Document:

EX-4.1

 

Exhibit 4.1

SECURITIES PURCHASE AGREEMENT

     This Securities Purchase Agreement (this “Agreement”) is dated as of February 14,
2007, among Hartville Group, Inc., a Nevada 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:

DEFINITIONS

     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 indicated 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 144 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.

     “Authorized Share Approval” means (i) the vote by the shareholders of the
company to approve an amendment to the Company’s articles or certificate of incorporation
that increases the number of authorized shares of Common Stock and authorizes the board of
directors of the Company to effect such increase (the “Amendment”) and (ii) the
filing by the Company of the Amendment with the Secretary of State of the State of Nevada
and the acceptance of the Amendment by the Secretary of State of the State of Nevada.

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     “Business Day” means any day except Saturday, Sunday, any day which shall be 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 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.

     “Closings” means the closings of the purchase and sale of the Securities
pursuant to Section 2.1.

     “Commission” means the Securities and Exchange Commission.

     “Common Stock” means the common stock of the Company, par value $0.001 per
share, 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 Baker & Hostetler, LLP.

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

     “Debentures” means, the Original Issue Discount Secured Convertible Debentures
due, subject to the terms therein, 3 years from their date of issuance, issued by the
Company to the Purchasers hereunder, in the form of Exhibit A 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.

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     “Exempt Issuance” means the issuance of (a) shares of Common Stock or options
to vendors of goods and services to the Company, or to employees, officers or directors of
the Company pursuant to a plan, in each case duly authorized by a majority of the non-
employee members of the Board of Directors of the Company 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 date of this Agreement to increase the number of such securities or to
decrease the exercise, exchange or conversion price of any such securities, and (c)
securities issued pursuant to acquisitions or strategic transactions approved by a majority
of the disinterested directors, provided 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.

     “FWS” means Feldman Weinstein & Smith LLP with offices located at 420 Lexington
Avenue, Suite 2620, New York, New York 10170-0002.

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

     “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.

     “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
4.13.

     “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.

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     “Pre-Notice” shall have the meaning ascribed to such term in Section 4.13.

     “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 4.11.

     “Registration Rights Agreement” means the Registration Rights Agreement, dated
the date hereof, 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, 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.

     “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.

     “SEC Reports” shall have the meaning ascribed to such term in Section 3.1(h).

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

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

     “Security Agreement” means the Security Agreement, dated July 31, 2006, among
the Company, the Subsidiaries and the Purchasers.

     “Short Sales” shall include 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).

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     “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, which
shall be 79% of the Principal Amount of the Debentures.

     “Subsequent Financing” shall have the meaning ascribed to such term in Section
4.13.

     “Subsequent Financing Notice” shall have the meaning ascribed to such term in
Section 4.13.

     “Subsidiary” means any subsidiary of the Company as set forth on Schedule
3.1(a).

     “Trading Day” means a day on which the Common Stock is traded on a Trading
Market.

     “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 Nasdaq Capital Market,
the American Stock Exchange, the New York Stock Exchange, the Nasdaq National Market or the
Over the Counter Bulletin Board (OTCBB).

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

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

     “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 and
reasonably acceptable to the Company.

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     “Warrants” means collectively the Common Stock purchase warrants, in the form
of Exhibit C 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 4 years.

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

PURCHASE AND SALE

     Closings. On the Closing Date, 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 each Purchaser agrees to purchase in the aggregate,
severally and not jointly, up to $2,531,645.50 principal amount of the Debentures (up to $2,000,000
Subscription Amount). Each Purchaser shall deliver to the Company via wire transfer or a certified
check immediately available funds equal to their Subscription Amount and the Company shall deliver
to each Purchaser their respective Debenture and Warrants as determined pursuant to Section 2.2(a)
and the other items set forth in Section 2.2 issuable 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 FW, or such
other location as the parties shall mutually agree.

     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 the form of Exhibit D
attached hereto;

     (iii) a Debenture with a principal amount equal to 126.58% of 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 100% of the principal amount of such
Purchaser’s Debenture divided by the initial Conversion Price, with an exercise
price equal to $0.15, subject to adjustment therein;

     (v) the Security Documents; and

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

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

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     this Agreement duly executed by such Purchaser;

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

     the Registration Rights Agreement duly executed by such Purchaser.

     Closing Conditions.

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

     the accuracy in all material respects when made and on the Closing Date of the
representations and warranties of the Purchasers contained herein;

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

     the delivery by the Purchasers 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:

     the accuracy in all material respects on the Closing Date of the
representations and warranties of the Company contained herein;

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

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

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

     from the date hereof to the Closing Date, trading in the Common Stock shall not
have been suspended by the Commission or the Company’s principal Trading Market
(except for any suspension of trading of limited duration agreed to by the Company,
which suspension shall be terminated prior to the Closing), and, at any time prior
to the Closing Date, trading in securities generally as reported by Bloomberg L.P.
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

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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 Debentures at the Closing.

REPRESENTATIONS AND WARRANTIES

     Representations and Warranties of the Company. Except as set forth under the
corresponding section of the disclosure schedules delivered to the Purchasers concurrently herewith
(the “Disclosure Schedules”) which Disclosure Schedules shall be deemed a part hereof and
to qualify any representation or warranty otherwise made herein to the extent of such disclosure,
the Company hereby makes the representations and warranties set forth below to each Purchaser.

     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 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, then all other references
in the Transaction Documents to the Subsidiaries or any of them will be disregarded.

     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, prospects 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.

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     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 thereby have been duly authorized
by all necessary action on the part of the Company and no further action is required by the
Company, its board of directors or its 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’ 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.

     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.

     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

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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”).

     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. As agreed with each Purchaser, the Company has not reserved from
its duly authorized capital stock any shares of Common Stock for issuance of the Underlying
Shares, but will so reserve a number of shares equal to the Required Minimum at such time as
the Company receives Authorized Share Approval.

     Capitalization. The capitalization of the Company is as set forth on
Schedule 3.1(g). 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 plan 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, script 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 of the Company 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.

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     SEC Reports; Financial Statements. The Company has filed all reports,
schedules, forms, statements and other documents required to be filed by it under the
Securities Act and the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof,
for the two years preceding the date hereof (or such shorter period as the Company was
required by law or regulation to file such material) (the foregoing materials, including the
exhibits thereto and documents incorporated by reference therein, being collectively
referred to herein as the “SEC Reports”) on a timely basis or has received a valid
extension of such time of filing and has filed any such SEC Reports prior to the expiration
of any such extension. As of their respective dates, the SEC Reports
complied in all material respects with the requirements of the Securities Act and the
Exchange Act, as applicable, and none of the SEC Reports, when filed, contained any untrue
statement of a material fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The financial statements of the
Company included in the SEC Reports comply in all material respects with applicable
accounting requirements and the rules and regulations of the Commission with respect thereto
as in effect at the time of filing. Such financial statements have been prepared in
accordance with United States generally accepted accounting principles applied on a
consistent basis during the periods involved (“GAAP”), except as may be otherwise
specified in such financial statements or the notes thereto and except that unaudited
financial statements may not contain all footnotes required by GAAP, and fairly present in
all material respects the financial position of the Company and its consolidated
subsidiaries as of and for the dates thereof and the results of operations and cash flows
for the periods then ended, subject, in the case of unaudited statements, to normal,
immaterial, year-end audit adjustments.

     Material Changes. Since the date of the latest audited financial statements
included within the SEC Reports, except as specifically disclosed in a subsequent SEC
Report, (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 pursuant to
GAAP or disclosed in filings made with the Commission, (iii) the Company has not altered its
method of 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. The Company does not have pending before the Commission any request for
confidential treatment of information. 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 that has not been

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publicly disclosed at least one
Trading Day prior to the date that this representation is made.

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.

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, and neither the Company or 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,
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 compliance
could not, individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect.

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

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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.

     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 as described in the
SEC Reports, except where the failure to possess such permits could not have or 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.

     Title to Assets. The Company and the Subsidiaries have good and marketable
title in fee simple to all real property owned by them that is material to the business of
the Company and the Subsidiaries 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.

     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 necessary or material for use in connection with their respective
businesses as described in the SEC Reports 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 the
Intellectual Property Rights used by the Company or any Subsidiary violates or infringes
upon the rights of any Person. To the knowledge of the Company, all such Intellectual
Property Rights are enforceable and there is no existing infringement by another Person of
any of the Intellectual Property Rights. The Company and its Subsidiaries have taken
reasonable 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 expect to have a Material Adverse Effect.

     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

13

 

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.

