Document:

Exhibit 4.2

 

CERTIFICATE OF DESIGNATIONS

OF

PREFERRED STOCK

OF

INTRUSION INC.

 

To Be Designated

5% Convertible Preferred Stock

 

 

Pursuant to Section 151(g) of the

General Corporation Law of the State
of Delaware

 

 

The undersigned DOES HEREBY CERTIFY that the following
resolution was duly adopted by the Board of Directors of Intrusion Inc., a
Delaware corporation (the “Corporation”), at a meeting duly convened and held,
at which a quorum was present and acting throughout:

 

“RESOLVED,
that pursuant to the authority conferred on the Board of Directors of the
Corporation (the “Board of Directors”) by the Corporation’s Certificate of
Incorporation, the issuance of a series of preferred stock, par value $0.01 per
share, of the Corporation which shall consist of 1,000,000 shares of preferred
stock be, and the same hereby is, authorized; and the Chief Executive Officer
and Secretary or Assistant Secretary of the Corporation be, and they hereby
are, authorized and directed to execute and file with the Secretary of State of
the State of Delaware a Certificate of Designations of Preferred Stock of the
Corporation fixing the designations, powers, preferences and rights of the
shares of such series, and the qualifications, limitations or restrictions
thereof (in addition to the designations, powers, preferences and rights, and
the qualifications, limitations or restrictions thereof, set forth in the
Certificate of Incorporation which may be applicable to the Corporation’s
preferred stock), as follows:

 

1.                                       Number
of Shares; Designation. A total of 1,000,000 shares of preferred stock,
par value $0.01 per share, of the Corporation are hereby designated as 5%
Convertible Preferred Stock (the “Series”). Shares of the Series are being sold
for a purchase price of $5.00 per share (the “Purchase Price”) pursuant to the
Securities Purchase Agreement dated March 25, 2004, among the Corporation and
the Purchasers party thereto.

 

2.                                       Rank. The Series
shall, with respect to payment of dividends, redemption payments and rights
upon liquidation, dissolution or winding-up of the affairs of the Corporation,
rank:

 

(i)                                     senior
and prior to the  Common
Stock, par value $0.01 per share, of the Corporation (the “Common Stock”), and
any additional series of preferred

 

 

stock which may in the future
be issued by the Corporation and are designated in the amendment to the
Certificate of Incorporation or the certificate of designations establishing
such additional preferred stock as ranking junior to the shares of the Series.
Any shares of the Corporation’s capital stock which are junior to the shares of
the Series with respect to the payment of dividends are hereinafter referred to
as “Junior Dividend Shares” and any shares which are junior to the shares of
the Series with respect to redemption, payment and rights upon liquidation,
dissolution or winding-up of the affairs of the Corporation are hereinafter
referred to as “Junior Liquidation Shares”.

 

(ii)                                  Parri passu with
any additional series of preferred stock which may in the future be issued by the
Corporation and are designated in the amendment to the Certificate of
Incorporation or the certificate of designations establishing such additional
preferred stock as ranking equal to the shares of the Series or which do not
state they are Junior Dividend Shares or Senior Dividend Shares (as defined
below). Any shares of the Corporation’s capital stock which are equal to the
shares of the Series with respect to the payment of dividends are hereinafter
referred to as “Parity Dividend Shares” and any shares which are equal to the
shares of the Series with respect to redemption, payment and rights upon
liquidation, dissolution or winding-up of the affairs of the Corporation are
hereinafter referred to as “Parity Liquidation Shares”.

 

(iii)                               Junior
to any additional series of preferred stock which may in the future be issued
by the Corporation and are designated in the amendment to the Certificate of
Incorporation or the certificate of designations establishing such additional
preferred stock as ranking senior to the shares of the Series. Any shares of
the Corporation’s capital stock which are senior to the shares of the Series
with respect to the payment of dividends are hereinafter referred to as “Senior
Dividend Shares” and any shares which are senior to the shares of the Series
with respect to redemption, payment and rights upon liquidation, dissolution or
winding-up of the affairs of the Corporation are hereinafter referred to as
“Senior Liquidation Shares”.

 

The Corporation
may not issue additional shares of preferred stock which are not (a) Junior
Stock (as defined in paragraph 3(c) below) or (b) both Parity Liquidation
Shares and Parity Dividend Shares without the consent of the holders of a
majority of the outstanding shares of the Series.

 

3.                                       Dividends.  (a) 
The dividend rate on shares of the Series shall be 5.0% of the Purchase Price per share
per annum (as adjusted for any stock dividends, combinations or splits,
recapitalizations or the like with respect to such shares). Dividends on shares
of the Series shall be fully cumulative, accruing, without interest, from the
date of original issuance of the Series through the date of redemption or
conversion thereof, and shall be payable in arrears, when, as and if declared
by the Board of Directors out of funds legally available for the payment of
dividends, on September 30 and March 31 of each year, commencing September 30,
2004, except that if such date is not a business day then the dividend shall be
payable on the first immediately succeeding business day (as used

 

2

 

herein, the term
“business day” shall mean any day except a Saturday, Sunday or day on which
banking institutions are legally authorized to close in Dallas, Texas) (each
such period being hereinafter referred to as a “Dividend Period”). Dividends
shall be payable in cash. Each dividend shall be paid to the holders of record
of shares of the Series as they appear on the stock register of the Corporation
on the record date, not less than 10 nor more than 60 days preceding the
payment date thereof, as shall be fixed by the Board of Directors. Dividends
payable for each Dividend Period shall be computed on the basis of a 360-day
year of twelve 30-day months and rounded to the nearest cent. Dividends on
account of arrearages for any past Dividend Period may be declared and paid at
any time, without reference to any regular dividend payment date, to holders of
record on such date, not exceeding 45 days preceding the payment date thereof,
as may be fixed by the Board of Directors. Dividends shall accrue regardless of
whether the Corporation has earnings, whether there are funds legally available
therefor and/or whether declared. No interest shall be payable with respect to
any dividend payment that may be in arrears. Holders of shares of the Series
called for redemption between the close of business on a dividend payment
record date and the close of business on the corresponding dividend payment
date shall, in lieu of receiving such dividend on the dividend payment date
fixed therefor, receive such dividend payment on the date fixed for redemption
together with all other accrued and unpaid dividends to the date fixed for
redemption. The holders of shares of the Series shall not be entitled to any
dividends other than the cash dividends provided for in this paragraph 3.

 

(b)                                 No cash dividends,
except as described in the next succeeding sentence, shall be declared or paid
or set apart for payment on any Parity Dividend Shares for any period unless
full cumulative dividends have been or contemporaneously are declared and paid
or declared and set aside for payment for all accrued dividends with respect to
the Series through the most recent Dividend Period ending on or prior to the
date of payment.  Unless dividends
accrued and payable but unpaid on shares of the Series and any Parity Dividend
Shares at the time outstanding have been paid in full, all cash dividends
declared by the Corporation upon shares of the Series or Parity Dividend Shares
shall be declared pro rata with respect to all such shares, so that the
amounts of any such dividends declared on shares of the Series and the Parity
Dividend Shares shall in all cases bear to each other the same ratio that, at
the time of the declaration, all accrued but unpaid cash dividends on shares of
the Series and the other Parity Dividend Shares, respectively, bear to each
other.

