Document:

EX-10.1 AMENDMENT AND EXERCISE AGREEMENT

 

Exhibit 10.1

AMENDMENT AND EXERCISE AGREEMENT

     AMENDMENT AND EXERCISE AGREEMENT (this “Agreement”), dated as of January 25, 2007, by and
among Stinger Systems, Inc., a Nevada corporation (the “Company”), Bonanza Master Fund Ltd.
(“Bonanza”), Tonga Partners, L.P. (“Tonga”), The Cuttyhunk Fund Limited (“Cuttyhunk”), and Anegada
Master Fund, Ltd. (“Anegada”, and together with Bonanza, Tonga and Cuttyhunk, the “Holders”).

     WHEREAS, on or about December 30, 2004, the Company issued to each of the Holders Common Stock
Purchase Warrants (collectively, the “2004 Warrants”) pursuant to which the Holders are entitled to
purchase an aggregate of 999,999 shares (the “2004 Warrant Shares”) of the Company’s common stock,
par value $0.001 per share (“Common Stock”), at an exercise price of $7.50, as adjusted; and

     WHEREAS, in connection with the issuance of the 2004 Warrants, the Company and the Holders
entered into that certain Registration Rights Agreement dated December 30, 2004 (the “2004
Registration Rights Agreement”) pursuant to which the Company agreed to register the 2004 Warrant
Shares; and

     WHEREAS, pursuant to and in accordance with the terms of this Agreement, the parties hereto
desire: (i) to reduce the exercise price of the 2004 Warrants to $0.60 per share; (ii) for the
Holders to exercise all of the 2004 Warrants for 999,999 shares of the Company’s Common Stock at an
exercise price of $0.60 per share; (iii) for the Company to issue to the Holders new warrants in
substantially the form of Exhibit A attached hereto (the “2007 Warrants”, and together with
the 2004 Warrant Shares, the “Securities”) to purchase up to an aggregate of 1,500,000 shares (the
“2007 Warrant Shares”) of the Company’s Common Stock at an exercise price of $2.00 per share; and
(iv) to enter into a registration rights agreement substantially in the form of Exhibit B
attached hereto (the “2007 Registration Rights Agreement”) pursuant to which the Company will agree
to register the shares of the Company’s Common Stock issuable upon exercise of the 2004 Warrants
and the 2007 Warrants in accordance with the terms thereof.

     NOW, THEREFORE, for good and valuable consideration, receipt of which is hereby acknowledged,
the parties hereto hereby agree as follows:

     1. Waiver. The Holders hereby waive any effect of the provisions of Section 3 of the
2004 Warrants as a result of the amendment of the exercise price of the 2004 Warrants and the
issuance of the 2007 Warrants, in each case pursuant to the terms of this Agreement, with the
effect that the amendment of the exercise price of the 2004 Warrants and the issuance of the 2007
Warrants, in each case pursuant to the terms of this Agreement, shall not otherwise effect the
exercise price of the 2004 Warrants.

     2. Amendment and Subsequent Exercise of 2004 Warrants.

          (a) Effective on the date hereof, the “Exercise Price” of the 2004 Warrants shall be $0.60 per
share. In all other respects, the 2004 Warrants remain in effect without amendment.

 

 

          (b) Simultaneous with the execution and delivery of this Agreement, each Holder hereby agrees
as follows: (i) Bonanza hereby exercises its 2004 Warrants and purchases 300,000 shares of the
Company’s Common Stock at an exercise price of $0.60 per share; (ii) Tonga hereby exercises its
2004 Warrants and purchases 292,520 shares of the Company’s Common Stock at an exercise price of
$0.60 per share; (iii) Cuttyhunk hereby exercises its 2004 Warrants and purchases 206,758 shares of
the Company’s Common Stock at an exercise price of $0.60 per share; and (iv) Anegada hereby
exercises its 2004 Warrants and purchases 200,721 shares of the Company’s Common Stock at an
exercise price of $0.60 per share. Each Holder shall simultaneously deliver to the Company via
wire transfer in immediately available funds an amount equal to the product of (x) the number of
shares underlying such Holder’s respective 2004 Warrants multiplied by (y) $0.60. The Company
shall deliver to each Holder a facsimile copy (with the original to be delivered to the Holder as
soon as practicable following the consummation the transactions hereunder) of a certificate
evidencing the number of shares underlying such Holder’s respective 2004 Warrants issued in the
name of such Holder. Each Holder acknowledges and agrees that the shares of the Company’s Common
Stock issued as a result of such exercise shall bear the following legend:

THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY STATE SECURITIES OR “BLUE SKY”
LAWS, AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN
EXEMPTION THEREFROM UNDER SUCH ACT AND ANY APPLICABLE STATE SECURITIES OR “BLUE SKY”
LAWS AND AN OPINION OF LEGAL COUNSEL REASONABLY ACCEPTABLE TO THE ISSUER THAT SUCH
REGISTRATION IS NOT REQUIRED.

     3. Issuance of 2007 Warrants; Delivery of 2007 Registration Rights Agreement; Termination
of Prior Agreements.

          (a) Simultaneous with the execution and delivery of this Agreement (i) the Company shall
deliver to each Holder the 2007 Warrants, in each case in accordance with Schedule I attached
hereto and (ii) the Company and each of the Holders shall execute and deliver the 2007 Registration
Rights Agreement.

          (b) Effective as of the date hereof, each of the 2004 Registration Rights Agreement and that
certain Securities Purchase Agreement dated December 30, 2004 (the “2004 Securities Purchase
Agreement”) by and among the Company and the parties thereto is hereby terminated, together with
any rights, obligations and claims of the parties thereunder.

     4. Representations and Warranties of the Company. The Company hereby represents and
warrants to each Holder as follows:

          (a) The Company has all requisite corporate power and authority to execute, deliver and
perform this Agreement. All corporate action on the part of the Company and its officers,
directors and stockholders necessary for the authorization, execution, delivery and performance of
all obligations of the Company under this Agreement has been or will be taken prior to or
concurrently with the execution and delivery of this Agreement in compliance with

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applicable law and agreements. This Agreement constitutes a valid and legally binding
obligation of the Company, enforceable in accordance with its terms, except (a) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general
application affecting enforcement of creditors’ rights generally or by equitable principles, (b) as
limited by laws relating to the availability of specific performance, injunctive relief or other
equitable remedies and (c) to the extent that the enforceability of the indemnification provisions
may be limited by applicable laws.

