule 144, to
the Company or to an Affiliate of a Purchaser or in connection with a pledge as
contemplated in Section 4.1(b), the Company may require the transferor
thereof to provide to the Company an opinion of counsel selected by the
transferor and reasonably acceptable to the Company, the form and substance of
which opinion shall be reasonably satisfactory to the Company, to the effect
that such transfer does not require registration of such transferred Securities
under the Securities Act.  As a condition
of transfer, any such transferee shall agree in writing to be bound by the
terms of this Agreement and shall have the rights of a Purchaser under this
Agreement and the Registration Rights Agreement. Upon a cashless exercise of
the Warrant, the holding period for purposes of Rule 144 shall tack back
to the original date of issuance of such Warrant.

 

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

 

[NEITHER] THIS SECURITY [NOR
THE SECURITIES INTO WHICH THIS SECURITY IS [EXERCISABLE] [CONVERTIBLE]] HAS
[NOT] BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE
SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN 

 

20

 

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 OR RULE 144 UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO
SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY.  THIS SECURITY [AND THE
SECURITIES ISSUABLE UPON [EXERCISE] [CONVERSION] OF THIS SECURITY] MAY BE
PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY
SUCH SECURITIES.

 

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

 

(c)   Certificates evidencing the
Underlying Shares shall not contain any legend (including the legend set forth
in Section 4.1(b) hereof): (i) while a registration statement
(including the Registration Statement) covering the resale of such security is
effective under the Securities Act, or (ii) following any sale of such
Underlying Shares pursuant to Rule 144, or (iii) if such Underlying
Shares are eligible for sale under Rule 144 without the requirements for
the Company to be in compliance with Rule 144(c)(1) and otherwise
without restrictions or limitations pursuant to Rule 144, or (iv) if
such legend is not required under applicable requirements of the Securities Act
(including judicial interpretations and pronouncements issued by the staff of
the Commission). The Company shall cause its counsel to issue a legal opinion
to the Transfer Agent promptly after the Effective Date if required by the
Transfer Agent to effect the removal of the legend hereunder.  If all or any portion of a Debenture or
Warrant is converted or exercised (as applicable) at a time when there is an
effective registration statement to cover the resale of the Underlying Shares,
or if such Underlying Shares may be sold 

 

21

 

under Rule 144
without the requirements for the Company to be in compliance with Rule 144(c)(1) and
otherwise without restrictions or limitations pursuant to Rule 144 or if
such legend is not otherwise required under applicable requirements of the
Securities Act (including judicial interpretations and pronouncements issued by
the staff of the Commission) then such Underlying Shares shall be issued free
of all legends.  The Company agrees that
following the Effective Date or at such time as such legend is no longer
required under this Section 4.1(c), it will, no later than three Trading
Days following the delivery by a Purchaser to the Company or the Transfer Agent
of a certificate representing Underlying Shares, as applicable, issued with a
restrictive legend (such third Trading Day, the “Legend Removal Date”),
deliver or cause to be delivered to such Purchaser a certificate representing
such shares that is free from all restrictive and other legends.  The Company may not make any notation on its
records or give instructions to the Transfer Agent that enlarge the
restrictions on transfer set forth in this Section.  Certificates for Underlying Shares subject to
legend removal hereunder shall be transmitted by the Transfer Agent to the
Purchaser by crediting the account of the Purchaser’s prime broker with the
Depository Trust Company System as directed by such Purchaser.

 

(d)           In addition to such
Purchaser’s other available remedies, the Company shall pay to a Purchaser, in
cash, as partial liquidated damages and not as a penalty, for each $1,000 of
Underlying Shares (based on the VWAP of the Common Stock on the date such
Securities are submitted to the Transfer Agent) delivered for removal of the
restrictive legend and subject to Section 4.1(c), $10 per Trading Day
(increasing to $20 per Trading Day 5 Trading Days after such damages have begun
to accrue) for each Trading Day after the Legend Removal Date until such
certificate is delivered without a legend. 
Nothing herein shall limit such Purchaser’s right to pursue actual
damages for the Company’s failure to deliver certificates representing any
Securities as required by the Transaction Documents, and such Purchaser shall
have the right to pursue all remedies available to it at law or in equity
including, without limitation, a decree of specific performance and/or
injunctive relief.