 

(c)                                  If
at any time the Corporation has failed to (x) pay or set apart for payment all
accrued dividends on any shares of the Series through the then most recent
Dividend Period and (y) set apart for payment an amount in cash equal to the
scheduled dividend payments for each of the next two Dividend Periods, the
Corporation shall not, and shall not permit any corporation or other entity directly
or indirectly controlled by the Corporation to:

 

(i)                                     declare
or pay or set aside for payment any dividend or other distribution on or with
respect to the Junior Dividend Shares, whether in cash, securities, obligations
or otherwise (other than dividends or distributions paid in shares of capital
stock of the Corporation ranking junior to shares of the Series both

 

3

 

as to the payment of
dividends and as to rights in liquidation, dissolution or winding-up of the
affairs of the Corporation (“Junior Stock”), or options, warrants or rights to
subscribe for or purchase shares of Junior Stock); or

 

(ii)                                  redeem, purchase or
otherwise acquire, or pay into, set apart money or make available for a sinking
or other analogous fund for the redemption, purchase or other acquisition of,
any shares of the Series (unless all of the shares of the Series are
concurrently redeemed), Parity Dividend Shares, Parity Liquidation Shares or
shares of Junior Stock for any consideration (except by conversion into or
exchange for Junior Stock), other than repurchases of
shares of Common Stock from employees, officers, directors, consultants or
other persons performing services for the Corporation or any subsidiary
pursuant to agreements under which the Corporation has the option to repurchase
such shares at cost or at cost plus interest at a rate not to exceed nine
percent (9%) per annum upon the occurrence of certain events, such as the
termination of employment; and provided further, that the total
amount applied to the repurchase of shares of Common Stock shall not exceed
$100,000 during any twelve month period,

 

unless, in each such case, all dividends accrued on
shares of the Series through the most recent Dividend Period and on any Parity
Dividend Shares have been or contemporaneously are declared and paid in full.

 

(d)                                 Any reference to
“distribution” contained in this paragraph 3 shall not be deemed to include any
distribution made in connection with any liquidation, dissolution or winding-up
of the Corporation, whether voluntary or involuntary.

 

4.                                       Liquidation.  (a)  The liquidation value per share of shares of
the Series, in case of the voluntary or involuntary liquidation, dissolution or
winding-up of the affairs of the Corporation, shall be an amount equal to the
Purchase Price, plus an amount equal to the cash value of dividends accrued and
unpaid thereon, whether or not declared, to the payment date.

 

(b)                                 In
the event of any voluntary or involuntary liquidation, dissolution or winding-up
of the Corporation, the holders of shares of the Series (i) shall not be
entitled to receive the liquidation value of the shares held by them until the
liquidation value of all Senior Liquidation Shares shall have been paid in
full, and (ii) shall be entitled to receive the liquidation value of such
shares held by them in preference to and in priority over any distributions
upon the Junior Liquidation Shares. Upon payment in full of the liquidation
value to which the holders of shares of the Series are entitled, the holders of
shares of the Series will not be entitled to any further participation in any
distribution of assets by the Corporation. If the assets of the Corporation are
not sufficient to pay in full the liquidation value payable to the holders of
shares of the Series and the liquidation value payable to the holders of any
Parity Liquidation Shares, the holders of all such shares shall share ratably
in such distribution of assets in accordance with the amounts that would be
payable on the distribution if the amounts to which the holders of shares of
the Series and the holders of Parity Liquidation Shares are entitled were paid
in full.

 

4

 

(c)                                  For
purposes of this paragraph 4, (i) any acquisition of the Corporation by means
of merger or other form of corporate reorganization in which outstanding
capital stock of the Corporation are exchanged for securities or other
consideration issued, or caused to be issued, by the acquiring entity or its subsidiary
(other than a mere reincorporation transaction), or (ii) a sale of all or
substantially all of the assets of the Corporation, shall be treated as a
liquidation, dissolution or winding-up of the Corporation, unless otherwise
approved by holders of at least two-thirds of the then outstanding shares of
the Series, and shall entitle the holders of the Series to receive at the
closing in cash, securities or other property (valued as provided in paragraph
4(e) below) amounts as specified in paragraph 4(a) and (b) above.

 

(d)                                 Written
notice of any liquidation, dissolution or winding-up of the Corporation,
stating the payment date or dates when and the place or places where the
amounts distributable in such circumstances shall be payable, shall be given by
first class mail, postage prepaid, not less than 30 days prior to any payment
date stated therein, to the holders of record of shares of the Series at their
respective addresses as the same shall appear on the books of the transfer
agent with respect to the Series.

 

(e)                                  Whenever
the distribution provided for in this paragraph 4 shall be payable in
securities or property other than cash, the value of such distribution shall be
the fair market value of such securities or other property as determined in
good faith by the Board of Directors.

 

5.                                       Optional
Redemption. (a) Shares of the Series will be
redeemable at the option of the Corporation, in whole or in part, from and
after the time that (x) the six-month anniversary of the issuance of shares of
the Series occurs, and (y) the Current Market Price for the Common Stock for a
period of any 20 out of 30 consecutive trading days equals or exceeds 200% of
the Conversion Price (as defined below) then in effect, and (z) the Common
Stock underlying the Shares can be sold by the holder thereof without
restriction on resale; provided, however,
that prior to the last date (the “Final Registration Date”) on which a
registration statement is required to remain effective and available for use
pursuant to that certain Registration Rights Agreement, dated March 25, 2004
(the “Registration Rights Agreement”), such registration statement is effective
and available for use at all times during the period beginning thirty (30) days
prior to the date of the redemption notice and ending on the earlier of the
redemption date or the Final Registration Date, and is expected to remain
effective and available for use until the earlier of thirty (30) days following
the redemption date or the Final Registration Date.  The redemption price will be payable in cash and equal to the
Purchase Price, together with an amount equal to the dividends accrued and
unpaid thereon, whether or not declared, to the redemption date. The aggregate
payment to each holder of shares of the Series to be redeemed will be rounded
to the nearest cent. Notwithstanding the foregoing, if the date fixed for
redemption occurs after a record date for a dividend and prior to the
corresponding payment date, such dividend shall be paid on the payment date and
the amount payable with respect to each share of the Series redeemed shall not
include the amount of the dividend to be so paid.

 

5

 

(b)                                 Not less than 60 nor
more than 90 days prior to the date fixed for any redemption of shares of the
Series pursuant to this paragraph 5, a notice of redemption shall be mailed by
first class mail, postage prepaid, to each holder of shares of the Series to be
redeemed at such holder’s last address as it appears on the books of the
transfer agent for the Series. Such notice shall state (i) that the Corporation
has elected to redeem all or a portion of the shares of the Series, as
specified in such notice, (ii) the redemption price, (iii) the redemption date,
(iv) that, unless the Corporation defaults in the payment of the redemption
price, all shares of the Series called for redemption shall cease to accrue
dividends after the redemption date and shall cease to be outstanding after
such date, and (v) any other information required by applicable law to be
included therein and any other procedures that a holder of shares of the Series
must follow to receive payment for its redeemed shares. Neither failure to mail
such notice, nor any defect therein or in the mailing thereof, to any
particular holder shall affect the sufficiency of the notice or the validity of
the proceedings for redemption with respect to any other holder. Any notice
mailed in the manner herein provided shall be conclusively presumed to have
been duly given whether or not the holder receives the notice. On or after the
redemption date, each holder of shares of the Series to be redeemed shall
present and surrender such holder’s certificate or certificates for such shares
to the Corporation at the place designated in the redemption notice and
thereupon the redemption price of the shares shall be promptly paid to or on
the order of the person whose name appears on such certificate or certificates
as the owner thereof, and each surrendered certificate shall be canceled. In
case less than all the shares represented by any such certificate are redeemed,
a new certificate shall be issued to the holder representing the unredeemed
shares of the Series.

 

(c)                                  If
a notice of redemption has been given pursuant to this paragraph 5 and if, on
or before the date fixed for redemption, the funds necessary for such
redemption shall have been set aside by the Corporation, separate and apart
from its other funds, in trust for the pro rata benefit of the holders of the
shares of the Series so called for redemption, then, notwithstanding that any
certificates for such shares have not been surrendered for cancellation, on the
redemption date dividends shall cease to accrue on the shares of the Series to
be redeemed, and at the close of business on the redemption date the holders of
such shares shall cease to be stockholders with respect to those shares, shall
have no interest in or claims against the Corporation by virtue thereof and
shall have no voting or other rights with respect thereto, except the right to
receive the moneys payable upon such redemption, without interest thereon, upon
surrender (and endorsement, if required by the Corporation) of their
certificates, and the shares evidenced thereby shall no longer be outstanding.
Subject to applicable escheat laws, any moneys so set aside by the Corporation
and unclaimed at the end of two years from the redemption date shall revert to
the Corporation, after which reversion the holders of such shares so called for
redemption shall look only to the Corporation for the payment of the redemption
price.  No holder shall be entitled to
receive any interest accrued on funds so deposited from time to time which
shall be for the sole benefit of the Corporation.