          (b) The 2004 Warrant Shares have been duly authorized and, when issued and paid for in
accordance with this Agreement, will be duly and validly issued, fully paid and non-assessable.

          (c) The 2007 Warrants constitute the legal, valid and binding obligation of the Company,
enforceable against it in accordance with their terms, subject to applicable bankruptcy,
insolvency, reorganization, moratorium or other laws affecting creditors’ rights generally and
subject to general principles of equity, regardless of whether considered in a proceeding in equity
or at law. The Company has reserved from its duly authorized capital stock the maximum number of
shares of Common Stock issuable upon exercise of the 2007 Warrants, and upon exercise in accordance
with their terms, the 2007 Warrant Shares will be duly authorized, validly issued, fully paid and
non-assessable.

     5. Representations and Warranties of the Holders. Each Holder, severally and not
jointly, hereby represents and warrants to the Company as follows:

          (a) Such Holder has all requisite power and authority to execute, deliver and perform this
Agreement. All action on the part of the Holder and its officers, directors, partners, members and
stockholders necessary for the authorization, execution, delivery and performance of all
obligations of such Holder under this Agreement has been or will be taken prior to or concurrently
with the execution and delivery of this Agreement in compliance with applicable law and agreements.
This Agreement constitutes a valid and legally binding obligation of such Holder, enforceable in
accordance with its terms, except (a) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium, and other laws of general application affecting enforcement of
creditors’ rights generally or by equitable principles, (b) as limited by laws relating to the
availability of specific performance, injunctive relief or other equitable remedies and (c) to the
extent that the enforceability of the indemnification provisions may be limited by applicable laws.

          (b) Such Holder is an “accredited investor” within the meaning of Rule 501 promulgated
pursuant to the Securities Act of 1933, as amended (the “Securities Act”).

          (c) Such Holder is acquiring the Securities as principal for its own account for investment
purposes only and not with a view to or for distributing such Securities or any part thereof in
violation of applicable federal and state securities laws; provided, however that
such representation is made without prejudice to such Holder’s right at all times to sell or
otherwise dispose of all or any part of such Securities in compliance with applicable federal and
state securities laws. Nothing contained herein shall be deemed a representation or warranty by
such Investor to hold the Securities for any period of time.

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          (d) Such Holder understands that the Securities are being offered and sold to it in reliance
upon specific exemptions from the registration requirements of U.S. federal and state securities
laws and that the Company is relying upon the truth and accuracy of, and the Holder’s compliance
with, the representations, warranties, agreements, acknowledgements and understandings of the
Holder set forth in this Section 5 in order to determine the availability of such exemption and the
eligibility of the Holder to acquire the Securities.

          (e) Such Holder is not acquiring 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.

          (f) Such Holder acknowledges that it has been afforded (i) the opportunity to ask such
questions as it has deemed necessary of, and to receive answers from, representatives of the
Company concerning the terms and conditions of the offering of the Securities and the merits and
risks of investing therein; (ii) access to public information about the Company and its
subsidiaries and their respective financial condition, results of operations, business, properties,
management and prospects sufficient to enable it to evaluate its investment; and (iii) the
opportunity to obtain such additional public information that the Company possesses or can acquire
without unreasonable effort or expense that is necessary to make an informed investment decision
with respect to the investment. Neither such inquiries nor any other investigation conducted by or
on behalf of such Holder or its representatives or counsel shall modify, amend or affect such
Investor’s right to rely on the truth, accuracy and completeness of the Company’s representations
and warranties contained in this Agreement.

          (g) Such Holder has independently evaluated the merits of its decision to purchase the
Securities pursuant to this Agreement, such decision has been independently made by such Holder and
such Holder confirms that it has only relied on the advice of its own business and/or legal counsel
and not on the advice of any other Holder’s business and/or legal counsel in making such decision.

          (h) Such Holder acknowledges and understands that its investment in the Securities involves a
significant degree of risk, including, without limitation that (i) an investment in the Company is
not without risk and (ii) in the event of a disposition of the Securities, the Holder could sustain
the loss of its entire investment.

          (i) Such Holder understands that except as otherwise provided in this Agreement and the 2007
Registration Rights Agreement, the Securities have not been and are not being registered under the
Securities Act or any applicable state securities laws and, consequently, the Holder may have to
bear the risk of owning the Securities for an indefinite period of time because the 2007 Warrants
may not be transferred unless (i) the resale of the Securities is registered pursuant to an
effective registration statement under the Securities Act; or the Securities are sold or
transferred pursuant to Rule 144.

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     6. MISCELLANEOUS.

          (a) THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HERETO SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK (EXCLUDING NEW YORK CONFLICT OF
LAWS RULES) APPLICABLE TO CONTRACTS MADE AND PERFORMED IN THE STATE OF NEW YORK.

          (b) Any term or provision of this Agreement that is invalid or unenforceable in any situation
in any jurisdiction shall not affect the validity or enforceability of the remaining terms and
provisions hereof or the validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.

          (c) No amendment of any provision of this Agreement shall be valid unless the same shall be in
writing and signed by all of the parties hereto.

          (d) This Agreement constitutes the entire agreement among the parties and supersedes any prior
understandings, agreements or representations by or among the parties, written or oral, to the
extent they related in any way to the subject matter hereof.

          (e) Each of the parties hereto recognizes and acknowledges that a breach by it of any
covenants or agreements contained in this Agreement will cause the other party to sustain damages
for which it would not have an adequate remedy at law for money damages, and therefore, each of the
parties hereto agrees that in the event of any such breach the aggrieved party shall be entitled to
the remedy of specific performance of such covenants and agreements and injunctive and other
equitable relief in addition to any other remedy to which it may be entitled, at law or in equity.
The parties agree that they shall be entitled to enforce specifically the terms and provisions of
this Agreement in any court of law, this being in addition to any other remedy to which they are
entitled at law or in equity.

          (f) This Agreement may be executed in any number of counterparts and by different parties
hereto on separate counterparts, each of which when so executed and delivered shall be deemed an
original, but all of which together shall constitute a single instrument. Delivery of an executed
counterpart of a signature page of this Agreement by facsimile transmission shall be as effective
as delivery of a manually executed counterpart hereof.

