Document:

EXHIBIT 10.1

SECURITIES PURCHASE AGREEMENT

SECURITIES PURCHASE AGREEMENT (the “Agreement”), dated as of August 30, 2006,
by and among Image Entertainment, Inc., a Delaware corporation, with
headquarters located at 20525 Nordhoff Street, Suite 200, Chatsworth,
California 91311 (the “Company”),
and the investors listed on the Schedule of Buyers attached hereto
(individually, a “Buyer” and
collectively, the “Buyers”).

WHEREAS:

A.            The Company and each Buyer is
executing and delivering this Agreement in reliance upon the exemption from
securities registration afforded by Section 4(2) of the Securities Act of 1933,
as amended (the “1933 Act”), and
Rule 506 of Regulation D (“Regulation D”)
as promulgated by the United States Securities and Exchange Commission (the “SEC”) under the 1933 Act.

B.            The Company has authorized a new
series of senior convertible notes of the Company, in the form attached hereto
as Exhibit A (the “Notes”),
which Notes shall be convertible into the Company’s common stock, par value
$0.0001 per share (the ”Common Stock”)
(as converted, the “Conversion Shares”),
in accordance with the terms of the Notes.

C.            Each Buyer wishes to purchase, and
the Company wishes to sell, upon the terms and conditions stated in this
Agreement, (i) that aggregate principal amount of the Notes set forth opposite
such Buyer’s name in column (3) on the Schedule of Buyers attached hereto
(which aggregate amount for all Buyers shall be $17,000,000) and (ii) warrants,
in substantially the form attached hereto as Exhibit B (the “Warrants”), to acquire up to that number of
additional shares of Common Stock set forth opposite such Buyer’s name in
column (4) of the Schedule of Buyers (as exercised, collectively, the ” Warrant Shares”).

D.            The Notes bear interest, which at
the option of the Company, subject to certain conditions, may be paid in shares
of Common Stock (the “Interest Shares”).

E.             Contemporaneously with the
execution and delivery of this Agreement, the parties hereto are executing and
delivering a Registration Rights Agreement, substantially in the form attached
hereto as Exhibit C (the “Registration
Rights Agreement”), pursuant to which the Company will agree to
provide certain registration rights with respect to the Registrable Securities
(as defined in the Registration Rights Agreement) under the 1933 Act and the
rules and regulations promulgated thereunder, and applicable state securities
laws.

F.             The Notes, the Conversion Shares,
the Interest Shares, the Warrants and the Warrant Shares collectively are
referred to herein as the “Securities”.

NOW,
THEREFORE, the Company and each Buyer hereby agree as
follows:

1.             PURCHASE AND
SALE OF NOTES AND WARRANTS.

(a)           Purchase
of Notes and Warrants.

 

(i)            Notes and
Warrants.  Subject to the satisfaction (or
waiver) of the conditions set forth in Sections 6 and 7 below, the Company
shall issue and sell to each Buyer, and each Buyer severally, but not jointly,
agrees to purchase from the Company on the Closing Date (as defined below), (x)
a principal amount of Notes as is set forth opposite such Buyer’s name in
column (3) on the Schedule of Buyers and (y) Warrants to acquire up to that
number of Warrant Shares as is set forth opposite such Buyer’s name in column
(4) on the Schedule of Buyers (the “Closing”).

(ii)           Closing.  The date and time of the Closing (the “Closing Date”) shall be 10:00 a.m., New York City time, on
the date hereof (or such later date as is mutually agreed to by the Company and
each Buyer) after notification of satisfaction (or waiver) of the conditions to
the Closing set forth in Sections 6 and 7 below at the offices of Schulte Roth
& Zabel LLP, 919 Third Avenue, New York, New York 10022.

(iii)          Purchase Price.  The aggregate purchase price for the Notes
and the Warrants to be purchased by each such Buyer at the Closing (the “Purchase Price”) shall be the amount set forth opposite each
Buyer’s name in column (5) of the Schedule of Buyers.  Each Buyer shall pay $1,000 for each $1,000
of principal amount of Notes and related Warrants to be purchased by such Buyer
at the Closing.

(b)           Form
of Payment.  On the Closing Date, (i)
each Buyer shall pay its Purchase Price to the Company for the Notes and the
Warrants to be issued and sold to such Buyer at the Closing, by wire transfer
of immediately available funds in accordance with the Company’s written wire
instructions and (ii) the Company shall deliver to each Buyer the Notes
(allocated in the principal amounts as such Buyer shall request) which such
Buyer is then purchasing hereunder along with the Warrants (allocated in the
amounts as such Buyer shall request) which such Buyer is purchasing, in each
case duly executed on behalf of the Company and registered in the name of such
Buyer or its designee.

2.             BUYER’S
REPRESENTATIONS AND WARRANTIES.  Each
Buyer, severally and not jointly, represents and warrants with respect to only
itself that: 

(a)           No
Sale or Distribution.  Such Buyer is
acquiring the Notes, and the Warrants, and upon conversion of the Notes and
exercise of the Warrants (other than pursuant to a Cashless Exercise (as
defined in the Warrants)) will acquire the Conversion Shares issuable upon
conversion of the Notes and the Warrant Shares issuable upon exercise of the
Warrants, for its own account and not with a view towards, or for resale in
connection with, the public sale or distribution thereof, except pursuant to
sales registered or exempted under the 1933 Act; provided, however, that by
making the representations herein, such Buyer does not agree to hold any of the
Securities for any minimum or other specific term and reserves the right to
dispose of the Securities at any time in accordance with or pursuant to a
registration statement or an exemption under the 1933 Act and pursuant to the
applicable terms of the Transaction Documents (as defined in Section 3(b)).  Such Buyer is acquiring the Securities
hereunder in the ordinary course of its business.  Such Buyer does not presently have any
agreement or understanding, directly or indirectly, with any Person to
distribute any of the Securities.

(b)           Accredited
Investor Status.  Such Buyer is an “accredited
investor” as that term is defined in Rule 501(a) of Regulation D.

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(c)           Reliance
on Exemptions.  Such Buyer
understands that the Securities are being offered and sold to it in reliance on
specific exemptions from the registration requirements of United States federal
and state securities laws and that the Company is relying in part upon the
truth and accuracy of, and such Buyer’s compliance with, the representations,
warranties, agreements, acknowledgments and understandings of such Buyer set
forth herein in order to determine the availability of such exemptions and the
eligibility of such Buyer to acquire the Securities.

(d)           Information.  Such Buyer and its advisors, if any, have
been furnished with all materials relating to the business, finances and
operations of the Company and materials relating to the offer and sale of the
Securities that have been requested by such Buyer.  Such Buyer and its advisors, if any, have
been afforded the opportunity to ask questions of the Company.  Neither such inquiries nor any other due
diligence investigations conducted by such Buyer or its advisors, if any, or
its representatives shall modify, amend or affect such Buyer’s right to rely on
the Company’s representations and warranties contained herein.  Such Buyer understands that its investment in
the Securities involves a high degree of risk and is able to afford a complete
loss of such investment.  Such Buyer has
sought such accounting, legal and tax advice as it has considered necessary to
make an informed investment decision with respect to its acquisition of the
Securities.

(e)           No
Governmental Review.  Such Buyer
understands that no United States federal or state agency or any other
government or governmental agency has passed on or made any recommendation or
endorsement of the Securities or the fairness or suitability of the investment
in the Securities nor have such authorities passed upon or endorsed the merits
of the offering of the Securities.

(f)            Transfer
or Resale.  Such Buyer understands
that except as provided in the Registration Rights Agreement: (i) the
Securities have not been and are not being registered under the 1933 Act or any
state securities laws, and may not be offered for sale, sold, assigned or
transferred unless (A) subsequently registered thereunder, (B) such Buyer shall
have delivered to the Company an opinion of counsel, in a generally acceptable
form, to the effect that such Securities to be sold, assigned or transferred
may be sold, assigned or transferred pursuant to an exemption from such
registration, or (C) such Buyer provides the Company with reasonable assurance
that such Securities can be sold, assigned or transferred pursuant to Rule 144
or Rule 144A promulgated under the 1933 Act, as amended, (or a successor rule
thereto) (collectively, “Rule 144”);
(ii) any sale of the Securities made in reliance on Rule 144 may be made only
in accordance with the terms of Rule 144 and further, if Rule 144 is not
applicable, any resale of the Securities under circumstances in which the
seller (or the Person (as defined in Section 3(s)) through whom the sale is
made) may be deemed to be an underwriter (as that term is defined in the 1933
Act) may require compliance with some other exemption under the 1933 Act or the
rules and regulations of the SEC thereunder; and (iii) neither the Company nor
any other Person is under any obligation to register the Securities under the
1933 Act or any state securities laws or to comply with the terms and
conditions of any exemption thereunder. 
The Securities may be pledged in connection with a bona fide margin
account or other loan or financing arrangement secured by the Securities and
such pledge of Securities shall not be deemed to be a transfer, sale or
assignment of the Securities hereunder, and no Buyer effecting a pledge of
Securities shall be required to provide the Company with any notice thereof or

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otherwise make any delivery to the Company pursuant to this Agreement
or any other Transaction Document (as defined in Section 3(b)), including
without limitation, this Section 2(f).

(g)           Legends.  Such Buyer understands that the certificates
or other instruments representing the Notes and the Warrants and, until such
time as the resale of the Conversion Shares and the Warrant Shares have been
registered under the 1933 Act as contemplated by the Registration Rights
Agreement, the stock certificates representing the Conversion Shares and the
Warrant Shares, except as set forth below, shall bear any legend as required by
the “blue sky” laws of any state and a restrictive legend in substantially the
following form (and a stop-transfer order may be placed against transfer of
such stock certificates):

[NEITHER THE ISSUANCE AND
SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO
WHICH THESE SECURITIES ARE [CONVERTIBLE] [EXERCISABLE] HAVE BEEN][THE
SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN] REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS.  THE SECURITIES MAY NOT BE OFFERED FOR SALE,
SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR (B) AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION
IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE
144A UNDER SAID ACT.  NOTWITHSTANDING THE
FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN
ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.

The legend set
forth above shall be removed and the Company shall issue a certificate without
such legend to the holder of the Securities upon which it is stamped, if,
unless otherwise required by state securities laws, (i) such Securities are
registered for resale under the 1933 Act, (ii) in connection with a sale,
assignment or other transfer, such holder provides the Company with an opinion
of a law firm reasonably acceptable to the Company (with Schulte Roth &
Zabel LLP being deemed acceptable), in a generally acceptable form, to the
effect that such sale, assignment or transfer of the Securities may be made
without registration under the applicable requirements of the 1933 Act, or
(iii) such holder provides the Company with reasonable assurance that the
Securities can be sold, assigned or transferred pursuant to Rule 144 or Rule
144A.

(h)           Validity;
Enforcement.  This Agreement and the
Registration Rights Agreement to which such Buyer is a party have been duly and
validly authorized, executed and delivered on behalf of such Buyer and shall
constitute the legal, valid and binding obligations of such Buyer enforceable
against such Buyer in accordance with their respective

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terms, except as such enforceability may be limited by general
principles of equity or to applicable bankruptcy, insolvency, reorganization,
moratorium, liquidation and other similar laws relating to, or affecting
generally, the enforcement of applicable creditors’ rights and remedies.

(i)            No
Conflicts.  The execution, delivery
and performance by such Buyer of this Agreement and the Registration Rights
Agreement to which such Buyer is a party and the consummation by such Buyer of
the transactions contemplated hereby and thereby will not (i) result in a
violation of the organizational documents of such Buyer or (ii) conflict with,
or constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, indenture or
instrument to which such Buyer is a party, or (iii) result in a violation of
any law, rule, regulation, order, judgment 
or decree (including federal and state securities laws) applicable to
such Buyer, except in the case of clauses (ii) and (iii) above, for such
conflicts, defaults, rights or violations which would not, individually or in
the aggregate, reasonably be expected to have a material adverse effect on the
ability of such Buyer to perform its obligations hereunder.

(j)            Residency.  Such Buyer is a resident of that jurisdiction
specified below its address on the Schedule of Buyers.

3.             REPRESENTATIONS
AND WARRANTIES OF THE COMPANY.  The
Company represents and warrants to each of the Buyers that, as of the date
hereof and as of the Closing Date:

(a)           Organization
and Qualification.  The Company and
its “Subsidiaries”
(which for purposes of this Agreement means any entity in which the Company,
directly or indirectly, owns any of the capital stock or holds an equity or
similar interest) are entities duly organized and validly existing and, to the
extent legally applicable, in good standing under the laws of the jurisdiction
in which they are formed, and have the requisite power and authorization to own
their properties and to carry on their business as now being conducted.  Each of the Company and its Subsidiaries is
duly qualified as a foreign entity to do business and to the extent legally
applicable, is in good standing in every jurisdiction in which its ownership of
property or the nature of the business conducted by it makes such qualification
necessary, except to the extent that the failure to be so qualified or be in
good standing would not have a Material Adverse Effect.  As used in this Agreement, “Material Adverse Effect” means any material adverse effect
on the business, properties, assets, operations, results of operations,
condition (financial or otherwise) or prospects of the Company and its
Subsidiaries, taken as a whole, or on the transactions contemplated hereby and
the other Transaction Documents or by the agreements and instruments to be
entered into in connection herewith or therewith, or on the authority or
ability of the Company to perform its obligations under the Transaction
Documents (as defined below).  The
Company has no Subsidiaries except as set forth on Schedule 3(a).

(b)           Authorization;
Enforcement; Validity.  The Company
has the requisite corporate power and authority to enter into and perform its
obligations under this Agreement, the Notes, the Registration Rights Agreement,
the Irrevocable Transfer Agent Instructions (as defined in Section 5(b)), the
Warrants and each of the other agreements entered into by the parties hereto in
connection with the transactions contemplated by this Agreement

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(collectively, the “Transaction
Documents”) and to issue the Securities in accordance with the terms
hereof and thereof.  The execution and
delivery of the Transaction Documents by the Company and the consummation by
the Company of the transactions contemplated hereby and thereby, including,
without limitation, the issuance of the Notes and the Warrants, the reservation
for issuance and the issuance of the Conversion Shares issuable
upon conversion of the Notes and the reservation for issuance and issuance of
Warrant Shares issuable upon exercise of the Warrants, have been duly
authorized by the Company’s Board of Directors and other than as set forth in
Section 3(e), no further filing, consent or authorization is required by the
Company, its Board of Directors or its stockholders.  This Agreement and the other Transaction
Documents of even date herewith have been duly executed and delivered by the
Company, and constitute the legal, valid and binding obligations of the Company
enforceable against the Company in accordance with their respective terms,
except as such enforceability may be limited by general principles of equity or
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or
similar laws relating to, or affecting generally, the enforcement of applicable
creditors’ rights and remedies.

(c)           Issuance
of Securities.  The issuance of the
Notes and the Warrants are duly authorized and are free from all taxes, liens
and charges with respect to the issue thereof. 
As of the Closing, a number of shares of Common Stock shall have been
duly authorized and reserved for issuance which equals or exceeds (i) 150% of
the aggregate of the maximum number of shares of Common Stock issuable (i) upon
conversion of the Notes, (ii) as Interest Shares pursuant to the terms of the
Notes and (iii) upon exercise of the Warrants. 
Upon conversion or exercise in accordance with the Notes or the
Warrants, as the case may be, the Conversion Shares, the Interest Shares and
the Warrant Shares, respectively, will be validly issued, fully paid and
nonassessable and free from all preemptive or similar rights, taxes, liens and
charges with respect to the issue thereof, with the holders being entitled to
all rights accorded to a holder of Common Stock.  Assuming the accuracy of each of the
representations and warranties set forth in Section 2 of this Agreement, the
offer and issuance by the Company of the Securities is exempt from registration
under the 1933 Act.

(d)           No
Conflicts.  The execution, delivery
and performance of the Transaction Documents by the Company and the
consummation by the Company of the transactions contemplated hereby and thereby
(including, without limitation, the issuance of the Notes and Warrants and
reservation for issuance and issuance of the Conversion Shares, the Interest
Shares and the Warrant Shares) will not (i) result in a violation of any
certificate of incorporation, certificate of formation, any certificate of
designations or other constituent documents of the Company or any of its Subsidiaries,
any capital stock of the Company or any of its Subsidiaries or bylaws of the
Company or any of its Subsidiaries or (ii) conflict with, or constitute a
default (or an event which with notice or lapse of time or both would become a
default) in any respect under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, indenture or
instrument to which the Company or any of its Subsidiaries is a party, or (iii)
result in a violation of any law, rule, regulation, order, judgment or decree
(including foreign, federal and state securities laws and regulations and the
rules and regulations of The NASDAQ Global Market (the “Principal Market”) applicable to the Company or any of its
Subsidiaries or by which any property or asset of the Company or any of its
Subsidiaries is bound or affected.

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(e)           Consents.  Neither the Company nor any of its
Subsidiaries is required to obtain any consent, authorization or order of, or
make any filing or registration with, any court, governmental agency or any
regulatory or self-regulatory agency or any other Person in order for it to
execute, deliver or perform any of its obligations under or contemplated by the
Transaction Documents, in each case in accordance with the terms hereof or
thereof, except for the following consents, authorizations, orders, filings and
registrations (none of which is required to be filed or obtained before the
Closing): (i) the filing with the SEC of one or more Registration Statements in
accordance with the requirements of the Registration Rights Agreement and (ii)
the filing of a listing application for the Conversion Shares, the Interest
Shares and Warrant Shares with the Principal Market, which shall be done
pursuant to the rules of the Principal Market. 
The Company and its Subsidiaries are unaware of any facts or
circumstances that might prevent the Company from obtaining or effecting any of
the registration, application or filings pursuant to the preceding
sentence.  The Company is not in violation
of the listing requirements of the Principal Market and has no knowledge of any
facts that would reasonably lead to delisting or suspension of the Common Stock
in the foreseeable future.

(f)            Acknowledgment
Regarding Buyer’s Purchase of Securities. 
The Company acknowledges and agrees that each Buyer is acting solely in
the capacity of an arm’s length purchaser with respect to the Transaction
Documents and the transactions contemplated hereby and thereby and that no
Buyer is (i) an officer or director of the Company, (ii) an “affiliate” of the
Company (as defined in Rule 144 of the 1933 Act) or (iii) to the knowledge of
the Company, a “beneficial owner” of more than 10% of the shares of Common
Stock (as defined for purposes of Rule 13d-3 of the Securities Exchange Act of
1934, as amended (the “1934 Act”)).  The Company further acknowledges that no
Buyer is acting as a financial advisor or fiduciary of the Company or any of
its Subsidiaries (or in any similar capacity) with respect to the Transaction
Documents and the transactions contemplated hereby and thereby, and any advice
given by a Buyer or any of its representatives or agents in connection with the
Transaction Documents and the transactions contemplated hereby and thereby is
merely incidental to such Buyer’s purchase of the Securities.  The Company further represents to each Buyer
that the Company’s decision to enter into the Transaction Documents has been
based solely on the independent evaluation by the Company and its
representatives.

(g)           No
General Solicitation; Placement Agent’s Fees.  Neither the Company, nor any of its
affiliates, nor any Person acting on its or their behalf, has engaged in any
form of general solicitation or general advertising (within the meaning of
Regulation D) in connection with the offer or sale of the Securities.  The Company shall be responsible for the
payment of any placement agent’s fees, financial advisory fees, or brokers’
commissions (other than for persons engaged by any Buyer or its investment
advisor) relating to or arising out of the transactions contemplated
hereby.  The Company acknowledges that it
has engaged C. E. Unterberg, Towbin as placement agent (collectively, the “Agent”) in connection with the sale of the Securities.  Other than the Agent, neither the Company nor
any of its Subsidiaries has engaged any placement agent or other agent in
connection with the sale of the Securities.

(h)           No
Integrated Offering.  None of the
Company, its Subsidiaries, any of their affiliates, and any Person acting on
their behalf has, directly or indirectly, made any offers or sales of any
security or solicited any offers to buy any security, under circumstances

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that would require registration of any of the Securities under the 1933
Act or cause this offering of the Securities to be integrated with prior
offerings by the Company for purposes of the 1933 Act or any applicable
stockholder approval provisions, including, without limitation, under the rules
and regulations of any exchange or automated quotation system on which any of
the securities of the Company are listed or designated.  None of the Company, its Subsidiaries, their
affiliates and any Person acting on their behalf will take any action or steps
referred to in the preceding sentence that would require registration of any of
the Securities under the 1933 Act or cause the offering of the Securities to be
integrated with other offerings.

(i)            Dilutive
Effect.  The Company understands and
acknowledges that the number of Conversion Shares issuable upon conversion of
the Notes and the Warrant Shares issuable upon exercise of the Warrants will
increase in certain circumstances.  The
Company further acknowledges that its obligation to issue Conversion Shares
upon conversion of the Notes in accordance with this Agreement and the Notes and its obligation to issue the Warrant Shares upon
exercise of the Warrants in accordance with this Agreement and the Warrants is,
in each case, absolute and unconditional regardless of the dilutive effect that
such issuance may have on the ownership interests of other stockholders of the
Company.

(j)            Application
of Takeover Protections; Rights Agreement. 
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 Certificate of Incorporation
(as defined in Section 3(r)) or the laws of the state of its incorporation
which is or could become applicable to any Buyer as a result of the
transactions contemplated by this Agreement, including, without limitation, the
Company’s issuance of the Securities and any Buyer’s ownership of the
Securities.  The Company and its board of
directors have taken all necessary action, if any, in order to render
inapplicable any stockholder rights plan or similar arrangement relating to
accumulations of beneficial ownership of Common Stock or a change in control of
the Company.

(k)           SEC
Documents; Financial Statements. 
During the two (2) years prior to the date hereof, the Company has filed
all reports, schedules, forms, statements and other documents required to be
filed by it with the SEC pursuant to the reporting requirements of the 1934 Act
(all of the foregoing filed prior to the date hereof and all exhibits included
therein and financial statements, notes and schedules thereto and documents
incorporated by reference therein being hereinafter referred to as the “SEC Documents”).  The
Company has delivered to the Buyers or their respective representatives true,
correct and complete copies of the SEC Documents not available on the EDGAR
system.  As of their respective dates,
the SEC Documents complied in all material respects with the requirements of
the 1934 Act and the rules and regulations of the SEC promulgated thereunder
applicable to the SEC Documents, and none of the SEC Documents, at the time
they were filed with the SEC, contained any untrue statement of a material fact
or omitted to state a material fact required to be stated therein or necessary
in order to make the statements therein, in the light of the circumstances
under which they were made, not misleading. 
As of their respective dates, the financial statements of the Company
included in the SEC Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto.  Such
financial statements have been prepared in accordance with generally accepted
accounting

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principles, consistently applied, during the periods involved (except
(i) as may be otherwise indicated in such financial statements or the notes
thereto, or (ii) in the case of unaudited interim statements, to the extent
they may exclude footnotes or may be condensed or summary statements) and
fairly present in all material respects the financial position of the Company
as of the dates thereof and the results of its operations and cash flows for
the periods then ended (subject, in the case of unaudited statements, to normal
year-end audit adjustments).  No other
information provided by or on behalf of the Company to the Buyers which is not
included in the SEC Documents, including, without limitation, information
referred to in Section 2(d) of this Agreement, contains any untrue statement of
a material fact or omits to state any material fact necessary in order to make
the statements therein, in the light of the circumstance under which they are
or were made not misleading.