     Transactions With Affiliates and Employees. Except as set forth in the SEC
Reports, 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 (i) for payment of salary or consulting fees for
services rendered, (ii) reimbursement for expenses incurred on behalf of the Company and
(iii) for other employee benefits, including stock option agreements under any stock option
plan of the Company.

     Sarbanes-Oxley; Internal Accounting Controls. The Company is in material
compliance with all provisions of the Sarbanes-Oxley Act of 2002 which are applicable to it
as of the Closing Date. 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. The Company has
established disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) for the Company and designed such disclosure controls and procedures to
ensure that information required to be disclosed by the Company in the reports it files or
submits under the Exchange Act is recorded, processed, summarized and reported, within the
time periods specified in the Commission’s rules and forms. The Company’s certifying
officers have evaluated the effectiveness of the Company’s disclosure controls and
procedures as of the end of the period covered by the Company’s most recently filed periodic
report under the Exchange Act (such date, the “Evaluation Date”). The Company
presented in its most recently filed periodic report under the Exchange Act the conclusions
of the certifying officers about the effectiveness of the disclosure controls and procedures
based on their evaluations as of the Evaluation Date. Since the Evaluation Date, there have
been no changes in the Company’s internal control over financial reporting (as such term is
defined in the Exchange Act) that has materially affected, or is reasonably likely to
materially affect, the Company’s internal control over financial reporting.

14

 

     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.

     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 the Trading Market.

     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.

     Registration Rights. Except as set forth on Schedule 3.1(v), 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.

     Listing and Maintenance Requirements. The Company’s Common Stock is registered
pursuant to Section 12(b) or 12(g) of the Exchange Act, and the Company has taken no action
designed to, or which to its knowledge is likely to have the effect of, terminating the
registration of the Common Stock under the Exchange Act nor has the Company received any
notification that the Commission is contemplating terminating such registration. The
Company has not, in the 12 months preceding the date hereof, received notice from any
Trading Market on which the Common Stock is or has been listed or quoted to the effect that
the Company is not in compliance with the listing or maintenance requirements of such
Trading Market. The Company is, and has no reason to believe that it will not in the
foreseeable future continue to be, in compliance with all such listing and maintenance
requirements.

     Application of Takeover Protections. The Company and its Board of Directors
have taken all necessary action, if any, in order to render inapplicable any control share
acquisition, business combination, poison pill (including any distribution under a rights
agreement) or other similar anti-takeover provision under the Company’s Certificate of
Incorporation (or similar charter documents) or the laws of its state of incorporation 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.

15

 

     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, with respect to the representations and warranties made herein are true and
correct with respect to such representations and warranties and do not contain any untrue
statement of a material fact
or omit to state any material fact necessary in order to make the statements made
therein, in light of the circumstances under which they were made, not misleading. The
press releases disseminated by the Company during the twelve months preceding the date of
this Agreement taken as a whole do not 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, 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 transactions contemplated hereby other
than those specifically set forth in Section 3.2 hereof.

     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 the Securities Act or any applicable shareholder
approval provision of any Trading Market on which any of the securities of the Company are
listed or designated.

     Solvency. Except as described in Schedule 3.1(aa), based on the
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

16

 

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 dates thereof 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” shall mean (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.

     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 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.

     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.

     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.

     Accountants. The Company’s accountants are set forth on Schedule
3.1(ee) of the Disclosure Schedule. To the knowledge of the Company, such accountants,
who the Company expects will express their opinion with respect to the financial statements
to be included in the Company’s Annual Report on Form 10-KSB for the year ended December 31,
2006 are a registered public accounting firm as required by the Exchange Act.

17

 

     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).

     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.

     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 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.

     Acknowledgement
Regarding Purchasers’ Trading Activity. Anything in this
Agreement or elsewhere herein to the contrary notwithstanding (except for Sections 3.2(f)
and 4.16 hereof), it is understood and acknowledged by the Company (i) that none of the
Purchasers have been asked to agree, 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)
that past or future open market or other transactions by any Purchaser, including Short
Sales, and 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)
that any Purchaser, and counter-parties in “derivative” transactions to which any such
Purchaser is a party, directly or indirectly, presently may have a “short” position in the
Common Stock, and (iv) that 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

18

 

(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.

     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.

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

     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, delivery and performance by such
Purchaser of the transactions contemplated by this Agreement 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.

     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

19

 

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.

     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.

     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.

     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 or any other general solicitation or general advertisement.

     Short Sales and Confidentiality Prior To The Date Hereof. Other than the
transaction contemplated hereunder, such Purchaser has not directly or indirectly, nor has
any Person acting on behalf of or pursuant to any understanding with such Purchaser,
executed any disposition, including Short Sales, in the securities of the Company during the
period commencing from the time that such Purchaser first received a term sheet (written or
oral) from the Company or any other Person setting forth the material terms of the
transactions contemplated hereunder until the date hereof (“Discussion Time”).
Notwithstanding the foregoing, in the case of a Purchaser that is a multi-managed investment
vehicle whereby separate portfolio managers manage separate portions of such Purchaser’s
assets and the portfolio managers have no direct knowledge of the investment decisions made
by the portfolio managers managing other portions of such Purchaser’s assets, the
representation set forth above shall only apply with respect to the portion of assets
managed by the portfolio manager that made the investment decision to purchase the
Securities covered by this Agreement. Other than to other Persons party to this Agreement,
such Purchaser has maintained the confidentiality of all disclosures made to it in
connection with this transaction (including the existence and terms of this transaction).

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OTHER AGREEMENTS OF THE PARTIES

     Transfer Restrictions.

     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.

     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] THESE SECURITIES [NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
[EXERCISABLE] [CONVERTIBLE]] HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE
COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION
FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES
ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE 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. THESE SECURITIES
AND THE SECURITIES ISSUABLE UPON [EXERCISE] [CONVERSION] OF THESE SECURITIES 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

21

 

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.

     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(k), or
(iv) if such legend is not required under applicable requirements of the Securities Act
(including judicial interpretations and pronouncements issued by the staff of the
Commission). The Company shall cause its counsel to issue a legal opinion to the Company’s
transfer agent promptly after the Effective Date if required by the Company’s 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 under Rule 144(k) 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 Company’s
transfer agent of a certificate representing Underlying Shares, as applicable, issued with a
restrictive legend (such third Trading

22

 

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 any transfer agent of the Company 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 of the
Company to the Purchasers by crediting the account of the Purchaser’s prime broker with the
Depository Trust Company System.

     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 Company’s 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.

     Each Purchaser, severally and not jointly with the other Purchasers, agrees 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 that the Purchaser will sell any
Securities pursuant to either the registration requirements of the Securities Act, including
any applicable prospectus delivery requirements, or an exemption therefrom, 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.

     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.

     Furnishing of Information. As long as any 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 hereof pursuant to 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

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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.

     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 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.

     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.

     Securities Laws Disclosure; Publicity. The Company shall, by 8:30 a.m. Eastern time
on the Trading Day following the date hereof, issue press release describing the material terms of
the Transaction Documents, and shall file a Current Report on Form 8-K disclosing the material
terms of the transactions contemplated hereby, and attaching the Transaction Documents thereto,
within the period required by Commission regulations. 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 subclause (ii).

     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”

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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.

     Non-Public Information. 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 representations in effecting transactions in securities
of the Company.

     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 not for 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 prior practices), to redeem any
Common Stock or Common Stock Equivalents or to settle any outstanding litigation.

     Reimbursement. If any Purchaser becomes involved in any capacity in any Proceeding by
or against any Person who is a stockholder of the Company (except as a result of sales, pledges,
margin sales and similar transactions by such Purchaser to or with any other stockholder), solely
as a result of such Purchaser’s acquisition of the Securities under this Agreement, the Company
will reimburse such Purchaser for its reasonable legal and other expenses (including the cost of
any investigation preparation and travel in connection therewith) incurred in connection therewith,
as such expenses are incurred. The reimbursement obligations of the Company under this paragraph
shall be in addition to any liability which the Company may otherwise have, shall extend upon the
same terms and conditions to any Affiliates of the Purchasers who are actually named in such
action, proceeding or investigation, and partners, directors, agents, employees and controlling
persons (if any), as the case may be, of the Purchasers and any such Affiliate, and shall be
binding upon and inure to the benefit of any successors, assigns, heirs and personal
representatives of the Company, the Purchasers and any such Affiliate and any such Person. The
Company also agrees that neither the Purchasers nor any such Affiliates, partners, directors,
agents, employees or controlling persons shall have any liability to the Company or any Person
asserting claims on behalf of or in right of the Company solely as a result of acquiring the
Securities under this Agreement.

     Indemnification of Purchasers. Subject to the provisions of this Section 4.11, 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,

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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, 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. The Company shall not effect any settlement
affecting a Purchaser Party without the Purchaser Party’s prior consent, which shall not be
unreasonably withheld or delayed.