 

(e)           Each Purchaser, severally and not jointly
with the other Purchasers, agrees that such Purchaser will sell any Securities
only pursuant to either the registration requirements of the Securities Act,
including any applicable prospectus delivery requirements, or an exemption
therefrom, and that if Securities are sold pursuant to a Registration
Statement, they will be sold in compliance with the plan of distribution set
forth therein, and acknowledges that the removal of the restrictive legend from
certificates representing Securities as set forth in this Section 4.1 is
predicated upon the Company’s reliance upon this understanding. If a
Registration Statement ceases to be effective for a 30 consecutive day period,
at any time before the time the Securities are eligible for sale under Rule 144
without the requirements for the Company to be in compliance with Rule 144(c)(1) and
otherwise without restrictions or limitations pursuant to Rule 144, each
Purchaser shall, at the Company’s request immediately after such 30 day period,
return the certificates representing the Securities to the Transfer Agent for
the purpose of exchanging such certificates for a certificate representing such
Securities with a legend required by this Agreement.

 

22

 

4.2           Acknowledgment
of Dilution.  The Company
acknowledges that the issuance of the Securities may result in dilution of the
outstanding shares of Common Stock, which dilution may be substantial under
certain market conditions.  The Company
further acknowledges that its obligations under the Transaction Documents,
including, without limitation, its obligation to issue the Underlying Shares
pursuant to the Transaction Documents, are unconditional and absolute and not
subject to any right of set off, counterclaim, delay or reduction, regardless
of the effect of any such dilution or any claim the Company may have against
any Purchaser and regardless of the dilutive effect that such issuance may have
on the ownership of the other stockholders of the Company.

 

4.3           Furnishing
of Information.  The Company shall
cause its Common Stock to be registered under Section 12(g) of the
Exchange Act within the earlier of (a) June 30, 2008 and (b) 30
days from the Reverse Merger Date (unless otherwise extended to a later date by
written consent of each Purchaser) (the date that the Common Stock is
registered under Section 12(g) of the Exchange Act, the “Exchange
Act Date”).  Until the time that no
Purchaser owns Securities, the Company covenants to timely file (or obtain
extensions in respect thereof and file within the applicable grace period) all
reports required to be filed by the Company after the date it becomes subject
to the reporting obligations of the Exchange Act.    As long as any Purchaser owns Securities,
if the Company is not required to file reports pursuant to the Exchange Act, it
will prepare and furnish to the Purchasers and make publicly available in
accordance with Rule 144(c) such information as is required for the
Purchasers to sell the Securities under Rule 144.  The Company further covenants that it will
take such further action as any holder of Securities may reasonably request, to
the extent required from time to time to enable such Person to sell such
Securities without registration under the Securities Act within the
requirements of the exemption provided by Rule 144.

 

4.4           Integration.  The Company shall not sell, offer for sale or
solicit offers to buy or otherwise negotiate in respect of any security (as
defined in Section 2 of the Securities Act) that would be integrated with
the offer or sale of the Securities to the Purchasers in a manner that would
require the registration under the Securities Act of the sale of the Securities
to the Purchasers or that would be integrated with the offer or sale of the
Securities for purposes of the rules and regulations of any Trading
Market.

 

4.5           Conversion
and Exercise Procedures.  The form of
Notice of Exercise included in the Warrants and the form of Notice of
Conversion included in the Debentures  set
forth the totality of the procedures required of the Purchasers in order to
exercise the Warrants or convert the Debentures.  No additional legal opinion or other
information or instructions shall be required of the Purchasers to exercise
their Warrants or convert their Debentures. 
The Company shall honor exercises of the Warrants and conversions of the
Debentures and shall deliver Underlying Shares in accordance with the terms,
conditions and time periods set forth in the Transaction Documents.

 

4.6           Securities Laws Disclosure; Publicity.  The Company shall, by 5:30 p.m. (New
York City time) on the fourth Trading Day following the Exchange Act Date, file
with the Commission a Current Report on Form 8-K (unless all such
disclosure was made in a prior filing with the Commission) disclosing the
material terms of the transactions contemplated hereby and 

 

23

 