          (g) Effective as of the date hereof, except for Claims (as defined below) a Holder may have
under the 2007 Warrants and the 2007 Registration Rights Agreement, each Holder, for and on behalf
of such Holder and its successors and assigns, as applicable (collectively, the “Holder Releasing
Parties”), hereby irrevocably and unconditionally releases and forever discharges the Company and
its directors, officers, stockholders, agents, past or present employees, representatives,
attorneys, predecessors, successors, parents, affiliates, insurers, heirs, executors,
administrators and assigns, and all persons acting by, through, under or in concert with any of
them (collectively, the “Released Parties”), of and from any and all actions, causes of action,
suits, debts, charges and expenses (including attorneys’ fees and costs), of any nature whatsoever,
whether arising out of federal, state or local statute, rule or ordinance and any other claims in
law or equity, whether asserted or unasserted, known or unknown, fixed

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or contingent, direct or indirect (collectively, the “Claims”), which the Holder Releasing
Parties ever had or now has, or hereafter may have against the Released Parties, or any of them,
arising under the 2004 Registration Rights Agreement, the 2004 Warrants or the 2004 Securities
Purchase Agreement.

[The remainder of this page is intentionally blank.]

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     IN WITNESS WHEREOF, the Company and the Holders have caused this Agreement to be signed by a
duly authorized officer as of the date above.

	 	 	 	 	 
	STINGER SYSTEMS, INC.	 	 
	 
	 	 	 	 
	By:

	 	/s/ David J. Meador
 

	 	 
	Name: David J. Meador	 	 
	Title: Chief Financial Officer	 	 
	 
	 	 	 	 
	BONANZA MASTER FUND LTD.	 	 
	 
	 	 	 	 
	By:

	 	/s/ Brian Ladin
 

	 	 
	Name: Brian Ladin	 	 
	Title: Partner	 	 
	 
	 	 	 	 
	TONGA PARTNERS, L.P.	 	 
	 
	 	 	 	 
	By:

	 	/s/ J. Carlo Cannell
 

	 	 
	Name: J. Carlo Cannell	 	 
	Title: General Partner	 	 
	 
	 	 	 	 
	THE CUTTYHUNK FUND LIMITED	 	 
	 
	 	 	 	 
	By:

	 	/s/ Geoffrey M. Lewis
 

	 	 
	Name: Geoffrey M. Lewis	 	 
	Title: Director	 	 
	 
	 	 	 	 
	ANEGADA MASTER FUND, LTD.	 	 
	 
	 	 	 	 
	By:

	 	/s/ J. Carlo Cannell
 

	 	 
	Name: J. Carlo Cannell	 	 
	Title: Director & Investment Adviser	 	 

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SCHEDULE I

	 	 	 	 	 
	Name	 	Number of 2007 Warrants
	Bonanza Master Fund Ltd.
	 	 	450,000	 
	Tonga Partners, L.P.
	 	 	438,781	 
	The Cuttyhunk Fund Limited
	 	 	310,138	 
	Anegada Master Fund, Ltd.
	 	 	301,082EX-10.2 FORM OF NEW WARRANT

 

Exhibit 10.2

NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS EXERCISABLE 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 EXERCISE OF THIS SECURITY MAY BE PLEDGED IN CONNECTION
WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.

COMMON STOCK PURCHASE WARRANT

To Purchase                      Shares of Common Stock of

STINGER SYSTEMS, INC.

          THIS COMMON STOCK PURCHASE WARRANT (the “Warrant”) certifies that, for value received,
                     (the “Holder”), is entitled, upon the terms and subject to the limitations on
exercise and the conditions hereinafter set forth, at any time on or after the date hereof (the
“Initial Exercise Date”) and on or prior to the close of business on the five year
anniversary of the Initial Exercise Date (the “Termination Date”) but not thereafter, to
subscribe for and purchase from Stinger Systems, Inc., a Nevada corporation (the
“Company”), up to                      shares (the “Warrant Shares”) of Common Stock, par value
$.001 per share, of the Company (the “Common Stock”). The purchase price of one share of
Common Stock under this Warrant shall be equal to the Exercise Price, as defined in Section 2(b).

     Section 1. Definitions.

     Capitalized terms used and not otherwise defined herein shall have the meanings set forth in
that certain Registration Rights Agreement dated January 25, 2007 (the “Registration Rights
Agreement”) among the Company and the other parties thereto. For purposes of this Warrant, the
following terms shall have the following meanings:

     “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.

     “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.

     “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 33% of the voting securities of the Company (other than by
means of exercise of the Warrants), 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 66% 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 Company immediately prior to
such transaction own less than 66% 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 of the Company, par value $.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.

     “Equity Conditions” shall mean, during the period in question, (i) the Company
shall have duly honored all exercises scheduled to occur or occurring by virtue of one or
more Notices of Exercise of the Holder, if any, (ii) the Company shall have paid all
liquidated damages and other amounts owing to the Holder in respect of this Warrant, (iii)
there is an effective Registration Statement pursuant to which the Holder is permitted to
utilize the prospectus thereunder to resell all of the shares issuable pursuant to the

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Warrants (and the Company believes, in good faith, that such effectiveness will
continue uninterrupted for the foreseeable future), (iv) the Common Stock is trading on a
Trading Market and all of the shares issuable pursuant to the Transaction Documents are
listed for trading on such Trading Market (and the Company believes, in good faith, that
trading of the Common Stock on a Trading Market will continue uninterrupted for the
foreseeable future), (v) there is a sufficient number of authorized but unissued and
otherwise unreserved shares of Common Stock for the issuance of all of the shares issuable
pursuant to the Warrants, (vi) the issuance of the shares in question to the Holder would
not violate the limitations set forth in Section 2(d) herein, (vii) there has been no public
announcement of a pending or proposed Fundamental Transaction or Change of Control
Transaction that has not been consummated, (viii) the Holder is not in possession of any
information provided to it by the Company that constitutes, or may constitute, material
non-public information and (ix) for a period of 20 consecutive Trading Days prior to the
applicable date in question, the daily trading volume for the Common Stock on the principal
Trading Market exceeds 50,000 shares per Trading Day (subject to adjustment for forward and
reverse stock splits and the like).

     “Exempt Issuance” means the issuance of (a) shares of Common Stock or options
to employees, consultants, officers or directors of the Company pursuant to any stock or
option plan duly adopted 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, 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.

     “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.