     Reservation and Listing of Securities.

     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.

     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, then the Board of
Directors of the Company shall use commercially reasonable efforts to amend the Company’s
certificate or articles of incorporation to increase the number of authorized

26

 

but unissued
shares of Common Stock to at least the Required Minimum at such time, as soon as possible
and in any event not later than the 75th day after such date.

     The Company shall, if applicable: (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.

     The Company shall submit a proposal to its shareholders at the Company’s next special
or annual meeting of shareholders, whichever comes first, to effect the Authorized Share
Approval which will permit conversion in full of all Debentures and the exercise of all
Warrants. The Company’s board of directors shall recommend that shareholders vote “for” such
proposal.

     Participation in Future Financing.

     From the date hereof until the date that no Debentures remain outstanding, 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.

     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, the Person or
Persons through or with whom such Subsequent Financing is proposed to be effected, and
attached to which shall be a term sheet or similar document relating thereto.

     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

27

 

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.

     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.

     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” is the
ratio of (x) the Subscription Amount of Securities purchased on the Closing Date by a
Purchaser participating under this Section 4.13 and (y) the sum of the aggregate
Subscription Amounts of Securities purchased on the Closing Date by all Purchasers
participating under this Section 4.13.

     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
4.13, 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.

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

     Subsequent Equity Sales.

     From the date hereof until 90 days after the Effective Date, without the prior written
consent of the holders of majority in principal amount of the Debentures, 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 4.14 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, 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.

     From the date hereof until such time as no Purchaser holds any of the Securities, the
Company shall be prohibited from effecting or entering into an agreement to effect

28

 

any Subsequent Financing involving a “Variable Rate Transaction”. The term “Variable Rate
Transaction” shall mean 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.

     Notwithstanding the foregoing, this Section 4.14 shall not apply in respect of an
Exempt Issuance, except that no Variable Rate Transaction shall be an Exempt Issuance.

     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.

     Short Sales and Confidentiality After The Date Hereof. Each Purchaser severally and
not jointly with the other Purchasers covenants that neither it nor any Affiliate acting on its
behalf or pursuant to any understanding with it will execute any Short Sales during the period
commencing at the Discussion Time and ending at the time that the transactions contemplated by this
Agreement are first publicly announced as described in Section 4.6. Each Purchaser, severally and
not jointly with the other Purchasers, covenants that until such time as the transactions
contemplated by this Agreement are publicly disclosed by the Company as described in Section 4.6,
such Purchaser will maintain the confidentiality of all disclosures made to it in connection with
this transaction (including the existence and terms of this transaction). Each Purchaser
understands and acknowledges, severally and not jointly with any other Purchaser, that the
Commission currently takes the position that coverage of short sales of shares of the Common Stock
“against the box” prior to the Effective Date of the Registration Statement with the Securities is
a violation of Section 5 of the Securities Act, as set forth in Item 65, Section A, of the Manual
of Publicly Available Telephone Interpretations, dated July 1997, compiled by the Office of Chief
Counsel, Division of Corporation Finance. Notwithstanding the foregoing, no Purchaser makes any
representation, warranty or covenant hereby that it will not engage in Short Sales in the
securities of the Company after the time that the transactions contemplated by this Agreement are
first publicly announced as described in Section 4.6. Notwithstanding the

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foregoing, in the case
of a Purchaser that is a multi-managed investment vehicle whereby separate portfolio managers
manage separate portions of such Purchaser’s assets and the portfolio managers have no direct
knowledge of the investment decisions made by the portfolio managers managing other portions of
such Purchaser’s assets, the covenant set forth above shall only apply with respect to the portion
of assets managed by the portfolio manager that made the investment decision to purchase the
Securities covered by this Agreement.

     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 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.

     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.

     Consent to Transaction Documents. The Purchaser acknowledge, agree and consent to the
transactions contemplated under the Transaction Documents and waive any breach or conflict with any
prior agreements between the Company and any of the Purchasers.

     Amendment to Security Agreement. The parties hereby acknowledge and agree that the
definition of “Obligations” under the Security Agreement is hereby amended and restated as follows:
““Obligations” means all of the liabilities and obligations (primary, secondary, direct,
contingent, sole, joint or several) due or to become due, or that are now or may be hereafter
contracted or acquired, or owing to, of any Debtor to the Secured Parties, including, without
limitation, all obligations under this Agreement, the Debentures, the Original Issue Discount
Secured Convertible Debenture due February 14, 2010, any existing or future credit line or other
loan facility, the Guaranty and any other instruments, agreements or other documents executed
and/or delivered in connection herewith or therewith, in each case, whether now or hereafter
existing, voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or
unliquidated, whether or not jointly owed with others, and whether or not from time to time
decreased or extinguished and later increased, created or incurred, and all or any portion of such
obligations or liabilities that are paid, to the extent all or any part of such payment is avoided
or recovered directly or indirectly from any of the Secured Parties as a preference, fraudulent
transfer or otherwise as such obligations may be amended, supplemented, converted, extended or
modified from time to time. Without limiting the generality of the foregoing, the term
“Obligations” shall include, 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 from time to time under or in connection with this
Agreement, the Debentures, the Guaranty and any other instruments, agreements or other documents
executed and/or delivered in connection herewith or therewith; and (iii) all amounts

30

 

(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.”

     $2,000,000 Line of Credit Facility. Commencing on the date hereof until December 31,
2007, the Purchasers, severally and not jointly with the other Purchasers, shall provide a line of
credit to the Company (the “Facility”). The amount of the Facility is, in the aggregate,
$2,000,000. To effect a draw down under the Facility (a “Draw Down”), the Company must
provide each Purchaser at least 10 Trading Days’ prior written notice of a Draw Down. As to any
Draw Down, a Purchaser shall only be responsible for its pro-rata share based on the initial
Subscription Amounts under this Agreement. Any Draw Down exercised by a Purchaser or the Company
shall close within 10 Trading Days of a duly delivered exercise notice by the Company of the Draw
Down. Draw Downs shall be evidenced in the form of a convertible debenture in the form of the
Debentures, which shall have a principal amount equal to the cash proceeds of the Draw Down
multiplied by 1.266. The terms of each Draw Down shall be identical to those set forth in the
Transaction Documents, mutatis mutandis. In order to effectuate a Draw Down, the Company and the
Purchasers shall enter into the following agreements: (x) a Securities Purchase Agreement identical
to this Agreement, mutatis mutandis and shall include updated disclosure schedules and (y) a
registration rights agreement identical to the Registration Rights Agreement, mutatis mutandis and
shall include updated disclosure schedules. Notwithstanding anything herein to the contrary, the
Company shall only have the right to exercise a Draw Down, and Purchasers shall only be obligated
to honor the Draw Down, if (i) a Material Adverse Effect has not occurred during the period from
the Closing Date to the closing date of such Draw Down, (b) each non-abstaining member of the Board
of Directors of the Company agrees to the
Draw Down and (c) prior to the closing of the Draw Down, a Purchaser receives any documents
and other item it may reasonably require, in form and content acceptable to such Purchaser.

MISCELLANEOUS

     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 August 1, 2006; provided, however, that no such
termination will affect the right of any party to sue for any breach by the other party (or
parties).

     Fees and Expenses. At the Closing, the Company has agreed to reimburse FWS and Olshan
Grundman Frome Rosenzweig & Wolosky LLP for their respective reasonable legal fees and expenses.
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.

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     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.

     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 2nd Trading Day following the
date of mailing, if sent by U.S. nationally recognized overnight courier service, or (d) upon
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.

     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 two-thirds in interest of the Purchasers (based on the then-outstanding principal
amount of the Debentures) 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.

     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.

     Successors and Assigns. This Agreement shall be binding upon and inure to the benefit
of the parties and their successors and permitted assigns. 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 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”.

     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 4.11.

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     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 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. The parties hereby waive all rights to a trial by jury. 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.

     Survival. The representations, warranties, covenants and other agreements contained
herein shall survive the Closing and the delivery, exercise and/or conversion of the Securities, as
applicable for the applicable statue of limitations.

     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.

     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

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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.

     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
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, 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 subject to any such rescinded conversion or exercise
notice.

     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.

     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.

     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.

     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

34

 

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 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.

     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 FWS. FWS does not represent
all of the Purchasers but only Midsummer. 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.

     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.

35

 

     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.

(Signature Pages Follow)

36

 

     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.