 

(d)                                 If
a notice of redemption has been given pursuant to this paragraph 5, and any
holder of shares of the Series shall, prior to the close of business on the
date fixed for redemption, give written notice to the Corporation pursuant to
paragraph 6 below of the

 

6

 

conversion of any or all
of the shares to be redeemed held by the holder, then such redemption shall not
become effective as to such shares to be converted and such conversion shall
become effective as provided in paragraph 6 below, whereupon any funds deposited
by the Corporation, or on its behalf, with a payment agent or segregated and
held in trust by the Corporation for the redemption of such shares shall
(subject to any right of the holder of such shares to receive the dividend
payable thereon as provided in paragraph 6 below) immediately upon such
conversion be returned to the Corporation or, if then held in trust by the
Corporation, shall be discharged from the trust.

 

(e)                                  In
every case of redemption of less than all of the outstanding shares of the
Series pursuant to this paragraph 5, the shares to be redeemed shall be
selected pro
rata or by lot or in such other manner as the Board of Directors may
determine, as may be prescribed by resolution of the Board of Directors,
provided that only whole shares shall be selected for redemption.

 

6.                                       Conversion. (a) Holders of shares of the Series will have the right,
exercisable at any time after (x) the issuance by the Corporation of shares of
the Series, and (y) prior to redemption of such shares (as described in
paragraph 5), to convert, in whole or in part, shares of the Series into shares
of Common Stock (calculated as to each conversion to the nearest 1/100th of a
share) at the conversion price in an amount equal to $0.786, subject to
adjustment as described below (the “Conversion Price”). The number of shares of
Common Stock into which each share of the Series shall be convertible shall be
determined by dividing $5.00, subject to proportional adjustment to reflect any
split or consolidation of the Common Stock or any dividend payable on the
Common Stock in additional shares of Common Stock (the “Conversion Amount”), by
the Conversion Price then in effect. In the case of shares of the Series called
for redemption, conversion rights will expire at the close of business on the
business day immediately preceding the redemption date. Upon conversion of
shares of the Series, the Corporation will pay to the holder of the converted
shares an amount equal to the dividends accrued but unpaid thereon through the
date the notice of conversion is delivered to the Corporation. Such payment
shall be made in cash. Notwithstanding the foregoing, holders of record of
shares of the Series on a record date fixed for the payment of a dividend on
such shares shall be entitled to receive the dividend notwithstanding the
conversion of the shares prior to the dividend payment date. A share of the
Series may not be converted in part.

 

(b)                                 In
order to exercise the conversion right, the holder of each share of the Series
to be converted shall surrender the certificate representing such share, duly
endorsed or assigned to the Corporation or in blank, at the office of the
Corporation in Richardson, Texas (or such other address as the Corporation may
designate) and shall give written notice to the Corporation in the form set
forth on the reverse of the stock certificates for the shares of the Series
that such holder elects to convert the shares represented by such certificate
or a portion thereof. Such notice shall also state the name or names (with
address) in which the certificate or certificates for the shares of Common
Stock which shall be issuable upon such conversion shall be issued, and shall
be accompanied by funds in an amount sufficient to pay any transfer or similar
tax required by the provisions of paragraph 6(e) below. Each share surrendered
for conversion shall, unless the shares issuable on conversion are to be issued
in the same name as the name in which such share

 

7

 

of the Series is
registered, be duly endorsed by, or be accompanied by instruments of transfer
(in each case, in form reasonably satisfactory to the Corporation), duly
executed by the holder or such holder’s duly authorized attorney-in-fact, with
such signature guaranteed by a member of the STAMP medallion program.

 

(c)                                  As
promptly as practicable after the surrender of certificates for shares of the
Series for conversion and the receipt of such notice and funds, if any, as
aforesaid, the Corporation shall issue and shall deliver to such holder, or on
such holder’s written order, a certificate or certificates for the number of
shares of Common Stock issuable upon the conversion of such shares of the
Series in accordance with the provisions of this paragraph 6, and a check or
cash in respect of any fractional interest in respect of a share of Common
Stock arising upon such conversion, as provided in paragraph 6(d) below.  Each conversion with respect to any shares
of the Series shall be deemed to have been effected immediately prior to the
close of business on the date on which the certificates for shares of the
Series shall have been surrendered (accompanied by the funds, if any, required
by paragraph 6(e) below) and such notice and assignment, if any, shall have
been received by the Corporation as aforesaid, and the person or persons
entitled to receive the Common Stock issuable upon such conversion shall be
deemed for all purposes to be the record holder or holders of such Common Stock
upon that date.

 

(d)                                 No
fractional shares of Common Stock or scrip representing fractional shares shall
be issued upon conversion of shares of the Series. If more than one share of
the Series shall be surrendered for conversion at one time by the same holder,
the number of full shares of Common Stock issuable upon conversion thereof
shall be computed on the basis of the aggregate number of shares of the Series
so surrendered. Instead of any fractional share of Common Stock otherwise
issuable upon conversion of any shares of the Series, the Corporation shall pay
a cash adjustment in respect to such fraction in an amount equal to the same
fraction of the Current Market Price of the Common Stock at the close of
business on the day of conversion.

 

(e)                                  If
a holder converts shares of the Series, the Corporation shall pay any and all
documentary, stamp or similar issue or transfer tax payable in respect of the
issue or delivery of the shares of the Series (or any other securities issued
on account thereof pursuant hereto) or Common Stock upon the conversion; provided,
however, the Corporation shall not be required to pay any such tax
that may be payable because any such shares are issued in a name other than the
name of the holder.

 

(f)                                    The
Corporation shall reserve out of its authorized but unissued Common Stock or
its Common Stock held in treasury sufficient shares of Common Stock to permit
the conversion of all of the outstanding shares of the Series. The Corporation
shall from time to time, in accordance with the General Corporation Law of the State
of Delaware, increase the authorized amount of its Common Stock if at any time
the authorized amount of its Common Stock remaining unissued shall not be
sufficient to permit the conversion of all shares of the Series at the time
outstanding. If any shares of Common Stock required to be reserved for issuance
upon conversion of shares of the Series hereunder require registration with or
approval of any governmental authority under any federal or state law before
the shares may be issued upon conversion, the Corporation shall in good

 

8

 

faith and as
expeditiously as possible endeavor to cause the shares to be so registered or
approved. All shares of Common Stock delivered upon conversion of the shares of
the Series will, upon delivery, be duly authorized and validly issued, fully
paid and nonassessable, free from all taxes, liens and charges with respect to
the issue thereof.

 

(g)                                 The
Conversion Price shall be subject to adjustment from time to time as follows:

 

(i)                                     In the event that
the Corporation shall (A) pay a dividend or make a distribution, in shares of
Common Stock, on any class of Capital Stock of the Corporation or any
subsidiary which is not directly or indirectly wholly owned by the Corporation,
(B) split or subdivide its outstanding Common Stock into a greater number of
shares, or (C) combine its outstanding Common Stock into a smaller number of
shares, then in each such case the Conversion Price in effect immediately prior
thereto shall be adjusted so that the holder of each share of the Series
thereafter surrendered for conversion shall be entitled to receive the number
of shares of Common Stock that such holder would have owned or have been
entitled to receive after the occurrence of any of the events described above
had such share of the Series been converted immediately prior to the occurrence
of such event. An adjustment made pursuant to this paragraph 6(g)(i) shall
become effective immediately after the close of business on the record date in the
case of a dividend or distribution (except as provided in paragraph 6(k) below)
and shall become effective immediately after the close of business on the
effective date in the case of such subdivision, split or combination, as the
case may be.

 

(ii)                                  No
adjustment in the Conversion Price shall be required unless the adjustment
would require an increase or decrease of at least 1% in the Conversion Price
then in effect; provided, however, that any adjustments that by reason of
this paragraph 6(g)(ii) are not required to be made shall be carried forward
and taken into account in any subsequent adjustment. All calculations under
this paragraph 6(g) shall be made to the nearest cent or nearest 1/100th of a
share.