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

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

3

 

     “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 Global Market, the
Nasdaq Global Select Market or the OTC Bulletin Board.

     “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 Holder and reasonably
acceptable to the Company.

     Section 2. Exercise.

     a) Exercise of Warrant. Exercise of the purchase rights represented by this
Warrant may be made, in whole or in part, at any time or times on or after the Initial
Exercise Date and on or before the Termination Date by delivery to the Company (or such
other office or agency of the Company as it may designate by notice in writing to the
registered Holder at the address of such Holder appearing on the books of the Company) of a
duly executed facsimile copy of the Notice of Exercise Form attached hereto; and, within 5
Trading Days of the date said Notice of Exercise is delivered to the Company, the Company
shall have received payment of the aggregate Exercise Price of the shares thereby purchased
by wire transfer or cashier’s check drawn on a United States bank. Notwithstanding anything
herein to the contrary, the Holder shall not be required to physically surrender this
Warrant to the Company until the Holder has purchased all of the Warrant Shares available
hereunder and the Warrant has been exercised in full, in which case, the Holder shall
surrender this Warrant to the Company for cancellation within 3 Trading Days of the date the
final Notice of Exercise is delivered to the Company. Partial exercises of this Warrant
resulting in purchases of a portion of the total number of Warrant Shares available
hereunder shall have the effect of lowering the outstanding number of Warrant Shares
purchasable hereunder in an amount equal to the applicable number of Warrant Shares
purchased. The Holder and the Company shall maintain records showing the number of Warrant
Shares purchased and the date of such

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purchases. The Company shall deliver any objection to any Notice of Exercise Form
within 2 Business Days of receipt of such notice. THE HOLDER AND ANY ASSIGNEE, BY
ACCEPTANCE OF THIS WARRANT, ACKNOWLEDGE AND AGREE THAT, BY REASON OF THE PROVISIONS OF THIS
PARAGRAPH, FOLLOWING THE PURCHASE OF A PORTION OF THE WARRANT SHARES HEREUNDER, THE NUMBER
OF WARRANT SHARES AVAILABLE FOR PURCHASE HEREUNDER AT ANY GIVEN TIME MAY BE LESS THAN THE
AMOUNT STATED ON THE FACE HEREOF.

     b) Exercise Price. The exercise price per share of the Common Stock under this
Warrant shall be $2.00, subject to adjustment hereunder (the “Exercise Price”).

     c) [Intentionally omitted.]

     d) Exercise Limitations.

	 	i.	 	Holder’s Restrictions. The Company shall
not effect any exercise of this Warrant, and a Holder shall not have the
right to exercise any portion of this Warrant, pursuant to Section 2(c)
or otherwise, to the extent that after giving effect to such issuance
after exercise as set forth on the applicable Notice of Exercise, such
Holder (together with such Holder’s Affiliates, and any other person or
entity acting as a group together with such Holder or any of such
Holder’s Affiliates), as set forth on the applicable Notice of Exercise,
would beneficially own in excess of the Beneficial Ownership Limitation
(as defined below). For purposes of the foregoing sentence, the number
of shares of Common Stock beneficially owned by such Holder and its
Affiliates shall include the number of shares of Common Stock issuable
upon exercise of this Warrant with respect to which such determination is
being made, but shall exclude the number of shares of Common Stock which
would be issuable upon (A) exercise of the remaining, nonexercised
portion of this Warrant beneficially owned by such Holder or any of its
Affiliates and (B) exercise or conversion of the unexercised or
nonconverted portion of any other securities of the Company (including,
without limitation, any other Warrants) subject to a limitation on
conversion or exercise analogous to the limitation contained herein
beneficially owned by such Holder or any of its affiliates. Except as
set forth in the preceding sentence, for purposes of this Section
2(d)(i), beneficial ownership shall be calculated in accordance with
Section 13(d) of the Exchange Act, it being acknowledged by a Holder that
the Company is not representing to such Holder that such calculation is
in compliance with Section 13(d) of the Exchange Act and such Holder is
solely responsible for any schedules required to be filed in accordance
therewith. To the extent that the limitation contained in this Section
2(d) applies, the determination of whether this Warrant is exercisable
(in relation to other securities owned by such Holder together with any
Affiliates) and of which a portion of this Warrant is exercisable shall
be in the sole discretion of a Holder, and the submission of a Notice of
Exercise

5

 

	 	 	 	shall be deemed to be each Holder’s determination of whether this Warrant is
exercisable (in relation to other securities owned by such Holder together
with any Affiliates) and of which portion of this Warrant is exercisable, in
each case subject to such aggregate percentage limitation, and the Company
shall have no obligation to verify or confirm the accuracy of such
determination. In addition, a determination as to any group status as
contemplated above shall be determined in accordance with Section 13(d) of
the Exchange Act. For purposes of this Section 2(d), in determining the
number of outstanding shares of Common Stock, a Holder may rely on the
number of outstanding shares of Common Stock as reflected in (x) the
Company’s most recent Form 10-Q or Form 10-K, as the case may be, (y) a more
recent public announcement by the Company or (z) any other notice by the
Company or the Company’s Transfer Agent setting forth the number of shares
of Common Stock outstanding. Upon the written or oral request of a Holder,
the Company shall within five Trading Days confirm orally and in writing to
such Holder the number of shares of Common Stock then outstanding. In any
case, the number of outstanding shares of Common Stock shall be determined
after giving effect to the conversion or exercise of securities of the
Company, including this Warrant, by such Holder or its Affiliates since the
date as of which such number of outstanding shares of Common Stock was
reported. The “Beneficial Ownership Limitation” shall be 4.99% of the
number of shares of the Common Stock outstanding immediately after giving
effect to the issuance of shares of Common Stock issuable upon exercise of
this Warrant. The Beneficial Ownership Limitation provisions of this
Section 2(d)(i) may be waived by such Holder, at the election of such
Holder, upon not less than 61 days’ prior notice to the Company to change
the Beneficial Ownership Limitation to 9.99% of the number of shares of the
Common Stock outstanding immediately after giving effect to the issuance of
 shares of Common Stock upon exercise of this Warrant, and the provisions of
this Section 2(d) shall continue to apply. Upon such a change by a Holder
of the Beneficial Ownership Limitation from such 4.99% limitation to such
9.99% limitation, the Beneficial Ownership Limitation may not be further
waived by such Holder. The provisions of this paragraph shall be construed
and implemented in a manner otherwise than in strict conformity with the
terms of this Section 2(d)(i) to correct this paragraph (or any portion
hereof) which may be defective or inconsistent with the intended Beneficial
Ownership Limitation herein contained or to make changes or supplements
necessary or desirable to properly give effect to such limitation. The
limitations contained in this paragraph shall apply to a successor holder of
this Warrant.