such terms as are required to be disclosed in connection with the
Reverse Merger and attaching the Transaction Documents as exhibits thereto
(including all attachments, the “8-K Filing”).  The 8-K Filing (or other filing with the
Commission, if applicable) shall disclose all material, nonpublic information
provided by the Company, any of its Subsidiaries or any of its respective
officers, directors, employees or agents to the Purchasers and, from and after
the 8-K Filing, no Purchaser shall be in possession of any material, nonpublic
information received from the Company, any of its Subsidiaries or any of its
respective officers, directors, employees or agents. The Company and each
Purchaser shall consult with each other in issuing any other press releases
with respect to the transactions contemplated hereby, and neither the Company
nor any Purchaser shall issue any such press release or otherwise make any such
public statement without the prior consent of the Company, with respect to any
press release of any Purchaser, or without the prior consent of each Purchaser,
with respect to any press release of the Company, which consent shall not
unreasonably be withheld or delayed, except if such disclosure is required by
law, in which case the disclosing party shall promptly provide the other party
with prior notice of such public statement or communication.  Notwithstanding the foregoing, the Company
shall not publicly disclose the name of any Purchaser, or include the name of
any Purchaser in any filing with the Commission or any regulatory agency or
Trading Market, without the prior written consent of such Purchaser, except (i) as
required by federal securities law in connection with (A) any registration
statement contemplated by the Registration Rights Agreement and (B) the
filing of final Transaction Documents (including signature pages thereto)
with the Commission and (ii) to the extent such disclosure is required by
law or Trading Market regulations, in which case the Company shall provide the Purchasers
with prior notice of such disclosure permitted under this clause (ii).

 

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

 

4.8           Non-Public
Information.  From the date the
Company becomes subject to the reporting obligations under the Exchange Act,
except with respect to the material terms and conditions of the transactions
contemplated by the Transaction Documents, the Company covenants and agrees
that neither it nor any other Person acting on its behalf, will provide any
Purchaser or its agents or counsel with any information that the Company
believes constitutes material non-public information, unless prior thereto such
Purchaser shall have executed a written agreement regarding the confidentiality
and use of such information.  The Company
understands and confirms that each Purchaser shall be relying on the foregoing
covenant in effecting transactions in securities of the Company.

 

4.9           Use
of Proceeds.  Except as set forth on Schedule
4.9 attached hereto, the Company shall use the net proceeds from the sale
of the Securities hereunder for working capital purposes and shall not use such
proceeds for (a) the satisfaction of any portion of the Company’s debt
(other than payment of trade payables in the ordinary course of the Company’s
business and 

 

24

 

prior
practices), (b) the redemption of any Common Stock or Common Stock
Equivalents, or (c) the settlement of any outstanding litigation.

 

4.10         Indemnification of Purchasers.   Subject to the provisions of this Section 4.10,
the Company will indemnify and hold each Purchaser and its directors, officers,
shareholders, members, partners, employees and agents (and any other Persons
with a functionally equivalent role of a Person holding such titles
notwithstanding a lack of such title or any other title), each Person who
controls such Purchaser (within the meaning of Section 15 of the
Securities Act and Section 20 of the Exchange Act), and the directors,
officers, shareholders, agents, members, partners or employees (and any other
Persons with a functionally equivalent role of a Person holding such titles
notwithstanding a lack of such title or any other title) of such controlling
person (each, a “Purchaser Party”) harmless from any and all losses,
liabilities, obligations, claims, contingencies, damages, costs and expenses,
including all judgments, amounts paid in settlements, court costs and
reasonable attorneys’ fees and costs of investigation that any such Purchaser
Party may suffer or incur as a result of or relating to (a) any breach of
any of the representations, warranties, covenants or agreements made by the
Company in this Agreement or in the other Transaction Documents or (b) any
action instituted against a Purchaser in any capacity, or any of them or their
respective Affiliates, by any stockholder of the Company who is not an
Affiliate of such Purchaser, with respect to any of the transactions
contemplated by the Transaction Documents (unless such action is based upon a
breach of such Purchaser’s representations, warranties or covenants under the
Transaction Documents or any agreements or understandings such Purchaser may
have with any such stockholder or any violations by the Purchaser of state or
federal securities laws or any conduct by such Purchaser which constitutes
fraud, gross negligence, willful misconduct or malfeasance).  If any action shall be brought against any
Purchaser Party in respect of which indemnity may be sought pursuant to this
Agreement, such Purchaser Party shall promptly notify the Company in writing,
and the Company shall have the right to assume the defense thereof with counsel
of its own choosing reasonably acceptable to the Purchaser Party.  Any Purchaser Party shall have the right to
employ separate counsel in any such action and participate in the defense
thereof, but the fees and expenses of such counsel shall be at the expense of
such Purchaser Party except to the extent that (i) the employment thereof
has been specifically authorized by the Company in writing, (ii) the
Company has failed after a reasonable period of time to assume such defense and
to employ counsel or (iii) in such action there is, in the reasonable
opinion of such separate counsel, a material conflict on any material issue
between the position of the Company and the position of such Purchaser Party,
in which case the Company shall be responsible for the reasonable fees and
expenses of no more than one such separate counsel.  The Company will not be liable to any
Purchaser Party under this Agreement (i) for any settlement by a Purchaser
Party effected without the Company’s prior written consent, which shall not be
unreasonably withheld or delayed; or (ii) to the extent, but only to the
extent that a loss, claim, damage or liability is attributable to any Purchaser
Party’s breach of any of the representations, warranties, covenants or
agreements made by such Purchaser Party in this Agreement or in the other
Transaction Documents. Except as otherwise set forth herein, the mechanics and
procedures with respect to the obligations under this Section 4.10 shall
be the same as those set forth in Section 5 of the Registration Rights
Agreement.