 

(iii)                               In the event that, at
any time as a result of an adjustment made pursuant to paragraph 6(g)(i) or
6(g)(ii) above, the holder of any share of the Series thereafter surrendered
for conversion shall become entitled to receive any shares of the Corporation
other than shares of the Common Stock, thereafter the number of such other
shares so receivable upon conversion of any share of the Series shall be
subject to adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to the Common Stock
contained in paragraphs 6(g)(i) and 6(g)(ii) above, and the other provisions of
this paragraph 6(g)(iii) with respect to the Common Stock shall apply on like
terms to any such other shares.

 

(h)                                 In case of any
reclassification of the Common Stock (other than in a transaction to which
paragraph 6(g)(i) applies), any consolidation of the Corporation with, or
merger of the Corporation into, any other entity, any merger of another entity

 

9

 

into the Corporation
(other than a merger that does not result in any reclassification, conversion,
exchange or cancellation of outstanding shares of Common Stock of the
Corporation), any sale or transfer of all or substantially all of the assets of
the Corporation or any compulsory share exchange which does not result in a
liquidation under paragraph 4 above, pursuant to which share exchange the
Common Stock is converted into other securities, cash or other property, then
lawful provision shall be made as part of the terms of such transaction whereby
the holder of each share of the Series then outstanding shall have the right
thereafter, during the period such share shall be convertible, to convert such
share only into the kind and amount of securities, cash and other property
receivable upon the reclassification, consolidation, merger, sale, transfer or
share exchange by a holder of the number of shares of Common Stock of the
Corporation into which a share of the Series might have been converted
immediately prior to the reclassification, consolidation, merger, sale,
transfer or share exchange assuming that such holder of Common Stock failed to
exercise rights of election, if any, as to the kind or amount of securities,
cash or other property receivable upon consummation of such transaction,
subject to adjustment as provided in paragraph 6(g) above following the date of
consummation of such transaction. As a condition to any such transaction, the
Corporation or the person formed by the consolidation or resulting from the
merger or which acquires such assets or which acquires the Corporation’s
shares, as the case may be, shall make provisions in its certificate or
articles of incorporation or other constituent document to establish such
right. The certificate or articles of incorporation or other constituent
document shall provide for adjustments which, for events subsequent to the
effective date of the certificate or articles of incorporation or other
constituent document, shall be as nearly equivalent as may be practicable to the
adjustments provided for in this paragraph 6. The provisions of this paragraph
6(h) shall similarly apply to successive reclassifications, consolidations,
mergers, sales, transfers or share exchanges.

 

(i)                                                             If:

 

(i)                                     the Corporation
shall take any action which would require an adjustment in the Conversion Price
pursuant to Section 7(g); or

 

(ii)                                  the Corporation shall
authorize the granting to the holders of its Common Stock generally of rights,
warrants or options to subscribe for or purchase any shares of any class or any
other rights, warrants or options; or

 

(iii)                               there shall be any
reclassification or change of the Common Stock (other than a subdivision or
combination of its outstanding Common Stock or a change in par value) or any
consolidation, merger or statutory share exchange to which the Corporation is a
party and for which approval of any stockholders of the Corporation is
required, or the sale or transfer of all or substantially all of the assets of
the Corporation; or

 

(iv)                              there
shall be a voluntary or involuntary dissolution, liquidation or winding-up of
the Corporation;

 

10

 

then, the Corporation shall cause to be filed with the
transfer agent for the Series and shall cause to be mailed to the holders of
shares of the Series at their addresses as shown on the books of the transfer
agent for the Series, as promptly as possible, but at least 30 days prior to
the applicable date hereinafter specified, a notice stating (A) the date on
which a record is to be taken for the purpose of such dividend, distribution or
granting of rights, warrants or options or, if a record is not to be taken, the
date as of which the holders of Common Stock of record to be entitled to such
dividend, distribution or rights, warrants or options are to be determined, or
(B) the date on which such reclassification, change, consolidation, merger,
statutory share exchange, sale, transfer, dissolution, liquidation or
winding-up is expected to become effective or occur, and the date as of which
it is expected that holders of Common Stock of record shall be entitled to
exchange their shares of Common Stock for securities or other property
deliverable upon such reclassification, change, consolidation, merger,
statutory share exchange, sale, transfer, dissolution, liquidation or
winding-up. Failure to give such notice or any defect therein shall not affect
the legality or validity of the proceedings described in this paragraph 6(i).

 

(j)                                     Whenever
the Conversion Price is adjusted as herein provided, the Corporation shall
promptly file with the transfer agent for the Series a certificate of an
officer of the Corporation setting forth the Conversion Price after the
adjustment and setting forth a brief statement of the facts requiring such adjustment
and a computation thereof. The Corporation shall promptly cause a notice of the
adjusted Conversion Price to be mailed to each registered holder of shares of
the Series.

 

(k)                                  In
any case in which paragraph 6(g) provides that an adjustment shall become
effective immediately after a record date for an event and the date fixed for
such adjustment pursuant to paragraph 6(g) occurs after such record date but
before the occurrence of such event, the Corporation may defer until the actual
occurrence of such event (i) issuing to the holder of any shares of the Series
converted after such record date and before the occurrence of such event the
additional shares of Common Stock issuable upon such conversion by reason of
the adjustment required by such event over and above the Common Stock issuable
upon such conversion before giving effect to such adjustment, and (ii) paying
to such holder any amount in cash in lieu of any fraction pursuant to paragraph
6(d).

 

(l)                                     In
case the Corporation shall take any action affecting the Common Stock, other
than actions described in this paragraph 6, which in the opinion of the Board
of Directors would materially adversely affect the conversion right of the
holders of the shares of the Series, the Conversion Price may be adjusted, to
the extent permitted by law, in such manner, if any, and at such time, as the
Board of Directors may determine to be equitable in the circumstances; provided,
however, that in no event shall the Board of Directors be required
to take any such action.

 

(m)                               The
Corporation shall list the shares of Common Stock required to be delivered upon
conversion of shares of the Series, prior to delivery, upon each national
securities exchange or any similar system of automated dissemination of
securities prices, if any, upon which the Common Stock is listed at the time of
delivery.

 

11

 

(n)                                 The Corporation shall not effect any
conversion of the Series by any holder, and no person who is a holder of shares
of the Series shall have the right to convert its shares into Common Stock, to
the extent that after giving effect to such conversion, such person (together
with such person’s Affiliates) would beneficially own in excess of 9.99% of the
shares of the Common Stock outstanding immediately after giving effect to such
conversion. For purposes of the foregoing sentence, the aggregate number of
shares of Common Stock beneficially owned by such person and its Affiliates
shall include, without limitation, the number of shares of Common Stock
issuable upon conversion of the shares of the Series with respect to which the
determination of such sentence is being made, but shall exclude shares of
Common Stock which would be issuable upon (i) conversion of the remaining,
unconverted shares of the Series beneficially owned by such person and its
Affiliates, and (ii) exercise or conversion of the unexercised or unconverted
portion of any other securities of the Corporation beneficially owned by such
person and its Affiliates (including, without limitation, any debentures,
convertible notes or convertible preferred stock or warrants) subject to a
limitation on conversion or exercise analogous to the limitation contained
herein. Except as set forth in the preceding sentence, for purposes of this
paragraph, beneficial ownership shall be calculated in accordance with Section
13(d) of the Securities Exchange Act of 1934, as amended. For purposes of this
paragraph 6(n), in determining the number of outstanding shares of Common
Stock, a holder may rely on the number of outstanding shares of Common Stock as
reflected in (A) the Corporation’s most recent Form 10-Q, Form 10-K or other
public filing with the Securities and Exchange Commission, as the case may be,
(B) a more recent public announcement by the Corporation, or (C) any other
notice by the Corporation or its transfer agent setting forth the number of
shares of Common Stock outstanding. For any reason at any time, upon the
written or oral request of any holder of the Series, the Corporation shall
within two business days confirm orally and in writing to such holder the
number of shares of Common Stock then outstanding. In any case, the number of
outstanding shares of Common Stock shall be determined after giving effect to
the conversion or exercise of securities of the Corporation by such holder and
its Affiliates since the date as of which such number of outstanding shares of
Common Stock was reported. In effecting the conversion of shares of the Series,
the Corporation shall be entitled to rely on a representation by the holder of
such shares of the Series as to the number of shares that it beneficially owns
for purposes of the above 9.99% limitation calculation.