     e) Mechanics of Exercise.

	 	i)	 	Authorization of Warrant Shares. The
Company covenants that all Warrant Shares which may be issued upon the
exercise of the

6

 

	 	 	 	purchase rights represented by this Warrant will, upon exercise of
the purchase rights represented by this Warrant and receipt by the
Company of the consideration hereof, be duly authorized, validly
issued, fully paid and nonassessable and free from all taxes, liens
and charges created by the Company in respect of the issue thereof
(other than taxes in respect of any transfer occurring
contemporaneously with such issue).

	 	ii)	 	Delivery of Certificates Upon Exercise.
Certificates for shares purchased hereunder shall be transmitted by
the transfer agent of the Company to the Holder by crediting the
account of the Holder’s prime broker with the Depository Trust Company
through its Deposit Withdrawal Agent Commission (“DWAC”) system if the
Company is a participant in such system and the shares are otherwise
able to be issued pursuant to such system, and otherwise by physical
delivery to the address specified by the Holder in the Notice of
Exercise within 3 Trading Days from the delivery to the Company of the
Notice of Exercise Form, surrender of this Warrant (if required) and
payment of the aggregate Exercise Price as set forth above (“Warrant
Share Delivery Date”). This Warrant shall be deemed to have been
exercised on the date the Exercise Price is received by the Company.
The Warrant Shares shall be deemed to have been issued, and Holder or
any other person so designated to be named therein shall be deemed to
have become a holder of record of such shares for all purposes, as of
the date the Warrant has been exercised by payment to the Company of
the Exercise Price (or by cashless exercise, if permitted) and all
taxes required to be paid by the Holder, if any, pursuant to Section
2(e)(vii) prior to the issuance of such shares, have been paid.
	 
	 	iii)	 	Delivery of New Warrants Upon Exercise.
If this Warrant shall have been exercised in part, the Company shall,
at the request of a Holder and upon surrender of this Warrant
certificate, at the time of delivery of the certificate or certificates
representing Warrant Shares, deliver to Holder a new Warrant evidencing
the rights of Holder to purchase the unpurchased Warrant Shares called
for by this Warrant, which new Warrant shall in all other respects be
identical with this Warrant.
	 
	 	iv)	 	Rescission Rights. If the Company
fails to cause its transfer agent to transmit to the Holder a
certificate or certificates representing the Warrant Shares pursuant to
this Section 2(e)(iv) by the Warrant Share Delivery Date, then the
Holder will have the right to rescind such exercise.
	 
	 	v)	 	Compensation for Buy-In on Failure to
Timely Deliver Certificates Upon Exercise. In addition to any
other rights available to the

7

 

	 	 	 	Holder, if the Company fails to cause its transfer agent to transmit
to the Holder a certificate or certificates representing the Warrant
Shares pursuant to an exercise on or before the Warrant Share
Delivery Date, and if after such date the Holder is required by its
broker to purchase (in an open market transaction or otherwise)
 shares of Common Stock to deliver in satisfaction of a sale by the
Holder of the Warrant Shares which the Holder anticipated receiving
upon such exercise (a “Buy-In”), then the Company shall (1) pay in
cash to the Holder the amount by which (x) the Holder’s total
purchase price (including brokerage commissions, if any) for the
 shares of Common Stock so purchased exceeds (y) the amount obtained
by multiplying (A) the number of Warrant Shares that the Company was
required to deliver to the Holder in connection with the exercise at
issue times (B) the price at which the sell order giving rise to such
purchase obligation was executed, and (2) at the option of the
Holder, either reinstate the portion of the Warrant and equivalent
number of Warrant Shares for which such exercise was not honored or
deliver to the Holder the number of shares of Common Stock that would
have been issued had the Company timely complied with its exercise
and delivery obligations hereunder. For example, if the Holder
purchases Common Stock having a total purchase price of $11,000 to
cover a Buy-In with respect to an attempted exercise of shares of
Common Stock with an aggregate sale price giving rise to such
purchase obligation of $10,000, under clause (1) 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, together with applicable confirmations and other evidence
reasonably requested by the Company 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 exercise of the Warrant as required
pursuant to the terms hereof.
	 
	 	vi)	 	No Fractional Shares or Scrip. No
fractional shares or scrip representing fractional shares shall be
issued upon the exercise of this Warrant. As to any fraction of a
share which Holder would otherwise be entitled to purchase upon such
exercise, the Company shall at its election, either pay a cash
adjustment in respect of such final fraction in an amount equal to such
fraction multiplied by the Exercise Price or round up to the next whole
share.
	 
	 	viii)	 	Charges, Taxes and Expenses. Issuance
of certificates for Warrant Shares shall be made without charge to the
Holder for any issue or

8

 

	 	 	 	transfer tax or other incidental expense in respect of the issuance
of such certificate, all of which taxes and expenses shall be paid by
the Company, and such certificates shall be issued in the name of the
Holder or in such name or names as may be directed by the Holder;
provided, however, that in the event certificates for Warrant Shares
are to be issued in a name other than the name of the Holder, this
Warrant when surrendered for exercise shall be accompanied by the
Assignment Form attached hereto duly executed by the Holder; and the
Company may require, as a condition thereto, the payment of a sum
sufficient to reimburse it for any transfer tax incidental thereto.
	 
	 	ix)	 	Closing of Books. The Company will not
close its stockholder books or records in any manner which prevents the
timely exercise of this Warrant, pursuant to the terms hereof.