	 	 	 	 	 
	HARTVILLE GROUP, INC.	 	Address for Notice:
	 

	 	 	 	3840 Greentree Avenue, SW
	 

	 	 	 	Canton, Ohio 44706
	By:

	 	 	 	Attn:
	 

	 	 	 	 
	 

	 	Name:
	 	Fax:
	 

	 	Title:
	 	e-mail:
	 
	 	 	 	 
	With a copy to (which shall not constitute notice):	 	 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK

SIGNATURE PAGE FOR PURCHASER FOLLOWS]

37

 

[PURCHASER SIGNATURE PAGES TO HTVL 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:

 

Signature of Authorized Signatory of Purchaser:

 

Name of Authorized Signatory:

 

Title of Authorized Signatory:

 

Email Address of Purchaser:

 

Facsimile Number of Purchaser: 

 

Address for Notice of Purchaser:

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

Subscription Amount:

Warrant Shares:

EIN Number: [PROVIDE THIS UNDER SEPARATE COVER]

[SIGNATURE PAGES CONTINUE]

38EX-4.2

 

Exhibit 4.2

NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS CONVERTIBLE HAVE BEEN
REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN
RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
“SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE 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 CONVERSION OF THIS SECURITY MAY BE PLEDGED IN CONNECTION
WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.

Original Issue Date: February 14, 2007

Original Conversion Price (subject to adjustment herein): $0.15

$                    

ORIGINAL ISSUE DISCOUNT SECURED CONVERTIBLE DEBENTURE

DUE FEBRUARY 14, 2010

     THIS DEBENTURE is one of a series of duly authorized and validly issued Original Issue
Discount Secured Convertible Debentures of Hartville Group, Inc., a Nevada corporation, having its
principal place of business at 3840 Greentree Ave., SW, Canton, Ohio 44706 (the “Company”),
designated as its Original Issue Discount Secured Convertible Debentures, due February 14, 2010
(this debenture, the “Debenture” and collectively with the other such series of debentures,
the “Debentures”).

     FOR
VALUE RECEIVED, the Company promises to pay to ___ or its registered
assigns (the “Holder”), or shall have paid pursuant to the terms hereunder, the principal
sum of $___ on February 14, 2010, or such earlier date as this Debenture is required to
be repaid as provided hereunder (the “Maturity Date”). This Debenture is subject to the
following additional provisions:

     Section 1. Definitions. For the purposes hereof, in addition to the terms
defined elsewhere in this Debenture, (a) capitalized terms not otherwise defined herein shall have
the meanings set forth in the Purchase Agreement and (b) the following terms shall have the
following meanings:

1

 

     “Alternate Consideration” shall have the meaning set forth in Section 5(e).

     “Bankruptcy Event” means any of the following events: (a) the Company or any
Significant Subsidiary (as such term is defined in Rule 1-02(w) of Regulation S-X) thereof
commences a case or other proceeding under any bankruptcy, reorganization, arrangement,
adjustment of debt, 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 60 days 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 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.

     “Base Conversion Price” shall have the meaning set forth in Section 5(b).

     “Business Day” means any day except Saturday, Sunday, any day which shall be 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.

     “Buy-In” shall have the meaning set forth in Section 4(d)(v).

     “Change of Control Transaction” means the occurrence after the date hereof of
any of (i) an acquisition after the date hereof by an individual or legal entity or “group”
(as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of effective control
(whether through legal or beneficial ownership of capital stock of the Company, by contract
or otherwise) of in excess of 40% of the voting securities of the Company (other than by
means of conversion or exercise of the Debentures and the Securities issued together with
the Debentures), or (ii) the Company merges into or consolidates with any other Person, or
any Person merges into or consolidates with the Company and, after giving effect to such
transaction, the stockholders of the Company immediately prior to such transaction own less
than 60% of the aggregate voting power of the Company or the successor entity of such
transaction, or (iii) the Company sells or transfers all or substantially all of its assets
to another Person and the stockholders of the

2

 

Company immediately prior to such transaction
own less than 60% of the aggregate voting power of the acquiring entity immediately after
the transaction, or (iv) a
replacement at one time or within a three year period of more than one-half of the
members of the Company’s board of directors which is not approved by a majority of those
individuals who are members of the board of directors on the date hereof (or by those
individuals who are serving as members of the board of directors on any date whose
nomination to the board of directors was approved by a majority of the members of the board
of directors who are members on the date hereof), or (v) the execution by the Company of an
agreement to which the Company is a party or by which it is bound, providing for any of the
events set forth in clauses (i) through (iv) above.

     “Common Stock” means the common stock, par value $0.001 per share, of the
Company and stock of any other class of securities into which such securities may hereafter
be reclassified or changed into.

     “Conversion Date” shall have the meaning set forth in Section 4(a).

     “Conversion Price” shall have the meaning set forth in Section 4(b).

     “Conversion Shares” means, collectively, the shares of Common Stock issuable
upon conversion of this Debenture in accordance with the terms hereof.

     “Debenture Register” shall have the meaning set forth in Section 2(c).

     “Dilutive Issuance” shall have the meaning set forth in Section 5(b).

     “Dilutive Issuance Notice” shall have the meaning set forth in Section 5(b).

     “Effectiveness Period” shall have the meaning set forth in the Registration
Rights Agreement.

     “Event of Default” shall have the meaning set forth in Section
8.

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

     “Fundamental Transaction” shall have the meaning set forth in Section 5(e).

     “Late Fees” shall have the meaning set forth in Section 2(d).

     “Mandatory Default Amount” means the sum of (i) the greater of (A) 110% of the
outstanding principal amount of this Debenture, or (B) the outstanding principal amount of
this Debenture divided by the Conversion Price on the date the Mandatory Default Amount is
either (a) demanded (if demand or notice is required to create an

3

 

Event of Default) or
otherwise due or (b) paid in full, whichever has a lower Conversion Price, multiplied by the
VWAP on the date the Mandatory Default Amount is either (x)
demanded or otherwise due or (y) paid in full, whichever has a higher VWAP, and (ii)
all other amounts, costs, expenses and liquidated damages due in respect of this Debenture.

     “New York Courts” shall have the meaning set forth in Section 9(d).

     “Notice of Conversion” shall have the meaning set forth in Section 4(a).

     “Original Issue Date” means the date of the first issuance of the Debentures,
regardless of any transfers of any Debenture and regardless of the number of instruments
which may be issued to evidence such Debentures.

     “Permitted Indebtedness” means (a) the Indebtedness existing on the Original
Issue Date and set forth on Schedule 3.1(aa) attached to the Purchase Agreement and
(b) lease obligations and purchase money indebtedness of up to $250,000, in the aggregate,
incurred in connection with the acquisition of capital assets and lease obligations with
respect to newly acquired or leased assets.

     “Permitted Lien” means the individual and collective reference to the
following: (a) Liens for taxes, assessments and other governmental charges or levies not yet
due or Liens for taxes, assessments and other governmental charges or levies being contested
in good faith and by appropriate proceedings for which adequate reserves (in the good faith
judgment of the management of the Company) have been established in accordance with GAAP;
(b) Liens imposed by law which were incurred in the ordinary course of the Company’s
business, such as carriers’, warehousemen’s and mechanics’ Liens, statutory landlords’
Liens, and other similar Liens arising in the ordinary course of the Company’s business, and
which (x) do not individually or in the aggregate materially detract from the value of such
property or assets or materially impair the use thereof in the operation of the business of
the Company and its consolidated Subsidiaries or (y) are being contested in good faith by
appropriate proceedings, which proceedings have the effect of preventing for the foreseeable
future the forfeiture or sale of the property or asset subject to such Lien; and (c) Liens
incurred in connection with Permitted Indebtedness under clause (b) thereunder, provided
that such Liens are not secured by assets of the Company or its Subsidiaries other than the
assets so acquired or leased.

     “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.

     “Purchase Agreement” means the Securities Purchase Agreement among the Company
and the original Holders, dated as of February 14, 2007, as amended, modified or
supplemented from time to time in accordance with its terms.

4

 

     “Registration Rights Agreement” means the Registration Rights Agreement among
the Company and the original Holders, dated as of the date of the Purchase Agreement, as
amended, modified or supplemented from time to time in accordance with its terms.

     “Registration Statement” means a registration statement that registers the
resale of all Conversion Shares of the Holder, who shall be named as a “selling stockholder”
therein, and meets the requirements of the Registration Rights Agreement.

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

     “Share Delivery Date” shall have the meaning set forth in Section 4(d).

     “Subsidiary” shall have the meaning set forth in the Purchase Agreement.

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

     “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 National Market, the New York Stock Exchange or the
OTC Bulletin Board.

     “Transaction Documents” shall have the meaning set forth in the Purchase
Agreement.

     “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 for
trading 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 quoted for
trading 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 Holder
and reasonably acceptable to the Company.