 

25

 

4.11         Reservation
and Listing of Securities.

 

(a)           The Company shall
maintain a reserve from its duly authorized shares of Common Stock for issuance
pursuant to the Transaction Documents in such amount as may be required to
fulfill its obligations in full under the Transaction Documents.

 

(b)           If, on any date, the
number of authorized but unissued (and otherwise unreserved) shares of Common
Stock is less than the Required Minimum on such date, minus the number of
shares of Common Stock previously issued pursuant to the Transaction Documents,
then the Board of Directors shall use reasonable best efforts to amend the
Company’s certificate or articles of incorporation to increase the number of
authorized but unissued shares of Common Stock to at least the Required Minimum
at such time (minus the number of shares of Common Stock previously issued
pursuant to the Transaction Documents), as soon as possible and in any event
not later than the 75th day after such date; provided that the Company will not
be required at any time to authorize a number of shares of Common Stock greater
than the maximum remaining number of shares of Common Stock that could possibly
be issued after such time pursuant to the Transaction Documents.

 

(c)           The Company shall on or
prior to the earlier of (a) June 30, 2008 and (b) 30 days from
the Reverse Merger Date: (i) in the time and manner required by the
principal Trading Market, prepare and file with such Trading Market an
additional shares listing application covering a number of shares of Common Stock
at least equal to the Required Minimum on the date of such application, (ii) take
all steps necessary to cause such shares of Common Stock to be approved for
listing on such Trading Market as soon as possible thereafter, (iii) provide
to the Purchasers evidence of such listing, and (iv) maintain the listing
of such Common Stock on any date at least equal to the Required Minimum on such
date on such Trading Market or another Trading Market.

 

4.12         Participation
in Future Financing.

 

(a)           From the date hereof
until the 12 month anniversary of the Effective Date, upon any issuance by the
Company or any of its Subsidiaries of Common Stock or Common Stock Equivalents
(a “Subsequent Financing”), each Purchaser shall have the right to
participate in up to an amount of the Subsequent Financing equal to 100% of the
Subsequent Financing (the “Participation Maximum”) on the same terms,
conditions and price provided for in the Subsequent Financing.

 

(b)           At least 5 Trading Days
prior to the closing of the Subsequent Financing, the Company shall deliver to
each Purchaser a written notice of its intention to effect a Subsequent
Financing (“Pre-Notice”), which Pre-Notice shall ask such Purchaser if
it wants to review the details of such financing (such additional notice, a “Subsequent
Financing Notice”).  Upon the request
of a Purchaser, and only upon a request by such Purchaser, for a Subsequent
Financing Notice, the Company shall promptly, but no later than 1 Trading Day
after such request, deliver a Subsequent Financing Notice to such
Purchaser.  The Subsequent Financing
Notice shall describe in reasonable detail the proposed terms of such
Subsequent Financing, the amount of proceeds intended to be raised thereunder
and the Person or Persons through or with whom such Subsequent 

 

26

 

Financing is proposed to be effected and
shall include a term sheet or similar document relating thereto as an
attachment.

 

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

 

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

 

(e)   If by 5:30 p.m. (New York City time) on the 5th
Trading Day after all of the Purchasers have received the Pre-Notice, the
Company receives responses to a Subsequent Financing Notice from Purchasers
seeking to purchase more than the aggregate amount of the Participation
Maximum, each such Purchaser shall have the right to purchase its Pro Rata
Portion (as defined below) of the Participation Maximum.  “Pro Rata
Portion” means the ratio of (x) the Subscription Amount of Securities
purchased on the Closing Date by a Purchaser participating under this Section 4.12
and (y) the sum of the aggregate Subscription Amounts of Securities
purchased on the Closing Date by all Purchasers participating under this Section 4.12.

 

(f)            The Company must
provide the Purchasers with a second Subsequent Financing Notice, and the
Purchasers will again have the right of participation set forth above in this Section 4.12,
if the Subsequent Financing subject to the initial Subsequent Financing Notice
is not consummated for any reason on the terms set forth in such Subsequent
Financing Notice within 60 Trading Days after the date of the initial
Subsequent Financing Notice.