     f) Notwithstanding anything herein to the contrary, if after the Effectiveness Date (as
defined in the Registration Rights Agreement), the VWAPs for each of any 20 consecutive
Trading Days, which period shall have commenced only after the Effectiveness Date (such
period the “Threshold Period”) exceeds $2.50 (subject to adjustment for reverse and
forward stock splits, stock dividends, stock combinations and other similar transactions of
the Common Stock that occur after the Initial Exercise Date), the Company may, within 1
Trading Day after the end of any such Threshold Period, deliver a written notice to the
Holder (a “Forced Exercise Notice” and the date such notice is delivered to the
Holder, the “Forced Exercise Notice Date”) to cause the Holder to exercise all or
part of this Warrant, it being agreed that the “Exercise Date” for purposes of Section 2(f)
shall be deemed to occur on the twentieth Trading Day following the Forced Exercise Notice
Date (such twentieth Trading Day, the “Forced Exercise Date”). The Company may not
deliver a Forced Exercise Notice, and any Forced Exercise Notice delivered by the Company
shall not be effective, unless all of the Equity Conditions are met on each Trading Day
occurring during the applicable Threshold Period through and including the later of the
Forced Exercise Date and the Trading Day after the date such Warrant Shares pursuant to such
exercise are delivered to the Holder. Any Forced Exercise shall be applied ratably to all
Holders based on their initial purchases of Warrants as of the date hereof, provided that
any voluntary exercises by a Holder shall be applied against such Holder’s pro-rata
allocation, thereby decreasing the aggregate amount forcibly exercised hereunder if only a
portion of this Warrant is forcibly converted. For purposes of clarification, a Forced
Exercise shall be subject to all of the provisions of this Section 2, including, without
limitation, the provision requiring payment of liquidated damages and limitations on
exercise.

     Section 3. Certain Adjustments.

     a) Stock Dividends and Splits. If the Company, at any time while this Warrant
is outstanding: (A) pays a stock dividend or otherwise make a distribution or distributions
on shares of its Common Stock or any other equity or equity equivalent

9

 

securities payable in shares of Common Stock (which, for avoidance of doubt, shall not
include any shares of Common Stock issued by the Company upon exercise of this Warrant), (B)
subdivides outstanding shares of Common Stock into a larger number of shares, (C) combines
(including by way of reverse stock split) outstanding shares of Common Stock into a smaller
number of shares, or (D) issues by reclassification of shares of the Common Stock any shares
of capital stock of the Company, then in each case the Exercise Price shall be multiplied by
a fraction of which the numerator shall be the number of shares of Common Stock (excluding
treasury shares, if any) outstanding immediately before such event and of which the
denominator shall be the number of shares of Common Stock outstanding immediately after such
event and the number of shares issuable upon exercise of this Warrant shall be
proportionately adjusted. Any adjustment made pursuant to this Section 3(a) 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.

     b) Subsequent Equity Sales. If the Company or any Subsidiary thereof, as
applicable, at any time while this Warrant is outstanding, shall sell or grant any option to
purchase or sell or grant any right to reprice its securities, or otherwise dispose of or
issue (or announce any offer, 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 less than the then Exercise Price (such lower
price, the “Base Share 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 which is less than the
Exercise Price, such issuance shall be deemed to have occurred for less than the Exercise
Price on such date of the Dilutive Issuance), then the Exercise Price shall be adjusted
downward, but never upward, by multiplying the Exercise Price by a fraction, the numerator
of which is the number of shares of Common Stock outstanding immediately prior to the
Dilutive Issuance plus the number of shares of Common Stock which the offering price for
such Dilutive Issuance would purchase at the Exercise Price, and the denominator of which
shall be the sum of the number of shares of Common Stock outstanding immediately prior to
the Dilutive Issuance plus the number of shares of Common Stock so issued or issuable in
connection with the Dilutive Issuance and the number of shares issuable pursuant to this
Warrant shall be proportionally increased. Such adjustment shall be made whenever such
Common Stock or Common Stock Equivalents are issued. Notwithstanding the foregoing, no
adjustments shall be made, paid or issued under this Section 3(b) in respect of an Exempt
Issuance. The Company shall notify the Holder in writing, no later than the Trading Day
following the issuance of any Common Stock or Common Stock Equivalents subject to this
section, 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 3(b), upon the occurrence of any Dilutive
Issuance, after the date

10

 

of such Dilutive Issuance the Holder is entitled to receive a number of Warrant Shares
based upon the Base Share Price regardless of whether the Holder accurately refers to the
Base Share Price in the Notice of Exercise. Notwithstanding the foregoing, prior to June
30, 2007, it shall not constitute a Dilutive Issuance and shall not require any adjustment
pursuant to this Section 3 if the Company issues up to 1,000,000 shares of Common Stock (or
securities exercisable or convertible therefor) at an effective price per share which is at
least $0.60.

     c) Subsequent Rights Offerings. If the Company, at any time while the Warrant
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 less than the VWAP at the record date mentioned below, then the Exercise
Price shall be multiplied by a fraction, 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 receipt by the Company in full of all consideration payable upon
exercise of such rights, options or warrants) would purchase at such VWAP and 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. 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.

     d) Pro Rata Distributions. If the Company, at any time prior to the
Termination Date, shall distribute to all holders of Common Stock (and not to Holders of the
Warrants) evidences of its indebtedness or assets (excluding quarterly cash dividends
declared and paid in the ordinary course of business) or rights or warrants to subscribe for
or purchase any security other than the Common Stock (which shall be subject to Section
3(b)), then in each such case the Exercise Price shall be adjusted by multiplying the
Exercise 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 per share fair market value
at such record date of the portion of such assets or evidence of indebtedness so distributed
applicable to one outstanding share of the Common Stock as determined by the Board of
Directors in good faith. In either case the adjustments shall be described in a statement
provided to the Holder of the portion of assets or evidences of indebtedness so distributed
or such subscription rights applicable to one 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 Warrant is outstanding,
(A) the Company effects any merger or consolidation of the Company with or into another
Person (other than to change the state of incorporation of the Company or to create a
holding company that will be owned in substantially the same proportions by the Persons that
held the Company’s securities immediately prior to such transactions),

11

 

(B) the Company effects any sale of all or substantially all of its assets in one 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 exercise of this Warrant, the Holder shall have the right to
receive, for each Warrant Share that would have been issuable upon such exercise immediately
prior to the occurrence of such Fundamental Transaction, at the option of the Holder, (a)
upon exercise of this Warrant, the number of shares of Common Stock of the successor or
acquiring corporation or of the Company, if it is the surviving corporation, and any
additional consideration (the “Alternate Consideration”) receivable upon or as a
result of such reorganization, reclassification, merger, consolidation or disposition of
assets by a Holder of the number of shares of Common Stock for which this Warrant is
exercisable immediately prior to such event or (b) if the Company is acquired in an all cash
transaction, cash equal to the value of this Warrant as determined in accordance with the
Black-Scholes option pricing formula. For purposes of any such exercise, the determination
of the Exercise Price shall be appropriately adjusted to apply to such Alternate
Consideration based on the amount of Alternate Consideration issuable in respect of one
share of Common Stock in such Fundamental Transaction, and the Company shall apportion the
Exercise 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 exercise of this Warrant following such Fundamental
Transaction. To the extent 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 warrant consistent with the foregoing provisions and evidencing the Holder’s right to
exercise such warrant 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 3(e) and insuring that
this Warrant (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 3 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 3, 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 treasury
 shares, if any) issued and outstanding.

     g) Voluntary Adjustment By Company. The Company may at any time during the term
of this Warrant reduce the then current Exercise Price to any amount and for any period of
time deemed appropriate by the Board of Directors of the Company.

     h) Notice to Holders.