(l)            Absence
of Certain Changes.  Since March 31,
2006, there has been no material adverse change and no material adverse
development in the business, properties, operations, condition (financial or
otherwise), results of operations or prospects of the Company or its Subsidiaries.  Except as disclosed in Schedule 3(l),
since March 31, 2006, the Company has not (i) declared or paid any dividends,
(ii) sold any assets, individually or in the aggregate, in excess of $100,000
outside of the ordinary course of business or (iii) had capital expenditures,
individually or in the aggregate, in excess of $500,000.  Neither the Company nor any of its
Subsidiaries has taken any steps to seek protection pursuant to any bankruptcy
law nor does the Company have any knowledge or reason to believe that its
creditors intend to initiate involuntary bankruptcy proceedings or any actual
knowledge of any fact that would reasonably lead a creditor to do so.  The Company and its Subsidiaries,
individually and on a consolidated basis, are not as of the date hereof, and
after giving effect to the transactions contemplated hereby to occur at the
Closing, will not be Insolvent (as defined below).  For purposes of this Section 3(l), “Insolvent” means, with respect to any Person (as defined in
Section 3(s)), (i) the present fair saleable value of such Person’s assets is
less than the amount required to pay such Person’s total Indebtedness (as
defined in Section 3(s)), (ii) such Person is unable to pay its debts and
liabilities, subordinated, contingent or otherwise, as such debts and
liabilities become absolute and matured, (iii) such Person intends to incur or
believes that it will incur debts that would be beyond its ability to pay as
such debts mature or (iv) such Person has unreasonably small capital with which
to conduct the business in which it is engaged as such business is now
conducted and is proposed to be conducted.

(m)          No
Undisclosed Events, Liabilities, Developments or Circumstances.  No event, liability, development or
circumstance has occurred or exists, or is contemplated to occur, with respect
to the Company, its Subsidiaries or their respective business, properties,
prospects, operations or financial condition, that would be required to be
disclosed by the Company under applicable securities laws on a registration
statement on Form S-1 filed with the SEC relating to an issuance and sale by
the Company of its Common Stock and which has not been publicly announced.

(n)           Conduct
of Business; Regulatory Permits. 
Neither the Company nor any of its Subsidiaries is in violation of any
term of or in default under its Certificate of Incorporation, any certificate
of designations of any outstanding series of preferred stock of the Company or
the Bylaws or their organizational charter or bylaws, respectively.  Neither the Company nor any of its
Subsidiaries is in violation of any judgment, decree or order or any

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statute, ordinance, rule or regulation applicable to the Company or its
Subsidiaries, and neither the Company nor any of its Subsidiaries will conduct
its business in violation of any of the foregoing, except for possible
violations which could not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect. 
Without limiting the generality of the foregoing, the Company is not in
violation of any of the rules, regulations or requirements of the Principal
Market and has no knowledge of any facts or circumstances that would reasonably
lead to delisting or suspension of the Common Stock by the Principal Market in
the foreseeable future.  During the two
(2) years prior to the date hereof, (i) the Common Stock has been designated
for quotation on the Principal Market, (ii) trading in the Common Stock has not
been suspended by the SEC or the Principal Market and (iii) the Company has
received no communication, written or oral, from the SEC or the Principal
Market regarding the suspension or delisting of the Common Stock from the
Principal Market.  The Company and its
Subsidiaries possess all certificates, authorizations and permits issued by the
appropriate regulatory authorities necessary to conduct their respective
businesses, except where the failure to possess such certificates,
authorizations or permits would not have, individually or in the aggregate, a
Material Adverse Effect, and neither the Company nor any such Subsidiary has
received any notice of proceedings relating to the revocation or modification
of any such certificate, authorization or permit.

(o)           Foreign
Corrupt Practices.  Neither the
Company, nor any of its Subsidiaries, nor any director, officer, agent,
employee or other Person acting on behalf of the Company or any of its
Subsidiaries has, in the course of its actions for, or on behalf of, the
Company or any of its Subsidiaries (i) used any corporate funds for any
unlawful contribution, gift, entertainment or other unlawful expenses relating
to political activity; (ii) made any direct or indirect unlawful payment to any
foreign or domestic government official or employee from corporate funds; (iii)
violated or is in violation of any provision of the U.S. Foreign Corrupt
Practices Act of 1977, as amended; or (iv) made any unlawful bribe, rebate,
payoff, influence payment, kickback or other unlawful payment to any foreign or
domestic government official or employee.

(p)           Sarbanes-Oxley
Act.  The Company is in compliance
with any and all applicable requirements of the Sarbanes-Oxley Act of 2002 that
are effective as of the date hereof, and any and all applicable rules and
regulations promulgated by the SEC thereunder that are effective as of the date
hereof.

(q)           Transactions
With Affiliates.  Except as set forth
in the SEC Documents filed at least ten (10) days prior to the date hereof and
other than the grant of stock options disclosed on Schedule 3(q), none
of the officers, directors or employees of the Company or any of its
Subsidiaries is presently a party to any transaction with the Company or any of
its Subsidiaries (other than for ordinary course services as employees,
officers or 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
such officer, director or employee or, to the knowledge of the Company or any
of its Subsidiaries, any corporation, partnership, trust or other entity in
which any such officer, director, or employee has a substantial interest or is
an officer, director, trustee or partner.

 10

 

(r)            Equity
Capitalization.  As of the date
hereof, the authorized capital stock of the Company consists of (i) 100,000,000
shares of Common Stock, of which as of the date hereof, 21,576,544 are issued
and outstanding, 2,710,900 shares are reserved for issuance pursuant to the
Company’s stock option and purchase plans, 3,400,000 shares are reserved for
issuance pursuant to the Relativity Agreement (as defined below) and 984,284
shares are reserved for issuance pursuant to securities (other than the
aforementioned options, the Notes and the Warrants) exercisable or exchangeable
for, or convertible into, shares of Common Stock and (ii) 25,000,000 shares of
preferred stock, par value $0.0001 per share, of which, as of the date hereof,
none are issued and outstanding.  All of
such outstanding shares have been, or upon issuance will be, validly issued and
are fully paid and nonassessable.  Except
as disclosed in Schedule 3(r): (i) none of the Company’s capital stock
is subject to preemptive rights or any other similar rights or any liens or
encumbrances suffered or permitted by the Company; (ii) there are no
outstanding options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into, or exercisable or exchangeable for, any capital stock of the
Company or any of its Subsidiaries, or contracts, commitments, understandings
or arrangements by which the Company or any of its Subsidiaries is or may
become bound to issue additional capital stock of the Company or any of its
Subsidiaries or options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into, or exercisable or exchangeable for, any capital stock of the
Company or any of its Subsidiaries; (iii) there are no outstanding debt
securities, notes, credit agreements, credit facilities or other agreements,
documents or instruments evidencing Indebtedness of the Company or any of its
Subsidiaries or by which the Company or any of its Subsidiaries is or may
become bound; (iv) there are no financing statements securing obligations in
any material amounts, either singly or in the aggregate, filed in connection
with the Company or any of its Subsidiaries; (v) there are no agreements or
arrangements under which the Company or any of its Subsidiaries is obligated to
register the sale of any of their securities under the 1933 Act (except
pursuant to the Registration Rights Agreement); (vi) there are no outstanding
securities or instruments of the Company or any of its Subsidiaries which
contain any redemption or similar provisions, and there are no contracts,
commitments, understandings or arrangements by which the Company or any of its
Subsidiaries is or may become bound to redeem a security of the Company or any
of its Subsidiaries; (vii) there are no securities or instruments containing
anti-dilution or similar provisions that will be triggered by the issuance of
the Securities; (viii) the Company does not have any stock appreciation rights
or “phantom stock” plans or agreements or any similar plan or agreement; and
(ix) the Company and its Subsidiaries have no liabilities or obligations
required to be disclosed in the SEC Documents but not so disclosed in the SEC
Documents, other than those incurred in the ordinary course of the Company’s or
its Subsidiaries’ respective businesses and which, individually or in the
aggregate, do not or would not have a Material Adverse Effect.  The Company has furnished to the Buyers true,
correct and complete copies of the Company’s Certificate of Incorporation, as
amended and as in effect on the date hereof (the “Certificate of Incorporation”), and the Company’s Bylaws, as
amended and as in effect on the date hereof (the “Bylaws”),
and the terms of all securities convertible into, or exercisable or
exchangeable for, shares of Common Stock and the material rights of the holders
thereof in respect thereto.

(s)           Indebtedness
and Other Contracts.  Except as
disclosed in Schedule 3(s), neither the Company nor any of its
Subsidiaries (i) has any outstanding Indebtedness (as defined below), (ii) is a
party to any contract, agreement or instrument, the

 11
 

 

violation of which, or default under which, by the other party(ies) to
such contract, agreement or instrument could reasonably be expected to result
in a Material Adverse Effect, (iii) is in violation of any term of or in
default under any contract, agreement or instrument relating to any
Indebtedness, except where such violations and defaults would not result,
individually or in the aggregate, in a Material Adverse Effect, or (iv) is a
party to any contract, agreement or instrument relating to any Indebtedness,
the performance of which, in the judgment of the Company’s officers, has or is
expected to have a Material Adverse Effect. 
Schedule 3(s) provides a detailed description of the material
terms of any such outstanding Indebtedness. 
For purposes of this Agreement: 
(x) “Indebtedness”
of any Person means, without duplication (A) all indebtedness for borrowed
money, (B) all obligations issued, undertaken or assumed as the deferred
purchase price of property or services, including (without limitation) “capital
leases” in accordance with generally accepted accounting principles (other than
trade payables entered into in the ordinary course of business), (C) all
reimbursement or payment obligations with respect to letters of credit, surety
bonds and other similar instruments, (D) all obligations evidenced by notes,
bonds, debentures or similar instruments, including obligations so evidenced
incurred in connection with the acquisition of property, assets or businesses,
(E) all indebtedness created or arising under any conditional sale or other
title retention agreement, or incurred as financing, in either case with
respect to any property or assets acquired with the proceeds of such
indebtedness (even though the rights and remedies of the seller or bank under
such agreement in the event of default are limited to repossession or sale of
such property), (F) all monetary obligations under any leasing or similar
arrangement which, in connection with generally accepted accounting principles,
consistently applied for the periods covered thereby, is classified as a
capital lease, (G) all indebtedness referred to in clauses (A) through (F)
above secured by (or for which the holder of such Indebtedness has an existing
right, contingent or otherwise, to be secured by) any mortgage, lien, pledge,
charge, security interest or other encumbrance upon or in any property or
assets (including accounts and contract rights) owned by any Person, even
though the Person which owns such assets or property has not assumed or become
liable for the payment of such indebtedness, and (H) all Contingent Obligations
in respect of indebtedness or obligations of others of the kinds referred to in
clauses (A) through (G) above; (y) “Contingent Obligation”
means, as to any Person, any direct or indirect liability, contingent or
otherwise, of that Person with respect to any indebtedness, lease, dividend or
other obligation of another Person if the primary purpose or intent of the
Person incurring such liability, or the primary effect thereof, is to provide
assurance to the obligee of such liability that such liability will be paid or
discharged, or that any agreements relating thereto will be complied with, or
that the holders of such liability will be protected (in whole or in part)
against loss with respect thereto; and (z) “Person”
means an individual, a limited liability company, a partnership, a joint
venture, a corporation, a trust, an unincorporated organization and a
government or any department or agency thereof.

(t)            Absence
of Litigation.  Except as set forth
in Schedule 3(t), there is no action, suit, proceeding, inquiry or
investigation before or by the Principal Market, any court, public board,
government agency, self-regulatory organization or body pending or, to the
knowledge of the Company, threatened against or affecting the Company or any of
its Subsidiaries, the Common Stock or any of the Company’s Subsidiaries or any
of the Company’s or its Subsidiaries’ officers or directors.

(u)           Insurance.  The Company and each of its Subsidiaries are
insured by insurers of recognized financial responsibility against such losses
and risks and in such

 12
 

 

amounts as management of the Company believes to be prudent and
customary in the businesses in which the Company and its Subsidiaries are
engaged.  Neither the Company nor any
such Subsidiary has been refused any insurance coverage sought or applied for
and neither the Company nor any such 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 at a cost that would not have a Material
Adverse Effect.

(v)           Employee
Relations.  (i) Neither the Company
nor any of its Subsidiaries is a party to any collective bargaining agreement
or employs any member of a union.  The
Company and its Subsidiaries believe that their relations with their employees
are good.  No executive officer of the
Company  or any of its Subsidiaries (as
defined in Rule 501(f) of the 1933 Act) has notified the Company or any such
Subsidiary that such officer intends to leave the Company or any such
Subsidiary or otherwise terminate such officer’s employment with the Company or
any such Subsidiary.  No executive
officer of the Company or any of its Subsidiaries, is, or is now expected to
be, in violation of any material term of any employment contract,
confidentiality, disclosure or proprietary information agreement,
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.

(ii)           The Company and its Subsidiaries, to their knowledge, are
in compliance with all federal, state, local and foreign laws and regulations
respecting labor, employment and employment practices and benefits, terms and
conditions of employment and wages and hours, except where failure to be in
compliance would not, either individually or in the aggregate, reasonably be
expected to result in a Material Adverse Effect.

(w)          Title.
The Company and its Subsidiaries have good and marketable title in fee simple
to all real property and good and marketable title to all personal property
owned by them which is material to the business of the Company and its
Subsidiaries, in each case free and clear of all liens, encumbrances and
defects except such as are described in Schedule 3(w) or such as do not
materially affect the value of such property and do not interfere with the use
made and proposed to be made of such property by the Company and any of its
Subsidiaries.  Any real property and
facilities held under lease by the Company and any of its Subsidiaries are held
by them under valid, subsisting and enforceable leases with such exceptions as
are not material and do not interfere with the use made and proposed to be made
of such property and buildings by the Company and its Subsidiaries.

(x)            Intellectual
Property Rights. The Company and its Subsidiaries own or possess adequate
rights or licenses to use all trademarks, service marks and all applications
and registrations therefor, trade names, patents, patent rights, copyrights,
original works of authorship, inventions, trade secrets and other intellectual
property rights (“Intellectual Property
Rights”) necessary to conduct their respective businesses as now
conducted.  None of the Company’s
registered, or applied for, Intellectual Property Rights have expired or
terminated or have been abandoned, or are expected to expire or terminate or expected
to be abandoned, within three years from the date of this Agreement.  The Company does not have any knowledge of
any infringement by the Company or its Subsidiaries of Intellectual Property
Rights of others.  There is no claim,
action or proceeding being made or brought, or to the knowledge of the

 13
 

 

Company, being threatened, against the Company or its Subsidiaries
regarding its Intellectual Property Rights. 
Neither the Company nor any of its Subsidiaries is aware of any facts or
circumstances which might give rise to any of the foregoing infringements or
claims, actions or proceedings.  The
Company and its Subsidiaries have taken reasonable security measures to protect
the secrecy, confidentiality and value of all of their Intellectual Property
Rights.

(y)           Environmental
Laws.  The Company and its
Subsidiaries, to their knowledge, (i) are in compliance with any and all
Environmental Laws (as hereinafter defined), (ii) have received all permits,
licenses or other approvals required of them under applicable Environmental
Laws to conduct their respective businesses and (iii) are in compliance with
all terms and conditions of any such permit, license or approval where, in each
of the foregoing clauses (i), (ii) and (iii), the failure to so comply could be
reasonably expected to have, individually or in the aggregate, a Material
Adverse Effect.  The term “Environmental Laws” means all federal, state, local or
foreign laws relating to pollution or protection of human health or the
environment (including, without limitation, ambient air, surface water,
groundwater, land surface or subsurface strata), including, without limitation,
laws relating to emissions, discharges, releases or threatened releases of
chemicals, pollutants, contaminants, or toxic or hazardous substances or wastes
(collectively, “Hazardous Materials”) into the environment, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Hazardous Materials, as well as all authorizations,
codes, decrees, demands or demand letters, injunctions, judgments, licenses,
notices or notice letters, orders, permits, plans or regulations issued,
entered, promulgated or approved thereunder.

(z)            Subsidiary
Rights.  The Company or one of its
Subsidiaries has the unrestricted right to vote, and (subject to limitations
imposed by applicable law) to receive dividends and distributions on, all
capital securities of its Subsidiaries as owned by the Company or such
Subsidiary.

(aa)         Tax
Status.  The Company and each of its
Subsidiaries (i) has made or filed all foreign, federal and state income and
all other tax returns, reports and declarations required by any jurisdiction to
which it is subject, (ii) has paid all taxes and other governmental assessments
and charges that are material in amount, shown or determined to be due on such
returns, reports and declarations, except those being contested in good faith
and (iii) has set aside on its books provision reasonably adequate for the
payment of all taxes for periods subsequent to the periods to which such
returns, reports or declarations apply. 
There are no unpaid taxes in any material amount claimed to be due by
the taxing authority of any jurisdiction, and the officers of the Company know
of no basis for any such claim.

(bb)         Internal
Accounting and Disclosure Controls. 
The Company and each of its Subsidiaries maintain a system of internal
accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management’s general or specific
authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset and liability accountability, (iii)
access to assets or incurrence of liabilities is permitted only in accordance
with management’s general or specific authorization and (iv) the recorded
accountability for assets and liabilities is compared with the existing assets
and liabilities at reasonable intervals and appropriate action is taken with
respect to any difference.  The Company
maintains disclosure controls and procedures (as such term is defined in Rule
13a-14

 14
 

 

under the 1934 Act) that are effective in ensuring that information
required to be disclosed by the Company in the reports that it files or submits
under the 1934 Act is recorded, processed, summarized and reported, within the
time periods specified in the rules and forms of the SEC, including, without
limitation, controls and procedures designed in to ensure that information
required to be disclosed by the Company in the reports that it files or submits
under the 1934 Act is accumulated and communicated to the Company’s management,
including its principal executive officer or officers and its principal
financial officer or officers, as appropriate, to allow timely decisions
regarding required disclosure.  During
the twelve months prior to the date hereof neither the Company nor any of its
Subsidiaries have received any notice or correspondence from any accountant
relating to any potential material weakness in any part of the system of
internal accounting controls of the Company or any of its Subsidiaries.

(cc)         Ranking of Notes. 
Except as set forth on Schedule 3(cc), no Indebtedness of the
Company is senior to or ranks pari passu
with the Notes in right of payment, whether with respect of payment of
redemptions, interest, damages or upon liquidation or dissolution or otherwise.

(dd)         Off Balance Sheet Arrangements.  There is no transaction, arrangement, or
other relationship between the Company and an unconsolidated or other off
balance sheet entity that is required to be disclosed by the Company in its
1934 Act filings and is not so disclosed or that otherwise would be reasonably
likely to have a Material Adverse Effect.

(ee)         Investment Company Status.  The Company is not, and upon consummation of
the sale of the Securities will not be, an “investment company,” a company
controlled by an “investment company” or an “affiliated person” of, or “promoter”
or “principal underwriter” for, an “investment company” as such terms are
defined in the Investment Company Act of 
1940, as amended.

(ff)           Form
S-3 Eligibility.  The Company is
eligible to register the Conversion Shares, the Interest Shares and the Warrant
Shares for resale by the Buyers using Form S-3 promulgated under the 1933 Act.

(gg)         Transfer Taxes. 
On the Closing Date, all stock transfer or other taxes (other than
income or similar taxes) which are required to be paid in connection with the
sale and transfer of the Securities to be sold to each Buyer hereunder will be,
or will have been, fully paid or provided for by the Company, and all laws
imposing such taxes will be or will have been complied with.

(hh)         Manipulation of Price.  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) other than the Agent, sold, bid for, purchased, or paid
any compensation for soliciting purchases of, any of the Securities, or (iii)
paid or agreed to pay to any person any compensation for soliciting another to
purchase any other securities of the Company.

(ii)           Disclosure.  The Company confirms that neither it nor any
other Person acting on its behalf has provided any of the Buyers or their
agents or counsel with any

 15
 

 

information that constitutes or could reasonably be expected to
constitute material, nonpublic information. 
The Company understands and confirms that each of the Buyers will rely
on the foregoing representations in effecting transactions in securities of the
Company.  All disclosure provided to the
Buyers regarding the Company and, its Subsidiaries, their business and the
transactions contemplated hereby, including the Schedules to this Agreement,
furnished by or on behalf of the Company is true and correct and does not
contain any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements made therein, in the light of
the circumstances under which they were made, not misleading.  Each press release issued by the Company or
its Subsidiaries during the twelve (12) months preceding the date of this
Agreement did not at the time of release contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.  No event or circumstance has occurred or
information exists with respect to the Company or any of its Subsidiaries or
its or their business, properties, prospects, operations or financial
conditions, which, under applicable law, rule or regulation, requires public
disclosure or announcement by the Company but which has not been so publicly
announced or disclosed.

(jj)           Acknowledgement
Regarding Buyers’ Trading Activity. 
Anything in this Agreement or elsewhere herein to the contrary
notwithstanding, but subject to compliance by the Buyers with applicable law
and the provisions of Section 4(t) hereto, it is understood and acknowledged by
the Company (i) that none of the Buyers have been asked to agree, nor has any
Buyer 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 Buyer, 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 Buyer, and counter parties in “derivative” transactions to which any such
Buyer is a party, directly or indirectly, presently may have a “short” position
in the Common Stock, and (iv) that each Buyer 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 Buyers 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 Conversion Shares deliverable with respect to Securities are being
determined and (b) such hedging activities (if any) could reduce the value of
the existing stockholders’ equity interests in the Company at and after the
time that the hedging activities are being conducted.

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

(ll)           Nothing contained in, or contemplated by, that certain
distribution agreement, dated as of August 11, 2006, between the Company and
Relativity Media, LLC (the “Relativity
Agreement”) could inhibit or prevent the Company from granting the
security interests contemplated by Section 4(p).

 16
 

 

4.             COVENANTS.

(a)           Best
Efforts.  Each party shall use its best
efforts timely to satisfy each of the conditions to be satisfied by it as
provided in Sections 6 and 7 of this Agreement.

(b)           Form
D and Blue Sky.  The Company agrees
to file a Form D with respect to the Securities as required under Regulation D
and to provide a copy thereof to each Buyer promptly after such filing.  The Company shall, on or before the Closing
Date, 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 Buyers at the Closing pursuant to this Agreement under applicable
securities or “Blue Sky” laws of the states of the United States (or to obtain
an exemption from such qualification), and shall provide evidence of any such
action so taken to the Buyers on or prior to the Closing Date.  The Company shall make all filings and
reports relating to the offer and sale of the Securities required under
applicable securities or “Blue Sky” laws of the states of the United States
following the Closing Date.