     Section 2. Interest and Prepayment.

5

 

     a) Interest. No interest shall be payable on this Debenture, it being
understood that such Debenture has been purchased at an original issue discount in lieu of
interest.

     b) Prepayment. Except as otherwise set forth in this Debenture, the Company
may not prepay any portion of the principal amount of this Debenture without the prior
written consent of the Holder.

     Section 3. Registration of Transfers and Exchanges.

     a) Different Denominations. This Debenture is exchangeable for an equal
aggregate principal amount of Debentures of different authorized denominations, as requested
by the Holder surrendering the same. No service charge will be payable for such
registration of transfer or exchange.

     b) Investment Representations. This Debenture has been issued subject to
certain investment representations of the original Holder set forth in the Purchase
Agreement and may be transferred or exchanged only in compliance with the Purchase Agreement
and applicable federal and state securities laws and regulations.

     c) Reliance on Debenture Register. Prior to due presentment for transfer to the
Company of this Debenture, the Company and any agent of the Company may treat the Person in
whose name this Debenture is duly registered on the Debenture Register as the owner hereof
for the purpose of receiving payment as herein provided and for all other purposes, whether
or not this Debenture is overdue, and neither the Company nor any such agent shall be
affected by notice to the contrary.

     Section 4. Conversion.

     a) Voluntary Conversion. At any time after the Original Issue Date until this
Debenture is no longer outstanding, this Debenture shall be convertible, in whole or in
part, into shares of Common Stock at the option of the Holder, at any time and from time to
time (subject to the conversion limitations set forth in Section 4(c) hereof). The Holder
shall effect conversions by delivering to the Company a Notice of Conversion, the form of
which is attached hereto as Annex A (a “Notice of Conversion”), specifying
therein the principal amount of this Debenture to be converted and the date on which such
conversion shall be effected (a “Conversion Date”). If no Conversion Date is
specified in a Notice of Conversion, the Conversion Date shall be the date that such Notice
of Conversion is deemed delivered hereunder. To effect conversions hereunder, the Holder
shall not be required to physically surrender this Debenture to the Company unless the
entire principal amount of this Debenture has been so converted. Conversions hereunder shall
have the effect of lowering the outstanding principal amount of this Debenture in an amount
equal to the applicable conversion. The Holder and the

6

 

Company shall maintain records
showing the principal amount(s) converted and the date of such conversion(s). The Company
may deliver an objection to any Notice of Conversion within 2 Business Days of delivery of
such Notice of Conversion. In the event of any dispute or discrepancy, the records of the
Holder shall be controlling and determinative in the absence of manifest error. The Holder,
and any assignee by acceptance of this Debenture, acknowledge and agree that, by reason of
the provisions of this paragraph, following conversion of a portion of this Debenture, the
unpaid and unconverted principal amount of this Debenture may be less than the amount stated
on the face hereof.

     b) Conversion Price. The conversion price in effect on any Conversion Date
shall be equal to $0.15 (subject to adjustment herein) (the “Conversion Price”).

     c)
Intentionally
Omitted.

     d) Mechanics of Conversion.

     i. Conversion Shares Issuable Upon Conversion of Principal Amount. The
number of shares of Common Stock issuable upon a conversion hereunder shall be
determined by the quotient obtained by dividing (x) the outstanding principal amount
of this Debenture to be converted by (y) the Conversion Price.

     ii. Delivery of Certificate Upon Conversion. Not later than three
Trading Days after each Conversion Date (the “Share Delivery Date”), the
Company shall deliver, or cause to be delivered, to the Holder a certificate or
certificates representing the Conversion Shares which, on or after the Effective
Date, shall be free of restrictive legends and trading restrictions (other than
those which may then be required by the Purchase Agreement) representing the number
of shares of Common Stock being acquired upon the conversion of this Debenture. On
or after the Effective Date, the Company shall use its best efforts to deliver any
certificate or certificates required to be delivered by the Company under this
Section 4 electronically through the Depository Trust Company or another established
clearing corporation performing similar functions.

     iii. Failure to Deliver Certificates. If in the case of any Notice of
Conversion such certificate or certificates are not delivered to or as directed by
the applicable Holder by the third Trading Day after the Conversion Date, the Holder
shall be entitled to elect by written notice to the Company at any time on or before
its receipt of such certificate or certificates, to rescind such Conversion, in
which event the Company shall promptly return to the Holder any original Debenture
delivered to the Company and the Holder shall promptly return the Common Stock
certificates representing the principal amount of this Debenture tendered for
conversion to the Company.

7

 

     iv. Obligation Absolute; Partial Liquidated Damages. The Company’s
obligations to issue and deliver the Conversion Shares upon conversion of this
Debenture in accordance with the terms hereof are absolute and unconditional,
irrespective of any action or inaction by the Holder to enforce the same, any waiver
or consent with respect to any provision hereof, the recovery of any
judgment against any Person or any action to enforce the same, or any setoff,
counterclaim, recoupment, limitation or termination, or any breach or alleged breach
by the Holder or any other Person of any obligation to the Company or any violation
or alleged violation of law by the Holder or any other Person, and irrespective of
any other circumstance which might otherwise limit such obligation of the Company to
the Holder in connection with the issuance of such Conversion Shares;
provided, however, that such delivery shall not operate as a waiver
by the Company of any such action the Company may have against the Holder. In the
event the Holder of this Debenture shall elect to convert any or all of the
outstanding principal amount hereof, the Company may not refuse conversion based on
any claim that the Holder or anyone associated or affiliated with the Holder has
been engaged in any violation of law, agreement or for any other reason, unless an
injunction from a court, on notice to Holder, restraining and or enjoining
conversion of all or part of this Debenture shall have been sought and obtained, and
the Company posts a surety bond for the benefit of the Holder in the amount of 150%
of the outstanding principal amount of this Debenture, which is subject to the
injunction, which bond shall remain in effect until the completion of
arbitration/litigation of the underlying dispute and the proceeds of which shall be
payable to such Holder to the extent it obtains judgment. In the absence of such
injunction, the Company shall issue Conversion Shares or, if applicable, cash, upon
a properly noticed conversion. If the Company fails for any reason to deliver to
the Holder such certificate or certificates pursuant to Section 4(d)(ii) by the
third Trading Day after the Conversion Date (other than as to any disputed amounts
in accordance with Section 4(a), the Company shall pay to such Holder, in cash, as
liquidated damages and not as a penalty, for each $1000 of principal amount being
converted, $10 per Trading Day (increasing to $20 per Trading Day on the fifth
Trading Day after such liquidated damages begin to accrue) for each Trading Day
after such third Trading Day until such certificates are delivered. Nothing
herein shall limit a Holder’s right to pursue actual damages or declare an Event of
Default pursuant to Section 8 hereof for the Company’s failure to deliver Conversion
Shares within the period specified herein and such Holder shall have the right to
pursue all remedies available to it hereunder, at law or in equity including,
without limitation, a decree of specific performance and/or injunctive relief. The
exercise of any such rights shall not prohibit the Holder from seeking to enforce
damages pursuant to any other Section hereof or under applicable law.

8

 

     v. Compensation for Buy-In on Failure to Timely Deliver Certificates Upon
Conversion. In addition to any other rights available to the Holder, if the
Company fails for any reason to deliver to the Holder such certificate or
certificates by the Share Delivery Date pursuant to Section 4(d)(ii), and if after
such Share Delivery Date the Holder is required by its brokerage firm to purchase
(in an open market transaction or otherwise) shares of Common Stock to deliver in
satisfaction of a sale by such Holder of the Conversion Shares which the Holder was
entitled to receive upon the conversion relating to such Share
Delivery Date (a “Buy-In”), then the Company shall (A) pay in cash to
the Holder (in addition to any other remedies available to or elected by the Holder)
the amount by which (x) the Holder’s total purchase price (including any brokerage
commissions) for the Common Stock so purchased exceeds (y) the product of (1) the
aggregate number of shares of Common Stock that such Holder was entitled to receive
from the conversion at issue multiplied by (2) the actual sale price at which the
sell order giving rise to such purchase obligation was executed (including any
brokerage commissions) and (B) at the option of the Holder, either reissue (if
surrendered) this Debenture in a principal amount equal to the principal amount of
the attempted conversion or deliver to the Holder the number of shares of Common
Stock that would have been issued if the Company had timely complied with its
delivery requirements under Section 4(d)(ii). For example, if the Holder purchases
Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect
to an attempted conversion of this Debenture with respect to which the actual sale
price of the Conversion Shares (including any brokerage commissions) giving rise to
such purchase obligation was a total of $10,000 under clause (A) of the immediately
preceding sentence, the Company shall be required to pay the Holder $1,000. The
Holder shall provide the Company written notice indicating the amounts payable to
the Holder in respect of the Buy-In and, upon request of the Company, evidence of
the amount of such loss. Nothing herein shall limit a Holder’s right to pursue any
other remedies available to it hereunder, at law or in equity including, without
limitation, a decree of specific performance and/or injunctive relief with respect
to the Company’s failure to timely deliver certificates representing shares of
Common Stock upon conversion of this Debenture as required pursuant to the terms
hereof.