 

8.                                       Status
of Shares. All shares of the Series that are at any time redeemed or
converted pursuant to paragraph 5 or 6 above, and all shares of the Series that
are otherwise reacquired by the Corporation and subsequently canceled by the
Board of Directors, shall have the status of authorized but unissued shares of
preferred stock, without designation as to series, subject to reissuance by the
Board of Directors as shares of any one or more other series.

 

9.                                       Voting Rights. Each
holder of shares of the Series shall be entitled to the number of votes equal
to the number of shares of Common Stock into which such shares of the Series
could be converted and shall have voting rights and powers equal to the voting
rights and powers of the Common Stock (except as otherwise expressly provided
herein or as required by law), voting together with the Common Stock as a
single class

 

12

 

and shall be entitled to
notice of any stockholders’ meeting in accordance with the Bylaws of the
Corporation. Fractional votes shall not, however, be permitted and any
fractional voting rights resulting from the above formula (after aggregating
all shares into which shares of the Series held by each holder could be
converted) shall be rounded to the nearest whole number (with one-half being
rounded upward).

 

10.                                 Restrictions and Limitations. So long as any
shares of the Series remain outstanding, the Corporation, shall not, without
the vote or written consent by the holders of at least a majority of the then
outstanding shares of the Series, voting together as a single class:

 

(i)                                     Redeem, purchase
or otherwise acquire for value (or pay into or set aside for a sinking fund for such purpose)
any share or shares of preferred stock otherwise than by redemption in
accordance with paragraph 5 hereof or by conversion in accordance with
paragraph 6 hereof;

 

(ii)                                  Redeem, purchase
or otherwise acquire (or pay into or set aside for a sinking fund for such purpose),
any of the Common Stock; provided, however, that this
restriction shall not apply to the repurchase of shares of Common Stock from
employees, officers, directors, consultants or other persons performing
services for the Corporation or any subsidiary pursuant to agreements under
which the Corporation has the option to repurchase such shares at cost or at
cost plus interest at a rate not to exceed nine percent (9%) per annum upon the
occurrence of certain events, such as the termination of employment; and provided further, that the total amount applied to the
repurchase of shares of Common Stock shall not exceed $100,000 during any
twelve month period; or

 

(iii)                               Authorize or issue, or
obligate itself to issue, any debt security, or otherwise incur indebtedness
for borrowed money (other than
(A) to a strategic investor in connection with a strategic commercial agreement
or transaction as determined by the Board of Directors, (B) pursuant to a
commercial borrowing, secured lending or lease financing transaction approved
by the Board of Directors, or (c) pursuant to the acquisition of another
corporation or entity by the Corporation by consolidation, merger, purchase of
all or substantially all of the assets, or other reorganization).

 

11.                                 Certain Definitions.
As used in this Certificate, the following terms shall have the following
respective meanings:

 

“Affiliate”
of any specified person means any other person directly or indirectly
controlling or controlled by or under common control with such specified
person. For purposes of this definition, “control” when used with respect to
any person means the power to direct the management and policies of such
person, directly or indirectly, whether through the ownership of voting
securities or otherwise; and the term “controlling” and “controlled” having
meanings correlative to the foregoing.

 

13

 

“Associate”
of a person means (A) any corporation or organization, other than the
Corporation or any subsidiary of the Corporation, of which the person is an
officer or partner or is, directly or indirectly, the beneficial owner of 10%
or more of any class of its equity securities; (B) any trust or estate in which
the person has a substantial beneficial interest or as to which the person
serves as trustee or in a similar fiduciary capacity; and (C) any relative or
spouse of the person, or any relative of the spouse, who has the same home as
the person or who is a director or officer of the person or any of its parents
or subsidiaries.

 

“Capital
Stock” of any person or entity means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in the common stock or preferred stock of such person or entity,
including, without limitation, partnership and membership interests.

 

“Current
Market Price” means, when used with respect to any security as of any date,
the volume weighted average price of such security on the ten (10) consecutive
trading days immediately preceding such date as reported for consolidated
transactions with respect to securities listed on the principal national
securities exchange on which such security is listed or admitted to trading or,
if such security is not listed or admitted to trading on any national
securities exchange, the volume weighted average price of such security on the
ten (10) consecutive trading days immediately preceding such date in the
over-the-counter market, as reported by the National Association of Securities
Dealers, Inc. Automated Quotations System or such other system then in use or,
if such security is not quoted by any such organization, the volume weighted
average price of such security as of the ten (10) consecutive trading days
immediately preceding such date furnished by a New York Stock Exchange member
firm selected by the Corporation, or if such security is not quoted by any such
organization and no such New York Stock Exchange member firm is able to provide
such prices, such price as is determined by the Board of Directors in good
faith.

 

“Related
Person”  means an individual related
to an officer, director or employee of the Corporation or any of its Affiliates
which relation is by blood, marriage or adoption and not more remote than first
cousin.

 

14

 

IN
WITNESS WHEREOF, the Corporation has caused this Certificate to be duly
executed on its behalf by its undersigned Chief Executive Officer this 25th
day of March, 2004.

 

 

	
   

  	
  /s/ G. WARD PAXTON

  	
   

  
	
   

  	
  G. Ward Paxton

  
	
   

  	
  Chief Executive Officer

  

 

 

[Signature
Page to Certificate of Designations]Exhibit
4.3

 

THE WARRANTS REPRESENTED BY THIS
CERTIFICATE AND THE SHARES ISSUABLE UPON THE EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS AND
MAY NOT BE TRANSFERRED EXCEPT UPON DELIVERY TO THE CORPORATION OF AN OPINION OF
COUNSEL SATISFACTORY IN FORM AND SUBSTANCE TO IT THAT SUCH TRANSFER WILL NOT
VIOLATE THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE
SECURITIES LAWS

 

THE TRANSFER OF THIS WARRANT IS RESTRICTED AS DESCRIBED
HEREIN.

 

Intrusion Inc.

 

Warrant for the Purchase of Shares of Common Stock,

par value $0.01 per Share

 

	
  No.
  WC-         

  	
   

  	
               Shares

  

Issuance Date:  March 25, 2004

 

THIS CERTIFIES that, for value received,
                                                    ,
whose address is
                                  ,
          ,
               
(the “Holder”), is entitled to subscribe for and purchase from Intrusion Inc.,
a Delaware corporation (the “Company”), upon the terms and conditions set forth
herein,              
shares of the Company’s Common Stock, par value $0.01 per share (“Common
Stock”), at a price of $0.786 per share (the “Exercise Price”). As used herein
the term “this Warrant” shall mean and include this Warrant and any Common
Stock or Warrants hereafter issued as a consequence of the exercise or transfer
of this Warrant in whole or in part.

 

The number of shares of Common Stock issuable upon
exercise of the Warrants (the “Warrant Shares”) may be adjusted from time to
time as hereinafter set forth. The Warrant Shares are entitled to the benefits,
and subject to the obligations, set forth in the Registration Rights Agreement
between the Company and the Holder dated concurrently herewith.

 

1.                                       Exercise
Period. This Warrant may be exercised at any time or from time to time
during the period commencing on the Issuance Date and ending at 5:00 P.M.
Central time on March 25, 2009 (the “Exercise Period”).