12

 

     i. Adjustment to Exercise Price. Whenever the Exercise Price is
adjusted pursuant to any provision of this Section 3, the Company shall
promptly mail to each Holder a notice setting forth the Exercise Price after
such adjustment and setting forth a brief statement of the facts requiring
such adjustment. If the Company issues a variable rate security, 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.
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.

     ii. Notice to Allow Exercise by Holder. Subject to the
requirements of applicable law, including, but not limited to, Regulation
FD, 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 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; (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 mailed to the Holder at its last address as it shall appear upon
the Warrant Register of the Company, at least 20 calendar days prior to the
applicable record or effective date hereinafter specified, a notice stating
(x) the 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,

13

 

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 mail such notice or any defect therein or in the mailing thereof
shall not affect the validity of the corporate action required to be
specified in such notice. The Holder is entitled to exercise this Warrant
during the 20-day period commencing on the date of such notice to the
effective date of the event triggering such notice.

     Section 4. Transfer of Warrant.

     a) Transferability. Subject to compliance with any applicable securities laws
and the conditions set forth in Section 4(d) hereof, this Warrant and all rights hereunder
(including, without limitation, any registration rights) are transferable, in whole or in
part, upon surrender of this Warrant at the principal office of the Company or its
designated agent, together with a written assignment of this Warrant substantially in the
form attached hereto duly executed by the Holder or its agent or attorney and funds
sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such
surrender and, if required, such payment, the Company shall execute and deliver a new
Warrant or Warrants in the name of the assignee or assignees and in the denomination or
denominations specified in such instrument of assignment, and shall issue to the assignor a
new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall
promptly be cancelled. A Warrant, if properly assigned, may be exercised by a new holder
for the purchase of Warrant Shares without having a new Warrant issued.

     b) New Warrants. This Warrant may be divided or combined with other Warrants
upon presentation hereof at the aforesaid office of the Company, together with a written
notice specifying the names and denominations in which new Warrants are to be issued, signed
by the Holder or its agent or attorney. Subject to compliance with Section 4(a), as to any
transfer which may be involved in such division or combination, the Company shall execute
and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided
or combined in accordance with such notice.

     c) Warrant Register. The Company shall register this Warrant, upon records to
be maintained by the Company for that purpose (the “Warrant Register”), in the name
of the record Holder hereof from time to time. The Company may deem and treat the
registered Holder of this Warrant as the absolute owner hereof for the purpose of any
exercise hereof or any distribution to the Holder, and for all other purposes, absent actual
notice to the contrary.

     d) Transfer Restrictions. If, at the time of the surrender of this Warrant in
connection with any transfer of this Warrant, the transfer of this Warrant shall not be
registered pursuant to an effective registration statement under the Securities Act and
under applicable state securities or blue sky laws, the Company may require, as a condition
of allowing such transfer (i) that the Holder or transferee of this Warrant, as the

14

 

case may be, furnish to the Company a written opinion of counsel (which opinion shall
be in form, substance and scope customary for opinions of counsel in comparable
transactions) to the effect that such transfer may be made without registration under the
Securities Act and under applicable state securities or blue sky laws, (ii) that the holder
or transferee execute and deliver to the Company an investment letter in form and substance
acceptable to the Company and (iii) that the transferee be an “accredited investor” as
defined in Rule 501(a)(1), (a)(2), (a)(3), (a)(7), or (a)(8) promulgated under the
Securities Act or a “qualified institutional buyer” as defined in Rule 144A(a) under the
Securities Act.

     Section 5. Miscellaneous.

     a) No Rights as Shareholder Until Exercise. This Warrant does not entitle the
Holder to any voting rights or other rights as a shareholder of the Company prior to the
exercise hereof as set forth in Section 2(e)(ii).

     b) Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants
that upon receipt by the Company of evidence reasonably satisfactory to it of the loss,
theft, destruction or mutilation of this Warrant or any stock certificate relating to the
Warrant Shares, and in case of loss, theft or destruction, of indemnity or security
reasonably satisfactory to it (which, in the case of the Warrant, shall not include the
posting of any bond), and upon surrender and cancellation of such Warrant or stock
certificate, if mutilated, the Company will make and deliver a new Warrant or stock
certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or
stock certificate.

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

     d) Authorized Shares.

     The Company covenants that during the period the Warrant is outstanding, it
will reserve from its authorized and unissued Common Stock a sufficient number of
 shares to provide for the issuance of the Warrant Shares upon the exercise of any
purchase rights under this Warrant. The Company further covenants that its issuance
of this Warrant shall constitute full authority to its officers who are charged with
the duty of executing stock certificates to execute and issue the necessary
certificates for the Warrant Shares upon the exercise of the purchase rights under
this Warrant. The Company will take all such reasonable action as may be necessary
to assure that such Warrant Shares may be issued as provided herein without
violation of any applicable law or regulation, or of any requirements of the Trading
Market upon which the Common Stock may be listed.

15

 

     Except and to the extent as waived or consented to by the Holder, the Company
shall not by any action, including, without limitation, amending its certificate of
incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms of this
Warrant, but will at all times in good faith assist in the carrying out of all such
terms and in the taking of all such actions as may be necessary or appropriate to
protect the rights of Holder as set forth in this Warrant against impairment.
Without limiting the generality of the foregoing, the Company will (a) not increase
the par value of any Warrant Shares above the amount payable therefor upon such
exercise immediately prior to such increase in par value, (b) take all such action
as may be necessary or appropriate in order that the Company may validly and legally
issue fully paid and nonassessable Warrant Shares upon the exercise of this Warrant,
and (c) use commercially reasonable efforts to obtain all such authorizations,
exemptions or consents from any public regulatory body having jurisdiction thereof
as may be necessary to enable the Company to perform its obligations under this
Warrant.

