Document:

Exhibit 4.6

 

REGISTRATION RIGHTS AGREEMENT

 

This Registration Rights Agreement (this “Agreement”)
is made and entered into as of March 25, 2004, by and among Intrusion Inc., a
Delaware corporation (the “Company”), and the Persons listed on Exhibit
A hereto (each a “Purchaser” and collectively, the “Purchasers”).

 

WHEREAS, upon the terms and subject to the conditions
of the Securities Purchase Agreement, dated as of the date hereof (the “Purchase
Agreement”), the Company has agreed to issue and sell shares of its
Preferred Stock and Warrants to purchase shares of its Common Stock to certain
of the Purchasers; and

 

WHEREAS, to induce such Purchasers to execute and
deliver the Purchase Agreement and to purchase the Shares and the Warrants, the
Company has agreed to provide certain registration rights under the Securities
Act of 1933, as amended (the “Securities Act”), with respect to the
Conversion Shares and the Warrant Shares (each as respectively defined in the
Purchase Agreement).

 

NOW, THEREFORE, in consideration of the
representations, warranties and agreements contained herein and other good and
valuable consideration, the receipt and legal adequacy of which are hereby
acknowledged by the parties, the Company and the Purchasers hereby agree as
follows:

 

1.                                       Definitions.

 

Capitalized terms used but not otherwise defined
herein shall have the meanings given such terms in the Purchase Agreement. As
used in this Agreement, the following terms shall have the following meanings:

 

“Affiliate” means, with respect to any Person,
any other Person that directly or indirectly controls or is controlled by or
under common control with such Person. For the purposes of this definition, “control,”
when used with respect to any Person, means the possession, direct or indirect,
of the power to direct or cause the direction of the management and policies of
such Person, whether through the ownership of voting securities, by contract or
otherwise; and the terms “affiliated,” “controlling” and “controlled”
have meanings correlative to the foregoing.

 

“Blackout Period” shall have the meaning set
forth in Section 3(m).

 

“Board” shall have the meaning set forth in
Section 3(m).

 

“Business Day” means any day except Saturday,
Sunday and any day which is a legal holiday or a day on which banking
institutions in the State of Texas generally are authorized or required by law
or other government actions to close.

 

“Commission” means the Securities and Exchange
Commission.

 

 

“Common Shares” shall have the meaning set
forth in the definition of “Registrable Securities.”

 

“Common Stock” means the Company’s Common
Stock, $0.01 par value.

 

“Effectiveness Date” means with respect to the
Registration Statement the earlier of (i) the 120th day following
the Closing Date, before which the Company will use its commercially reasonable
efforts to cause the Registration Statement to become effective, and (ii) the
date which is within five (5) Business Days of the date on which the Commission
informs the Company that the Commission (a) will not review the Registration
Statement or (b) that the Company may request the acceleration of the
effectiveness of the Registration Statement.

 

“Effectiveness Period” shall have the meaning
set forth in Section 2.

 

“Event” shall have the meaning set forth in
Section 8(d).

 

“Exchange Act” means the Securities Exchange
Act of 1934, as amended.

 

“Filing Date” means the date that the
Registration Statement is required to be filed, which date shall be within
thirty (30) days after the Closing Date.

 

“Holder” means, collectively, each holder from
time to time of Registrable Securities including, without limitation, each
Purchaser and its assignees. To the extent this Agreement refers to an
election, consent, waiver, request or approval of or by the Holders, such
reference shall mean an election, consent, waiver, request or approval by the
holders of a majority in interest of the then-outstanding Registrable
Securities (on an as converted basis).

 

“Indemnified Party” shall have the meaning set
forth in Section 6(c).

 

“Indemnifying Party” shall have the meaning set
forth in Section 6(c).

 

“Liquidated Damages” shall have the meaning set
forth in Section 8(d).

 

“Losses” shall have the meaning set forth in
Section  6(a).

 

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

 

“Preferred Shares” means the shares of
Preferred Stock issued or issuable pursuant to the Purchase Agreement, and upon
any stock split, stock dividend, recapitalization or similar event with respect
to such shares of Preferred Stock and any other securities issued in exchange
of or replacement of such shares of Preferred Stock.

 

“Preferred Stock” means the Company’s 5%
Convertible Preferred Stock, $0.01 par value.

 

2

 

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

 

“Prospectus” means the prospectus included in
the Registration Statement (including, without limitation, a prospectus that
includes any information previously omitted from a prospectus filed as part of
an effective registration statement in reliance upon Rule 430A promulgated
under the Securities Act), as amended or supplemented by any prospectus
supplement, with respect to the terms of the offering of any portion of the
Registrable Securities covered by the Registration Statement, and all other
amendments and supplements to the Prospectus, including post-effective
amendments, and all material incorporated by reference in such Prospectus.