 

2.                                       Procedure
for Exercise; Effect of Exercise.

 

(a)                                  Cash Exercise. This Warrant may be exercised, in whole
or in part, by the Holder during normal business hours on any business day
during the Exercise Period by (i) the presentation and surrender of this
Warrant to the Company at its principal office along with a

 

1

 

duly executed Notice of
Exercise (in the form attached to this Agreement) specifying the number of
Warrant Shares to be purchased, and (ii) delivery of payment to the Company of
the Exercise Price for the number of Warrant Shares specified in the Notice of
Exercise by cash, wire transfer of immediately available funds to a bank
account specified by the Company, or by certified or bank cashier’s check.

 

(b)                                 Cashless
Exercise. This Warrant may also be exercised by the Holder through a
cashless exercise, as described in this Section 2(b);
provided, that if so required by an acquiror in connection with a transaction
resulting in a liquidation of the Company’s 5% Convertible Preferred Stock
pursuant to paragraph 4 of the Company’s Certificate of Designations for such
stock, this Warrant shall be deemed exercised pursuant to this Section 2(b),
or, if the Exercise Price is greater than the consideration paid per share of
Common Stock in such transaction, shall be deemed cancelled, immediately prior
to the consummation thereof. This Warrant may be
exercised, in whole or in part, by the Holder during normal business hours on
any business day during the Exercise Period by the presentation and surrender
of this Warrant to the Company at its principal office along with a duly
executed Notice of Exercise specifying the number of Warrant Shares to be
applied to such exercise. The number of Warrant Shares to be delivered upon
exercise of this Warrant pursuant to this Section 2(b) shall equal the value of
this Warrant (or the portion thereof being canceled) computed as of the date of
delivery of this Warrant to the Company using the following formula:

 

	
  X =

  	
   

  	
  Y(A-B)

  
	
   

  	
   

  	
  A

  

 

Where:

 

	
  X =

  	
   

  	
  the number of shares of Common Stock to be issued to
  Holder under this Section 2(b);

  
	
  Y =

  	
   

  	
  the number of Warrant Shares identified in the
  Notice of Exercise as being applied to the subject exercise;

  
	
  A =

  	
   

  	
  the Current Market Price on such date; and

  
	
  B =

  	
   

  	
  the Exercise Price on such date

  

 

For purposes of this Section 2(b) and Section 6, the “Current Market
Price” per share of Common Stock on any date shall mean the volume weighted average price of such
security on the ten (10) consecutive trading days immediately preceding such
date as reported for consolidated transactions with respect to securities
listed on the principal national securities exchange on which such security is
listed or admitted to trading or, if such security is not listed or admitted to
trading on any national securities exchange, the volume weighted average price
of such security on the ten (10) consecutive trading days immediately preceding
such date in the over-the-counter market, as reported by the National
Association of Securities Dealers, Inc. Automated Quotations System or such
other system then in use or, if such security is not quoted by any such

 

2

 

organization, the volume weighted average
price of such security as of the ten (10) consecutive trading days immediately
preceding such date furnished by a New York Stock Exchange member firm selected
by the Company, or if such security is not quoted by any such organization and
no such New York Stock Exchange member firm is able to provide such prices,
such price as is determined by the Board of Directors in good faith.

 

The
Company acknowledges and agrees that this Warrant was issued on the Issuance
Date. Consequently, the Company acknowledges and agrees that, if the Holder
conducts a cashless exercise pursuant to this Section 2(b), the period during
which the Holder held this Warrant may, for purposes of Rule 144 promulgated
under the Securities Act of 1933, as amended (the “Securities Act”), be
“tacked” to the period during which the Holder holds the Warrant Shares
received upon such cashless exercise.

 

Notwithstanding
the foregoing, except in connection with a transaction described in the proviso
in the first sentence of this Section 2(b), the Holder may conduct a cashless
exercise pursuant to this Section 2(b) only after the first anniversary of the
Issuance Date, and then only in the event that a registration statement
covering the resale of the Warrant Shares is not then effective and available
for use by the Holder at the time that the Holder wishes to conduct such
cashless exercise.

 

(c)                                  Effect
of Exercise. Upon receipt by the Company of this Warrant and a Notice of
Exercise, together with proper payment of the Exercise Price, as provided in
this Section 2, the Company agrees that such Warrant Shares shall be deemed to
be issued to the Holder as the record holder of such Warrant Shares as of the
close of business on the date on which this Warrant has been surrendered and
payment has been made for such Warrant Shares in accordance with this Agreement
and the Holder shall be deemed to be the holder of record of the Warrant Shares,
notwithstanding that the stock transfer books of the Company shall then be
closed or that certificates representing such Warrant Shares shall not then be
actually delivered to the Holder. A stock certificate or certificates for the
Warrant Shares specified in the Notice of Exercise shall be delivered to the
Holder as promptly as practicable, and in any event within seven (7) business
days, thereafter. The stock certificate(s) so delivered shall be in any such
denominations as may be reasonably specified by the Holder in the Notice of
Exercise. If this Warrant should be exercised in part only, the Company shall,
upon surrender of this Warrant for cancellation, execute and deliver a new
Warrant evidencing the right of the Holder to purchase the balance of the
Warrant Shares subject to purchase hereunder.

 

3.                                       Registration
of Warrants; Transfer of Warrants. Any Warrants issued upon the transfer or
exercise in part of this Warrant shall be numbered and shall be registered in a
Warrant Register as they are issued. The Company shall be entitled to treat the
registered holder of any Warrant on the Warrant Register as the owner in fact
thereof for all pur­poses and shall not be bound to recognize any equitable or
other claim to or inter­est in such Warrant on the part of any other person,
and shall not be liable for any registration or transfer of Warrants which are
registered or to be registered in the name of a fiduciary or the nominee of a
fiduciary unless made with the actual knowledge that a fiduciary or nominee is
committing a breach of trust in requesting such registration or transfer, or
with the knowledge of such facts that its participation therein amounts to bad
faith. This Warrant shall be transferable only on the books of the Company upon
delivery thereof duly endorsed by the Holder or by its duly authorized attorney

 

3

 

or representative, or accompanied by proper evidence of succession,
assignment, or authority to transfer. 
In all cases of transfer by an attorney, executor, administrator,
guardian, or other legal representative, duly authenticated evidence of his or
its author­ity shall be produced. Upon any registration of transfer, the
Company shall deliver a new Warrant or Warrants to the person entitled thereto.
This Warrant may be exchanged, at the option of the Holder thereof, for another
Warrant, or other Warrants of different denominations, of like tenor and
representing in the aggregate the right to purchase a like number of Warrant
Shares, upon surrender to the Company or its duly authorized agent.

 

4.                                       Restrictions
on Transfer. (a) The Holder, as of the date of issuance hereof, represents
to the Company that such Holder is acquiring the Warrants for its own account
for investment purposes and not with a view to the distribution thereof or of
the Warrant Shares.  Notwithstanding any
provisions contained in this Warrant to the contrary, this Warrant and the
related Warrant Shares shall not be transferable except pursuant to the proviso
contained in the following sentence or upon the conditions specified in this
Section 4, which conditions are intended, among other things, to insure
compliance with the provisions of the Securities Act and applicable state law
in respect of the transfer of this Warrant or such Warrant Shares. The Holder
by acceptance of this Warrant agrees that the Holder will not transfer this
Warrant or the related Warrant Shares prior to delivery to the Company of an
opinion of the Holder’s counsel (as such opinion and such counsel are described
in Section 4(b) hereof) or until registration of such Warrant Shares under the
Securities Act has become effective or after a sale of such Warrant or Warrant
Shares has been consummated pursuant to Rule 144 or Rule 144A under the
Securities Act; provided, however, that the Holder may freely transfer this
Warrant or such Warrant Shares (without delivery to the Company of an opinion
of Counsel) (i) to one of its nominees, affiliates or a nominee thereof, (ii)
to a pension or profit-sharing fund established and maintained for its
employees or for the employees of any affiliate, (iii) from a nominee to any of
the aforementioned persons as beneficial owner of this Warrant or such Warrant
Shares, or (iv) to a qualified institutional buyer, so long as such transfer is
effected in compliance with Rule 144A under the Securities Act; provided, in
each case, that such transferee agrees to be bound by the transfer restrictions
set forth herein.