     Before taking any action which would result in an adjustment in the number of
Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the
Company shall obtain all such authorizations or exemptions thereof, or consents
thereto, as may be necessary from any public regulatory body or bodies having
jurisdiction thereof.

     e) Jurisdiction. All questions concerning the construction, validity,
enforcement and interpretation of this Warrant shall be determined in accordance with the
provisions of the Registration Rights Agreement.

     f) Restrictions. The Holder acknowledges that the Warrant Shares acquired upon
the exercise of this Warrant, if not registered, will have restrictions upon resale imposed
by state and federal securities laws.

     g) Nonwaiver and Expenses. No course of dealing or any delay or failure to
exercise any right hereunder on the part of Holder shall operate as a waiver of such right
or otherwise prejudice Holder’s rights, powers or remedies, notwithstanding the fact that
all rights hereunder terminate on the Termination Date. If the Company willfully and
knowingly fails to comply with any provision of this Warrant, which results in any material
damages to the Holder, the Company shall pay to Holder such amounts as shall be sufficient
to cover any costs and expenses including, but not limited to, reasonable attorneys’ fees,
including those of appellate proceedings, incurred by Holder in collecting any amounts due
pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder.

     h) Notices. Any notice, request or other document required or permitted to be
given or delivered to the Holder by the Company shall be delivered in accordance with the
notice provisions of the Registration Rights Agreement.

16

 

     i) Limitation of Liability. No provision hereof, in the absence of any
affirmative action by Holder to exercise this Warrant to purchase Warrant Shares, and no
enumeration herein of the rights or privileges of Holder, shall give rise to any liability
of Holder for the purchase price of any Common Stock or as a stockholder of the Company,
whether such liability is asserted by the Company or by creditors of the Company.

     j) Remedies. Holder, in addition to being entitled to exercise all rights
granted by law, including recovery of damages, will be entitled to specific performance of
its rights under this Warrant. The Company agrees that monetary damages would not be
adequate compensation for any loss incurred by reason of a breach by it of the provisions of
this Warrant and hereby agrees to waive and not to assert the defense in any action for
specific performance that a remedy at law would be adequate.

     k) Successors and Assigns. Subject to applicable securities laws, this Warrant
and the rights and obligations evidenced hereby shall inure to the benefit of and be binding
upon the successors of the Company and the successors and permitted assigns of Holder. The
provisions of this Warrant are intended to be for the benefit of all Holders from time to
time of this Warrant and shall be enforceable by any such Holder or holder of Warrant
Shares.

     l) Amendment. This Warrant may be modified or amended or the provisions hereof
waived with the written consent of the Company and the Holder.

     m) Severability. Wherever possible, each provision of this Warrant shall be
interpreted in such manner as to be effective and valid under applicable law, but if any
provision of this Warrant shall be prohibited by or invalid under applicable law, such
provision shall be ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provisions or the remaining provisions of this Warrant.

     n) Headings. The headings used in this Warrant are for the convenience of
reference only and shall not, for any purpose, be deemed a part of this Warrant.

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

17

 

          IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer
thereunto duly authorized.

Dated: January 25, 2007

	 	 	 	 	 	 	 
	 	 	STINGER SYSTEMS, INC.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ David J. Meador
 

	 	 
	 

	 	 	 	Name: David J. Meador	 	 
	 

	 	 	 	Title: Chief Financial Officer	 	 

18

 

NOTICE OF EXERCISE

TO: STINGER SYSTEMS, INC.

          (1) The undersigned hereby elects to purchase                      Warrant Shares of the Company pursuant
to the terms of the attached Warrant (only if exercised in full), and tenders herewith payment of
the exercise price in full, together with all applicable transfer taxes, if any.

          (2) Payment shall take the form of (check applicable box):

[ ] in lawful money of the United States; or

[ ] [if permitted] the cancellation of such number of Warrant Shares as is
necessary, in accordance with the formula set forth in subsection 2(c), to
exercise this Warrant with respect to the maximum number of Warrant Shares
purchasable pursuant to the cashless exercise procedure set forth in subsection
2(c).

          (3) Please issue a certificate or certificates representing said Warrant Shares in the name of
the undersigned or in such other name as is specified below:

 

The Warrant Shares shall be delivered to the following DWAC Account Number or by physical delivery
of a certificate to:

 

 

 

          (4) Accredited Investor. The undersigned is an “accredited investor” as defined in
Regulation D promulgated under the Securities Act of 1933, as amended.

[SIGNATURE OF HOLDER]

	 	 	 	 	 	 	 	 	 
	Name of Investing Entity:	 	 	 	 	 	 
	 	 	 	 
	Signature of Authorized Signatory of Investing Entity:	 	 
	 

	 	 	 	 	 	 	 	 
	Name of Authorized Signatory: 	 	 	 	 	 	 
	 	 	 	 
	Title of Authorized Signatory:	 	 	 	 
	 	 	 	 
	Date:
	 	 	 	 	 	 	 	 
	 	 

 

 

ASSIGNMENT FORM

(To assign the foregoing warrant, execute

this form and supply required information.

Do not use this form to exercise the warrant.)

          FOR VALUE RECEIVED, [                    ] all of or [                    ] shares of the foregoing Warrant and all rights
evidenced thereby are hereby assigned to

	 	 	 	 	 
	 

	 	whose address is	 	 
	 

	 	 	 	.
	 	 	 
	 
	 	 	 	 
	 	 	 

Dated:                                         ,                     

	 	 	 	 	 	 	 
	 

	 	Holder’s Signature:	 	 	 	 
	 

	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 

	 	Holder’s Address:	 	 	 	 
	 

	 	 	 	 

	 	 
	 

	 	 	 	 

	 	 

Signature Guaranteed:                                                             

NOTE: The signature to this Assignment Form must correspond with the name as it appears on the
face of the Warrant, without alteration or enlargement or any change whatsoever, and must be
guaranteed by a bank or trust company. Officers of corporations and those acting in a fiduciary or
other representative capacity should file proper evidence of authority to assign the foregoing
Warrant.

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