(c)           Reporting
Status.  Until the date on which the
Investors (as defined in the Registration Rights Agreement) shall have sold all
the Conversion Shares, the Interest Shares and Warrant Shares and none of the Notes or Warrants is
outstanding, (the “Reporting Period”),
the Company shall timely file all reports required to be filed with the SEC
pursuant to the 1934 Act, and the Company shall not terminate its status as an
issuer required to file reports under the 1934 Act even if the 1934 Act or the
rules and regulations thereunder would permit such termination.

(d)           Use of Proceeds. 
The Company will use the proceeds from the sale of the Securities for
general corporate purposes, and not for (A) except as set forth on Schedule
4(d), the repayment of any outstanding Indebtedness of the Company or any
of its Subsidiaries or (B) redemption or repurchase of any of its or its
Subsidiaries’ equity securities.

(e)           Financial
Information.  The Company agrees to
send the following to each Investor (as defined in the Registration Rights
Agreement) during the Reporting Period (i) unless the following are filed with
the SEC through EDGAR and are available to the public through the EDGAR system,
within one (1) Business Day after the filing thereof with the SEC, a copy of its
Annual Reports and Quarterly Reports on Form 10-K, 10-KSB, 10-Q or 10-QSB, any
interim reports or any consolidated balance sheets, income statements,
stockholders’ equity statements and/or cash flow statements for any period
other than annual, any Current Reports on Form 8-K and any registration
statements (other than on Form S-8) or amendments filed pursuant to the 1933
Act, (ii) on the same day as the release thereof, facsimile or e-mailed copies
of all press releases issued by the Company or any of its Subsidiaries, and
(iii) copies of any notices and other information made available or given to
the stockholders of the Company generally, contemporaneously with the making
available or giving thereof to the stockholders.  As used herein, “Business Day” means any day other than Saturday, Sunday or
other day on which commercial banks in The City of New York are authorized or
required by law to remain closed.

(f)            Listing.  The Company shall promptly secure the listing
of all of the Registrable Securities (as defined in the Registration Rights
Agreement) upon each national securities exchange and automated quotation
system, if any, upon which the Common Stock is

 17
 

 

then listed (subject to official notice of issuance) and shall
maintain, in accordance with the Notes and Warrants, such listing of all
Registrable Securities from time to time issuable under the terms of the
Transaction Documents.  The Company shall
maintain the Common Stocks’ authorization for quotation on the Principal
Market.  Neither the Company nor any of
its Subsidiaries shall take any action which would be reasonably expected to
result in the delisting or suspension of the Common Stock on the Principal
Market.  The Company shall pay all fees
and expenses in connection with satisfying its obligations under this Section
4(f).

(g)           Fees.  Subject to Section 8 below, at Closing, the
Company shall pay an expense allowance to Portside Growth and Opportunity Fund
(a Buyer) or its designee(s) (in addition to any other expense amounts paid to
any Buyer prior to the date of this Agreement) for all reasonable costs and
expenses incurred in connection with the transactions contemplated by the
Transaction Documents (including all reasonable legal fees and disbursements in
connection therewith, documentation and implementation of the transactions
contemplated by the Transaction Documents and due diligence in connection
therewith), in an amount not to exceed $45,000 
(in addition to any other expense amounts paid to any Buyer prior to the
date of this Agreement), which amount shall be withheld by such Buyer from its
Purchase Price at the Closing.  The
Company shall be responsible for the payment of any placement agent’s fees,
financial advisory fees, or broker’s commissions relating to or arising out of
the transactions contemplated hereby, including, without limitation, any fees
payable to the Agent.  The Company shall
pay, and hold each Buyer harmless against, any liability, loss or expense
(including, without limitation, reasonable attorney’s fees and out-of-pocket
expenses) arising in connection with any claim relating to any such payment.

(h)           Pledge
of Securities.  The Company
acknowledges and agrees that the Securities may be pledged by an Investor (as
defined in the Registration Rights Agreement) in connection with a bona fide
margin agreement or other loan or financing arrangement that is secured by the
Securities.  The pledge of Securities
shall not be deemed to be a transfer, sale or assignment of the Securities
hereunder, and no Investor effecting a pledge of Securities shall be required
to provide the Company with any notice thereof or otherwise make any delivery
to the Company pursuant to this Agreement or any other Transaction Document,
including, without limitation, Section 2(f) hereof; provided that an Investor
and its pledgee shall be required to comply with the provisions of Section 2(f)
hereof in order to effect a sale, transfer or assignment of Securities to such
pledgee.  The Company hereby agrees to
execute and deliver such documentation as a pledgee of the Securities may
reasonably request in connection with a pledge of the Securities to such
pledgee by an Investor.

(i)            Disclosure
of Transactions and Other Material Information.  On or before 8:30 a.m., New York City time,
on the first Business Day following the date of this Agreement, the Company
shall issue a press release and file a Current Report on Form 8-K describing
the terms of the transactions contemplated by the Transaction Documents in the
form required by the 1934 Act and attaching the material Transaction Documents
(including, without limitation, this Agreement (and all schedules to this
Agreement), the form of the Notes, the form of Warrant and the form of the
Registration Rights Agreement) as exhibits to such filing (including all attachments,
the “8-K Filing”).  From and after the filing of the 8-K Filing
with the SEC, no Buyer shall be in possession of any material, nonpublic
information received from the Company, any of its Subsidiaries or any of its
respective officers, directors, employees or agents,

 18
 

 

that is not disclosed in the 8-K Filing.  The Company shall not, and shall cause each
of its Subsidiaries and its and each of their respective officers, directors,
employees and agents, not to, provide any Buyer with any material, nonpublic
information regarding the Company or any of its Subsidiaries from and after the
filing of the 8-K Filing with the SEC without the express written consent of
such Buyer.  If a Buyer has, or believes
it has, received any such material, nonpublic information regarding the Company
or any of its Subsidiaries, it shall provide the Company with written notice
thereof.  The Company shall, within five
(5) Trading Days (as defined in the Notes) of receipt of such notice, make
public disclosure of such material, nonpublic information.  In the event of a breach of the foregoing
covenant by the Company, any of its Subsidiaries, or any of its or their
respective officers, directors, employees and agents, in addition to any other
remedy provided herein or in the Transaction Documents, a Buyer shall have the
right to make a public disclosure, in the form of a press release, public
advertisement or otherwise, of such material, nonpublic information without the
prior approval by the Company, its Subsidiaries, or any of its or their
respective officers, directors, employees or agents.  No Buyer shall have any liability to the
Company, its Subsidiaries, or any of its or their respective officers,
directors, employees, stockholders or agents for any such disclosure.  Subject to the foregoing, neither the
Company, its Subsidiaries nor any Buyer shall issue any press releases or any
other public statements with respect to the transactions contemplated hereby;
provided, however, that the Company shall be entitled, without the prior
approval of any Buyer, to make any press release or other public disclosure
with respect to such transactions (i) in substantial conformity with the 8-K
Filing and contemporaneously therewith and (ii) as is required by applicable
law and regulations (provided that in the case of clause (i) each Buyer shall
be consulted by the Company in connection with any such press release or other
public disclosure prior to its release). 
Without the prior written consent of any applicable Buyer, neither the
Company nor any of its Subsidiaries or affiliates shall disclose the name of
such Buyer in any filing, announcement, release or otherwise.

(j)            Restriction
on Redemption and Cash Dividends.  So
long as any Notes are outstanding, the Company shall not, directly or indirectly,
redeem, or declare or pay any cash dividend or distribution on, the Common
Stock without the prior express written consent of the holders of Notes
representing not less than a majority of the aggregate principal amount of the
then outstanding Notes.

(k)           Additional
Notes; Variable Securities; Dilutive Issuances.  So long as any Buyer beneficially owns any
Securities, the Company will not issue any Notes other than to the Buyers as
contemplated hereby and the Company shall not issue any other securities that
would cause a breach or default under the Notes.  For so long as any Notes or Warrants remain
outstanding, the Company shall not, in any manner, issue or sell any rights,
warrants or options to subscribe for or purchase Common Stock or directly or
indirectly convertible into or exchangeable or exercisable for Common Stock at
a price which varies or may vary with the market price of the Common Stock,
including by way of one or more reset(s) to any fixed price unless the
conversion, exchange or exercise price of any such security cannot be less than
the then applicable Conversion Price (as defined in the Notes) with respect to
the Common Stock into which any Note is convertible or the then applicable
Exercise Price (as defined in the Warrants) with respect to the Common Stock
into which any Warrant is exercisable. 
For so long as any Notes or Warrants remain outstanding, the Company
shall not, in any manner, enter into or affect any Dilutive Issuances (as defined
in the Notes) if the effect of such Dilutive Issuance is

 19
 

 

to cause the Company to be required to issue upon conversion of any
Note or exercise of any Warrant any shares of Common Stock in excess of that
number of shares of Common Stock which the Company may issue upon conversion of
the Notes and exercise of the Warrants without breaching the Company’s
obligations under the rules or regulations of the Principal Market.

(l)            Corporate
Existence.  So long as any Buyer
beneficially owns any Securities, the Company shall not be party to any
Fundamental Transaction (as defined in the Notes) unless the Company is in
compliance with the applicable provisions governing Fundamental Transactions
set forth in the Notes and the Warrants.

(m)          Reservation
of Shares.  The Company shall take
all action necessary to at all times have authorized, and reserved for the
purpose of issuance, no less than 150% of the sum of  the number of shares of Common Stock issuable
(i) upon conversion of the Notes issued at the Closing, (ii) as Interest Shares
pursuant to the terms of the Notes and (iii) upon exercise of the Warrants
issued at the Closing (without taking into account any limitations on the
Conversion of the Notes or exercise of the Warrants set forth in the Notes and
Warrants, respectively).

(n)           Conduct
of Business.  The business of the
Company and its Subsidiaries shall not be conducted in violation of any law,
ordinance or regulation of any governmental entity, except where such
violations would not result, either individually or in the aggregate, in a
Material Adverse Effect.

(o)           Additional
Issuances of Securities.

(i)            For purposes of
this Section 4(o), the following definitions shall apply.

(A)          “Convertible Securities” means any stock or securities (other
than Options) convertible into or exercisable or exchangeable for shares of
Common Stock.

(B)           “Options” means any rights, warrants or options to subscribe
for or purchase shares of Common Stock or Convertible Securities.

(C)           “Common Stock Equivalents” means, collectively, Options and
Convertible Securities.

(ii)           From the date hereof until the date that is 30 Trading
Days following the Effective Date (as defined in the Registration Rights
Agreement) (the “Trigger Date”),
the Company will not, directly or indirectly, file any registration statement
with the SEC other than the Registration statement (as defined in the
Registration Rights Agreement).  From the
date hereof until the Trigger Date, the Company will not, directly or
indirectly, offer, sell, grant any option to purchase, or otherwise dispose of
(or announce any offer, sale, grant or any option to purchase or other
disposition of) any of its or its Subsidiaries’ equity or equity equivalent
securities, including without limitation any debt, preferred stock or other
instrument or security that is, at any time during its life and under any
circumstances, convertible into or

 20
 

 

exchangeable or exercisable for shares of
Common Stock or Common Stock Equivalents (any such offer, sale, grant,
disposition or announcement being referred to as a “Subsequent Placement”).

(iii)          From the Trigger Date until the second anniversary of the
Closing Date, the Company will not, directly or indirectly, effect any
Subsequent Placement unless the Company shall have first complied with this
Section 4(o)(iii).

(A)          The Company shall
deliver to each Buyer an irrevocable written notice (the ”Offer Notice”) of any proposed or intended issuance or sale
or exchange (the ”Offer”) of the
securities being offered (the “Offered Securities”)
in a Subsequent Placement, which Offer Notice shall (w) identify and describe
the Offered Securities, (x) describe the price and other terms upon which
they are to be issued, sold or exchanged, and the number or amount of the
Offered Securities to be issued, sold or exchanged, (y) identify the
persons or entities (if known) to which or with which the Offered Securities
are to be offered, issued, sold or exchanged and (z) offer to issue and sell to
or exchange with such Buyers at least 30% of the Offered Securities allocated
among such Buyers (a) based on such Buyer’s pro rata portion of the aggregate
principal amount of Notes purchased hereunder (the “Basic Amount”),
and (b) with respect to each Buyer that elects to purchase its Basic Amount,
any additional portion of the Offered Securities attributable to the Basic Amounts
of other Buyers as such Buyer shall indicate it will purchase or acquire should
the other Buyers subscribe for less than their Basic Amounts (the “Undersubscription Amount”), which process shall be repeated
until the Buyers shall have an opportunity to subscribe for any remaining
Undersubscription Amount.

(B)           To accept an Offer,
in whole or in part, such Buyer must deliver a written notice to the Company
prior to the end of the tenth (10th) Business Day after such Buyer’s receipt
of the Offer Notice (the “Offer Period”),
setting forth the portion of such Buyer’s Basic Amount that such Buyer elects
to purchase and, if such Buyer shall elect to purchase all of its Basic Amount,
the Undersubscription Amount, if any, that such Buyer elects to purchase (in
either case, the “Notice of Acceptance”);
provided, however, that such Buyers may not accept an Offer by
electing to purchase less than 5% of the Offered Securities on an aggregate
basis.  If the Basic Amounts subscribed
for by all Buyers are less than the total of all of the Basic Amounts, then
each Buyer who has set forth an Undersubscription Amount in its Notice of
Acceptance shall be entitled to purchase, in addition to the Basic Amounts
subscribed for, the Undersubscription Amount it has subscribed for; provided,
however, that if the Undersubscription Amounts subscribed for exceed the
difference between the total of all the Basic Amounts and the Basic Amounts
subscribed for (the “Available
Undersubscription Amount”), each Buyer who has subscribed for any
Undersubscription Amount shall be entitled to purchase only that portion of the
Available Undersubscription Amount as the Basic Amount of such Buyer bears to
the total Basic Amounts of all Buyers that have subscribed for
Undersubscription Amounts, subject to rounding by the Company to the extent its
deems reasonably necessary.

(C)           The Company shall
have fifteen (15) Business Days from the expiration of the Offer Period above
to offer, issue, sell or exchange all or any

 21
 

 

part of such
Offered Securities as to which a Notice of Acceptance has not been given by the
Buyers (the “Refused Securities”),
but only to the offerees described in the Offer Notice (if so described
therein) and only upon terms and conditions (including, without limitation,
unit prices and interest rates) that are not more favorable to the acquiring
person or persons or less favorable to the Company than those set forth in the
Offer Notice.

(D)          In the event the
Company shall propose to sell less than all the Refused Securities (any such sale
to be in the manner and on the terms specified in Section 4(o)(iii)(C) above),
then each Buyer may, at its sole option and in its sole discretion, reduce the
number or amount of the Offered Securities specified in its Notice of
Acceptance to an amount that shall be not less than the number or amount of the
Offered Securities that such Buyer elected to purchase pursuant to Section
4(o)(iii)(B) above multiplied by a fraction, (i) the numerator of which shall
be the number or amount of Offered Securities the Company actually proposes to
issue, sell or exchange (including Offered Securities to be issued or sold to
Buyers pursuant to Section 4(o)(iii)(C) above prior to such reduction) and (ii)
the denominator of which shall be the original amount of the Offered
Securities.  In the event that any Buyer
so elects to reduce the number or amount of Offered Securities specified in its
Notice of Acceptance, the Company may not issue, sell or exchange more than the
reduced number or amount of the Offered Securities unless and until such
securities have again been offered to the Buyers in accordance with
Section 4(o)(iii)(A) above.

(E)           Upon the closing of
the issuance, sale or exchange of all or less than all of the Refused
Securities, the Buyers shall acquire from the Company, and the Company shall
issue to the Buyers, the number or amount of Offered Securities specified in
the Notices of Acceptance, as reduced pursuant to Section 4(p)(iii)(C) above if
the Buyers have so elected, upon the terms and conditions specified in the
Offer.  Notwithstanding anything to the
contrary contained in this Agreement, if the Company does not consummate the
closing of the issuance, sale or exchange of all or less than all of the
Refused Securities within fifteen (15) Business Days of the expiration of the
Offer Period, the Company shall issue to the Buyers the number or amount of
Offered Securities specified in the Notices of Acceptance, as reduced pursuant
to Section 4(p)(iii)(D) above if the Buyers have so elected, upon the terms and
conditions specified in the Offer.  The
purchase by the Buyers of any Offered Securities is subject in all cases to the
preparation, execution and delivery by the Company and the Buyers of a purchase
agreement relating to such Offered Securities reasonably satisfactory in form
and substance to the Buyers and their respective counsel.

(F)           Any Offered Securities not acquired
by the Buyers or other persons in accordance with Section 4(o)(iii)(C) above
may not be issued, sold or exchanged until they are again offered to the Buyers
under the procedures specified in this Agreement.

(iv)          The restrictions contained in subsections (ii) and (iii) of
this Section 4(o) shall not apply in connection with the issuance of any
Excluded Securities (as defined in the Notes).

 22
 

 

(p)           Future Security.

(i)            At such time as the Sonopress Indebtedness (as defined in
the Notes) has been repaid in full or is otherwise terminated, cancelled or
forgiven (the “Sonopress Termination”),
the Company shall use its best efforts to promptly (and shall promptly cause
its Subsidiaries to) secure the Company’s liabilities and obligations under the
Notes by granting to the Buyers a second priority perfected security interest
in all of the assets and properties of the Company (and its Subsidiaries), including
(without limitation) the capital stock and assets and properties of each of the
Company’s Subsidiaries, junior solely to the lien securing the Permitted Senior
Indebtedness (collectively, the “Second Priority Interests”),
which Second Priority Interests shall be evidenced by documentation reasonably
satisfactory to the Buyers.

(ii)           The Company shall not amend, modify
or refinance any of its Permitted Senior Indebtedness (as defined in the Notes)
unless, prior to or contemporaneously therewith, the Company shall have secured
its liabilities and obligations under the Notes by (A) in the event that the
Sonopress Termination shall have occurred, granting (and causing its
Subsidiaries to grant) the Second Priority Interests to the Buyers, or (B) in
the event that the Sonopress Termination shall not then have occurred, by
granting (and by causing its Subsidiaries to grant) to the Buyers a third
priority perfected security interest in all of the assets and properties of the
Company (and its Subsidiaries), including (without limitation) the capital
stock and assets and properties of each of the Company’s Subsidiaries, junior
solely to the liens securing the Permitted Senior Indebtedness and the
Sonopress Indebtedness (collectively, the “Third Priority Interests”), and shall evidence the security
interest contemplated by clauses (A) or (B), as applicable, by documentation
reasonably satisfactory to the Buyers.

(iii)          Notwithstanding anything to the
contrary contained in Sections 4(p)(i) and 4(p)(ii) hereof, the Company (and
its Subsidiaries) shall use its best efforts to grant (and to cause its
Subsidiaries to grant) the Third Priority Interests to the Buyers within 120
days after the date of this Agreement.

(iv)          Notwithstanding anything to the
contrary contained in Sections 4(p)(i), 4(p)(ii) and 4(p)(iii) hereof, (A) the
Company (and its Subsidiaries) shall not grant the Second Priority Interests to
any Buyer, nor shall any Buyer accept any such grant, unless each Buyer and
Wells Fargo Foothill, Inc. (“WFF”)
shall have entered into a debt and lien subordination agreement in form and
substance acceptable to WFF in its sole and absolute discretion, and (B) the
Company (and its Subsidiaries) shall not grant the Third Priority Interests to
any Buyer, nor shall any Buyer accept any such grant, unless (x) each Buyer and
WFF shall have entered into a debt and lien subordination agreement in form and
substance satisfactory to WFF in its sole and absolute discretion, and (y) to
the extent such consent is required under the Replication Agreement, dated as
of June 30, 2006, between Sonopress LLC and the Company, WFF and the Company
shall have received the consent of Sonopress LLC to the granting of the Third
Priority Interests, in form and substance satisfactory to WFF in its sole and
absolute discretion, which subordination agreement and/or consent, as
contemplated by clauses (A) and (B) hereof, the Company shall use its best
efforts to obtain.

 23

 

 

(q)           The Company shall not in any way amend or modify the
Relativity Agreement in a manner that could inhibit or prevent the Company from
granting the security interests contemplated by Section 4(p).

(r)            Within ten (10) days after the Closing Date, the Company
shall deliver the Buyer a certificate evidencing the Company’s qualification as
a foreign corporation and good standing issued by the Secretary of State (or
comparable office) of each jurisdiction in which the Company conducts business,
each as of a date within 10 days of the Closing Date.

5.             REGISTER;
TRANSFER AGENT INSTRUCTIONS.

(a)           Register.  The Company shall maintain at its principal
executive offices (or such other office or agency of the Company as it may
designate by notice to each holder of Securities), a register for the Notes and
the Warrants, in which the Company shall record the name and address of the
Person in whose name the Notes and the Warrants have been issued (including the
name and address of each transferee), the principal amount of Notes held by
such Person, the number of Conversion Shares issuable upon conversion of the
Notes, and Warrant Shares issuable upon exercise of the Warrants held by such
Person.  The Company shall keep the
register open and available at all times during business hours for inspection
of any Buyer or its legal representatives.

(b)           Transfer
Agent Instructions.  The Company
shall issue irrevocable instructions to its transfer agent, and any subsequent
transfer agent, to issue certificates or credit shares to the applicable
balance accounts at The Depository Trust Company (“DTC”), registered in the name of each Buyer or its
respective nominee(s), for the Conversion Shares, the Interest Shares and the
Warrant Shares issued at the Closing or upon conversion of the Notes or
exercise of the Warrants in such amounts as specified from time to time by each
Buyer to the Company upon conversion of the Notes or exercise of the Warrants
in the form of Exhibit D attached hereto (the “Irrevocable
Transfer Agent Instructions”). 
The Company warrants that no instruction other than the Irrevocable
Transfer Agent Instructions referred to in this Section 5(b), and stop transfer
instructions to give effect to Section 2(g) hereof, will be given by the
Company to its transfer agent, and that the Securities shall otherwise be
freely transferable on the books and records of the Company as and to the
extent provided in this Agreement and the other Transaction Documents.  If a Buyer effects a sale, assignment or
transfer of the Securities in accordance with Section 2(f), the Company shall
permit the transfer and shall promptly instruct its transfer agent to issue one
or more certificates or credit shares to the applicable balance accounts at DTC
in such name and in such denominations as specified by such Buyer to effect
such sale, transfer or assignment.  In
the event that such sale, assignment or transfer involves Conversion Shares,
the Interest Shares or Warrant Shares sold, assigned or transferred pursuant to
an effective registration statement or pursuant to Rule 144, the transfer agent
shall issue such Securities to the Buyer, assignee or transferee, as the case
may be, without any restrictive legend. 
The Company acknowledges that a breach by it of its obligations
hereunder will cause irreparable harm to a Buyer.  Accordingly, the Company acknowledges that
the remedy at law for a breach of its obligations under this Section 5(b) will
be inadequate and agrees, in the event of a breach or threatened breach by the
Company of the provisions of this Section 5(b), that a Buyer shall be entitled,
in addition to all other available remedies, to an order and/or injunction
restraining any breach and requiring immediate issuance and transfer, without
the necessity of showing economic loss and without any bond or other security
being required.