     vi. Reservation of Shares Issuable Upon Conversion. The Company
covenants that it will at all times after it has received shareholder approval to
increase its authorized capital, or when otherwise available, reserve and keep
available out of its authorized and unissued shares of Common Stock for the sole
purpose of issuance upon conversion of this Debenture, each as herein provided, free
from preemptive rights or any other actual contingent purchase rights of Persons
other than the Holder (and the other holders of the Debentures), not less than such
aggregate number of shares of the Common Stock as shall (subject to the terms and
conditions set forth in the Purchase Agreement) be issuable (taking into account the
adjustments and restrictions of Section 5) upon the conversion of

9

 

the outstanding
principal amount of this Debenture. The Company covenants that all shares of Common
Stock that shall be so issuable shall, upon issue, be duly authorized, validly
issued, fully paid and nonassessable and, if the Registration Statement is then
effective under the Securities Act, shall be registered for public sale in
accordance with such Registration Statement.

     vii. Fractional Shares. Upon a conversion hereunder the Company shall
not be required to issue stock certificates representing fractions of shares of
Common Stock, but may if otherwise permitted, make a cash payment in respect
of any final fraction of a share based on the VWAP at such time. If the
Company elects not, or is unable, to make such a cash payment, the Holder shall be
entitled to receive, in lieu of the final fraction of a share, 1 whole share of
Common Stock.

     viii. Transfer Taxes. The issuance of certificates for shares of the
Common Stock on conversion of this Debenture shall be made without charge to the
Holder hereof for any documentary stamp or similar taxes that may be payable in
respect of the issue or delivery of such certificates, provided that the Company
shall not be required to pay any tax that may be payable in respect of any transfer
involved in the issuance and delivery of any such certificate upon conversion in a
name other than that of the Holder of this Debenture so converted and the Company
shall not be required to issue or deliver such certificates unless or until the
person or persons requesting the issuance 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.

     Section 5. Certain Adjustments.

     a) Stock Dividends and Stock Splits. If the Company, at any time while this
Debenture 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 this Debenture); (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.

10

 

     b) Subsequent Equity Sales. If the Company or any Subsidiary thereof, as
applicable, at any time while this Debenture is outstanding, sells or grants any option to
purchase or sells or grants any right to reprice its securities, or otherwise disposes of or
issues (or announces any sale, grant or any option to purchase or other disposition) any
Common Stock or Common Stock Equivalents entitling any Person to acquire shares of Common
Stock at an effective price per share that is lower than the then Conversion Price (such
lower price, the “Base Conversion Price” and such issuances collectively, a
“Dilutive Issuance”) (if the holder of the Common Stock or Common Stock Equivalents
so issued shall at any time, whether by operation of purchase price adjustments, reset
provisions, floating conversion, exercise or exchange prices or otherwise, or due to
warrants, options or rights per share which are issued in connection with such issuance, be
entitled to receive shares of Common Stock at an effective price per share that is lower
than the Conversion Price, such issuance shall be deemed to have occurred for less than the
Conversion Price on such date of the Dilutive Issuance), then the Conversion Price shall be
reduced to equal the Base Conversion Price. Such adjustment shall be made whenever such
Common Stock or Common Stock Equivalents are issued. Notwithstanding the foregoing, no
adjustment will be made under this Section 5(b) in respect of an Exempt Issuance. The
Company shall notify the Holder in writing, no later than the Business Day following the
issuance of any Common Stock or Common Stock Equivalents subject to this Section 5(b),
indicating therein the applicable issuance price, or applicable reset price, exchange price,
conversion price and other pricing terms (such notice, the “Dilutive Issuance
Notice”). For purposes of clarification, whether or not the Company provides a Dilutive
Issuance Notice pursuant to this Section 5(b), upon the occurrence of any Dilutive Issuance,
the Holder is entitled to receive a number of Conversion Shares based upon the Base
Conversion Price on or after the date of such Dilutive Issuance, regardless of whether the
Holder accurately refers to the Base Conversion Price in the Notice of Conversion.

     c) Subsequent Rights Offerings. If the Company, at any time while the
Debenture is outstanding, shall issue rights, options or warrants to all holders of Common
Stock (and not to Holders) entitling them to subscribe for or purchase shares of Common
Stock at a price per share that is lower than the VWAP on the record date referenced below,
then the Conversion Price shall be multiplied by a fraction of which the denominator shall
be the number of shares of the Common Stock outstanding on the date of issuance of such
rights or warrants plus the number of additional shares of Common Stock offered for
subscription or purchase, and of which the numerator shall be the number of shares of the
Common Stock outstanding on the date of issuance of such rights or warrants plus the number
of shares which the aggregate offering price of the total number of shares so offered
(assuming delivery to the Company in full of all consideration payable upon exercise of such
rights, options or warrants) would purchase at such VWAP. Such adjustment shall be made
whenever such rights or warrants are issued, and shall become effective immediately after
the record date for the determination of stockholders entitled to receive such rights,
options or warrants.

11

 

     d) Pro Rata Distributions. If the Company, at any time while this Debenture is
outstanding, distributes to all holders of Common Stock (and not to the Holders) evidences
of its indebtedness or assets (including cash and cash dividends) or rights or warrants to
subscribe for or purchase any security (other than the Common Stock, which shall be subject
to Section 5(b)), then in each such case the Conversion Price shall be adjusted by
multiplying such Conversion Price in effect immediately prior to the record date fixed for
determination of stockholders entitled to receive such distribution by a fraction of which
the denominator shall be the VWAP determined as of the record date mentioned above, and of
which the numerator shall be such VWAP on such record date less the then fair market value
at such record date of the portion of such assets or
evidence of indebtedness so distributed applicable to 1 outstanding share of the Common
Stock as determined by the Board of Directors of the Company in good faith. In either case
the adjustments shall be described in a statement delivered to the Holder describing the
portion of assets or evidences of indebtedness so distributed or such subscription rights
applicable to 1 share of Common Stock. Such adjustment shall be made whenever any such
distribution is made and shall become effective immediately after the record date mentioned
above.

     e) Fundamental Transaction. If, at any time while this Debenture is
outstanding, (A) the Company effects any merger or consolidation of the Company with or into
another Person, (B) the Company effects any sale of all or substantially all of its assets
in one transaction or a series of related transactions, (C) any tender offer or exchange
offer (whether by the Company or another Person) is completed pursuant to which holders of
Common Stock are permitted to tender or exchange their shares for other securities, cash or
property, or (D) the Company effects any reclassification of the Common Stock or any
compulsory share exchange pursuant to which the Common Stock is effectively converted into
or exchanged for other securities, cash or property (in any such case, a “Fundamental
Transaction”), then, upon any subsequent conversion of this Debenture, the Holder shall
have the right to receive, for each Conversion Share that would have been issuable upon such
conversion immediately prior to the occurrence of such Fundamental Transaction, the same
kind and amount of securities, cash or property as it would have been entitled to receive
upon the occurrence of such Fundamental Transaction if it had been, immediately prior to
such Fundamental Transaction, the holder of 1 share of Common Stock (the “Alternate
Consideration”). For purposes of any such conversion, the determination of the
Conversion Price shall be appropriately adjusted to apply to such Alternate Consideration
based on the amount of Alternate Consideration issuable in respect of 1 share of Common
Stock in such Fundamental Transaction, and the Company shall apportion the Conversion Price
among the Alternate Consideration in a reasonable manner reflecting the relative value of
any different components of the Alternate Consideration. If holders of Common Stock are
given any choice as to the securities, cash or property to be received in a Fundamental
Transaction, then the Holder shall be given the same choice as to the Alternate
Consideration it receives upon any conversion of this Debenture following such Fundamental
Transaction. To the extent

12

 

necessary to effectuate the foregoing provisions, any successor
to the Company or surviving entity in such Fundamental Transaction shall issue to the Holder
a new debenture consistent with the foregoing provisions and evidencing the Holder’s right
to convert such debenture into Alternate Consideration. The terms of any agreement pursuant
to which a Fundamental Transaction is effected shall include terms requiring any such
successor or surviving entity to comply with the provisions of this Section 5(e) and
insuring that this Debenture (or any such replacement security) will be similarly adjusted
upon any subsequent transaction analogous to a Fundamental Transaction.