 

(g)           Notwithstanding the foregoing,
this Section 4.12 shall not apply in respect of (i) an Exempt
Issuance, or (ii) an underwritten public offering of Common Stock.

 

4.13         Subsequent
Equity Sales.

 

(a)           From the date hereof
until 90 days after the Effective Date, neither the Company nor any Subsidiary
shall issue shares of Common Stock or Common Stock Equivalents; provided,
however, the 90 day period set forth in this Section 4.13 shall be
extended for the number of Trading Days during such period in which (i) trading
in the Common Stock is suspended by any Trading Market, or (ii) following
the Effective Date, 

 

27

 

the
Registration Statement is not effective or the prospectus included in the
Registration Statement may not be used by the Purchasers for the resale of the
Underlying Shares.

 

(b)           From the date hereof
until the date the Debentures and Warrants are no longer outstanding, the
Company shall be prohibited from effecting or entering into an agreement to
effect any Subsequent Financing involving a Variable Rate Transaction. “Variable
Rate Transaction” means a transaction in which the Company issues or sells (i) any
debt or equity securities that are convertible into, exchangeable or
exercisable for, or include the right to receive additional shares of Common
Stock either (A) at a conversion, exercise or exchange rate or other price
that is based upon and/or varies with the trading prices of or quotations for
the shares of Common Stock at any time after the initial issuance of such debt
or equity securities, or (B) with a conversion, exercise or exchange price
that is subject to being reset at some future date after the initial issuance
of such debt or equity security or upon the occurrence of specified or
contingent events directly or indirectly related to the business of the Company
or the market for the Common Stock or (ii) enters into any agreement,
including, but not limited to, an equity line of credit, whereby the Company
may sell securities at a future determined price.

 

(c)           So long as any
Purchaser beneficially owns any Debentures, the Company will not issue any
Debentures other than up to an additional $5 million of Debentures on the terms
described in this Agreement as contemplated hereby and the Company shall not
issue any other securities that would cause a breach or default under the
Debentures.

 

(d)           Notwithstanding the
foregoing, this Section 4.13 shall not apply in respect of an Exempt
Issuance.

 

4.14         Equal
Treatment of Purchasers.  No
consideration shall be offered or paid to any Person to amend or consent to a
waiver or modification of any provision of any of the Transaction Documents
unless the same consideration is also offered to all of the parties to the
Transaction Documents. Further, the Company shall not make any payment of
principal or interest on the Debentures in amounts which are disproportionate
to the respective principal amounts outstanding on the Debentures at any
applicable time.  For clarification
purposes, this provision constitutes a separate right granted to each Purchaser
by the Company and negotiated separately by each Purchaser, and is intended for
the Company to treat the Purchasers as a class and shall not in any way be
construed as the Purchasers acting in concert or as a group with respect to the
purchase, disposition or voting of Securities or otherwise.

 

4.15         Reverse Merger Transaction. The Company
shall use best efforts to consummate a reverse merger transaction with Tripath
substantially on the terms provided for in the Disclosure Schedule, as supplemented
and filed with the Bankruptcy Court in connection with Tripath’s bankruptcy
proceeding (such merger, the “Reverse Merger”), no later than April 30,
2008 (unless otherwise extended to a later date by the prior written consent of
each Purchaser) (the “Reverse Merger Deadline”).

 

4.16         Form D; Blue Sky
Filings.  The Company agrees to
timely file a Form D with respect to the Securities as required under
Regulation D and to provide a copy thereof, promptly 

 

28

 

upon request
of any Purchaser. The Company shall take such action as the Company shall
reasonably determine is necessary in order to obtain an exemption for, or to
qualify the Securities for, sale to the Purchasers at the Closing under
applicable securities or “Blue Sky” laws of the states of the United States,
and shall provide evidence of such actions promptly upon request of any
Purchaser.

 

4.17         Capital Changes.  Until the one year anniversary of the
Effective Date, the Company shall not undertake a reverse or forward stock
split or reclassification of the Common Stock without the prior written consent
of the Purchasers holding a majority in principal amount outstanding of the
Debentures.