 24
 

 

6.             CONDITIONS
TO THE COMPANY’S OBLIGATION TO SELL.  
The obligation of the Company hereunder to issue and sell the Notes and
the related Warrants to each Buyer at the Closing is subject to the
satisfaction, at or before the Closing Date, of each of the following
conditions, provided that these conditions are for the Company’s sole benefit
and may be waived by the Company at any time in its sole discretion by
providing each Buyer with prior written notice thereof:

(a)           Such
Buyer shall have executed each of the Transaction Documents to which it is a
party and delivered the same to the Company

(b)           Such
Buyer and each other Buyer shall have delivered to the Company the Purchase
Price (less, in the case of Portside Growth and Opportunity Fund, the amounts
withheld pursuant to Section 4(g)) for the Notes and the related Warrants being
purchased by such Buyer at the Closing by wire transfer of immediately
available funds pursuant to the wire instructions provided by the Company.

(c)           The
representations and warranties of such Buyer shall be true and correct in all
material respects (except for those representations and warranties that are
qualified by materiality or Material Adverse Effect, which shall be true and
correct in all respects) as of the date when made and as of the Closing Date as
though made at that time (except for representations and warranties that speak
as of a specific date, which shall be true and correct as of such specified
date), and such Buyer shall have performed, satisfied and complied in all
material respects with the covenants, agreements and conditions required by
this Agreement to be performed, satisfied or complied with by such Buyer at or
prior to the Closing Date.

7.             CONDITIONS
TO EACH BUYER’S OBLIGATION TO PURCHASE. 
The obligation of each Buyer hereunder to purchase the Notes and the related Warrants at the Closing is subject to the
satisfaction, at or before the Closing Date, of each of the following
conditions, provided that these conditions are for each Buyer’s sole benefit
and may be waived by such Buyer at any time in its sole discretion by providing
the Company with prior written notice thereof:

(a)           The
Company shall have duly executed and delivered to such Buyer (i) each of the
Transaction Documents and (ii) the Notes (allocated in such principal amounts
as such Buyer shall request), being purchased by such Buyer at the Closing
pursuant to this Agreement, and (iii) the related Warrants (allocated in such
amounts as such Buyer shall request) being purchased by such Buyer at the
Closing pursuant to this Agreement.

(b)           Such
Buyer shall have received the opinion of Greenberg Traurig, LLP, the Company’s
outside counsel, dated as of the Closing Date, in substantially the form of Exhibit
E attached hereto.

(c)           The
Company shall have delivered to such Buyer a copy of the Irrevocable Transfer
Agent Instructions, in the form of Exhibit D attached hereto, which
instructions shall have been delivered to and acknowledged in writing by the
Company’s transfer agent.

 25
 

 

(d)           The
Company shall have delivered to such Buyer a certificate evidencing the
formation and good standing of the Company and each of its Subsidiaries in such
entity’s jurisdiction of formation issued by the Secretary of State (or
comparable office) of such jurisdiction, as of a date within 10 days of the
Closing Date.

(e)           [Reserved]

(f)            The
Company shall have delivered to such Buyer a certified copy of the Certificate
of Incorporation as certified by the Secretary of State of the State of Delaware
within 10 days of the Closing Date.

(g)           The
Company shall have delivered to such Buyer a certificate, executed by the
Secretary of the Company and dated as of the Closing Date, as to (i) the
resolutions consistent with Section 3(b) as adopted by the Company’s Board of
Directors in a form reasonably acceptable to such Buyer, (ii) the Certificate
of Incorporation and (iii) the Bylaws, each as in effect at the Closing in the
form attached hereto as Exhibit F.

(h)           The
representations and warranties of the Company shall be true and correct in all
material respects (except for those representations and warranties that are
qualified by materiality or Material Adverse Effect, which shall be true and
correct in all respects) as of the date when made and as of the Closing Date as
though made at that time (except for representations and warranties that speak
as of a specific date, which shall be true and correct as of such specified
date) and the Company shall have performed, satisfied and complied in all material
respects with the covenants, agreements and conditions required by the
Transaction Documents to be performed, satisfied or complied with by the
Company at or prior to the Closing Date. 
Such Buyer shall have received a certificate, executed by the Chief Executive
Officer of the Company, dated as of the Closing Date, to the foregoing effect
and as to such other matters as may be reasonably requested by such Buyer in
the form attached hereto as Exhibit G.

(i)            The
Company shall have delivered to such Buyer a letter from the Company’s transfer
agent certifying the number of shares of Common Stock outstanding as of a date
within five days of the Closing Date.

(j)            The
Common Stock (i) shall be designated for quotation or listed on the Principal
Market and (ii) shall not have been suspended, as of the Closing Date, by the
SEC or the Principal Market from trading on the Principal Market nor shall
suspension by the SEC or the Principal Market have been threatened, as of the
Closing Date, either (A) in writing by the SEC or the Principal Market or (B)
by falling below the minimum listing maintenance requirements of the Principal
Market.

(k)           The
Company shall have obtained all governmental, regulatory or third party
consents and approvals, if any, necessary for the sale of the Securities.

(l)            The
Company shall have delivered to such Buyer such other documents relating to the
transactions contemplated by this Agreement as such Buyer or its counsel may
reasonably request.

 26
 

 

8.             TERMINATION.  In the event that the Closing shall not have
occurred with respect to a Buyer on or before five (5) Business Days from the
date hereof due to the Company’s or such Buyer’s failure to satisfy the
conditions set forth in Sections 6 and 7 above (and the nonbreaching party’s
failure to waive such unsatisfied condition(s)), the nonbreaching party shall
have the option to terminate this Agreement with respect to such breaching
party at the close of business on such date without liability of any party to
any other party; provided, however, if this Agreement is terminated pursuant to
this Section 8, the Company shall remain obligated to reimburse the
non-breaching Buyers for the expenses described in Section 4(g) above.

9.             MISCELLANEOUS.

(a)           Governing
Law; Jurisdiction; Jury Trial.  All
questions concerning the construction, validity, enforcement and interpretation
of this Agreement shall be governed by the internal laws of the State of New
York, without giving effect to any choice of law or conflict of law provision
or rule (whether of the State of New York or any other jurisdictions) that
would cause the application of the laws of any jurisdictions other than the
State 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, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is brought in an inconvenient forum or that the
venue of such suit, action or proceeding is improper.  Each party hereby irrevocably waives personal
service of process and consents to process being served in any such suit,
action or proceeding by mailing a copy thereof to such party at the address for
such notices to it under this Agreement and agrees that such service shall constitute
good and sufficient service of process and notice thereof.  Nothing contained herein shall be deemed to
limit in any way any right to serve process in any manner permitted by law.  EACH PARTY
HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A
JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH
OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.

(b)           Counterparts.  This Agreement may be executed in two or more
identical counterparts, all of which shall be considered one and the same
agreement and shall become effective when counterparts have been signed by each
party and delivered to the other party; provided that a facsimile signature
shall be considered due execution and shall be binding upon the signatory
thereto with the same force and effect as if the signature were an original,
not a facsimile signature.

(c)           Headings.  The headings of this Agreement are for
convenience of reference and shall not form part of, or affect the interpretation
of, this Agreement.

(d)           Severability.  If any provision of this Agreement shall be
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement in that jurisdiction or the validity or
enforceability of any provision of this Agreement in any other jurisdiction.

 27
 

 

(e)           Entire
Agreement; Amendments.  This
Agreement and the other Transaction Documents supersede all other prior oral or
written agreements between the Buyers, the Company, their affiliates and
Persons acting on their behalf with respect to the matters discussed herein,
and this Agreement, the other Transaction Documents and the instruments
referenced herein and therein contain the entire understanding of the parties
with respect to the matters covered herein and therein and, except as
specifically set forth herein or therein, neither the Company nor any Buyer
makes any representation, warranty, covenant or undertaking with respect to such
matters.  No provision of this Agreement
may be amended other than by an instrument in writing signed by the Company and
the holders of at least a majority of the aggregate number of Registrable
Securities issued and issuable hereunder and under the Notes, and any amendment
to this Agreement made in conformity with the provisions of this Section 9(e)
shall be binding on all Buyers and holders of Securities as applicable.  No provision hereof may be waived other than
by an instrument in writing signed by the party against whom enforcement is
sought.  No such amendment shall be
effective to the extent that it applies to less than all of the holders of the
applicable Securities then outstanding. 
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 also is offered to all of the parties
to the Transaction Documents, holders of Notes or holders of the Warrants, as
the case may be.  The Company has not,
directly or indirectly, made any agreements with any Buyers relating to the
terms or conditions of the transactions contemplated by the Transaction
Documents except as set forth in the Transaction Documents.  Without limiting the foregoing, the Company
confirms that, except as set forth in this Agreement, no Buyer has made any
commitment or promise or has any other obligation to provide any financing to
the Company or otherwise.

(f)            Notices.  Any notices, consents, waivers or other communications
required or permitted to be given under the terms of this Agreement must be in
writing and will be deemed to have been delivered:  (i) upon receipt, when delivered personally;
(ii) upon receipt, when sent by facsimile (provided confirmation of
transmission is mechanically or electronically generated and kept on file by
the sending party); or (iii) one Business Day after deposit with an overnight
courier service, in each case properly addressed to the party to receive the
same.  The addresses and facsimile
numbers for such communications shall be:

If
to the Company:

Image Entertainment, Inc.

20525 Nordhoff Street,
Suite 200

Chatsworth, California
91311

Telephone:            (818) 407-9100

Facsimile:             (818) 407-9331

Attention:  Jeff Framer

with a copy to:

Greenberg Traurig, LLP

50 Town Center Drive
#1700

Costa Mesa, California
92626

Telephone
714-708-6510

 28
 

 

Facsimile 714-708-6501

Attention: Raymond A. Lee

John C. Kirkland

If to the Transfer
Agent:

Computershare
Investor Services

350 Indiana Street, Suite 800
Golden, CO 80401

Telephone: (303) 262-0710

Facsimile: (303) 262-0700

Attention: Kathy Heagerty

If to a Buyer, to
its address and facsimile number set forth on the Schedule of Buyers, with
copies to such Buyer’s representatives as set forth on the Schedule of Buyers,

with a copy (for
informational purposes) to:

Schulte Roth & Zabel
LLP

919 Third Avenue

New York, New York 10022

Telephone: (212) 756-2000

Facsimile: (212) 593-5955

Attention: Eleazer N. Klein, Esq.

or to such other
address and/or facsimile number and/or to the attention of such other Person as
the recipient party has specified by written notice given to each other party
five (5) days prior to the effectiveness of such change.  Written confirmation of receipt (A) given by
the recipient of such notice, consent, waiver or other communication, (B)
mechanically or electronically generated by the sender’s facsimile machine
containing the time, date, recipient facsimile number and an image of the first
page of such transmission or (C) provided by an overnight courier service shall
be rebuttable evidence of personal service, receipt by facsimile or receipt
from an overnight courier service in accordance with clause (i), (ii) or (iii)
above, respectively.

(g)           Successors
and Assigns.  This Agreement shall be
binding upon and inure to the benefit of the parties and their respective
successors and assigns, including any purchasers of the Notes or the
Warrants.  The Company shall not assign
this Agreement or any rights or obligations hereunder without the prior written
consent of the holders of at least a majority of the aggregate number of
Registrable Securities issued and issuable hereunder, including by way of a
Fundamental Transaction (unless the Company is in compliance with the
applicable provisions governing Fundamental Transactions set forth in the Notes
and the Warrants).  A Buyer may assign
some or all of its rights hereunder without the consent of the Company, in
which event such assignee shall be deemed to be a Buyer hereunder with respect
to such assigned rights

 29
 

 

(h)           No
Third Party Beneficiaries.  This
Agreement is intended for the benefit of the parties hereto and their
respective permitted successors and assigns, and is not for the benefit of, nor
may any provision hereof be enforced by, any other Person.

(i)            Survival.  Unless this Agreement is terminated under
Section 8, the representations and warranties of the Company and the Buyers
contained in Sections 2 and 3, and the agreements and covenants set forth in
Sections 4, 5 and 9 shall survive the Closing. 
Each Buyer shall be responsible only for its own representations,
warranties, agreements and covenants hereunder.

(j)            Further
Assurances.  Each party shall do and
perform, or cause to be done and performed, all such further acts and things,
and shall execute and deliver all such other agreements, certificates,
instruments and documents, as any other party may reasonably request in order
to carry out the intent and accomplish the purposes of this Agreement and the
consummation of the transactions contemplated hereby.

(k)           Indemnification.  In consideration of each Buyer’s execution
and delivery of the Transaction Documents and acquiring the Securities
thereunder and in addition to all of the Company’s other obligations under the
Transaction Documents, the Company shall defend, protect, indemnify and hold
harmless each Buyer and each other holder of the Securities and all of their
stockholders, partners, members, officers, directors, employees and direct or
indirect investors and any of the foregoing Persons’ agents or other
representatives (including, without limitation, those retained in connection
with the transactions contemplated by this Agreement) (collectively, the “Indemnitees”) from and against any and all actions, causes
of action, suits, claims, losses, costs, penalties, fees, liabilities and
damages, and expenses in connection therewith (irrespective of whether any such
Indemnitee is a party to the action for which indemnification hereunder is
sought), and including reasonable attorneys’ fees and disbursements (the “Indemnified Liabilities”), incurred by any Indemnitee as a
result of, or arising out of, or relating to (a) any misrepresentation or
breach of any representation or warranty made by the Company in the Transaction
Documents or any other certificate, instrument or document contemplated hereby
or thereby, (b) any breach of any covenant, agreement or obligation of the
Company contained in the Transaction Documents or any other certificate,
instrument or document contemplated hereby or thereby or (c) any cause of
action, suit or claim brought or made against such Indemnitee by a third party
(including for these purposes a derivative action brought on behalf of the
Company) and arising out of or resulting from (i) the execution, delivery, performance
or enforcement of the Transaction Documents or any other certificate,
instrument or document contemplated hereby or thereby, (ii) any transaction
financed or to be financed in whole or in part, directly or indirectly, with
the proceeds of the issuance of the Securities, (iii) any disclosure made by
such Buyer pursuant to Section 4(i), or (iv) the status of such Buyer or holder
of the Securities as an investor in the Company pursuant to the transactions
contemplated by the Transaction Documents. 
To the extent that the foregoing undertaking by the Company may be
unenforceable for any reason, the Company shall make the maximum contribution
to the payment and satisfaction of each of the Indemnified Liabilities that is
permissible under applicable law.  Except
as otherwise set forth herein, the mechanics and procedures with respect to the
rights and obligations under this Section 9(k) shall be the same as those set
forth in Section 6 of the Registration Rights Agreement.

 30
 

 

(l)            No
Strict Construction.  The language
used in this Agreement will be deemed to be the language chosen by the parties
to express their mutual intent, and no rules of strict construction will be
applied against any party.

(m)          Remedies.  Each Buyer and each holder of the Securities
shall have all rights and remedies set forth in the Transaction Documents and
all rights and remedies which such holders have been granted at any time under
any other agreement or contract and all of the rights which such holders have
under any law.  Any Person having any
rights under any provision of this Agreement shall be entitled to enforce such
rights specifically (without posting a bond or other security), to recover
damages by reason of any breach of any provision of this Agreement and to
exercise all other rights granted by law. 
Furthermore, the Company recognizes that in the event that it fails to
perform, observe, or discharge any or all of its obligations under the
Transaction Documents, any remedy at law may prove to be inadequate relief to
the Buyers.  The Company therefore agrees
that the Buyers shall be entitled to seek temporary and permanent injunctive
relief in any such case without the necessity of proving actual damages and
without posting a bond or other security.

(n)           Rescission
and Withdrawal Right. 
Notwithstanding anything to the contrary contained in (and without
limiting any similar provisions of) the Transaction Documents, whenever any
Buyer 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 Buyer 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

(o)           Payment
Set Aside.  To the extent that the
Company makes a payment or payments to the Buyers hereunder or pursuant to any
of the other Transaction Documents or the Buyers enforce or exercise their rights
hereunder or thereunder, and such payment or payments or the proceeds of such
enforcement or exercise or any part thereof are subsequently invalidated,
declared to be fraudulent or preferential, set aside, recovered from, disgorged
by or are required to be refunded, repaid or otherwise restored to the Company,
a trustee, receiver or any other Person under any law (including, without
limitation, any bankruptcy law, foreign, 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.

(p)           Independent
Nature of Buyers’ Obligations and Rights. 
The obligations of each Buyer under any Transaction Document are several
and not joint with the obligations of any other Buyer, and no Buyer shall be
responsible in any way for the performance of the obligations of any other
Buyer under any Transaction Document. 
Nothing contained herein or in any other Transaction Document, and no
action taken by any Buyer pursuant hereto or thereto, shall be deemed to
constitute the Buyers as, and the Company acknowledges that the Buyers do not
so constitute, a partnership, an association, a joint venture or any other kind
of entity, or create a presumption that the Buyers are in any way acting in
concert or as a group, and the Company will not assert any such claim with
respect to such obligations or the transactions contemplated by the Transaction
Documents and the Company acknowledges that the Buyers are not acting in
concert or as a group with respect to such

 31
 

 

obligations or the transactions contemplated by the Transaction
Documents.  The Company acknowledges and
each Buyer confirms that it has independently participated in the negotiation
of the transaction contemplated hereby with the advice of its own counsel and
advisors.  Each Buyer shall be entitled
to independently protect and enforce its rights, including, without limitation,
the rights arising out of this Agreement or out of any other Transaction
Documents, and it shall not be necessary for any other Buyer to be joined as an
additional party in any proceeding for such purpose.

(q)           Individual
Buyer.   Notwithstanding anything in
this agreement to the contrary, or any references to “Buyers” herein, Portside
Growth and Opportunity Fund acknowledges and the Company confirms that Portside
Growth and Opportunity Fund is the only Buyer party to the transactions
contemplated by this Agreement.

[Signature
Page Follows]

 32

 

IN
WITNESS WHEREOF, each Buyer and the Company have caused their
respective signature page to this Securities Purchase Agreement to be duly
executed as of the date first written above.

	
  

  	
   

  	
  COMPANY:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  IMAGE ENTERTAINMENT, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  /s/ MARTIN W. GREENWALD

  	
   

  
	
   

  	
   

  	
   

  	
  Name:

  	
  Martin W. Greenwald

  
	
   

  	
   

  	
   

  	
  Title:

  	
  President and CEO

  
						

 

[Signature Page to
Securities Purchase Agreement]

 

IN
WITNESS WHEREOF, each Buyer and the Company have caused their
respective signature page to this Securities Purchase Agreement to be duly
executed as of the date first written above.

	
  

  	
   

  	
  BUYERS:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  PORTSIDE GROWTH AND OPPORTUNITY

  FUND

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  /s/ JEFF SMITH

  	
   

  
	
   

  	
   

  	
   

  	
  Name:

  	
  Jeff Smith

  
	
   

  	
   

  	
   

  	
  Title:

  	
  Authorized Signatory

  
						

 

[Signature Page to
Securities Purchase Agreement]

 

SCHEDULE OF BUYERS

	
  (1)

  	
   

  	
  (2)

  	
   

  	
  (3)

  	
   

  	
  (4)

  	
   

  	
  (5)

  	
   

  	
  (5)

  
	
  Buyer

  	
   

  	
  Address and Facsimile Number

  	
   

  	
  Principal

  Amount of

  Notes

  	
   

  	
  Number of

  Warrant

  Shares

  	
   

  	
  Purchase Price

  	
   

  	
  Legal Representative’s

  Address and Facsimile Number

  
	
  Portside Growth and Opportunity Fund

  	
   

  	
  c/o Ramius Capital Group, L.L.C.

  666 Third Avenue, 26th Floor

  New York, New York 10017 

  Attention: Jeffrey Smith 

  Owen Littman 

  Facsimile: (212) 201-4802 

  (212) 845-7995 

  Telephone: (212) 845-7955 

  (212) 201-4841 

  Residence: Cayman Islands

  	
   

  	
  $

  	
  17,000,000

  	
   

  	
  1,000,000

  	
   

  	
  $

  	
  17,000,000

  	
   

  	
  Schulte Roth & Zabel LLP

  919 Third Avenue

  New York, New York 10022 

  Attention: Eleazer Klein, Esq. 

  Facsimile:  (212) 593-5955 

  Telephone: (212) 756-2376

  
													

 

 

EXHIBITS

	
  Exhibit A

  	
   

  	
  Form of Notes

  
	
  Exhibit B

  	
   

  	
  Form of Warrant

  
	
  Exhibit C

  	
   

  	
  Form of Registration Rights Agreement

  
	
  Exhibit D

  	
   

  	
  Form of Irrevocable Transfer Agent Instructions

  
	
  Exhibit E

  	
   

  	
  Form of Opinion of Company’s Counsel

  
	
  Exhibit F

  	
   

  	
  Form of Secretary’s Certificate

  
	
  Exhibit G

  	
   

  	
  Form of Officers Certificate

  

 

SCHEDULES

	
  Schedule 3(a)

  	
   

  	
  Subsidiaries

  
	
  Schedule 3(l)

  	
   

  	
  Absence of Certain Changes

  
	
  Schedule 3(q)

  	
   

  	
  Transactions with Affiliates

  
	
  Schedule 3(r)

  	
   

  	
  Equity Capitalization

  
	
  Schedule 3(s)

  	
   

  	
  Indebtedness and Other Contracts

  
	
  Schedule 3(t)

  	
   

  	
  Absence of Litigation

  
	
  Schedule 3(w)

  	
   

  	
  Title

  
	
  Schedule 3(cc)

  	
   

  	
  Ranking

  
	
  Schedule 4(d)

  	
   

  	
  Use of ProceedsExhibit
10.2

[FORM
OF SENIOR CONVERTIBLE NOTE]

NEITHER
THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE
SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES
LAWS.  THE SECURITIES MAY NOT BE OFFERED
FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR (B) AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT
REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO
RULE 144 OR RULE 144A UNDER SAID ACT. 
NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN
CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING
ARRANGEMENT SECURED BY THE SECURITIES. 
ANY TRANSFEREE OF THIS NOTE SHOULD CAREFULLY REVIEW THE TERMS OF THIS
NOTE, INCLUDING SECTIONS 3(c)(iii) AND 18(a) HEREOF.  THE PRINCIPAL AMOUNT REPRESENTED BY THIS NOTE
AND, ACCORDINGLY, THE SECURITIES ISSUABLE UPON CONVERSION HEREOF MAY BE LESS
THAN THE AMOUNTS SET FORTH ON THE FACE HEREOF PURSUANT TO SECTION 3(c)(iii) OF
THIS NOTE.

IMAGE
ENTERTAINMENT, INC.