     f) Calculations. All calculations under this Section 5 shall be made to the
nearest cent or the nearest 1/100th of a share, as the case may be. For purposes of this
Section 5, the number of shares of Common Stock deemed to be issued and outstanding
as of a given date shall be the sum of the number of shares of Common Stock (excluding
any treasury shares of the Company) issued and outstanding.

     g) Notice to the Holder.

     i. Adjustment to Conversion Price. Whenever the Conversion Price is
adjusted pursuant to any provision of this Section 5, the Company shall promptly
mail to each Holder a notice setting forth the Conversion Price after such
adjustment and setting forth a brief statement of the facts requiring such
adjustment. If the Company issues a variable rate security, despite the prohibition
thereon in the Purchase Agreement, the Company shall be deemed to have issued Common
Stock or Common Stock Equivalents at the lowest possible conversion or exercise
price at which such securities may be converted or exercised in the case of a
Variable Rate Transaction (as defined in the Purchase Agreement).

     ii. Notice to Allow Conversion by Holder. If (A) the Company shall
declare a dividend (or any other distribution in whatever form) on the Common Stock,
(B) the Company shall declare a special nonrecurring cash dividend on or a
redemption of the Common Stock, (C) the Company shall authorize the granting to all
holders of the Common Stock of rights or warrants to subscribe for or purchase any
shares of capital stock of any class or of any rights, (D) the approval of any
stockholders of the Company shall be required in connection with any
reclassification of the Common Stock, any consolidation or merger to which the
Company is a party, any sale or transfer of all or substantially all of the assets
of the Company, of any compulsory share exchange whereby the Common Stock is
converted into other securities, cash or property or (E) the Company shall authorize
the voluntary or involuntary dissolution, liquidation or winding up of the affairs
of the Company, then, in each case, the Company shall cause to be filed at each
office or agency maintained for the purpose of conversion of this Debenture, and
shall cause to be delivered to the Holder at its last address as it shall appear
upon the Debenture Register, at least 20 calendar days prior to the applicable
record or effective date hereinafter specified, a notice stating (x) the

13

 

date on which a record is to be taken for the purpose of such dividend, distribution,
redemption, rights or warrants, or if a record is not to be taken, the date as of
which the holders of the Common Stock of record to be entitled to such dividend,
distributions, redemption, rights or warrants are to be determined or (y) the date
on which such reclassification, consolidation, merger, sale, transfer or share
exchange is expected to become effective or close, and the date as of which it is
expected that holders of the Common Stock of record shall be entitled to exchange
their shares of the Common Stock for securities, cash or other property deliverable
upon such reclassification, consolidation, merger, sale, transfer or share exchange,
provided that the failure to deliver such notice or any defect therein or in the
delivery thereof shall not affect the validity of the corporate action required to
be specified in such notice. The Holder is entitled to convert
this Debenture during the 20-day period commencing on the date of such notice
through the effective date of the event triggering such notice.

     a) Section 6. Intentionally Omitted.

     Section 7. Negative Covenants. As long as any portion of this Debenture
remains outstanding, the Company shall not, and shall not permit any of its Subsidiaries to,
directly or indirectly:

     a) other than Permitted Indebtedness, except with the prior written consent of the
Agent (as defined in the Security Agreement), enter into, create, incur, assume, guarantee
or suffer to exist any indebtedness for borrowed money of any kind, including but not
limited to, a guarantee, on or with respect to any of its property or assets now owned or
hereafter acquired or any interest therein or any income or profits therefrom;

     b) other than Permitted Liens, enter into, create, incur, assume or suffer to exist any
Liens of any kind, on or with respect to any of its property or assets now owned or
hereafter acquired or any interest therein or any income or profits therefrom;

     c) amend its charter documents, including without limitation, the certificate of
incorporation and bylaws, in any manner that materially and adversely affects any rights of
the Holder;

     d) repay, repurchase or offer to repay, repurchase or otherwise acquire more than a
de minimis number of shares of its Common Stock or Common Stock Equivalents
other than as to (a) the Conversion Shares or Warrant Shares as permitted or required under
the Transaction Documents and (b) repurchases of Common Stock or Common Stock Equivalents of
departing officers and directors of the Company, provided that such repurchases shall not
exceed an aggregate of $100,000 for all officers and directors during the term of this
Debenture);

     e) enter into any agreement with respect to any of the foregoing; or

14

 

     f) pay cash dividends or distributions on any equity securities of the Company.

     Section 8. Events of Default.

     a) “Event of Default” means, wherever used herein, any of the following events
(whatever the reason for such event and whether such event shall be voluntary or involuntary
or effected by operation of law or pursuant to any judgment, decree or order of any court,
or any order, rule or regulation of any administrative or governmental body):

     i. any default in the payment of (A) the principal amount of any Debenture or
(B) liquidated damages and other amounts owing to a Holder on any
Debenture, 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 a default under clause (B) above, is not cured within 3
Trading Days;

     ii. the Company shall fail to observe or perform any other covenant or
agreement contained in the Debentures (other than a breach by the Company of its
obligations to deliver shares of Common Stock to the Holder upon conversion, which
breach is addressed in clause (xi) below) which failure is not cured, if possible to
cure, within the earlier to occur of (A) 5 Trading Days after notice of such failure
sent by the Holder or by any other Holder and (B) 10 Trading 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 Documents or (B) any other material agreement, lease,
document or instrument to which the Company or any Subsidiary is obligated (and not
covered by clause (vi) below);

     iv. any representation or warranty made in this Debenture, any other
Transaction Documents, 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;

     vi. the Company or any Subsidiary shall default on any of its obligations under
any mortgage, credit agreement or other facility, indenture agreement, factoring
agreement or other instrument under which there may be

15

 

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 $150,000, whether such indebtedness now exists or shall hereafter be created,
and (b) results 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 Common Stock shall not be eligible for listing or quotation for
trading on a Trading Market and shall not be eligible to resume listing or quotation
for trading thereon within five Trading Days;

     viii. the Company shall be a party to any Change of Control Transaction or
Fundamental Transaction or shall agree to sell or dispose of all or
in excess of 33% of its assets in one transaction or a series of related
transactions (whether or not such sale would constitute a Change of Control
Transaction);

     ix. Intentionally Omitted;

     x. if, during the Effectiveness Period (as defined in the Registration Rights
Agreement), either (a) the effectiveness of the Registration Statement lapses for
any reason or (b) the Holder shall not be permitted to resell Registrable Securities
(as defined in the Registration Rights Agreement) under the Registration Statement
for a period of more than 30 consecutive Trading Days or 60 non-consecutive Trading
Days during any 12 month period; provided, however, that if the
Company is negotiating a merger, consolidation, acquisition or sale of all or
substantially all of its assets or a similar transaction and, in the written opinion
of counsel to the Company, the Registration Statement would be required to be
amended to include information concerning such pending transaction(s) or the parties
thereto which information is not available or may not be publicly disclosed at the
time, the Company shall be permitted an additional 10 consecutive Trading Days
during any 12 month period pursuant to this Section 8(a)(x);

     xi. the Company shall fail for any reason to deliver certificates to a Holder
prior to the tenth Trading Day after a Conversion Date pursuant to Section 4(d) 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 Debentures in accordance with the terms hereof;

     xii. 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 $100,000, and such judgment, writ or similar final
process shall remain unvacated, unbonded or unstayed for a period of 45 calendar
days.

16

 

     b) Remedies Upon Event of Default. If any Event of Default occurs, the
outstanding principal amount of this Debenture, liquidated damages and other amounts owing
in respect thereof through the date of acceleration, shall become, at the Holder’s election,
immediately due and payable in cash at the Mandatory Default Amount. Upon the payment in
full of the Mandatory Default Amount, the Holder shall promptly surrender this Debenture to
or as directed by the Company. In connection with such acceleration described herein, the
Holder need not provide, and the Company hereby waives, any presentment, demand, protest or
other notice of any kind, and the Holder may immediately and without expiration of any grace
period enforce any and all of its rights and remedies hereunder and all other remedies
available to it under applicable law. Such acceleration may be rescinded and annulled by
Holder at any time prior to payment hereunder and the Holder shall have all rights as a
holder of the Debenture until such time, if any, as the Holder receives full payment
pursuant to this Section 8(b). No such
rescission or annulment shall affect any subsequent Event of Default or impair any
right consequent thereon.