 

4.18         Public Information.  At any time during the period commencing from
the six (6) month anniversary of the Closing Date and ending at such time
that all of the Securities can be sold either pursuant to a registration
statement, or if a registration statement is not available for the resale of
all of the Securities, may be sold without the requirement for the Company to
be in compliance with Rule 144(c)(1) and otherwise without
restriction or limitation pursuant to Rule 144, if the Company shall fail
for any reason to satisfy the current public information requirement under Rule 144(c) (a
“Public Information Failure”) then, in addition to such Purchaser’s
other available remedies, the Company shall pay to a Purchaser, in cash, as
partial liquidated damages and not as a penalty, by reason of any such delay in
or reduction of its ability to sell the Securities, an amount in cash equal to
one percent (1.0%) of the aggregate Subscription Amount of such Purchaser’s
Securities on the day of a Public Information Failure and on every thirtieth
(30th) day (pro rated for periods totaling less than thirty days)
thereafter until the earlier of (a) the date such Public Information
Failure is cured and (b) such time that such public information is no
longer required  for the Purchasers to
transfer the Underlying Shares pursuant to Rule 144.  The payments to which a Purchaser shall be
entitled pursuant to this Section 4.18 are referred to herein as “Public Information Failure Payments.”  Public
Information Failure  Payments
shall be paid on the earlier of (i) the last day of the calendar month
during which such Public Information
Failure  Payments are
incurred and (ii) the third (3rd) Business Day after the event
or failure giving rise to the Public
Information Failure  Payments
is cured.  In the event the Company fails
to make Public Information Failure  Payments in a timely manner, such Public Information Failure  Payments shall bear interest at the
rate of 1.5% per month (prorated for partial months) until paid in full.
Nothing herein shall limit such Purchaser’s right to pursue actual damages for
the Public Information Failure, and such Purchaser shall have the right to
pursue all remedies available to it at law or in equity including, without
limitation, a decree of specific performance and/or injunctive relief.

 

4.19         Ratification of
Security Interest and Subsidiary Guarantee. 
As an inducement for the Purchasers to extend the loans as evidenced by
the Debentures and to secure the complete and timely payment, performance and
discharge in full, as the case may be, of all of the Debenture Obligations (as
defined below), the Company hereby acknowledges and ratifies that, pursuant to
the Security Agreement dated January 31, 2008, by and among the Company
and the secured creditors signatory thereto (the “Security Agreement”),
the Company hereby unconditionally and irrevocably acknowledges and ratifies
the pledge, grant and hypothecation to the Purchasers of a security interest in
and to, a lien upon and a right of set-off against all of their respective
right, title and interest of whatsoever kind and nature in and to, the
Collateral (as 

 

29

 

defined in the
Security Agreement).  The parties
acknowledge and confirm that such security interest is subject to the terms of
the Security Agreement and the definition of “Obligations” under the Security
Agreement includes, without limitation: (i) principal of, and interest on
the Debentures and the loans extended pursuant thereto; (ii) any and all
other fees, indemnities, costs, obligations and liabilities of the Debtors (as
defined under the Security Agreement) from time to time under or in connection
with this Agreement, the Debentures, the Guarantee (as defined under the
Security Agreement) and any other instruments, agreements or other documents executed
and/or delivered in connection herewith or therewith; and (iii) all
amounts (including but not limited to post-petition interest) in respect of the
foregoing that would be payable but for the fact that the obligations to pay
such amounts are unenforceable or not allowable due to the existence of a
bankruptcy, reorganization or similar proceeding involving any Debtor (the “Debenture
Obligations”).

 

ARTICLE V.

MISCELLANEOUS

 

5.1           Termination. 
This Agreement may be terminated by any Purchaser, as to such Purchaser’s
obligations hereunder only and without any effect whatsoever on the obligations
between the Company and the other Purchasers, by written notice to the other
parties, if the Closing has not been consummated on or before April 30,
2008; provided, however, that such termination will not affect
the right of any party to sue for any breach by the other party (or parties).

 

5.2           Fees
and Expenses.  The Company shall
deliver to each Purchaser, prior to the Closing, a completed and executed copy
of the Closing Statement attached hereto as Annex A.  Except as expressly set forth in the
Transaction Documents to the contrary, each party shall pay the fees and
expenses of its advisers, counsel, accountants and other experts, if any, and
all other expenses incurred by such party incident to the negotiation,
preparation, execution, delivery and performance of this Agreement.  The Company shall pay all transfer agent
fees, stamp taxes and other taxes and duties levied in connection with the
delivery of any Securities to the Purchasers.

 

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

 

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

 

30

 

actual receipt by the party to whom such notice is required to be
given.  The address for such notices and
communications shall be as set forth on the signature pages attached
hereto.

 

5.5           Amendments;
Waivers.  No provision of this
Agreement may be waived, modified, supplemented or amended except in a written
instrument signed, in the case of an amendment, by the Company and the
Purchasers of at least 67% in interest of the Securities still held by
Purchasers or, in the case of a waiver, by the party against whom enforcement
of any such waived provision is sought. 
No waiver of any default with respect to any provision, condition or
requirement of this Agreement shall be deemed to be a continuing waiver in the
future or a waiver of any subsequent default or a waiver of any other
provision, condition or requirement hereof, nor shall any delay or omission of
any party to exercise any right hereunder in any manner impair the exercise of
any such right.