SENIOR
CONVERTIBLE NOTE

	
  Issuance Date: August 30, 2006

  	
   

  	
  Original Principal Amount: U.S. $17,000,000.00

  

 

FOR VALUE RECEIVED, Image Entertainment,
Inc., a Delaware corporation (the “Company”),
hereby promises to pay to the order of PORTSIDE GROWTH AND OPPORTUNITY FUND or
registered assigns (“Holder”) the
amount set out above as the Original Principal Amount (as reduced pursuant to
the terms hereof pursuant to redemption, conversion or otherwise, the “Principal”) when due, whether upon the
Maturity Date (as defined below), on any Installment Date with respect to the
Installment Amount due on such Installment Date (each, as defined herein),
acceleration, redemption or otherwise (in each case in accordance with the
terms hereof) and to pay interest (“Interest”)
on any outstanding Principal at the rate of seven and seven-eighths percent
(7.875%) per annum (the “Interest Rate”),
from the date set out above as the Issuance Date (the “Issuance  Date”)
until the same becomes due and payable, whether upon an Interest Date (as
defined below), any Installment Date or, the Maturity Date, acceleration,
conversion, redemption or otherwise (in each case in accordance with the terms
hereof).  This Senior Convertible Note
(including all Senior Convertible Notes issued in exchange, transfer or
replacement hereof, this “Note”)
is one of an issue of Senior Convertible Notes issued pursuant to the
Securities Purchase Agreement (as defined below) on the Closing Date
(collectively, the “Notes” and
such other Senior Convertible Notes, the “Other
Notes”).  Certain capitalized terms used herein are
defined in Section 28.

 

(1)           PAYMENTS OF
PRINCIPAL.  On the Maturity Date, the
Company shall pay to the Holder an amount in cash representing all outstanding
Principal, accrued and unpaid Interest and accrued and unpaid Late Charges, if
any, on such Principal and Interest.  The
“Maturity  Date” shall be August 30, 2011, as may be
extended at the option of the Holder (i) in the event that, and for so long as,
an Event of Default (as defined in Section 4(a)) shall have occurred and be
continuing on the Maturity Date (as may be extended pursuant to this Section 1)
or any event that shall have occurred and be continuing that with the passage
of time and the failure to cure would result in an Event of Default and (ii)
through the date that is ten (10) Business Days after the consummation of a
Change of Control in the event that a Change of Control is publicly announced
or a Change of Control Notice (as defined in Section 5(b)) is delivered prior
to the Maturity Date.  On each
Installment Date, if the Holder should deliver an Installment Notice, the
Company shall pay to the Holder an amount equal to the Installment Amount due
on such Installment Date in accordance with Section 8.  Other than as specifically permitted by the
Note, the Company may not prepay any portion of the outstanding Principal,
accrued and unpaid Interest or accrued and unpaid Late Charges, if any, on
Principal and Interest.

(2)           INTEREST;
INTEREST RATE.  (a) Interest on this
Note shall commence accruing on the Issuance Date and shall be computed on the
basis of a 365-day year and actual days elapsed and shall be payable in arrears
for each Calendar Quarter on the first day of the succeeding Calendar Quarter
during the period beginning on the Issuance Date and ending on, and including,
the Maturity Date (each, an “Interest
Date”) with the first Interest
Date being October 1, 2006.  Interest
shall be payable on each Interest Date, to the record holder of this Note on
the applicable Interest Date, in shares of Common Stock (“Interest Shares”) so long as there has been
no Equity Conditions Failure; provided however, that the Company may, at its
option following notice to the Holder, pay Interest on any Interest Date in
cash (“Cash Interest”) or in a
combination of Cash Interest and Interest Shares.  The Company shall deliver a written notice
(each, an “Interest Election Notice”)
to each holder of the Notes on or prior to the Interest Notice Due Date (the
date such notice is delivered to all of the holder, the “Interest Notice Date”) which notice (i)
either (A) confirms that Interest to be paid on such Interest Date shall be
paid entirely in Interest Shares or (B) elects to pay Interest as Cash Interest
or a combination of Cash Interest and Interest Shares and specifies the amount
of Interest that shall be paid as Cash Interest and the amount of Interest, if
any, that shall be paid in Interest Shares and (ii) certifies that there has
been no Equity Conditions Failure.  If
any portion of Interest for a particular Interest Date shall be paid in
Interest Shares, then the Company shall pay to the Holder, in accordance with
Section 2(b), a number of shares of Common Stock equal to (x) the amount of
Interest payable on the applicable Interest Date in Interest Shares divided by
(y) the applicable Interest Conversion Price. 
Interest to be paid on an Interest Date in Interest Shares shall be paid
in a number of fully paid and nonassessable shares of Common Stock (rounded to
the nearest whole share).  If the Equity
Conditions are not satisfied as of the Interest Notice Date, then unless the
Company has elected to pay such Interest in cash, the Interest Notice shall
indicate that unless the Holder waives the Equity Conditions, the Interest
shall be paid in cash.  If the Equity
Conditions were satisfied as of the Interest Notice Date but the Equity
Conditions are no longer satisfied at any time prior to the Interest Date, the
Company shall provide the Holder a subsequent notice to that effect indicating
that unless the Holder waives the Equity Conditions, the Interest shall be paid
in cash.  Interest to be paid on an
Interest Date in Interest Shares shall be paid in a number of fully paid and
nonassessable shares (rounded to the nearest whole share in

 2
 

 

accordance with
Section 3(a)) of Common Stock equal to the quotient of (1) the amount of
Interest payable on such Interest Date less any Cash Interest paid and (2) the
Interest Conversion Price in effect on the applicable Interest Date.  

(a)   When any Interest Shares are to be paid on an Interest Date, the Company
shall (i) (X) provided that the Company’s transfer agent (the “Transfer Agent”) is participating in the Depository Trust
Company (“DTC”) Fast Automated Securities
Transfer Program and such action is not prohibited by applicable law or
regulation or any applicable policy of DTC, credit such aggregate number of
Interest Shares to which the Holder shall be entitled to the Holder’s or its
designee’s balance account with DTC through its Deposit Withdrawal Agent
Commission system, or (Y) if the foregoing shall not apply, issue and deliver
on the applicable Interest Date, to the address set forth in the register
maintained by the Company for such purpose pursuant to the Securities Purchase
Agreement or to such address as specified by the Holder in writing to the
Company at least two (2) Business Days prior to the applicable Interest Date, a
certificate, registered in the name of the Holder or its designee, for the
number of Interest Shares to which the Holder shall be entitled and (ii) with
respect to each Interest Date, pay to the Holder, in cash by wire transfer of
immediately available funds, the amount of any Cash Interest.  Notwithstanding the foregoing, the Company
shall not be entitled to pay Interest in Interest Shares and shall be required
to pay such Interest in cash as Cash Interest on the applicable Interest Date
if, unless waived in writing by the Holder, there has been an Equity Conditions
Failure.  If an Event of Default or
Equity Conditions Failure occurs during the Interest Measuring Period, then on
the Interest Date, at the Holder’s option, the Holder may require the Company
to pay all or any specified portion of the Interest due on the applicable
Interest Date as Cash Interest. 

(b)   Prior to the payment of Interest on an Interest Date, Interest on
this Note shall accrue at the Interest Rate and be payable by way of inclusion
of the Interest in the Conversion Amount in accordance with Section
3(b)(i).  From and after the occurrence
and during the continuance of an Event of Default, the Interest Rate shall be
increased to twelve percent (12.0%).  In
the event that such Event of Default is subsequently cured, the adjustment
referred to in the preceding sentence shall cease to be effective as of the
date of such cure; provided that the Interest as calculated and unpaid at such
increased rate during the continuance of such Event of Default shall continue
to apply to the extent relating to the days after the occurrence of such Event
of Default through and including the date of cure of such Event of Default.  The Company shall pay any and all taxes that
may be payable with respect to the issuance and delivery of Interest Shares; provided
that the Company shall not be required to pay any tax that may be payable in
respect of any issuance of Interest Shares to any Person other than the Holder
or with respect to any income tax due by the Holder with respect to such
Interest Shares.

(3)   CONVERSION OF NOTES.  This Note shall be convertible into shares of
the Company’s common stock, par value $0.0001 per share (the “Common Stock”), on the terms and conditions
set forth in this Section 3.

(a)   Conversion Right. 
Subject to the provisions of Section 3(d), at any time or times on or
after the Issuance Date, the Holder shall be entitled to convert any portion of
the outstanding and unpaid Conversion Amount (as defined below) into fully paid
and

 3
 

 

nonassessable shares of Common Stock in
accordance with Section 3(c), at the Conversion Rate (as defined below).  The Company shall not issue any fraction of a
share of Common Stock upon any conversion. 
If the issuance would result in the issuance of a fraction of a share of
Common Stock, the Company shall round such fraction of a share of Common Stock
up to the nearest whole share.  The
Company shall pay any and all taxes that may be payable with respect to the
issuance and delivery of Common Stock upon conversion of any Conversion Amount;
provided that the Company shall not be required to pay any tax that may
be payable in respect of any issuance of Common Stock to any Person other than
the converting Holder or with respect to any income tax due by the Holder with
respect to such Common Stock.

(b)   Conversion Rate.  The
number of shares of Common Stock issuable upon conversion of any Conversion
Amount pursuant to Section 3(a) shall be determined by dividing (x) such
Conversion Amount by (y) the Conversion Price (the “Conversion Rate”).

(i)            “Conversion
Amount” means the sum of (A) the portion of the Principal to be
converted, redeemed or otherwise with respect to which this determination is
being made, (B) accrued and unpaid Interest with respect to such Principal and
(C) accrued and unpaid Late Charges with respect to such Principal and
Interest.

(ii)           “Conversion Price”
means, as of any Conversion Date (as defined below) or other date of
determination, $4.25, subject to adjustment as provided herein.

(c)   Mechanics of Conversion.

(i)            Optional Conversion.  To convert any Conversion Amount into shares
of Common Stock on any date (a “Conversion
Date”), the Holder shall (A) transmit by facsimile (or otherwise
deliver), for receipt on or prior to 11:59 p.m., New York Time, on such date, a
copy of an executed notice of conversion in the form attached hereto as Exhibit
I (the “Conversion Notice”) to the Company
and (B) if required by Section 3(c)(iii), surrender this Note to a common
carrier for delivery to the Company as soon as practicable on or following such
date (or an indemnification undertaking with respect to this Note in the case
of its loss, theft or destruction).  On
or before the first (1st)
Trading Day following the date of receipt of a Conversion Notice, the Company
shall transmit by facsimile a confirmation of receipt of such Conversion Notice
to the Holder and the Transfer Agent.  On
or before the second (2nd)
Trading Day following the date of receipt of a Conversion Notice (the “Share Delivery  Date”), the
Company shall (X) provided that the Transfer Agent is participating in the DTC
Fast Automated Securities Transfer Program, credit such aggregate number of
shares of Common Stock to which the Holder shall be entitled to the Holder’s or
its designee’s balance account with DTC through its Deposit Withdrawal Agent
Commission system or (Y) if the Transfer Agent is not participating in the DTC
Fast Automated Securities Transfer Program, issue and deliver to the address as
specified in the Conversion Notice, a certificate, registered in the name of
the Holder or its designee, for the number of shares of Common Stock to which
the Holder shall be entitled.  If this
Note is physically surrendered for conversion as required by Section 3(c)(iii)
and the outstanding Principal of this Note is greater than the Principal
portion of the Conversion Amount being converted, then the Company shall as
soon as practicable and in no event later than three (3) Business Days after
receipt of this Note and at its own expense, issue and deliver to the holder a
new Note (in accordance with Section 18(d)) representing the outstanding
Principal not

 4
 

 

converted. 
The Person or Persons entitled to receive the shares of Common Stock
issuable upon a conversion of this Note shall be treated for all purposes as
the record holder or holders of such shares of Common Stock on the Conversion
Date.  

(ii)           Company’s Failure to Timely Convert.  If
the Company shall fail to issue a certificate to the Holder or credit the
Holder’s balance account with DTC for the number of shares of Common Stock to
which the Holder is entitled upon conversion of any Conversion Amount on or
prior to the date which is five (5) Trading Days after the Conversion Date (a “Conversion Failure “), then (A) the Company shall pay
damages in cash to the Holder for each date of such Conversion Failure in an
amount equal to 1.0% of the product of (I) the sum of the number of shares of
Common Stock not issued to the Holder on or prior to the Share Delivery Date
and to which the Holder is entitled, and (II) the Closing Sale Price of the
Common Stock on the Share Delivery Date and (B) the Holder, upon written notice
to the Company, may void its Conversion Notice with respect to, and retain or
have returned, as the case may be, any portion of this Note that has not been
converted pursuant to such Conversion Notice; provided that the voiding
of a Conversion Notice shall not affect the Company’s obligations to make any
payments which have accrued prior to the date of such notice pursuant to this
Section 3(c)(ii) or otherwise.  In
addition to the foregoing, if within three (3) Trading Days after
the Company’s receipt of the facsimile copy of a Conversion Notice the Company
shall fail to issue and deliver a certificate to the Holder or credit the
Holder’s balance account with DTC for the number of shares of Common Stock to
which the Holder is entitled upon such holder’s conversion of any Conversion
Amount, and if on or after such Trading Day the Holder purchases (in an open
market transaction or otherwise) Common Stock to deliver in satisfaction of a
sale by the Holder of Common Stock issuable upon such conversion that the
Holder anticipated receiving from the Company (a “Buy-In”),
then the Company shall, within five (5) Business Days after the Holder’s
request and in the Holder’s discretion, either (i) pay cash to the Holder in an
amount equal to the Holder’s total purchase price (including brokerage
commissions and other out-of-pocket expenses, if any) for the shares of Common
Stock so purchased (the “Buy-In Price”),
at which point the Company’s obligation to deliver such certificate (and to
issue such Common Stock) shall terminate, or (ii) promptly honor its obligation
to deliver to the Holder a certificate or certificates representing such Common
Stock and pay cash to the Holder in an amount equal to the excess (if any) of
the Buy-In Price over the product of (A) such number of shares of Common Stock,
times (B) the Closing Bid Price on the Conversion Date.

(iii)          Book-Entry. Notwithstanding anything to the contrary
set forth herein, upon conversion of any portion of this Note in accordance
with the terms hereof, the Holder shall not be required to physically surrender
this Note to the Company unless (A) the full Conversion Amount represented by
this Note is being converted or (B) the Holder has provided the Company with
prior written notice (which notice may be included in a Conversion Notice)
requesting reissuance of this Note upon physical surrender of this Note.  The Holder and the Company shall maintain
records showing the Principal, Interest and Late Charges converted and the
dates of such conversions or shall use such other method, reasonably
satisfactory to the Holder and the Company, so as not to require physical
surrender of this Note upon conversion.

(iv)          Pro Rata Conversion; Disputes.  In the event that the Company receives a
Conversion Notice from more than one holder of Notes for the same Conversion
Date and the Company can convert some, but not all, of such portions of the
Notes

 5
 

 

submitted for conversion, the Company,
subject to Section 3(d), shall convert from each holder of Notes electing to
have Notes converted on such date a pro rata amount of such holder’s portion of
its Notes submitted for conversion based on the principal amount of Notes
submitted for conversion on such date by such holder relative to the aggregate
principal amount of all Notes submitted for conversion on such date.  In the event of a dispute as to the number of
shares of Common Stock issuable to the Holder in connection with a conversion
of this Note, the Company shall issue to the Holder the number of shares of
Common Stock not in dispute and resolve such dispute in accordance with Section
23.

(v)           Company’s Right of Mandatory Conversion.  

(A)          Mandatory
Conversion.  If at any time from and
after the one (1) year anniversary of the Issuance Date (the “Mandatory Conversion Eligibility Date”), (i) (A) from the
period beginning from the Mandatory Conversion Eligibility Date until the two
(2) year anniversary of the Issuance Date, the Closing Sale Price of the Common
Stock exceeds for each of any twenty (20) consecutive Trading Days following
the Mandatory Conversion Eligibility Date (the “Mandatory
Conversion Measuring Period”) 150% of the Conversion Price on the
Issuance Date (as adjusted for any stock splits, stock dividends,
recapitalizations, combinations, reverse stock splits or other similar events
during such period) and (B) on and after the two (2) year anniversary of the
Issuance Date, the Closing Sale Price of the Common Stock exceeds for each of
any twenty (20) consecutive Trading Days 180% of the Conversion Price on the
Issuance Date (as adjusted for any stock splits, stock dividends,
recapitalizations, combinations, reverse stock splits or other similar events
during such period) and (ii) there shall not have been any Equity Conditions
Failure, the Company shall have the right to require the Holder to convert all,
or any portion, of the Conversion Amount then remaining under this Note into
fully paid, validly issued and nonassessable shares of Common Stock in
accordance with Section 3(c) hereof at the Conversion Rate as of the
Mandatory Conversion Date (as defined below) with respect to the Conversion
Amount (a “Mandatory Conversion”).  The Company may exercise its right to require
conversion under this Section 3(c)(v)(A) by delivering within not more than two
(2) Trading Days following the end
of any such Mandatory Conversion Measuring Period a written
notice thereof by facsimile and overnight courier to all, but not less than
all, of the holders of Notes and the Transfer Agent (the “Mandatory
Conversion Notice” and the date all of the holders received such
notice is referred to as the “Mandatory Conversion
Notice Date”).  The Mandatory
Conversion Notice shall be irrevocable. 
The Mandatory Conversion Notice shall state (1) the Trading Day selected
for the Mandatory Conversion in accordance herewith, which Trading Day shall be
at least twenty (20) Trading Days but not more than sixty (60) Trading Days
following the Mandatory Conversion Notice Date (the “Mandatory
Conversion Date”), (2) the aggregate Conversion Amount of the Notes
subject to mandatory conversion from all of the holders of the Notes pursuant
hereto (and analogous provisions under the Other Notes) and (3) the number of
shares of Common Stock to be issued to. 
All Conversion Amounts converted by the Holder after the Mandatory
Conversion Notice Date shall reduce the Conversion Amount of this Note required
to be converted on the Mandatory Conversion Date.  The mechanics of conversion set forth in
Section 3(c) shall apply to any Mandatory Conversion as if the Company and the
Transfer Agent had received from the Holder on the Mandatory

 6
 

 

Conversion Date a Conversion Notice with respect to the Conversion
Amount being converted pursuant to the Mandatory Conversion.

(B)             Pro Rata
Conversion Requirement.  If the
Company elects to cause a conversion of any Conversion Amount of this Note pursuant
to Section 3(c)(v)(A), then it must simultaneously take the same action in the
same proportion with respect to the Other Notes.  If the Company elects a Mandatory Conversion
of this Note pursuant to Section 3(c)(v)(A) (or similar provisions under the
Other Notes) with respect to less than all of the Conversion Amounts of the
Notes then outstanding, then the Company shall require conversion of a
Conversion Amount from each of the holders of the Notes equal to the product of
(I) the aggregate Conversion Amount of Notes which the Company has elected to
cause to be converted pursuant to Section 3(c)(v)(A), multiplied by (II) the
fraction, the numerator of which is the sum of the aggregate Original Principal
Amount of the Notes purchased by such holder of outstanding Notes and the
denominator of which is the sum of the aggregate Original Principal Amount of
the Notes purchased by all holders holding outstanding Notes (such fraction
with respect to each holder is referred to as its “Conversion  Allocation Percentage,”
and such amount with respect to each holder is referred to as its “Pro Rata Conversion Amount”); provided, however, that in the
event that any holder’s Pro Rata Conversion Amount exceeds the outstanding
Principal amount of such holder’s Note, then such excess Pro Rata Conversion
Amount shall be allocated amongst the remaining holders of Notes in accordance
with the foregoing formula.  In the event
that the initial holder of any Notes shall sell or otherwise transfer any of
such holder’s Notes, the transferee shall be allocated a pro rata portion of
such holder’s Conversion Allocation Percentage and the Pro Rata Conversion
Amount.

(d)   Limitations on Conversions. 

(i)            Beneficial Ownership.  The Company shall not effect any conversion
of this Note, and the Holder of this Note shall not have the right to convert
any portion of this Note pursuant to Section 3(a), to the extent that after
giving effect to such conversion, the Holder (together with the Holder’s
affiliates) would beneficially own in excess of 4.99% (the “Maximum Percentage”) of the number of shares of Common Stock
outstanding immediately after giving effect to such conversion.  For purposes of the foregoing sentence, the
number of shares of Common Stock beneficially owned by the Holder and its
affiliates shall include the number of shares of Common Stock issuable upon
conversion of this Note with respect to which the determination of such
sentence is being made, but shall exclude the number of shares of Common Stock
which would be issuable upon (A) conversion of the remaining, nonconverted
portion of this Note beneficially owned by the 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
Notes or warrants) subject to a limitation on conversion or exercise analogous
to the limitation contained herein beneficially owned by the Holder or any of
its affiliates.  Except as set forth in
the preceding sentence, for purposes of this Section 3(d)(i), beneficial
ownership shall be calculated in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”).  For purposes of this Section 3(d)(i), in
determining the number of outstanding shares of Common Stock, the Holder may
rely on the number of outstanding shares of Common Stock as reflected in (x)
the

 7
 

 

Company’s most recent Form 10-K, Form 10-Q or
Form 8-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 Transfer Agent setting
forth the number of shares of Common Stock outstanding.  For any reason at any time, upon the written
or oral request of the Holder, the Company shall within one (1) Business Day
confirm orally and in writing to the 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 Note, by the Holder or its affiliates since the date as of which such
number of outstanding shares of Common Stock was reported.  By written notice to the Company, the Holder
may increase or decrease the Maximum Percentage to any other percentage not in
excess of 9.99% specified in such notice; provided that (i) any such increase
will not be effective until the sixty-first (61st) day after such notice is
delivered to the Company, and (ii) any such increase or decrease will apply
only to the Holder and not to any other holder of Notes. 

(ii)           Principal Market Regulation.  The Company shall not be obligated to issue
any shares of Common Stock upon conversion of this Note, and the Holder of this
Note shall not have the right to receive upon conversion of this Note any
shares of Common Stock, if the issuance of such shares of Common Stock would
exceed the aggregate number of shares of Common Stock which the Company may
issue upon conversion or exercise, as applicable, of the Notes and Warrants
without breaching the Company’s obligations under the rules or regulations of
the Principal Market (the “Exchange Cap”),
except that such limitation shall not apply in the event that the Company (A)
obtains the approval of its stockholders as required by the applicable rules of
the Principal Market for issuances of Common Stock in excess of such amount or
(B) obtains a written opinion from outside counsel to the Company that such
approval is not required, which opinion shall be reasonably satisfactory to the
Required Holders.  Until such approval or
written opinion is obtained, no purchaser of the Notes pursuant to the
Securities Purchase Agreement (the “Purchasers”)
shall be issued in the aggregate, upon conversion or exercise, as applicable,
of Notes or Warrants, shares of Common Stock in an amount greater than the
product of the Exchange Cap multiplied by a fraction, the numerator of which is
the principal amount of Notes issued to such Purchaser pursuant to the
Securities Purchase Agreement on the Closing Date and the denominator of which
is the aggregate principal amount of all Notes issued to the Purchasers
pursuant to the Securities Purchase Agreement on the Closing Date (with respect
to each Purchaser, the “Exchange Cap Allocation”).  In the event that any Purchaser shall sell or
otherwise transfer any of such Purchaser’s Notes, the transferee shall be
allocated a pro rata portion of such Purchaser’s Exchange Cap Allocation, and
the restrictions of the prior sentence shall apply to such transferee with
respect to the portion of the Exchange Cap Allocation allocated to such
transferee.  In the event that any holder
of Notes shall convert all of such holder’s Notes into a number of shares of
Common Stock which, in the aggregate, is less than such holder’s Exchange Cap
Allocation, then the difference between such holder’s Exchange Cap Allocation
and the number of shares of Common Stock actually issued to such holder shall
be allocated to the respective Exchange Cap Allocations of the remaining
holders of Notes on a pro rata basis in proportion to the aggregate principal
amount of the Notes then held by each such holder.