 

“Registrable Securities” means (i) the shares
of Common Stock issued and issuable pursuant to the conversion of the Preferred
Stock and the exercise of the Warrants, as the case may be, (ii) up to
1,349,352 shares of Common Stock owned by Gryphon Master Fund, L.P., (iii) up
to 500,000 shares of Common Stock owned by James F. and Catherine A. Gero,
Tenants in Common, (iv) the shares of Common Stock issued and issuable upon the
exercise of that certain Warrant to Purchase Common Stock dated March 25, 2004,
issued by the Company to Black Point Partners, Inc., and (v) any Common Stock
issued upon any stock split, stock dividend, recapitalization or similar event
with respect to such shares of Common Stock and any other securities issued in
exchange of or replacement of the shares of Common Stock referenced in clauses
(i) through (iv) above (collectively, the “Common Shares”); until in the
case of any of the Common Shares (a) a Registration Statement covering such
Common Share has been declared effective by the Commission and continues to be
effective during the Effectiveness Period, or (b) such Common Share is sold in
compliance with Rule 144 or may be sold pursuant to Rule 144(k), after which
time such Common Share shall not be a Registrable Security.

 

“Registration Statement” means the registration
statement, including the Prospectus, amendments and supplements to such
registration statement or Prospectus, including pre- and post-effective
amendments, all exhibits thereto, and all material incorporated by reference in
such registration statement, for the Conversion Shares and the Warrant Shares
required to be filed by the Company with the Commission pursuant to this
Agreement.

 

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

 

“Rule 158” means Rule 158 promulgated by the
Commission pursuant to the Securities Act, as such Rule may be amended from
time to time, or any similar rule or regulation hereafter adopted by the
Commission having substantially the same effect as such Rule.

 

“Rule 415” means Rule 415 promulgated by the
Commission pursuant to the Securities Act, as such Rule may be amended from
time to time, or any similar rule or regulation hereafter adopted by the
Commission having substantially the same effect as such Rule.

 

“Securities Act” means the Securities Act of
1933, as amended.

 

3

 

“Special Counsel” means any special counsel to
Gryphon Master Fund, L.P.

 

2.                                       Registration. On or prior to the Filing Date, the Company shall prepare and file with
the Commission a Registration Statement covering the resale of the Registrable
Securities for an offering to be made on a continuous basis pursuant to Rule
415. The Registration Statement shall be on Form S-3 (except if the Company is
not then eligible to register for resale the Registrable Securities on Form
S-3, in which case such registration shall be on another appropriate form in
accordance with the Securities Act and the rules promulgated thereunder) and
shall contain (except if otherwise directed by the Holders or required by the
Commission) the “Plan of Distribution” attached hereto as Exhibit B.
The Company shall (i) not permit any securities other than the Registrable
Securities to be included in the Registration Statement, (ii) use its
commercially reasonable efforts to cause the Registration Statement to be
declared effective under the Securities Act (including filing with the
Commission a request for acceleration of effectiveness in accordance with Rule
12dl-2 promulgated under the Exchange Act within five (5) Business Days of the
date that the Company is notified (orally or in writing, whichever is earlier)
by the Commission that a Registration Statement will not be “reviewed,” or not
be subject to further review) as soon as possible after the filing thereof, but
in any event prior to the Effectiveness Date, and (iii) keep such Registration
Statement continuously effective under the Securities Act for a period ending
on the earliest of (A) two years from the Closing Date, (B) such time as all
Registrable Securities covered by such Registration Statement have been sold, and
(C) the termination of this Agreement (the “Effectiveness Period”).

 

3.                                       Registration Procedures; Company’s Obligations.

 

In connection with the registration of the Registrable
Securities, the Company shall:

 

(a)                                  Prepare
and file with the Commission on or prior to the Filing Date, a Registration
Statement on Form S-3 (or if the Company is not then eligible to register for
resale the Registrable Securities on Form S-3 such registration shall be on
another appropriate form in accordance with the Securities Act and the Rules
promulgated thereunder) in accordance with Section 2, and use its commercially
reasonable efforts to cause the Registration Statement to become effective and
remain effective as provided herein; provided, however, that not
less than three (3) Business Days prior to the filing of the Registration
Statement or any related Prospectus or any amendment or supplement thereto
(including any document that would be incorporated therein by reference), the
Company shall (i) furnish to the Holders and any Special Counsel, copies of all
such documents proposed to be filed, which documents (other than those
incorporated by reference) will be subject to the timely review of and comment
by such Special Counsel, and (ii) at the request of any Holder cause its
officers and directors, counsel and independent certified public accountants to
respond to such inquiries as shall be necessary, in the reasonable opinion of
such Special Counsel, to conduct a reasonable investigation within the meaning
of the Securities Act. The Company shall not file the Registration Statement or
any such Prospectus or any amendments or supplements thereto to which any
Holder or any Special Counsel shall reasonably object in writing within three
(3) Business Days of their receipt thereof.