 

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

 

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

 

5.8           No
Third-Party Beneficiaries.  This
Agreement is intended for the benefit of the parties hereto and their respective
successors and permitted assigns and is not for the benefit of, nor may any
provision hereof be enforced by, any other Person, except as otherwise set
forth in Section 4.10.

 

5.9           Governing
Law.  All questions concerning the
construction, validity, enforcement and interpretation of the Transaction
Documents shall be governed by and construed and enforced in accordance with
the internal laws of the State of New York, without regard to the principles of
conflicts of law thereof.  Each party
agrees that all legal proceedings concerning the interpretations, enforcement
and defense of the transactions contemplated by this Agreement and any other
Transaction Documents (whether brought against a party hereto or its respective
affiliates, directors, officers, shareholders, employees or agents) shall be
commenced exclusively in the state and federal courts sitting in the City of
New York.  Each party hereby irrevocably
submits to the exclusive jurisdiction of the state and federal courts sitting
in the City of New York, borough of Manhattan for the adjudication of any
dispute hereunder or in connection herewith or with any transaction
contemplated hereby or discussed herein (including with respect to the
enforcement of any of the Transaction Documents), and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is improper or is an inconvenient venue for
such proceeding.  Each party hereby
irrevocably waives personal service

 

31

 

of process and
consents to process being served in any such suit, action or proceeding by
mailing a copy thereof via registered or certified mail or overnight delivery
(with evidence of delivery) to such party at the address in effect for notices
to it under this Agreement and agrees that such service shall constitute good
and sufficient service of process and notice thereof.  Nothing contained herein shall be deemed to
limit in any way any right to serve process in any other manner permitted by
law.   If either party shall commence an
action or proceeding to enforce any provisions of the Transaction Documents,
then the prevailing party in such action or proceeding shall be reimbursed by
the other party for its reasonable attorneys’ fees and other costs and expenses
incurred with the investigation, preparation and prosecution of such action or
proceeding.

 

5.10         Survival.  The representations and warranties shall
survive the Closing and the delivery of the Securities for the applicable
statute of limitations.

 

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

 

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

 

5.13         Rescission and Withdrawal Right.  Notwithstanding anything to the contrary
contained in (and without limiting any similar provisions of) any of the other
Transaction Documents, whenever any Purchaser exercises a right, election, demand
or option under a Transaction Document and the Company does not timely perform
its related obligations within the periods therein provided, then such
Purchaser may rescind or withdraw, in its sole discretion from time to time,
prior to such Purchaser’s actual receipt of the Company’s performance of its
related obligations, upon written notice to the Company, any relevant notice,
demand or election in whole or in part without prejudice to its future actions
and rights; provided, however, that in the case of a rescission
of a conversion of a Debenture or exercise of a Warrant, the Purchaser shall be
required to return any shares of Common Stock delivered in connection with any
such rescinded conversion or exercise notice.

 

32

 

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

 

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

 

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

 

5.17         Usury.  To the extent it may lawfully do so, the
Company hereby agrees not to insist upon or plead or in any manner whatsoever
claim, and will resist any and all efforts to be compelled to take the benefit
or advantage of, usury laws wherever enacted, now or at any time hereafter in
force, in connection with any claim, action or proceeding that may be brought
by any Purchaser in order to enforce any right or remedy under any Transaction
Document.  Notwithstanding any provision
to the contrary contained in any Transaction Document, it is expressly agreed
and provided that the total liability of the Company under the Transaction
Documents for payments in the nature of interest shall not exceed the maximum
lawful rate authorized under applicable law (the “Maximum Rate”), and,
without limiting the foregoing, in no event shall any rate of interest or
default interest, or both of them, when aggregated with any other sums in the
nature of interest that the Company may be obligated to pay under the
Transaction Documents exceed such Maximum Rate. 
It is agreed that if the maximum contract rate of interest allowed by
law and applicable to the Transaction Documents is increased or decreased by
statute or any official governmental action subsequent to the date hereof, the
new maximum contract rate of interest allowed by law will be the Maximum Rate
applicable to the Transaction Documents from the effective date forward, unless
such application is precluded by applicable law.  If under any circumstances whatsoever,
interest in excess of the Maximum Rate is paid by the Company to any Purchaser
with respect to indebtedness evidenced by the 

 

33

 

Transaction
Documents, such excess shall be applied by such Purchaser to the unpaid
principal balance of any such indebtedness or be refunded to the Company, the
manner of handling such excess to be at such Purchaser’s election.