 8
 

 

(4)   RIGHTS UPON EVENT OF
DEFAULT.

(a)   Event of Default. 
Each of the following events shall constitute an “Event of Default”:

(i)            the failure of the applicable Registration Statement
required to be filed pursuant to the Registration Rights Agreement to be
declared effective by the SEC on or prior to the date that is sixty (60) days
after the applicable Effectiveness Deadline (as defined in the Registration
Rights Agreement), or, while the applicable Registration Statement is required
to be maintained effective pursuant to the terms of the Registration Rights
Agreement, the effectiveness of the applicable Registration Statement lapses
for any reason (including, without limitation, the issuance of a stop order) or
is unavailable to any holder of the Notes for sale of all of such holder’s
Registrable Securities (as defined in the Registration Rights Agreement) in
accordance with the terms of the Registration Rights Agreement, and such lapse
or unavailability continues for a period of ten (10) consecutive days or for
more than an aggregate of thirty (30) days in any 365-day period (other than
days during an Allowable Grace Period (as defined in the Registration Rights
Agreement));

(ii)           the suspension from trading or failure of the Common Stock
to be listed on an Eligible Market for a period of five (5) consecutive Trading
Days or for more than an aggregate of ten (10) Trading Days in any 365-day
period;

(iii)          the Company’s (A) failure to cure a Conversion Failure by
delivery of the required number of shares of Common Stock within ten (10)
Business Days after the applicable Conversion Date or (B) notice, written or
oral, to any holder of the Notes, including by way of public announcement or
through any of its agents, at any time, of its intention not to comply with a
request for conversion of any Notes into shares of Common Stock that is
tendered in accordance with the provisions of the Notes;

(iv)          at any time following the tenth (10th) consecutive Business Day
that the Holder’s Authorized Share Allocation is less than the number of shares
of Common Stock that the Holder would be entitled to receive upon a conversion
of the full Conversion Amount of this Note (without regard to any limitations
on conversion set forth in Section 3(d) or otherwise);

(v)           the Company’s failure to pay to the Holder any amount of
Principal (including, without limitation, any redemption payments), Interest,
Late Charges or other amounts when and as due under this Note or any other
Transaction Document (as defined in the Securities Purchase Agreement) or any
other agreement, document, certificate or other instrument delivered in
connection with the transactions contemplated hereby and thereby to which the
Holder is a party, except, in the case of a failure to pay Interest and Late
Charges when and as due, in which case only if such failure continues for a
period of at least five (5) Business Days;

(vi)          any default under, redemption of or acceleration prior to
maturity of any Indebtedness of the Company or any of its Subsidiaries (as
defined in Section 3(a) of the Securities Purchase Agreement) other than with
respect to any Other Notes;

 9

 

(vii)         the Company or any of its Subsidiaries, pursuant to or
within the meaning of Title 11, U.S. Code, or any similar Federal, foreign or
state law for the relief of debtors (collectively, “Bankruptcy Law”), (A) commences a voluntary case, (B)
consents to the entry of an order for relief against it in an involuntary case,
(C) consents to the appointment of a receiver, trustee, assignee, liquidator or
similar official (a “Custodian”),
(D) makes a general assignment for the benefit of its creditors or (E) admits
in writing that it is generally unable to pay its debts as they become due;

(viii)        a court of competent jurisdiction enters an order or decree
under any Bankruptcy Law that (A) is for relief against the Company or any of
its Subsidiaries in an involuntary case, (B) appoints a Custodian of the
Company or any of its Subsidiaries or (C) orders the liquidation of the Company
or any of its Subsidiaries;

(ix)           a final judgment or judgments for the payment of money
aggregating in excess of $500,000 are rendered against the Company or any of
its Subsidiaries and which judgments are not, within sixty (60) days after the
entry thereof, bonded, discharged or stayed pending appeal, or are not
discharged within sixty (60) days after the expiration of such stay; provided,
however, that any judgment which is covered by insurance or an indemnity from a
credit worthy party shall not be included in calculating the $500,000 amount
set forth above so long as the Company provides the Holder a written statement
from such insurer or indemnity provider (which written statement shall be
reasonably satisfactory to the Holder) to the effect that such judgment is
covered by insurance or an indemnity and the Company will receive the proceeds
of such insurance or indemnity within thirty (30) days of the issuance of such
judgment;

(x)            the Company breaches any representation, warranty,
covenant or other term or condition of any Transaction Document, except, in the
case of a breach of a covenant which is curable, only if such breach continues
for a period of at least ten (10) consecutive Business Days;

(xi)           any breach or failure in any respect to comply with either
of Section 8 or Section 14 of this Note or Section 4(p)(ii) of the Securities
Purchase Agreement; or

(xii)          any Event of Default (as defined in the Other Notes) occurs
with respect to any Other Notes.

(b)   Redemption Right. 
Upon the occurrence of an Event of Default with respect to this Note or
any Other Note, the Company shall within (1) Business Day deliver written
notice thereof via facsimile and overnight courier (an “Event of Default Notice”) to the Holder.  At any time after the earlier of the Holder’s
receipt of an Event of Default Notice and the Holder becoming aware of an Event
of Default, the Holder may require the Company to redeem all or any portion of
this Note by delivering written notice thereof (the “Event of
Default Redemption Notice”) to the Company, which Event of Default
Redemption Notice shall indicate the portion of this Note the Holder is
electing to redeem.  Each portion of this
Note subject to redemption by the Company pursuant to this Section 4(b) shall
be redeemed by the Company at a price equal to the greater of (i) the product
of (x) the Conversion Amount to be

 10
 

 

redeemed and (y) the Redemption Premium and (ii)
the product of (A) the Conversion Rate with respect to such Conversion Amount
in effect at such time as the Holder delivers an Event of Default Redemption
Notice and (B) the greater of (1) the Closing Sale Price of the Common Stock on
the date immediately preceding such Event of Default, (2) the Closing Sale
Price of the Common Stock on the date immediately after such Event of Default
and (3) the Closing Sale Price of the Common Stock on the date the Holder
delivers the Event of Default Redemption Notice (the “Event of Default  Redemption Price”).  Redemptions required by this Section 4(b)
shall be made in accordance with the provisions of Section 12.  To the extent redemptions required by this
Section 4(b) are deemed or determined by a court of competent jurisdiction to
be prepayments of the Note by the Company, such redemptions shall be deemed to
be voluntary prepayments.  The parties
hereto agree that in the event of the Company’s redemption of any portion of
the Note under this Section 4(b), the Holder’s damages would be uncertain and
difficult to estimate because of the parties’ inability to predict future
interest rates and the uncertainty of the availability of a suitable substitute
investment opportunity for the Holder. 
Accordingly, any Redemption Premium due under this Section 4(b) is
intended by the parties to be, and shall be deemed, a reasonable estimate of
the Holder’s actual loss of its investment opportunity and not as a penalty.

(5)   RIGHTS UPON FUNDAMENTAL
TRANSACTION AND CHANGE OF CONTROL.

(a)   Assumption.  The
Company shall not enter into or be party to a Fundamental Transaction unless
(i)  the Successor Entity assumes in writing all of the obligations of the
Company under this Note and the other Transaction Documents in accordance with
the provisions of this Section 5(a) pursuant to written agreements in form and
substance satisfactory to the Required Holders and approved by the Required
Holders prior to such Fundamental Transaction, including agreements to deliver
to each holder of Notes in exchange for such Notes a security of the Successor
Entity evidenced by a written instrument substantially similar in form and
substance to the Notes, including, without limitation, having a principal
amount and interest rate equal to the principal amounts then outstanding and
the interest rates of the Notes held by such holder, having similar conversion
rights as the Notes and having similar ranking to the Notes, and satisfactory
to the Required Holders and (ii) the Successor Entity (including its
Parent Entity) is a publicly traded corporation whose common stock is quoted on
or listed for trading on an Eligible Market. 
Upon the occurrence of any Fundamental Transaction, the Successor Entity
shall succeed to, and be substituted for (so that from and after the date of
such Fundamental Transaction, the provisions of this Note referring to the “Company”
shall refer instead to the Successor Entity), and may exercise every right and
power of the Company and shall assume all of the obligations of the Company under
this Note with the same effect as if such Successor Entity had been named as
the Company herein.  Upon consummation of
the Fundamental Transaction, the Successor Entity shall deliver to the Holder
confirmation that there shall be issued upon conversion or redemption of this
Note at any time after the consummation of the Fundamental Transaction, in lieu
of the shares of the Company’s Common Stock (or other securities, cash, assets
or other property) issuable upon the conversion or redemption of the Notes
prior to such Fundamental Transaction, such shares of the publicly traded
common stock (or their equivalent) of the Successor Entity (including its
Parent Entity), as adjusted in accordance with the provisions of this Note.  The provisions of this Section shall

 11
 

 

apply similarly and equally to successive
Fundamental Transactions and shall be applied without regard to any limitations
on the conversion or redemption of this Note.

(b)   Redemption Right.  No
sooner than fifteen (15) days nor later than ten (10) days prior to the
consummation of a Change of Control, but not prior to the public announcement
of such Change of Control, the Company shall deliver written notice thereof via
facsimile and overnight courier to the Holder (a “Change of Control  Notice”).  At any time during the period beginning after
the Holder’s receipt of a Change of Control Notice and ending twenty (20)
Trading Days after the consummation of such Change of Control, the Holder may
require the Company to redeem all or any portion of this Note by delivering
written notice thereof (“Change of Control
Redemption Notice”) to the Company, which Change of Control
Redemption Notice shall indicate the Conversion Amount the Holder is electing
to redeem.  The portion of this Note
subject to redemption pursuant to this Section 5 shall be redeemed by the
Company in cash at a price equal to the greater of (i) the product of (x) the
Conversion Amount being redeemed and (y) the quotient determined by dividing
(A) the greater of the Closing Sale Price of the Common Stock immediately prior
to the consummation of the Change of Control, the Closing Sale Price
immediately following the public announcement of such proposed Change of
Control and the Closing Sale Price of the Common Stock immediately prior to the
public announcement of such proposed Change of Control by (B) the Conversion
Price and (ii) 120% of the Conversion Amount being redeemed (the “Change of Control Redemption Price”).  Redemptions required by this Section 5 shall
be made in accordance with the provisions of Section 12 and shall have priority
to payments to stockholders in connection with a Change of Control.  To the extent redemptions required by this
Section 5(b) are deemed or determined by a court of competent jurisdiction to
be prepayments of the Note by the Company, such redemptions shall be deemed to
be voluntary prepayments. 
Notwithstanding anything to the contrary in this Section 5, but subject
to Section 3(d), until the Change of Control Redemption Price is paid in full,
the Conversion Amount submitted for redemption under this Section 5(c) may be
converted, in whole or in part, by the Holder into Common Stock pursuant to
Section 3.  The parties hereto agree that
in the event of the Company’s redemption of any portion of the Note under this
Section 5(b), the Holder’s damages would be uncertain and difficult to estimate
because of the parties’ inability to predict future interest rates and the
uncertainty of the availability of a suitable substitute investment opportunity
for the Holder.  Accordingly, any
redemption premium due under this Section 5(b) is intended by the parties to
be, and shall be deemed, a reasonable estimate of the Holder’s actual loss of
its investment opportunity and not as a penalty.

(6)   RIGHTS UPON ISSUANCE OF
PURCHASE RIGHTS AND OTHER CORPORATE EVENTS.

(a)   Purchase Rights.  If
at any time the Company grants, issues or sells any Options, Convertible
Securities or rights to purchase stock, warrants, securities or other property
pro rata to the record holders of any class of Common Stock (the “Purchase Rights”), then the Holder will be entitled to
acquire, upon the terms applicable to such Purchase Rights, the aggregate
Purchase Rights which the Holder could have acquired if the Holder had held the
number of shares of Common Stock acquirable upon complete conversion of this
Note (without taking into account any limitations or restrictions on the
convertibility of this Note) immediately before the date on which a record is
taken for the grant, issuance or sale of such Purchase Rights,

 12
 

 

or, if no such record is taken, the date as
of which the record holders of Common Stock are to be determined for the grant,
issue or sale of such Purchase Rights.

(b)   Other Corporate Events. 
In addition to and not in substitution for any other rights hereunder,
prior to the consummation of any Fundamental Transaction pursuant to which
holders of shares of Common Stock are entitled to receive securities or other
assets with respect to or in exchange for shares of Common Stock (a “Corporate Event”), the Company shall make appropriate
provision to insure that the Holder will thereafter have the right to receive
upon a conversion of this Note, (i) in addition to the shares of Common Stock
receivable upon such conversion, such securities or other assets to which the
Holder would have been entitled with respect to such shares of Common Stock had
such shares of Common Stock been held by the Holder upon the consummation of
such Corporate Event (without taking into account any limitations or
restrictions on the convertibility of this Note) or (ii) in lieu of the shares
of Common Stock otherwise receivable upon such conversion, such securities or
other assets received by the holders of shares of Common Stock in connection
with the consummation of such Corporate Event in such amounts as the Holder
would have been entitled to receive had this Note initially been issued with
conversion rights for the form of such consideration (as opposed to shares of
Common Stock) at a conversion rate for such consideration commensurate with the
Conversion Rate.  Provision made pursuant
to the preceding sentence shall be in a form and substance satisfactory to the
Required Holders.  The provisions of this
Section shall apply similarly and equally to successive Corporate Events and
shall be applied without regard to any limitations on the conversion or
redemption of this Note.

(7)   RIGHTS UPON ISSUANCE OF
OTHER SECURITIES.

(a)   Adjustment of Conversion Price upon Issuance of Common Stock.  If and whenever on or after the Subscription
Date through the first (1st) anniversary of the Issuance Date, the
Company issues or sells, or in accordance with this Section 7(a) is deemed to
have issued or sold, any shares of Common Stock (including the issuance or sale
of shares of Common Stock owned or held by or for the account of the Company,
but excluding shares of Common Stock deemed to have been issued or sold by the
Company in connection with any Excluded Security) for a consideration per share
(the “New Issuance Price”) less than a price
(the “Applicable Price”) equal to the
Conversion Price in effect immediately prior to such issue or sale (the
foregoing a “Dilutive Issuance”), then
immediately after such Dilutive Issuance, the Conversion Price then in effect
shall be reduced to an amount equal to the New Issuance Price.  If and whenever on or after the first (1st) anniversary of the Issuance
Date, the Company issues or sells, or in accordance with this Section 7(a) is
deemed to have issued or sold, any shares of Common Stock (including the issuance
or sale of shares of Common Stock owned or held by or for the account of the
Company, but excluding shares of Common Stock deemed to have been issued or
sold by the Company in connection with any Excluded Security) in a Dilutive
Issuance, then immediately after such Dilutive Issuance, the Conversion Price
then in effect shall be reduced to an amount equal the product of (A) the
Conversion Price in effect immediately prior to such Dilutive Issuance and
(B) the quotient determined by dividing (1) the sum of (I) the
product derived by multiplying the Conversion Price in effect immediately prior
to such Dilutive Issuance and the number of shares of Common Stock Deemed
Outstanding immediately prior to such Dilutive Issuance plus (II) the
consideration, if any, received by the Company upon such Dilutive Issuance, by
(2) the product derived by multiplying (I) the Applicable Price in effect

 13
 

 

immediately prior to such Dilutive Issuance
by (II) the number of shares of Common Stock Deemed Outstanding immediately
after such Dilutive Issuance.  For
purposes of determining the adjusted Conversion Price under this Section 7(a),
the following shall be applicable:

(i)            Issuance of Options.  If the Company in any manner grants or sells
any Options and the lowest price per share for which one share of Common Stock
is issuable upon the exercise of any such Option or upon conversion or exchange
or exercise of any Convertible Securities issuable upon exercise of such Option
is less than the Applicable Price, then such share of Common Stock shall be
deemed to be outstanding and to have been issued and sold by the Company at the
time of the granting or sale of such Option for such price per share.  For purposes of this Section 7(a)(i), the “lowest
price per share for which one share of Common Stock is issuable upon the
exercise of any such Option or upon conversion or exchange or exercise of any
Convertible Securities issuable upon exercise of such Option” shall be equal to
the sum of the lowest amounts of consideration (if any) received or receivable
by the Company with respect to any one share of Common Stock upon granting or
sale of the Option, upon exercise of the Option and upon conversion or exchange
or exercise of any Convertible Security issuable upon exercise of such Option.  No further adjustment of the Conversion Price
shall be made upon the actual issuance of such share of Common Stock or of such
Convertible Securities upon the exercise of such Options or upon the actual
issuance of such Common Stock upon conversion or exchange or exercise of such
Convertible Securities.

(ii)           Issuance of Convertible Securities.  If the Company in any manner issues or sells
any Convertible Securities and the lowest price per share for which one share
of Common Stock is issuable upon such conversion or exchange or exercise
thereof is less than the Applicable Price, then such share of Common Stock
shall be deemed to be outstanding and to have been issued and sold by the
Company at the time of the issuance or sale of such Convertible Securities for
such price per share.  For the purposes
of this Section 7(a)(ii), the “lowest price per share for which one share of
Common Stock is issuable upon such conversion or exchange or exercise” shall be
equal to the sum of the lowest amounts of consideration (if any) received or
receivable by the Company with respect to any one share of Common Stock upon
the issuance or sale of the Convertible Security and upon the conversion or
exchange or exercise of such Convertible Security.  No further adjustment of the Conversion Price
shall be made upon the actual issuance of such share of Common Stock upon
conversion or exchange or exercise of such Convertible Securities, and if any
such issue or sale of such Convertible Securities is made upon exercise of any
Options for which adjustment of the Conversion Price had been or are to be made
pursuant to other provisions of this Section 7(a), no further adjustment of the
Conversion Price shall be made by reason of such issue or sale.

(iii)          Change in Option Price or Rate of Conversion.  If the purchase price provided for in any
Options, the additional consideration, if any, payable upon the issue,
conversion, exchange or exercise of any Convertible Securities, or the rate at
which any Convertible Securities are convertible into or exchangeable or
exercisable for Common Stock changes at any time, the Conversion Price in
effect at the time of such change shall be adjusted to the Conversion Price
which would have been in effect at such time had such Options or Convertible Securities
provided for such changed purchase price, additional consideration or changed
conversion rate, as the case may be, at the time initially granted, issued or
sold.  For purposes of this Section
7(a)(iii), if the terms of any Option or Convertible Security that was

 14
 

 

outstanding as of the Subscription Date are
changed in the manner described in the immediately preceding sentence, then
such Option or Convertible Security and the Common Stock deemed issuable upon
exercise, conversion or exchange thereof shall be deemed to have been issued as
of the date of such change.  No
adjustment shall be made if such adjustment would result in an increase of the
Conversion Price then in effect.

(iv)          Calculation of Consideration Received.  In case any Option is issued in connection
with the issue or sale of other securities of the Company, together comprising
one integrated transaction in which no specific consideration is allocated to
such Options by the parties thereto, the Options will be deemed to have been
issued for a consideration of $.01.  If
any Common Stock, Options or Convertible Securities are issued or sold or
deemed to have been issued or sold for cash, the consideration received
therefor will be deemed to be the net amount received by the Company therefor.  If any Common Stock, Options or Convertible
Securities are issued or sold for a consideration other than cash, the amount
of the consideration other than cash received by the Company will be the fair
value of such consideration, except where such consideration consists of
securities, in which case the amount of consideration received by the Company
will be the Closing Sale Price of such securities on the date of receipt.  If any Common Stock, Options or Convertible Securities
are issued to the stockholders of the non-surviving entity in connection with
any merger in which the Company is the surviving entity, the amount of
consideration therefor will be deemed to be the fair value of such portion of
the net assets and business of the non-surviving entity as is attributable to
such Common Stock, Options or Convertible Securities, as the case may be.  The fair value of any consideration other
than cash or securities will be determined jointly by the Company and the Required
Holders.  If such parties are unable to
reach agreement within ten (10) days after the occurrence of an event requiring
valuation (the “Valuation Event”),
the fair value of such consideration will be determined, at the Company’s
expense, within five (5) Business Days after the tenth (10th) day following the Valuation Event by an
independent, reputable appraiser jointly selected by the Company and the
Required Holders.  The determination of
such appraiser shall be deemed binding upon all parties absent manifest error.

(v)           Record Date. 
If the Company takes a record of the holders of Common Stock for the
purpose of entitling them (A) to receive a dividend or other distribution
payable in Common Stock, Options or in Convertible Securities or (B) to
subscribe for or purchase Common Stock, Options or Convertible Securities, then
such record date will be deemed to be the date of the issue or sale of the
Common Stock deemed to have been issued or sold upon the declaration of such
dividend or the making of such other distribution or the date of the granting
of such right of subscription or purchase, as the case may be.

(b)   Adjustment of Conversion Price upon Subdivision or Combination
of Common Stock.  If the Company at
any time on or after the Subscription Date subdivides (by any stock split,
stock dividend, recapitalization or otherwise) one or more classes of its
outstanding shares of Common Stock into a greater number of shares, the
Conversion Price in effect immediately prior to such subdivision will be
proportionately reduced.  If the Company
at any time on or after the Subscription Date combines (by combination, reverse
stock split or otherwise) one or more classes of its outstanding shares of
Common Stock into a smaller number of shares, the Conversion Price in effect
immediately prior to such combination will be proportionately increased.

 15
 

 

(c)   Other Events.  If any
event occurs of the type contemplated by the provisions of this Section 7 but
not expressly provided for by such provisions (including, without limitation,
the granting of stock appreciation rights, phantom stock rights or other rights
with equity features), then the Company’s Board of Directors will make an
appropriate adjustment in the Conversion Price so as to protect the rights of
the Holder under this Note; provided that no such adjustment will increase the
Conversion Price as otherwise determined pursuant to this Section 7.