 

(b)                                 The
Holder, by its acceptance hereof, agrees that prior to any transfer of this
Warrant or of the related Warrant Shares (other than as permitted by Section
4(a) hereof or pursuant to a registration under the Securities Act), the Holder
will give written notice to the Company of its intention to effect such transfer,
together with an opinion of such counsel for the Holder as shall be reasonably
acceptable to the Company, to the effect that the proposed transfer of this
Warrant and/or such Warrant Shares may be effected without registration under
the Securities Act, which opinion shall be
reasonably satisfactory in form and substance to the Company.
Upon delivery of such notice and opinion to the Company, the Holder shall be
entitled to transfer this Warrant and/or such Warrant Shares in accordance with
the intended method of disposition specified in the notice to the Company.

 

4

 

(c)                                  Each
stock certificate representing Warrant Shares issued upon exercise or exchange
of this Warrant shall bear the following legend unless the opinion of counsel
referred to in Section 4(b) states such legend is not required:

 

“THE
SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS AND MAY NOT BE TRANSFERRED
EXCEPT UPON DELIVERY TO THE CORPORATION OF AN OPINION OF COUNSEL SATISFACTORY
IN FORM AND SUBSTANCE TO IT THAT SUCH TRANSFER WILL NOT VIOLATE THE SECURITIES
ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS.”

 

The
Holder understands that the Company may place, and may instruct any transfer
agent or depository for the Warrant Shares to place, a stop transfer notation
in the securities records in respect of the Warrant Shares.

 

5.                                       Reservation
of Shares. The Company shall at all times during the Exercise Period
reserve and keep available out of its authorized and unissued Common Stock,
solely for the purpose of providing for the exercise of the rights to purchase
all Warrant Shares granted pursuant to the Warrants, such number of shares of
Common Stock as shall, from time to time, be sufficient therefor. The Company
covenants that all shares of Common Stock issuable upon exercise of this
Warrant, upon receipt by the Company of the full Exercise Price therefor, and
all shares of Common Stock issuable upon conversion of this Warrant, shall be
validly issued, fully paid, non-assessable, and free of preemptive rights.

 

6.                                       Adjustments.
The number of shares of Common Stock issuable upon exercise of the Warrants
shall be adjusted from time to time as follows:

 

(a)                                  (i)                                     In
the event that the Company shall (A) pay a dividend or make a distribution, in
shares of Common Stock, on any class of capital stock of the Company or any
subsidiary which is not directly or indirectly wholly owned by the Company, (B)
split or subdivide its outstanding Common Stock into a greater number of
shares, or (C) combine its outstanding Common Stock into a smaller number of
shares, then in each such case the number of shares issuable upon exercise of
this Warrant shall be adjusted so that the Holder of a Warrant thereafter
surrendered for exercise shall be entitled to receive the number of shares of
Common Stock that such Holder would have owned or have been entitled to receive
after the occurrence of any of the events described above had such Warrant been
exercised immediately prior to the occurrence of such event.  An adjustment made pursuant to this Section
6(a)(i) shall become effective immediately after the close of business on the
record date in the case of a dividend or distribution (except as provided in
Section 6(e) below) and shall become effective immediately after the close of
business on the effective date in the case of such subdivision, split or
combination, as the case may be.

 

5

 

(ii)                                  No
adjustment in the Exercise Price shall be required unless the adjustment would
require an increase or decrease of at least 1% in the Exercise Price then in
effect; provided,
however, that any adjustments that by reason of this Section 6(a) are
not required to be made shall be carried forward and taken into account in any
subsequent adjustment. All calculations under this Section 6(a) shall be made
to the nearest cent or nearest 1/100th of a share.

 

(iii)                               In
the event that, at any time as a result of an adjustment made pursuant to
Sections 6(a)(i) and 6(a)(ii) above, the Holder of any Warrant thereafter
surrendered for exercise shall become entitled to receive any shares of the
Company other than shares of the Common Stock, thereafter the number of such
other shares so receivable upon exercise of any such Warrant shall be subject
to adjustment from time to time in a manner and on terms as nearly equivalent
as practicable to the provisions with respect to the Common Stock contained in
Sections 6(a)(i) and 6(a)(ii) above, and the other provisions of this Section
6(a) with respect to the Common Stock shall apply on like terms to any such
other shares.

 

(b)                                 In
case of any reclassification of the Common Stock (other than in a transaction
to which Section 6(a)(i) applies), any consolidation of the Company with, or
merger of the Company into, any other entity, any merger of another entity into
the Company (other than a merger that does not result in any reclassification,
conversion, exchange or cancellation of outstanding shares of Common Stock of
the Company), any sale or transfer of all or substantially all of the assets of
the Company or any compulsory share exchange which does not result in the
cashless exercise or cancellation of this Warrant pursuant to Section 2(b),
pursuant to which share exchange the Common Stock is converted into other
securities, cash or other property, then lawful provision shall be made as part
of the terms of such transaction whereby the Holder of a Warrant then
outstanding shall have the right thereafter, during the period such Warrant
shall be exercisable, to exercise such Warrant only for the kind and amount of
securities, cash and other property receivable upon the reclassification,
consolidation, merger, sale, transfer or share exchange by a holder of the
number of shares of Common Stock of the Company into which a Warrant might have
been able to exercise for immediately prior to the reclassification,
consolidation, merger, sale, transfer or share exchange assuming that such
holder of Common Stock failed to exercise rights of election, if any, as to the
kind or amount of securities, cash or other property receivable upon
consummation of such transaction subject to adjustment as provided in Section
6(a) above following the date of consummation of such transaction. The Company
shall not effect any such reclassification, consolidation, merger, sale,
transfer, share exchange or other disposition unless prior to or simultaneously
with the consummation thereof the successor corporation (if other than the
Company) resulting from such consolidation or merger, or the corporation
purchasing or otherwise acquiring such assets or other appropriate corporation
or entity shall assume, by written instrument executed and delivered to the Holder,
the obligation to deliver to the Holder upon its exercise of the Warrant such
shares of stock, securities or assets as, in accordance with the foregoing
provisions, the Holder may be entitled to purchase and the other obligations
under this Warrant. The provisions of this Section 6(b) shall similarly apply
to successive reclassifications, consolidations, mergers, sales, transfers or
share exchanges.

 

6

 

(c)                                  If:

 

(i)                                     the
Company shall take any action which would require an adjustment pursuant to
Section 6(a); or

 

(ii)                                  the
Company shall authorize the granting to the holders of its Common Stock
generally of rights, warrants or options to subscribe for or purchase any
shares of any class or any other rights, warrants or options; or

 

(iii)                               there
shall be any reclassification or change of the Common Stock (other than a
subdivision or combination of its outstanding Common Stock or a change in par
value) or any consolidation, merger or statutory share exchange to which the
Company is a party and for which approval of any stockholders of the Company is
required, or the sale or transfer of all or substantially all of the assets of
the Company; or

 

(iv)                              there
shall be a voluntary or involuntary dissolution, liquidation or winding up of
the Company;

 

then, the Company shall
cause to be filed with the transfer agent for the Warrants and shall cause to
be mailed to each Holder at such Holder’s address as shown on the books of the
transfer agent for the Warrants, as promptly as possible, but at least 30 days
prior to the applicable date hereinafter specified, a notice stating (A) the
date on which a record is to be taken for the purpose of such dividend,
distribution or granting of rights, warrants or options, or, if a record is not
to be taken, the date as of which the holders of Common Stock of record to be
entitled to such dividend, distribution or rights, warrants or options are to
be determined, or (B) the date on which such reclassification, change,
consolidation, merger, statutory share exchange, sale, transfer, dissolution,
liquidation or winding-up is expected to become effective or occur, and the
date as of which it is expected that holders of Common Stock of record shall be
entitled to exchange their shares of Common Stock for securities or other
property deliverable upon such reclassification, change, consolidation, merger,
statutory share exchange, sale, transfer, dissolution, liquidation or winding
up. Failure to give such notice or any defect therein shall not affect the
legality or validity of the proceedings described in this Section 6(c).