 

5.18         Independent Nature
of Purchasers’ Obligations and Rights. 
The obligations of each Purchaser under any Transaction Document are
several and not joint with the obligations of any other Purchaser, and no
Purchaser shall be responsible in any way for the performance or
non-performance of the obligations of any other Purchaser under any Transaction
Document.  Nothing contained herein or in
any other Transaction Document, and no action taken by any Purchaser pursuant
thereto, shall be deemed to constitute the Purchasers as a partnership, an
association, a joint venture or any other kind of entity, or create a
presumption that the Purchasers are in any way acting in concert or as a group
with respect to such obligations or the transactions contemplated by the
Transaction Documents.  Each Purchaser
shall be entitled to independently protect and enforce its rights, including
without limitation the rights arising out of this Agreement or out of the other
Transaction Documents, and it shall not be necessary for any other Purchaser to
be joined as an additional party in any proceeding for such purpose.  Each Purchaser has been represented by its
own separate legal counsel in their review and negotiation of the Transaction
Documents.  For reasons of administrative
convenience only, Purchasers and their respective counsel have chosen to
communicate with the Company through LS. 
LS does not represent all of the Purchasers but only Enable.  The Company has elected to provide all
Purchasers with the same terms and Transaction Documents for the convenience of
the Company and not because it was required or requested to do so by the
Purchasers.

 

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

 

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

 

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

 

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

 

34

 

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

 

	
  ETELOS INCORPORATED

  	
   

  	
  Address for Notice:

  1900 O’Farrell St., Suite 320

  San Mateo, CA 94403

  
	
   

  	
   

  	
   

  
	
  By:

  	
          /s/
  Jeffrey L. Garon

  	
   

  	
  Fax:
  

  
	
   

  	
  Name: 
  Jeffrey L. Garon

  	
   

  	
  (408) 516-8425

  
	
   

  	
  Title: 
  President and Chief Executive Officer

  	
   

  	
   

  
	
   

  	
   

  	
   

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

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  James A. Mercer, III, Esq. 

  Duane Morris LLP 

  101 West Broadway, Suite 900 

  San Diego, CA 92101-8285

  	
   

  	
   

  

 

[REMAINDER OF PAGE
INTENTIONALLY LEFT BLANK

SIGNATURE PAGE FOR PURCHASER
FOLLOWS]

 

35

 

[PURCHASER SIGNATURE PAGES TO ETELOS
SECURITIES PURCHASE AGREEMENT]

 

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

 

	
  Name of Purchaser: 

  	
  Enable Growth Partners LP

  	
   

  

 

	
  Signature of Authorized Signatory of Purchaser:

  	
   /s/ Brendon O’Neil

  	
   

  

 

	
  Name of Authorized Signatory: 

  	
  Brendan O’Neil

  	
   

  
	
   

  	
   

  
	
  Title of Authorized Signatory: 

  	
  President and Chief Investment Officer

  	
   

  
				

 

Email Address of Purchaser: boneil@enablecapitalcom

 

Facsimile Number of Purchaser: (415) 677-1580

 

Address for Notice of Purchaser:

 

One Ferry Building

Suite 255

San Francisco, CA 94111

 

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

 

Subscription Amount: $3,000,000

 

Warrant Shares: 333,333

 

EIN Number:  [PROVIDE
THIS UNDER SEPARATE COVER]

 

[SIGNATURE PAGES CONTINUE]

 

36

 

[PURCHASER SIGNATURE PAGES TO ETELOS
SECURITIES PURCHASE AGREEMENT]

 

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

 

	
  Name of Purchaser: 

  	
  Hudson Bay Overseas Fund LTD

  	
   

  

 

	
  Signature of Authorized Signatory of Purchaser:

  	
   /s/ Yoav Roth

  	
   

  

 

	
  Name of Authorized Signatory: 

  	
  Yoav Roth

  	
   

  
	
   

  	
   

  
	
  Title of Authorized Signatory: 

  	
  Principal and Portfolio Manager

  	
   

  
						

 

Email Address of Purchaser: investments@hudsonbaycapital.com

 

Facsimile Number of Purchaser: (212) 571-1279

 

Address for Notice of Purchaser:

 

120 Broadway, 40th Floor

New York, NY 10271

 

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

 

Same as above

 

Subscription Amount: $500,000

 

Warrant Shares: 55,556

 

EIN Number:  [PROVIDE
THIS UNDER SEPARATE COVER]

 

37

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