(8)   INSTALLMENT AMOUNTS.
As of the thirty (30) month anniversary of the Issuance Date (the “Initial Installment Date”) and on each
Installment Date thereafter, the Holder shall have the right, in its sole
discretion, to require that the Company amortize on such Installment Date a
portion of this Note  (an “Installment Payment”) up to the Available
Installment Amount by delivering written notice thereof (an “Installment Notice”) to the Company at
least five (5) Trading Days prior to such Installment Date; provided, however,
that the Holder shall not have the option to require the Company to make any
Installment Payment on the Initial Installment Date if the Closing Sale Price
of the Common Stock equals or exceeds $4.00 for each of the twenty (20)
consecutive Trading Days immediately prior to such Initial Installment
Date.  The Installment Notice shall
indicate the Principal amount (plus the sum of any accrued and unpaid Interest
on such Principal amount and any accrued and unpaid Late Charges with respect
to such Principal amount and Interest as of such Installment Date) of the
Available Installment Amount the Holder is electing to have redeemed (the “Installment Amount”). The portion of this
Note subject to amortization pursuant to this Section 8 shall be paid by the
Company in cash at a price equal to 100% of the Installment Amount (the “Installment Price”).  Payments required by this Section 8 shall be
made in accordance with the provisions of Section 12.  Notwithstanding anything to the contrary in
this Section 8, but subject to Section 3(d), until the Holder receives the
Installment Price, the Installment Amount may be converted, in whole or in
part, by the Holder into Common Stock pursuant to Section 3, and any such
conversion shall reduce the Installment Amount in the manner set forth by the
Holder in the applicable Conversion Notice.

(9)           SECURITY.  This Note and the Other Notes shall be
secured at such time, to the extent and in the manner, set forth in Section
4(p) of the Securities Purchase Agreement.

(10)         NONCIRCUMVENTION.  The Company hereby covenants and agrees that
the Company will not, by amendment of its Certificate of Incorporation, Bylaws
or through any reorganization, transfer of assets, consolidation, merger,
scheme of arrangement, 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 Note, and will at all times in good faith carry out all of
the provisions of this Note and take all action as may be required to protect
the rights of the Holder of this Note.

(11)         RESERVATION OF
AUTHORIZED SHARES.

(a)   Reservation.  The
Company shall initially reserve out of its authorized and unissued Common Stock
a number of shares of Common Stock for each of the Notes equal to 150% of the
Conversion Rate with respect to the Conversion Amount of each such Note as of
the Issuance Date.  So long as any of the Notes are outstanding,
the Company shall take all

 16
 

 

action necessary to reserve and keep
available out of its authorized and unissued Common Stock, solely for the
purpose of effecting the conversion of the Notes, 150% of the number of shares
of Common Stock as shall from time to time be necessary to effect the
conversion of all of the Notes then outstanding; provided that at no time shall
the number of shares of Common Stock so reserved be less than the number of
shares required to be reserved by the previous sentence (without regard to any
limitations on conversions) (the “Required
Reserve Amount”).  The initial
number of shares of Common Stock reserved for conversions of the Notes and each
increase in the number of shares so reserved shall be allocated pro rata among
the holders of the Notes based on the principal amount of the Notes held by
each holder at the Closing (as defined in the Securities Purchase Agreement) or
increase in the number of reserved shares, as the case may be (the “Authorized Share Allocation”).  In the event that a holder shall sell or
otherwise transfer any of such holder’s Notes, each transferee shall be
allocated a pro rata portion of such holder’s Authorized Share Allocation.  Any shares of Common Stock reserved and
allocated to any Person which ceases to hold any Notes shall be allocated to
the remaining holders of Notes, pro rata based on the principal amount of the
Notes then held by such holders.

(b)   Insufficient Authorized Shares.  If at any time while any of the Notes remain
outstanding the Company does not have a sufficient number of authorized and
unreserved shares of Common Stock to satisfy its obligation to reserve for
issuance upon conversion of the Notes at least a number of shares of Common
Stock equal to the Required Reserve Amount (an “Authorized Share Failure”), then the Company shall
immediately take all action necessary to increase the Company’s authorized
shares of Common Stock to an amount sufficient to allow the Company to reserve
the Required Reserve Amount for the Notes then outstanding.  Without limiting the generality of the
foregoing sentence, as soon as practicable after the date of the occurrence of
an Authorized Share Failure, but in no event later than sixty (60) days after
the occurrence of such Authorized Share Failure, the Company shall hold a
meeting of its stockholders for the approval of an increase in the number of
authorized shares of Common Stock.  In
connection with such meeting, the Company shall provide each stockholder with a
proxy statement and shall use its best efforts to solicit its stockholders’
approval of such increase in authorized shares of Common Stock and to cause its
board of directors to recommend to the stockholders that they approve such
proposal.

(12)         HOLDER’S
REDEMPTIONS AND AMORTIZATIONS.

(a)   Mechanics.  The
Company shall deliver the applicable Event of Default Redemption Price to the
Holder within five (5) Business Days after the Company’s receipt of the Holder’s
Event of Default Redemption Notice.  If
the Holder has submitted a Change of Control Redemption Notice in accordance
with Section 5(b), the Company shall deliver the applicable Change of Control
Redemption Price to the Holder concurrently with the consummation of such
Change of Control if such notice is received prior to the consummation of such
Change of Control and within five (5) Business Days after the Company’s receipt
of such notice otherwise.  The Company
shall deliver the Installment Price on the applicable Installment Date.  In the event of a redemption or amortization
of less than all of the Conversion Amount of this Note, the Company shall
promptly cause to be issued and delivered to the Holder a new Note (in
accordance with Section 18(d)) representing the outstanding Principal which has
not been redeemed or amortized.  In the event
that the Company does not pay the applicable Redemption Price to the Holder
within the time period required, at any time thereafter and until the Company

 17
 

 

pays such unpaid Redemption Price in full,
the Holder shall have the option, in lieu of redemption or amortization, to
require the Company to promptly return to the Holder all or any portion of this
Note representing the Conversion Amount that was submitted for redemption or
required to be amortized and for which the applicable Redemption Price (together
with any Late Charges thereon) has not been paid.  Upon the Company’s receipt of such notice,
(x) the Redemption Notice shall be null and void with respect to such
Conversion Amount, (y) the Company shall immediately return this Note, or issue
a new Note (in accordance with Section 18(d)) to the Holder representing such
Conversion Amount and (z) the Conversion Price of this Note or such new Notes
shall be adjusted to the lesser of (A) the Conversion Price as in effect on the
date on which the Redemption Notice is voided and (B) the lowest Closing Bid
Price of the Common Stock during the period beginning on and including the date
on which the Redemption Notice is delivered to the Company and ending on and
including the date on which the Redemption Notice is voided.  The Holder’s delivery of a notice voiding a
Redemption Notice and exercise of its rights following such notice shall not
affect the Company’s obligations to make any payments of Late Charges which
have accrued prior to the date of such notice with respect to the Conversion
Amount subject to such notice.

(b)   Redemption by Other Holders.  Upon the Company’s receipt of notice from any
of the holders of the Other Notes for redemption or repayment as a result of an
event or occurrence substantially similar to the events or occurrences
described in Section 4(b) or Section 5(b) or amortization pursuant to Section 8
(each, an “Other Redemption Notice”),
the Company shall immediately, but no later than one (1) Business Day of its
receipt thereof, forward to the Holder by facsimile a copy of such notice.  If the Company receives a Redemption Notice
and one or more Other Redemption Notices, during the seven (7) Business Day
period beginning on and including the date which is three (3) Business Days
prior to the Company’s receipt of the Holder’s Redemption Notice and ending on
and including the date which is three (3) Business Days after the Company’s
receipt of the Holder’s Redemption Notice and the Company is unable to redeem
all principal, interest and other amounts designated in such Redemption Notice
and such Other Redemption Notices received during such seven (7) Business Day
period, then the Company shall redeem a pro rata amount from each holder of the
Notes (including the Holder) based on the principal amount of the Notes
submitted for redemption pursuant to such Redemption Notice and such Other
Redemption Notices received by the Company during such seven Business Day
period.

(13)         VOTING RIGHTS.  The Holder shall have no voting rights as the
holder of this Note, except as required by law, including, but not limited to,
the General Corporation Law of the State of Delaware and as expressly provided
in this Note.

(14)         COVENANTS.

(a)   Rank.              All
payments due under this Note (A) shall rank pari passu with all Other Notes and (B) shall be senior to
all other Indebtedness of the Company and its Subsidiaries other than the
Permitted Senior Indebtedness and the Sonopress Indebtedness.

(b)   Incurrence of Indebtedness. 
So long as this Note is outstanding, the Company shall not, and the
Company shall not permit any of its Subsidiaries to, directly or

 18
 

 

indirectly, incur or guarantee, assume or
suffer to exist any Indebtedness, other than (i) the Indebtedness evidenced by
this Note and the Other Notes and (ii) other Permitted Indebtedness.

(c)   Existence of Liens. 
So long as this Note is outstanding, the Company shall not, and the
Company shall not permit any of its Subsidiaries to, directly or indirectly,
allow or suffer to exist any mortgage, lien, pledge, charge, security interest
or other encumbrance upon or in any property or assets (including accounts and
contract rights) owned by the Company or any of its Subsidiaries (collectively,
“Liens”) other
than Permitted Liens.

(d)   Restricted Payments. 
The Company shall not, and the Company shall not permit any of its
Subsidiaries to, directly or indirectly, redeem, defease, repurchase, repay or
make any payments in respect of, by the payment of cash or cash equivalents (in
whole or in part, whether by way of open market purchases, tender offers,
private transactions or otherwise), all or any portion of any Permitted
Indebtedness (other than this Note, the Other Notes and the Permitted Senior
Indebtedness), whether by way of payment in respect of principal of (or
premium, if any) or interest on such Indebtedness, if at the time such payment
is due or is otherwise made or, after giving effect to such payment, an event
constituting, or that with the passage of time and without being cured would
constitute, an Event of Default has occurred and is continuing; provided that
notwithstanding the foregoing, no principal (or any portion thereof) of any
Subordinated Indebtedness may be paid (whether upon maturity, redemption,
acceleration or otherwise) so long as this Note is outstanding.

(e)   Restriction on Redemption and Cash Dividends.  Until all of the Notes have been converted,
redeemed or otherwise satisfied in accordance with their terms, the Company
shall not, directly or indirectly, redeem, repurchase or declare or pay any
cash dividend or distribution on its capital stock without the prior express
written consent of the Required Holders.

(15)         PARTICIPATION.  The Holder, as the holder of this Note, shall
be entitled to receive such dividends paid and distributions made to the holders
of Common Stock to the same extent as if the Holder had converted this Note
into Common Stock (without regard to any limitations on conversion herein or
elsewhere) and had held such shares of Common Stock on the record date for such
dividends and distributions.  Payments
under the preceding sentence shall be made concurrently with the dividend or
distribution to the holders of Common Stock.

(16)         VOTE TO ISSUE, OR
CHANGE THE TERMS OF, NOTES.  The
affirmative vote at a meeting duly called for such purpose or the written
consent without a meeting of the Required Holders shall be required for any
change or amendment to this Note or the Other Notes.

(17)         TRANSFER.  This Note may be offered, sold, assigned or
transferred by the Holder without the consent of the Company, subject only to
the provisions of Section 2(f) of the Securities Purchase Agreement.

 19
 

 

(18)         REISSUANCE OF THIS
NOTE.

(a)   Transfer.  If this
Note is to be transferred, the Holder shall surrender this Note to the Company,
whereupon the Company will forthwith issue and deliver upon the order of the
Holder a new Note (in accordance with Section 18(d)), registered as the Holder
may request, representing the outstanding Principal being transferred by the
Holder and, if less then the entire outstanding Principal is being transferred,
a new Note (in accordance with Section 18(d)) to the Holder representing the
outstanding Principal not being transferred. 
The Holder and any assignee, by acceptance of this Note, acknowledge and
agree that, by reason of the provisions of Section 3(c)(iii) following
conversion or redemption of any portion of this Note, the outstanding Principal
represented by this Note may be less than the Principal stated on the face of
this Note.

(b)   Lost, Stolen or Mutilated Note.  Upon receipt by the Company of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of this Note, and, in the case of loss, theft or destruction, of any
indemnification undertaking by the Holder to the Company in customary form and,
in the case of mutilation, upon surrender and cancellation of this Note, the
Company shall execute and deliver to the Holder a new Note (in accordance with
Section 18(d)) representing the outstanding Principal.

(c)   Note Exchangeable for Different Denominations.  This Note is exchangeable, upon the surrender
hereof by the Holder at the principal office of the Company, for a new Note or
Notes (in accordance with Section 18(d) and in principal amounts of at least
$100,000) representing in the aggregate the outstanding Principal of this Note,
and each such new Note will represent such portion of such outstanding
Principal as is designated by the Holder at the time of such surrender.

(d)   Issuance of New Notes. 
Whenever the Company is required to issue a new Note pursuant to the
terms of this Note, such new Note (i) shall be of like tenor with this Note,
(ii) shall represent, as indicated on the face of such new Note, the Principal
remaining outstanding (or in the case of a new Note being issued pursuant to
Section 18(a) or Section 18(c), the Principal designated by the Holder which,
when added to the principal represented by the other new Notes issued in
connection with such issuance, does not exceed the Principal remaining
outstanding under this Note immediately prior to such issuance of new Notes),
(iii) shall have an issuance date, as indicated on the face of such new Note,
which is the same as the Issuance Date of this Note, (iv) shall have the same
rights and conditions as this Note, and (v) shall represent accrued and unpaid
Interest and Late Charges on the Principal and Interest of this Note, if any,
from the Issuance Date.

(19)         REMEDIES,
CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF.  The remedies provided in this Note shall be
cumulative and in addition to all other remedies available under this Note and
any of the other Transaction Documents at law or in equity (including a decree
of specific performance and/or other injunctive relief), and nothing herein
shall limit the Holder’s right to pursue actual and consequential damages for
any failure by the Company to comply with the terms of this Note.  Amounts set forth or provided for herein with
respect to payments, conversion and the like (and the computation thereof)
shall be the amounts to be received by the Holder and shall not, except as
expressly provided herein, be subject to any other obligation of the Company
(or the performance thereof).  The
Company acknowledges that a breach by it of its obligations

 20
 

 

hereunder will cause
irreparable harm to the Holder and that the remedy at law for any such breach
may be inadequate.  The Company therefore
agrees that, in the event of any such breach or threatened breach, the Holder
shall be entitled, in addition to all other available remedies, to an
injunction restraining any breach, without the necessity of showing economic
loss and without any bond or other security being required.

(20)         PAYMENT OF
COLLECTION, ENFORCEMENT AND OTHER COSTS. 
If (a) this Note is placed in the hands of an attorney for collection or
enforcement or is collected or enforced through any legal proceeding or the
Holder otherwise takes action to collect amounts due under this Note or to
enforce the provisions of this Note or (b) there occurs any bankruptcy, reorganization,
receivership of the Company or other proceedings affecting Company creditors’
rights and involving a claim under this Note, then the Company shall pay the
costs incurred by the Holder for such collection, enforcement or action or in
connection with such bankruptcy, reorganization, receivership or other
proceeding, including, but not limited to, financial advisory fees and
attorneys’ fees and disbursements.

(21)         CONSTRUCTION;
HEADINGS.  This Note shall be deemed
to be jointly drafted by the Company and all the Purchasers and shall not be
construed against any person as the drafter hereof.  The headings of this Note are for convenience
of reference and shall not form part of, or affect the interpretation of, this
Note.

(22)         FAILURE OR
INDULGENCE NOT WAIVER.  No failure or
delay on the part of the Holder in the exercise of any power, right or
privilege hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise of any such power, right or privilege preclude other or
further exercise thereof or of any other right, power or privilege.

(23)         DISPUTE RESOLUTION.  In the case of a dispute as to the
determination of the Closing Bid Price, the Closing Sale Price or the Weighted
Average Price or the arithmetic calculation of the Conversion Rate or any
Redemption Price, the Company shall submit the disputed determinations or
arithmetic calculations via facsimile within one (1) Business Day of receipt,
or deemed receipt, of the Conversion Notice or Redemption Notice or other event
giving rise to such dispute, as the case may be, to the Holder.  If the Holder and the Company are unable to
agree upon such determination or calculation within one (1) Business Day of
such disputed determination or arithmetic calculation being submitted to the Holder,
then the Company shall, within one Business Day submit via facsimile (a) the
disputed determination of the Closing Bid Price, the Closing Sale Price or the
Weighted Average Price to an independent, reputable investment bank selected by
the Company and approved by the Holder or (b) the disputed arithmetic
calculation of the Conversion Rate or any Redemption Price to the Company’s
independent, outside accountant.  The
Company, at the Company’s expense, shall cause the investment bank or the
accountant, as the case may be, to perform the determinations or calculations
and notify the Company and the Holder of the results no later than five (5)
Business Days from the time it receives the disputed determinations or
calculations.  Such investment bank’s or
accountant’s determination or calculation, as the case may be, shall be binding
upon all parties absent demonstrable error.

 21
 

 

(24)         NOTICES; PAYMENTS.

(a)   Notices.  Whenever
notice is required to be given under this Note, unless otherwise provided
herein, such notice shall be given in accordance with Section 9(f) of the
Securities Purchase Agreement.  The
Company shall provide the Holder with prompt written notice of all actions
taken pursuant to this Note, including in reasonable detail a description of
such action and the reason therefore. 
Without limiting the generality of the foregoing, the Company will give
written notice to the Holder (i) immediately upon any adjustment of the
Conversion Price, setting forth in reasonable detail, and certifying, the calculation
of such adjustment and (ii) at least twenty (20) days prior to the date on
which the Company closes its books or takes a record (A) with respect to any
dividend or distribution upon the Common Stock, (B) with respect to any pro
rata subscription offer to holders of Common Stock or (C) for determining
rights to vote with respect to any Fundamental Transaction, dissolution or
liquidation, provided in each case that such information shall be made known to
the public prior to or in conjunction with such notice being provided to the
Holder.

(b)   Payments.  Whenever
any payment of cash is to be made by the Company to any Person pursuant to this
Note, such payment shall be made in lawful money of the United States of
America by a check drawn on the account of the Company and sent via overnight
courier service to such Person at such address as previously provided to the
Company in writing (which address, in the case of each of the Purchasers, shall
initially be as set forth on the Schedule of Buyers attached to the Securities
Purchase Agreement); provided that the Holder may elect to receive a payment of
cash via wire transfer of immediately available funds by providing the Company
with prior written notice setting out such request and the Holder’s wire
transfer instructions.  Whenever any
amount expressed to be due by the terms of this Note is due on any day which is
not a Business Day, the same shall instead be due on the next succeeding day
which is a Business Day and, in the case of any Interest Date which is not the
date on which this Note is paid in full, the extension of the due date thereof
shall not be taken into account for purposes of determining the amount of
Interest due on such date.  Any amount of
Principal or other amounts due under the Transaction Documents which is not
paid when due shall result in a late charge being incurred and payable by the
Company in an amount equal to interest on such amount at the rate of fifteen
percent (15%) per annum from the date such amount was due until the same is paid
in full (“Late Charge”).

(25)         CANCELLATION.  After all Principal, accrued Interest and
other amounts at any time owed on this Note have been paid in full, this Note
shall automatically be deemed canceled, shall be surrendered to the Company for
cancellation and shall not be reissued.

(26)         WAIVER OF NOTICE.  To the extent permitted by law, the Company
hereby waives demand, notice, protest and all other demands and notices in
connection with the delivery, acceptance, performance, default or enforcement
of this Note and the Securities Purchase Agreement.

(27)         GOVERNING LAW;
JURISDICTION; SEVERABILITY; JURY TRIAL. 
This Note shall be construed and enforced in accor­dance with, and all
questions concerning the construction, validity, interpretation and performance
of this Note shall be governed by, the internal laws of the State of New York,
without giving effect to any choice of law or conflict of law provision or rule
(whether of the State of New York or any other jurisdictions) that would cause
the application of the laws of any jurisdictions other than the State of New
York.  The

 22
 

 

Company hereby
irrevocably submits to the exclusive jurisdiction of the state and federal
courts sitting in The City of New York, Borough of Manhattan, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is brought in an inconvenient forum or that the
venue of such suit, action or proceeding is improper.  Nothing contained herein shall be deemed to
limit in any way any right to serve process in any manner permitted by
law.  In the event that any provision of
this Note is invalid or unenforceable under any applicable statute or rule of
law, then such provision shall be deemed inoperative to the extent that it may
conflict therewith and shall be deemed modified to conform with such statute or
rule of law.  Any such provision which
may prove invalid or unenforceable under any law shall not affect the validity
or enforceability of any other provision of this Note.  Nothing contained herein shall be deemed or
operate to preclude the Holder from bringing suit or taking other legal action
against the Company in any other jurisdiction to collect on the Company’s
obligations to the Holder, to realize on any collateral or any other security
for such obligations, or to enforce a judgment or other court ruling in favor
of the Holder.  THE COMPANY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY
HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY
DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF THIS NOTE OR ANY
TRANSACTION CONTEMPLATED HEREBY.

(28)         CERTAIN
DEFINITIONS.  For purposes of this
Note, the following terms shall have the following meanings:

(a)           “Approved Stock Plan”
means any employee benefit plan which has been approved by the Board of
Directors of the Company, pursuant to which the Company’s securities may be
issued to any employee, officer or director for services provided to the
Company.

(b)           “Available Installment
Amount” means for any Installment Date, an amount equal to the
lesser of (A) the product of (i) $4,000,000, multiplied
by (ii) Holder Pro Rata Amount (plus the sum of any accrued and unpaid Interest
on such Principal amount and any accrued and unpaid Late Charges with respect
to such Principal amount and Interest as of such Installment Date) and (B) the
outstanding Conversion Amount under this Note as of such Installment Date.  For the avoidance of doubt, any accrued and
unpaid Interest which may be paid pursuant to this definition shall be deducted
from the total interest to be paid on any subsequent Interest Payment Date.

(c)           “Bloomberg”
means Bloomberg Financial Markets.

(d)           “Business Day”
means any day other than Saturday, Sunday or other day on which commercial
banks in The City of New York are authorized or required by law to remain
closed.

(e)           “Calendar Quarter”
means each of: the period beginning on and including January 1 and ending on
and including March 31; the period beginning on and including April 1 and
ending on and including June 30; the period beginning on and including

 23
 

 

July 1 and ending on and including September
30; and the period beginning on and including October 1 and ending on and
including December 31.

(f)            “Change of
Control” means any Fundamental Transaction other than (A) any
reorganization, recapitalization or reclassification of Common Stock, in which
holders of the Company’s voting power immediately prior to such reorganization,
recapitalization or reclassification continue after such reorganization,
recapitalization or reclassification to hold publicly traded securities and,
directly or indirectly, the voting power of the surviving entity or entities
necessary to elect a majority of the members of the board of directors (or
their equivalent if other than a corporation) of such entity or entities, or
(B) pursuant to a migratory merger effected solely for the purpose of changing
the jurisdiction of incorporation of the Company.