 

(d)                                 Whenever an adjustment is made as herein
provided, the Company shall promptly file with the transfer agent for the
Warrants a certificate of an officer of the Company setting forth the
adjustment and setting forth a brief statement of the facts requiring such
adjustment and a computation thereof. The Company shall promptly cause a notice
of such adjustment to be mailed to each Holder.

 

7

 

(e)                                  In any case in which Section 6(a) provides
that an adjustment shall become effective immediately after a record date for
an event and the date fixed for such adjustment pursuant to Section 6(a) occurs
after such record date but before the occurrence of such event, the Company may
defer until the actual occurrence of such event (i) issuing to the Holder of
any Warrants exercised after such record date and before the occurrence of such
event the additional shares of Common Stock issuable upon such conversion by
reason of the adjustment required by such event over and above the Common Stock
issuable upon such exercise before giving effect to such adjustment, and (ii)
paying to such holder any amount in cash in lieu of any fraction pursuant to
Section 6(g).

 

(f)                                    Upon
each adjustment of the Exercise Price, this Warrant shall thereafter evidence
the right to purchase, at the adjusted Exercise Price, that number of shares
(calculated to the nearest thousandth) obtained by dividing (i) the product obtained
by multiplying the number of shares purchasable upon exercise of this Warrant
prior to adjustment of the number of shares by the Exercise Price in effect
prior to adjustment of the Exercise Price, by (ii) the Exercise Price in effect
after such adjustment of the Exercise Price.

 

(g)                                 The Company shall not be required to issue
fractions of shares of Common Stock or other capital stock of the Company upon
the exercise of this Warrant. If any fraction of a share would be issuable on
the exercise of this Warrant (or specified portions thereof), the Company shall
purchase such fraction for an amount in cash equal to the same fraction of the
Current Market Price of such share of Common Stock on the date of exercise of
this Warrant.

 

(h)                                 In
case the Company shall take any action affecting the Common Stock, other than
actions described in this Section 6, which in the opinion of the Board of
Directors would materially adversely affect the exercise right of the Holder,
the Exercise Price may be adjusted, to the extent permitted by law, in such
manner, if any, and at such time, as the Board of Directors may determine to be
equitable in the circumstances; provided, however, that in no event shall
the Board of Directors be required to take any such action.

 

7.                                       Transfer
Taxes. The issuance of any shares or other securities upon the exercise of
this Warrant, and the delivery of certificates or other instruments
representing such shares or other securities, shall be made without charge to
the Holder for any tax or other charge in respect of such issuance. The Company
shall not, however, be required to pay any tax which may be payable in respect
of any transfer involved in the issue and delivery of any certificate in a name
other than that of the Holder and the Company shall not be required to issue or
deliver any such certificate unless and until the person or persons requesting
the issue thereof shall have paid to the Company the amount of such tax or
shall have established to the satisfaction of the Company that such tax has
been paid.

 

8.                                       Loss
or Mutilation of Warrant. Upon receipt of evidence satisfactory to the
Company of the loss, theft, destruction, or mutilation of any Warrant (and upon
surrender of any Warrant if mutilated), and upon reimbursement of the Company’s
reasonable incidental

 

8

 

expenses, the Company shall execute and deliver to the Holder thereof a
new Warrant of like date, tenor, and denomination.

 

9.                                       No
Rights as a Stockholder. The Holder of any Warrant shall not have, solely
on account of such status, any rights of a stockholder of the Company, either
at law or in equity, or to any notice of meetings of stockholders or of any
other proceedings of the Company, except as provided in this Warrant.

 

10.                                 Governing
Law. This Warrant shall be con­strued in accordance with the laws of the
State of Delaware applicable to contracts made and performed within such State,
without regard to principles of conflicts of law.

 

11.                                 Beneficial Ownership. The Company shall not effect the exercise
of this Warrant by any Holder, and no person who is a holder of this Warrant
shall have the right to exercise this Warrant, to the extent that after giving
effect to such exercise, such person (together with such person’s affiliates)
would beneficially own in excess of 9.99% of the shares of the Common Stock
outstanding immediately after giving effect to such exercise. For purposes of
the foregoing sentence, the aggregate number of shares of Common Stock
beneficially owned by such person and its affiliates shall include, without
limitation, the number of shares of Common Stock issuable upon exercise of this
Warrant with respect to which the determination of such sentence is being made,
but shall exclude shares of Common Stock which would be issuable upon (a)
exercise of the remaining, unexercised portion of this Warrant beneficially
owned by such person and its affiliates, and (b) exercise or conversion of the
unexercised or unconverted portion of any other securities of the Company beneficially
owned by such person and its affiliates (including, without limitation, any
debentures, convertible notes or convertible preferred stock or warrants)
subject to a limitation on conversion or exercise analogous to the limitation
contained herein. Except as set forth in the preceding sentence, for purposes
of this Section 11, beneficial ownership shall be calculated in accordance with
Section 13(d) of the Securities Exchange Act of 1934, as amended. For purposes
of this Warrant, in determining the number of outstanding shares of Common
Stock, a Holder may rely on the number of outstanding shares of Common Stock as
reflected in (i) the Company’s most recent Form 10-Q, Form 10-K or other public
filing with the Securities and Exchange Commission, as the case may be, (ii) a
more recent public announcement by the Company, or (iii) any other notice by
the Company or its transfer agent setting forth the number of shares of Common
Stock outstanding.  For any reason at
any time, upon the written or oral request of the Holder of this Warrant, the
Company shall within two business days confirm orally and in writing to the
Holder of this Warrant the number of shares of Common Stock then outstanding.
In any case, the number of outstanding shares of Common Stock shall be
determined after giving effect to the conversion or exercise of securities of
the Company by the Holder of this Warrant and its affiliates since the date as
of which such number of outstanding shares of Common Stock was reported. In
effecting the exercise of this Warrant, the Company shall be entitled to rely
on a representation by the Holder of this Warrant as to the number of shares
that it beneficially owns for purposes of the above 9.99% limitation
calculation.

 

9

 

[Remainder
of page intentionally left blank

 

10

 

Dated:             March
25, 2004

 

 

	
   

  	
  INTRUSION
  INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  G. Ward Paxton,

  
	
   

  	
   

  	
  Chairman, CEO and
  President

  

 

 

[Signature
Page to Warrant]

 

 

FORM OF ASSIGNMENT

 

 

(To be executed by the registered holder if such holder desires to
transfer the attached Warrant.)

 

FOR VALUE RECEIVED,
                                                                                        
hereby sells, assigns, and transfers unto
                                
a Warrant to purchase                       
shares of Common Stock, par value $0.01 per share, of Intrusion Inc. (the
“Company”), together with all right, title, and interest therein, and does
hereby irrevocably constitute and appoint
                                                                                           
attorney to transfer such Warrant on the books of the Company, with full power
of substitution.

 

	
   

  	
  Dated:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Signature

  
						

 

The signature on the foregoing Assignment must
correspond to the name as written upon the face of this Warrant in every
particular, without alteration or enlarge­ment or any change whatsoever.

 

 

To:                              Intrusion Inc.

1101
East Arapaho Road

Richardson,
Texas  75081

Attention:  Chief Executive Officer

 

 

NOTICE OF EXERCISE

 

 

The undersigned hereby exercises his or its rights to
purchase
               
Warrant Shares covered by the within Warrant and tenders payment herewith in
the amount of $                
by [tendering cash or
delivering a certified check or bank cashier’s check, payable to the order of
the Company] [surrendering
             
shares of Common Stock received upon exercise of the attached Warrant, which
shares have a Current Market Price equal to such payment] in accordance
with the terms thereof, and requests that certificates for such securities be
issued in the name of, and delivered to:

 

	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  

(Print Name, Address and Social Security

or Tax Identification
Number)

 

and, if such number of Warrant Shares shall not be all the Warrant
Shares covered by the within Warrant, that a new Warrant for the balance of the
Warrant Shares covered by the within Warrant be registered in the name of, and
delivered to, the under­signed at the address stated below.

 

	
   

  	
  Dated:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Print
  Name

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Signature

  
						

Address:

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00063-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00063-of-00352.parquet"}]]