     Section 9. Miscellaneous.

     a) Notices. Any and all notices or other communications or deliveries to be
provided by the Holder hereunder, including, without limitation, any Notice of Conversion,
shall be in writing and delivered personally, by facsimile, or sent by a nationally
recognized overnight courier service, addressed to the Company, at the address set forth
above, facsimile number (330) 484-8081, Attn: Christopher R. Sachs, CFO or such other
facsimile number or address as the Company may specify for such purpose by notice to the
Holder delivered in accordance with this Section 9. Any and all notices or other
communications or deliveries to be provided by the Company hereunder shall be in writing and
delivered personally, by facsimile, or sent by a nationally recognized overnight courier
service addressed to each Holder at the facsimile number or address of such Holder appearing
on the books of the Company, or if no such facsimile number or address appears, at the
principal place of business of the Holder. Any notice or other communication or deliveries
hereunder shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the facsimile
number specified in this Section 9 prior to 5:30 p.m. (New York City time), (ii) the date
immediately following the date of transmission, if such notice or communication is delivered
via facsimile at the facsimile number specified in this Section 9 between 5:30 p.m. (New
York City time) and 11:59 p.m. (New York City time) on any date, (iii) the second Business
Day following the date of mailing, if sent by nationally recognized overnight courier
service, or (iv) upon actual receipt by the party to whom such notice is required to be
given.

     b) Absolute Obligation. Except as expressly provided herein, no provision of
this Debenture shall alter or impair the obligation of the Company, which is absolute and
unconditional, to pay the principal of, liquidated damages, as applicable, on this

17

 

Debenture at the time, place, and rate, and in the coin or currency, herein prescribed. This
Debenture is a direct debt obligation of the Company. This Debenture ranks pari
passu with all other Debentures now or hereafter issued under the terms set forth
herein.

     c) Lost or Mutilated Debenture. If this Debenture shall be mutilated, lost,
stolen or destroyed, the Company shall execute and deliver, in exchange and substitution for
and upon cancellation of a mutilated Debenture, or in lieu of or in substitution for a lost,
stolen or destroyed Debenture, a new Debenture for the principal amount of this Debenture so
mutilated, lost, stolen or destroyed, but only upon receipt of evidence of such loss, theft
or destruction of such Debenture, and of the ownership hereof, reasonably satisfactory to
the Company.

     d) Governing Law. All questions concerning the construction, validity,
enforcement and interpretation of this Debenture 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 conflict of laws thereof. Each party agrees that all legal
proceedings concerning the interpretation, enforcement and defense of the transactions
contemplated by any of the Transaction Documents (whether brought against a party hereto or
its respective Affiliates, directors, officers, shareholders, employees or agents) shall be
commenced in the state and federal courts sitting in the City of New York, Borough of
Manhattan (the “New York Courts”). Each party hereto hereby irrevocably submits to
the exclusive jurisdiction of the New York Courts 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 such New York Courts, or such
New York Courts are improper or inconvenient venue for such proceeding. Each party hereby
irrevocably waives personal service of process and consents to process being served in any
such suit, action or proceeding by mailing a copy thereof 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 Debenture 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 applicable
law. Each party hereto hereby irrevocably waives, to the fullest extent permitted by
applicable law, any and all right to trial by jury in any legal proceeding arising out of or
relating to this Debenture or the transactions contemplated hereby. If either party shall
commence an action or proceeding to enforce any provisions of this Debenture, then the
prevailing party in such action or proceeding shall be reimbursed by the other party for its
attorneys fees and other costs and expenses incurred in the investigation, preparation and
prosecution of such action or proceeding.

     e) Waiver. Any waiver by the Company or the Holder of a breach of any
provision of this Debenture shall not operate as or be construed to be a waiver of any other
breach of such provision or of any breach of any other provision of this Debenture.

18

 

The failure of the Company or the Holder to insist upon strict adherence to any term of this
Debenture on one or more occasions shall not be considered a waiver or deprive that party of
the right thereafter to insist upon strict adherence to that term or any other term of this
Debenture. Any waiver by the Company or the Holder must be in writing.

     f) Severability. If any provision of this Debenture is invalid, illegal or
unenforceable, the balance of this Debenture shall remain in effect, and if any provision is
inapplicable to any Person or circumstance, it shall nevertheless remain applicable to all
other Persons and circumstances. If it shall be found that any interest or other amount
deemed interest due hereunder violates the applicable law governing usury, the applicable
rate of interest due hereunder shall automatically be lowered to equal the maximum rate of
interest permitted under applicable law. The Company covenants (to the extent that it may
lawfully do so) that it shall not at any time insist upon, plead, or in any manner
whatsoever claim or take the benefit or advantage of, any stay, extension or usury law or
other law which would prohibit or forgive the Company from paying all or any portion of the
principal of or interest on this Debenture as contemplated herein, wherever enacted,
now or at any time hereafter in force, or which may affect the covenants or the
performance of this indenture, and the Company (to the extent it may lawfully do so) hereby
expressly waives all benefits or advantage of any such law, and covenants that it will not,
by resort to any such law, hinder, delay or impeded the execution of any power herein
granted to the Holder, but will suffer and permit the execution of every such as though no
such law has been enacted.

     g) Next Business Day. Whenever any payment or other obligation hereunder shall
be due on a day other than a Business Day, such payment shall be made on the next succeeding
Business Day.

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

     i) Assumption. Any successor to the Company or any surviving entity in a
Fundamental Transaction shall (i) assume, prior to such Fundamental Transaction, all of the
obligations of the Company under this Debenture and the other Transaction Documents pursuant
to written agreements in form and substance satisfactory to the Holder (such approval not to
be unreasonably withheld or delayed) and (ii) issue to the Holder a new debenture of such
successor entity evidenced by a written instrument substantially similar in form and
substance to this Debenture, including, without limitation, having a principal amount and
interest rate equal to the principal amount and the interest rate of this Debenture and
having similar ranking to this Debenture, which shall be satisfactory to the Holder (any
such approval not to be unreasonably withheld or
delayed). The provisions of this Section 9(i) shall apply similarly and equally to
successive Fundamental Transactions and shall be applied without regard to any limitations
of this Debenture.

*********************

19

 

     IN WITNESS WHEREOF, the Company has caused this Debenture to be duly executed by a duly
authorized officer as of the date first above indicated.

	 	 	 	 	 	 	 
	 	 	HARTVILLE GROUP, INC.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	 	 	Name:	 	 
	 

	 	 	 	Title:	 	 

20

 

ANNEX A

NOTICE OF CONVERSION

     The undersigned hereby elects to convert principal under the Original Issue Discount Secured
Convertible Debenture of Hartville Group, Inc., a Nevada corporation (the “Company”), due
on February 14, 2010, into shares of common stock, par value $0.001 per share (the “Common
Stock”), of the Company according to the conditions hereof, as of the date written below. If
shares are to be issued in the name of a person other than the undersigned, the undersigned will
pay all transfer taxes payable with respect thereto and is delivering herewith such certificates
and opinions as reasonably requested by the Company in accordance therewith. No fee will be
charged to the holder for any conversion, except for such transfer taxes, if any.

     By the delivery of this Notice of Conversion the undersigned represents and warrants to the
Company that its ownership of the Common Stock does not exceed the amounts determined in accordance
with Section 13(d) of the Exchange Act, specified under Section 4 of this Debenture.

     The undersigned agrees to comply with the prospectus delivery requirements under the
applicable securities laws in connection with any transfer of the aforesaid shares of Common Stock.

Conversion calculations:

Date to Effect Conversion:

Principal Amount of Debenture to be Converted:

Number of shares of Common Stock to be issued:

Signature:

Name:

Address:

21

 

Schedule 1

CONVERSION SCHEDULE

The Original Issue Discount Convertible Debentures due on February 14, 2010 in the aggregate
principal amount of $___ issued by Hartville Group, Inc. This Conversion Schedule
reflects conversions made under Section 4 of the above referenced Debenture.

Dated:

	 	 	 	 	 	 	 
	 	 	 	 	Aggregate	 	 
	 	 	 	 	Principal	 	 
	 	 	 	 	Amount	 	 
	 	 	 	 	Remaining	 	 
	 	 	 	 	Subsequent to	 	 
	 	 	 	 	Conversion	 	 
	Date of Conversion	 	 	 	(or original	 	 
	(or for first entry,	 	Amount of	 	Principal	 	 
	Original Issue Date)	 	Conversion	 	Amount)	 	Company Attest
	 
	 	 	 	 	 	 
	 

	 
	 	 	 	 	 	 
	 

	 
	 	 	 	 	 	 
	 

	 
	 	 	 	 	 	 
	 

	 
	 	 	 	 	 	 
	 

	 
	 	 	 	 	 	 
	 

	 
	 	 	 	 	 	 
	 

	 
	 	 	 	 	 	 
	 

22

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