(g)           “Closing Bid Price”
and “Closing Sale Price” means, for any
security as of any date, the last closing bid price and last closing trade
price, respectively, for such security on the Principal Market, as reported by
Bloomberg, or, if the Principal Market begins to operate on an extended hours
basis and does not designate the closing bid price or the closing trade price,
as the case may be, then the last bid price or last trade price, respectively,
of such security prior to 4:00:00 p.m., New York Time, as reported by
Bloomberg, or, if the Principal Market is not the principal securities exchange
or trading market for such security, the last closing bid price or last trade
price, respectively, of such security on the principal securities exchange or
trading market where such security is listed or traded as reported by
Bloomberg, or if the foregoing do not apply, the last closing bid price or last
trade price, respectively, of such security in the over-the-counter market on
the electronic bulletin board for such security as reported by Bloomberg, or,
if no closing bid price or last trade price, respectively, is reported for such
security by Bloomberg, the average of the bid prices, or the ask prices,
respectively, of any market makers for such security as reported in the “pink
sheets” by Pink Sheets LLC (formerly the National Quotation Bureau, Inc.).  If the Closing Bid Price or the Closing Sale
Price cannot be calculated for a security on a particular date on any of the
foregoing bases, the Closing Bid Price or the Closing Sale Price, as the case
may be, of such security on such date shall be the fair market value as mutually
determined by the Company and the Holder. 
If the Company and the Holder are unable to agree upon the fair market
value of such security, then such dispute shall be resolved pursuant to Section
23.  All such determinations to be
appropriately adjusted for any stock dividend, stock split, stock combination
or other similar transaction during the applicable calculation period.

(h)           “Closing Date”
shall have the meaning set forth in the Securities Purchase Agreement, which
date is the date the Company initially issued Notes pursuant to the terms of
the Securities Purchase Agreement.

(i)            “Common Stock
Deemed Outstanding” means, at any given time, the number of shares
of Common Stock outstanding at such time, plus the number of shares of Common
Stock deemed to be outstanding pursuant to Sections 7(a)(i) and 7(a)(ii) hereof
regardless of whether the Options or Convertible Securities are actually
exercisable at such time, but excluding any Common Stock owned or held by or
for the account of the Company or issuable upon conversion or exercise, as
applicable, of the Notes and the Warrants.

 24

 

(j)            “Contingent Obligation” means, as to any Person, any direct
or indirect liability, contingent or otherwise, of that Person with respect to
any indebtedness, lease, dividend or other obligation of another Person if the
primary purpose or intent of the Person incurring such liability, or the
primary effect thereof, is to provide assurance to the obligee of such
liability that such liability will be paid or discharged, or that any
agreements relating thereto will be complied with, or that the holders of such
liability will be protected (in whole or in part) against loss with respect
thereto.

(k)           “Convertible Securities” means any stock or
securities (other than Options) directly or indirectly convertible into or
exercisable or exchangeable for Common Stock.

(l)            “Eligible Market” means the Principal Market, The New York
Stock Exchange, Inc., the American Stock Exchange, The Nasdaq Global Select
Market or The Nasdaq Capital Market.

(m)          “Equity
Conditions” means
each of the following conditions:  (i) on
each day during the period beginning three (3) months prior to the applicable
date of determination and ending on and including the applicable date of
determination (the “Equity Conditions
Measuring Period”), either (x) the Registration Statement filed
pursuant to the Registration Rights Agreement shall be effective and available
for the resale of all remaining Registrable Securities in accordance with the
terms of the Registration Rights Agreement and there shall not have been any
Grace Periods (as defined in the Registration Rights Agreement) or (y) all
shares of Common Stock issuable upon conversion of the Notes and exercise of
the Warrants shall be eligible for sale without restriction and without the
need for registration under any applicable federal or state securities laws;
(ii) during the Equity Conditions Measuring Period the Common Stock is
designated for quotation on the Principal Market or any other Eligible Market
and shall not have been suspended from trading on such exchange or market
(other than suspensions of not more than two (2) days and occurring prior to
the applicable date of determination due to business announcements by the
Company) nor shall delisting or suspension by such exchange or market been
threatened or pending either (A) in writing by such exchange or market or (B)
by falling below the then effective minimum listing maintenance requirements of
such exchange or market; (iii) during the Equity Conditions Measuring Period,
the Company shall have delivered Conversion Shares upon conversion of the Notes
and Warrant Shares upon exercise of the Warrants to the holders on a timely
basis as set forth in Section 2(c)(ii) hereof (and analogous provisions under
the Other Notes) and Sections 2(a) of the Warrants; (iv) any applicable shares
of Common Stock to be issued in connection with the event requiring
determination may be issued in full without violating Section 3(d) hereof and
the rules or regulations of the Principal Market or any other applicable
Eligible Market; (v) during the six (6) month period ending on and including
the date immediately preceding the applicable date of determination, the
Company shall not have failed to timely make any payments within five (5)
Business Days of when such payment is due pursuant to any Transaction Document;
(vi) during the Equity Conditions Measuring Period, there shall not have
occurred either (A) the public announcement of a pending, proposed or intended
Fundamental Transaction which has not been abandoned, terminated or
consummated, or (B) an Event of Default or (vii) during the period commencing
on the Interest Notice Due Date, and ending on the Interest Date, an event that
with the passage of time or giving of notice would constitute an Event of
Default; (viii) the Company

 25
 

 

shall have no knowledge of any fact that would cause (x) the
Registration Statements required pursuant to the Registration Rights Agreement
not to be effective and available for the resale of all remaining Registrable
Securities in accordance with the terms of the Registration Rights Agreement or
(y) any shares of Common Stock issuable upon conversion of the Notes and shares
of Common Stock issuable upon exercise of the Warrants not to be eligible for
sale without restriction pursuant to Rule 144(k) and any applicable state
securities laws; and (ix) the Company otherwise shall have been in material
compliance with and shall not have materially breached any provision, covenant,
representation or warranty of any Transaction Document.

(n)           “Equity Conditions Failure” means that (i) on any day during
the period commencing ten (10) Trading Days prior to the applicable Interest
Notice Date through the applicable Interest Date and (ii) on any day during the
period commencing ten (10) Trading Days prior to the applicable Mandatory
Conversion Notice Date through the applicable Mandatory Conversion Date, the
Equity Conditions have not been satisfied (or waived in writing by the Holder).

(o)           “Excluded
Securities” means
any Common Stock issued or issuable: (i) in connection with any Approved Stock
Plan; (ii) upon conversion of the Notes or the exercise of the Warrants; (iii)
in connection with the payment of any Interest Shares on the Notes; (iv)
pursuant to a bona fide firm commitment underwritten public offering with a
nationally recognized underwriter which generates gross proceeds to the Company
in excess of $20,000,000 (other than an “at-the-market offering” as defined in
Rule 415(a)(4) under the 1933 Act and “equity lines”); (v) to Relativity Media,
LLC pursuant to a distribution agreement dated as of August 11, 2006 between
the Company and Relativity Media, LLC in an aggregate amount not to exceed
3,400,000 shares of Common Stock on such terms and conditions set forth in the
Company’s Form 10-Q for the quarterly period ended June 30, 2006 and (vi) upon
conversion of any Options or Convertible Securities which are outstanding on
the day immediately preceding the Subscription Date, provided that the terms of
such Options or Convertible Securities are not amended, modified or changed on
or after the Subscription Date.

(p)           “Foothill Loan Agreement” means the Indebtedness incurred
pursuant to the Amended and Restated Loan and Security Agreement, dated August
10, 2005, between the Company and Wells Fargo Foothill, Inc.; provided, however,
that the aggregate outstanding amount of any such Indebtedness does not as of
any date exceed (i) $26,000,000 or (ii) in the event that the Company has
complied with the terms and conditions set forth in Section 4(p) of the
Securities Purchase Agreement, if greater, an amount equal to 60% of the value
of the Company’s “Eligible Accounts” (as defined in the Foothill Loan
Agreement).

(q)           “Fundamental Transaction” means that the Company shall, directly or indirectly, in one or
more related transactions, (i) consolidate or merge with or into (whether or
not the Company is the surviving corporation) another Person or Persons, or
(ii) sell, assign, transfer, convey or otherwise dispose of all or
substantially all of the properties or assets of the Company to another Person,
or (iii) allow another Person to make a purchase, tender or exchange
offer that is accepted by the holders of more than the 50% of the outstanding
shares of Voting Stock (not
including any shares of Voting Stock held by the Person or Persons making or
party to, or associated or affiliated with the Persons making or party to, such
purchase, tender or exchange offer), or (iv) consummate a stock purchase
agreement or other business combination

 26
 

 

(including, without limitation, a reorganization, recapitalization, spin-off
or scheme of arrangement) with another Person whereby such other Person acquires more than
the 50% of the outstanding shares of Voting Stock (not including any shares of Voting Stock held by the other Person
or other Persons making or party to, or associated or affiliated with the other
Persons making or party to, such stock purchase agreement or other
business combination), (v)
reorganize, recapitalize or reclassify its Common Stock or (vi) any “person”
or “group” (as these terms are used for purposes of Sections 13(d) and 14(d) of
the Exchange Act) is or shall become the “beneficial owner” (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of 50% of the aggregate
ordinary voting power represented by issued and outstanding Common Stock.

(r)            “GAAP” means United States generally accepted accounting
principles, consistently applied.

(s)           “Holder Pro Rata Amount”
means a fraction (i) the numerator of which is the Principal amount of this
Note on the Closing Date and (ii) the denominator of which is the aggregate
principal amount of all Notes issued to the initial purchasers pursuant to the
Securities Purchase Agreement on the Closing Date.

(t)          “Indebtedness” of any Person means, without duplication (i)
all indebtedness for borrowed money, (ii) all obligations issued, undertaken or
assumed as the deferred purchase price of property or services, including
(without limitation) “capital leases” in accordance with generally accepted
accounting principles (other than trade payables entered into in the ordinary
course of business), (iii) all reimbursement or payment obligations with
respect to letters of credit, surety bonds and other similar instruments, (iv)
all obligations evidenced by notes, bonds, debentures or similar instruments,
including obligations so evidenced incurred in connection with the acquisition
of property, assets or businesses, (v) all indebtedness created or arising
under any conditional sale or other title retention agreement, or incurred as
financing, in either case with respect to any property or assets acquired with
the proceeds of such indebtedness (even though the rights and remedies of the
seller or bank under such agreement in the event of default are limited to
repossession or sale of such property), (vi) all monetary obligations under any
leasing or similar arrangement which, in connection with generally accepted
accounting principles, consistently applied for the periods covered thereby, is
classified as a capital lease, (vii) all indebtedness referred to in clauses
(i) through (vi) above secured by (or for which the holder of such Indebtedness
has an existing right, contingent or otherwise, to be secured by) any mortgage,
lien, pledge, charge, security interest or other encumbrance upon or in any
property or assets (including accounts and contract rights) owned by any
Person, even though the Person which owns such assets or property has not
assumed or become liable for the payment of such indebtedness, and (viii) all
Contingent Obligations in respect of indebtedness or obligations of others of
the kinds referred to in clauses (i) through (vii) above.

(u)           “Installment Date” means each of the following dates: (i)
January 30, 2009; (ii) July 30, 2009, (iii) January 30, 2010, (iv) July 30,
2010, (v) January 30, 2011, and (vi) July 30, 2011.

(v)           “Interest Conversion Price” means, with respect to any
Interest Date that price which shall be the lower of (i) the applicable
Conversion Price and (ii) the price

 27
 

 

computed as 90% of the arithmetic average of the Weighted Average Price
of the Common Stock on each of the ten (10) consecutive Trading Days ending on
the Trading Day immediately preceding the applicable Interest Date (each, an “Interest Measuring Period”). 
All such determinations to be appropriately adjusted for any stock
split, stock dividend, stock combination or other similar transaction during
such period.

(w)          “Interest
Notice Due Date” means the
fifteenth (15th) Trading Day prior to the applicable
Interest Date.

(x)            “Options” means any rights, warrants or options to subscribe
for or purchase shares of Common Stock or Convertible Securities.

(y)           “Parent Entity” of a Person means an entity that, directly or
indirectly, controls the applicable Person and whose common stock or
equivalent equity security is quoted or listed on an Eligible Market, or, if there is more than one such
Person or Parent Entity, the Person or Parent Entity with the largest public
market capitalization as of the date of consummation of the Fundamental
Transaction.

(z)            “Permitted Indebtedness” means (i) Permitted
Senior Indebtedness; (ii) Indebtedness incurred by the Company that is made
expressly subordinate in right of payment to the Indebtedness evidenced by this
Note, as reflected in a written agreement acceptable to the Holder and approved
by the Holder in writing, and which Indebtedness does not provide at any time
for (1) the payment, prepayment, repayment, repurchase or defeasance, directly
or indirectly, of any principal or premium, if any, thereon until ninety-one
(91) days after the Maturity Date or later and (2) total interest and fees at a
rate in excess of seven and seven-eighths 
percent (7.875%) per annum (such Indebtedness, the “Subordinated Indebtedness”), (iii)
Indebtedness secured by Permitted Liens, (iv) Indebtedness to trade creditors
incurred in the ordinary course of business, (v) Indebtedness under this Note
and the Other Notes, (vi) extensions, refinancings and renewals of any items in
clauses (i) through (iii) above, provided that (A) the principal amount is not
increased or the terms modified to impose more burdensome terms upon the
Company or its Subsidiary, as the case may be, and (B) with respect to the
Permitted Senior Indebtedness, the Company has complied with the terms and
conditions set forth in Section 4(p), and 
(vii) the Sonopress Indebtedness.

(aa)         “Permitted Liens”
means (i) any Lien for taxes not yet due or delinquent or being
contested in good faith by appropriate proceedings for which adequate reserves
have been established in accordance with GAAP, (ii) any statutory Lien arising
in the ordinary course of business by operation of law with respect to a
liability that is not yet due or delinquent, (iii) any Lien created by
operation of law, such as materialmen’s liens, mechanics’ liens and other
similar liens, arising in the ordinary course of business with respect to a
liability that is not yet due or delinquent or that are being contested in good
faith by appropriate proceedings,
(iv) Liens securing the Company’s obligations under the Notes; (v) Liens
(A) upon or in any equipment (as defined in the Security Agreement) acquired or
held by the Company or any of its Subsidiaries to secure the purchase price of
such equipment or indebtedness incurred solely for the purpose of financing the
acquisition or lease of such equipment, or (B) existing on such equipment at
the time of its acquisition, provided that the Lien is confined solely to the
property so acquired and improvements thereon, and the proceeds of such
equipment; (vi) Liens 

 28
 

 

securing the Permitted Senior Indebtedness; (vii) Liens incurred in
connection with the extension, renewal or refinancing of the indebtedness
secured by Liens of the type described in clauses (i) and (vi) above, provided
that any extension, renewal or replacement Lien shall be limited to the
property encumbered by the existing Lien and the principal amount of the
Indebtedness being extended, renewed or refinanced does not increase, (vii)
Liens securing the Sonopress Indebtedness in existence as of the date hereof;
(viii) leases or subleases and licenses and sublicenses granted to others in
the ordinary course of the Company’s business, not interfering in any material
respect with the business of the Company and its Subsidiaries taken as a whole,
(ix) Liens in favor of customs and revenue authorities arising as a matter
of law to secure payments of custom duties in connection with the importation
of goods, and (x) Liens arising from judgments, decrees or
attachments in circumstances not constituting an Event of Default under Section
4(a)(ix).

(bb)         “Permitted Senior Indebtedness” the
principal of (and premium, if any), interest on, and all fees and other amounts
(including, without limitation, any reasonable out-of-pocket costs, enforcement
expenses (including reasonable out-of-pocket legal fees and disbursements),
collateral protection expenses and other reimbursement or indemnity obligations
relating thereto) payable by Company and/or its Subsidiaries under or in
connection with the Foothill Loan Agreement.

(cc)         “Person” means an individual, a limited
liability company, a partnership, a joint venture, a corporation, a trust, an
unincorporated organization, any other entity and a government or any
department or agency thereof.

(dd)         “Principal Market” means The Nasdaq Global
Market.

(ee)         “Redemption Notices” means, collectively, the Event of
Default Redemption Notices, the Change of Control Redemption Notices and the Installment Notice, each of the
foregoing, individually, a Redemption Notice.

(ff)           “Redemption Premium” means (i) in the case of the Events of
Default described in Section 4(a)(i) - (vi) and (ix) - (xii), 120% or (ii) in
the case of the Events of Default described in Section 4(a)(vii) - (viii),
100%.

(gg)         “Redemption Prices” means, collectively, the Event of Default
Redemption Price, Change of Control Redemption Price and the Installment Price and,
each of the foregoing, individually, a Redemption Price.

(hh)         “Registration
Rights Agreement”
means that certain registration rights agreement dated as of the Subscription
Date by and among the Company and the initial holders of the Notes relating to,
among other things, the registration of the resale of the Common Stock issuable
upon conversion of the Notes and exercise of the Warrants and as Interest
Shares under the Notes.

(ii)           “Required Holders” means the holders of Notes representing at
least a majority of the aggregate principal amount of the Notes then
outstanding.

 29
 

 

(jj)           “SEC” means the United States Securities
and Exchange Commission.

(kk)         “Securities
Purchase Agreement”
means that certain securities purchase agreement dated as of the Subscription
Date by and among the Company and the initial holders of the Notes pursuant to
which the Company issued the Notes.

(ll)           “Sonopress Indebtedness” means the “Advance”
incurred under (and as defined in) the Replication Agreement dated as of June
30, 2006 by and between the Company and Sonopress LLC; provided, however, that
(i) the Company shall not be permitted to extend, refinance or renew such
Advance, (ii) the Company shall not be permitted to increase the outstanding
amount of such Advance as of the Subscription Date or to reborrow any portion
of such Advance once it has been repaid thereunder and (iii) such Advance may
not be repaid by the payment of greater than $0.20 per each “DVD Product” purchased
under (and as defined in) the Replication Agreement.

(mm)       “Subscription Date” means August 30, 2006.

(nn)         “Successor Entity” means the Person, which may be the
Company, formed by, resulting from or surviving any Fundamental Transaction or
the Person with which such Fundamental Transaction shall have been made,
provided that if such Person is not a publicly traded entity whose
common stock or equivalent equity security is quoted or listed for trading on
an Eligible Market, Successor Entity shall mean such Person’s Parent Entity.

(oo)         “Trading
Day” means any day
on which the Common Stock is traded on the Principal Market, or, if the
Principal Market is not the principal trading market for the Common Stock, then
on the principal securities exchange or securities market on which the Common
Stock is then traded; provided that “Trading Day” shall not include any day on
which the Common Stock is scheduled to trade on such exchange or market for
less than 4.5 hours or any day that the Common Stock is suspended from trading
during the final hour of trading on such exchange or market (or if such
exchange or market does not designate in advance the closing time of trading on
such exchange or market, then during the hour ending at 4:00:00 p.m., New York
Time).

(pp)         “Voting Stock” of a Person means capital
stock of such Person of the class or classes pursuant to which the holders
thereof have the general voting power to elect, or the general power to
appoint, at least a majority of the board of directors, managers or trustees of
such Person (irrespective of whether or not at the time capital stock of any
other class or classes shall have or might have voting power by reason of the
happening of any contingency).

(qq)         “Warrants” has the meaning ascribed to such
term in the Securities Purchase Agreement, and shall include all warrants
issued in exchange therefor or replacement thereof.

(rr)           “Weighted
Average Price”
means, for any security as of any date, the dollar volume-weighted average
price for such security on the Principal Market during the period beginning at
9:30:01 a.m., New York Time (or such other time as the Principal Market
publicly announces is the official open of trading), and ending at 4:00:00
p.m., New York Time

 30
 

 

(or such other time as the Principal Market publicly announces is the
official close of trading) as reported by Bloomberg through its “Volume at
Price” functions, or, if the foregoing does not apply, the dollar
volume-weighted average price of such security in the over-the-counter market
on the electronic bulletin board for such security during the period beginning
at 9:30:01 a.m., New York Time (or such other time as such market publicly
announces is the official open of trading), and ending at 4:00:00 p.m., New
York Time (or such other time as such market publicly announces is the official
close of trading) as reported by Bloomberg, or, if no dollar volume-weighted
average price is reported for such security by Bloomberg for such hours, the
average of the highest closing bid price and the lowest closing ask price of
any of the market makers for such security as reported in the “pink sheets” by
Pink Sheets LLC (formerly the National Quotation Bureau, Inc.).  If the Weighted Average Price cannot be
calculated for a security on a particular date on any of the foregoing bases,
the Weighted Average Price of such security on such date shall be the fair
market value as mutually determined by the Company and the Holder.  If the Company and the Holder are unable to agree
upon the fair market value of such security, then such dispute shall be
resolved pursuant to Section 23.  All
such determinations to be appropriately adjusted for any stock dividend, stock
split, stock combination or other similar transaction during the applicable
calculation period.

(29)         DISCLOSURE.
Upon receipt or delivery by the Company of any notice in accordance with the
terms of this Note, unless the Company has in good faith determined that the
matters relating to such notice do not constitute material, nonpublic
information relating to the Company or its Subsidiaries, the Company shall
within one (1) Business Day after any such receipt or delivery publicly
disclose such material, nonpublic information on a Current Report on Form 8-K
or otherwise. In the event that the Company believes that a notice contains
material, nonpublic information, relating to the Company or its Subsidiaries,
the Company shall indicate to the Holder contemporaneously with delivery of
such notice, and in the absence of any such indication, the Holder shall be allowed
to presume that all matters relating to such notice do not constitute material,
nonpublic information relating to the Company or its Subsidiaries.

[Signature Page Follows]

 31

 

IN WITNESS WHEREOF, the
Company has caused this Note to be duly executed as of the Issuance Date set
out above.

	
  

  	
   

  	
  IMAGE ENTERTAINMENT, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
   

  	
  Title:

  

 

 

EXHIBIT
I

IMAGE ENTERTAINMENT, INC.

CONVERSION
NOTICE

Reference is made to the Senior Convertible Note (the “Note”) issued to the undersigned by Image
Entertainment, Inc. (the “Company”).  In accordance with and pursuant to the Note,
the undersigned hereby elects to convert the Conversion Amount (as defined in
the Note) of the Note indicated below into shares of Common Stock par value
$0.0001 per share (the “Common Stock”)
of the Company, as of the date specified below.

 

	
   

  	
  Date of Conversion:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Aggregate Conversion Amount to be converted:

  	
   

  
	
   

  	
   

  	
   

  
	
  Please confirm the following information:

  
	
   

  
	
   

  	
  Conversion Price:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Number of shares of Common Stock to be issued:

  	
   

  
	
   

  	
   

  	
   

  
	
  Please issue the Common Stock into which the Note is
  being converted in the following name and to the following address:

  
	
   

  	
  Issue to:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Facsimile Number:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Authorization:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  	
   

  
	
  Dated:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Account Number:

  	
   

  
	
   

  	
    (if electronic book entry transfer)

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Transaction Code Number:

  	
   

  
	
   

  	
    (if electronic book entry transfer)

  	
   

  
															

 

 

ACKNOWLEDGMENT

The Company hereby
acknowledges this Conversion Notice and hereby directs the Computershare
Investor Services to issue the above indicated number of shares of Common Stock
in accordance with the Transfer Agent Instructions dated August    ,
2006 from the Company and acknowledged and agreed to by Computershare Investor
Services.

	
  

  	
   

  	
  IMAGE ENTERTAINMENT, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
   

  	
  Title:

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00109-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00109-of-00352.parquet"}]]