 

(b)                                 (i)
Prepare and file with the Commission such amendments, including post-effective
amendments, to the Registration Statement as may be necessary to keep the

 

4

 

Registration Statement continuously effective as to
the applicable Registrable Securities for the Effectiveness Period in order to
register for resale under the Securities Act of all the Registrable Securities;
(ii) cause the related Prospectus to be amended or supplemented by any required
Prospectus supplement, and as so supplemented or amended to be filed pursuant
to Rule 424 (or any similar provisions then in force) promulgated under the
Securities Act; (iii) respond promptly to any comments received from the
Commission with respect to the Registration Statement or any amendment thereto
and promptly provide the Holders true and complete copies of all correspondence
from and to the Commission relating to the Registration Statement; and (iv)
comply in all material respects with the provisions of the Securities Act and
the Exchange Act with respect to the disposition of all Registrable Securities
covered by the Registration Statement during the applicable period in
accordance with the intended methods of disposition by the Holders set forth in
the Registration Statement as so amended or in such Prospectus as so
supplemented.

 

(c)                                  Notify
the Holders of Registrable Securities to be sold and any Special Counsel
promptly (and, in the case of (i)(A) below, not less than three (3) Business
Days prior to such filing and, in the case of (i)(B) or (i)(C) below, no later
than the first Business Day following the date on which the Registration
Statement becomes effective) and (if requested by any such Person) confirm such
notice in writing no later than three (3) Business Days following the day
(i)(A) when a Prospectus or any Prospectus supplement or post-effective
amendment to the Registration Statement is proposed to be filed, (B) when the
Commission notifies the Company whether there will be a “review” of such
Registration Statement and whenever the Commission comments in writing on such
Registration Statement, and (C) with respect to the Registration Statement or
any post-effective amendment, when the same has become effective; (ii) of any
request by the Commission or any other Federal or state governmental authority
for amendments or supplements to the Registration Statement or Prospectus or
for additional information; (iii) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement covering any
or all of the Registrable Securities or the initiation of any Proceedings for
that purpose; (iv) of the receipt by the Company of any notification with
respect to the suspension of the qualification or exemption from qualification
of any of the Registrable Securities for sale in any jurisdiction, or the
initiation or threatening of any Proceeding for such purpose; and (v) of the
occurrence of any event that makes any statement made in the Registration
Statement or Prospectus or any document incorporated or deemed to be
incorporated therein by reference untrue in any material respect or that
requires any revisions to the Registration Statement, Prospectus or other
documents so that, in the case of the Registration Statement or the Prospectus,
as the case may be, it will not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading.

 

The Company shall promptly furnish to the Special
Counsel, without charge, (i) any correspondence from the Commission or the
Commission’s staff to the Company or its representatives relating to any
Registration Statement, and (ii) promptly after the same is prepared and filed
with the Commission, a copy of any written response to the correspondence
received from the Commission.

 

5

 

(d)                                 Use
its commercially reasonable efforts to avoid the issuance of, or, if issued,
obtain the withdrawal of, (i) any order suspending the effectiveness of the
Registration Statement, or (ii) any suspension of the qualification (or
exemption from qualification) of any of the Registrable  Securities for sale in any
U.S. jurisdiction, at the earliest practicable moment.

 

(e)                                  If
requested by the Holders, (i) promptly incorporate in a Prospectus supplement
or post-effective amendment to the Registration Statement such information as
the Company reasonably agrees should be included therein, and (ii) make all
required filings of such Prospectus supplement or such post-effective amendment
as soon as practicable after the Company has received notification of the
matters to be incorporated in such Prospectus supplement or post-effective
amendment.

 

(f)                                    Furnish
to each Holder and any Special Counsel, without charge, at least one conformed
copy of each Registration Statement and each amendment thereto, including
financial statements and schedules, all documents incorporated or deemed to be
incorporated therein by reference, and all exhibits to the extent requested by
such Person (including those previously furnished or incorporated by reference)
promptly after the filing of such documents with the Commission.

 

(g)                                 Promptly
deliver to the Holders and any Special Counsel, without charge, as many copies
of the Registration Statement, Prospectus or Prospectuses (including each form
of prospectus) and each amendment or supplement thereto as such Persons may
reasonably request; and the Company hereby consents to the use of such
Prospectus and each amendment or supplement thereto by any selling Holder in
connection with the offering and sale of the Registrable Securities covered by
such Prospectus and any amendment or supplement thereto until such time that
the Company provides such selling Holder with the notice contemplated by
Section 3(c)(ii), (iii), (iv) or (v).

 

(h)                                 Prior
to any public offering of Registrable Securities, use its commercially
reasonable efforts to register or qualify or cooperate with the selling Holders
and any Special Counsel in connection with the registration or qualification
(or exemption from such registration or qualification) of such Registrable
Securities for offer and sale under the securities or Blue Sky laws of such
jurisdictions within the United States as any Holder reasonably requests in
writing, to keep each such registration or qualification (or exemption
therefrom) effective during the Effectiveness Period and to do any and all other
acts or things necessary or advisable to enable the disposition in such
jurisdictions of the Registrable Securities covered by a Registration
Statement; provided, however, that the Company shall not be
required to qualify generally to do business in any jurisdiction where it is
not then so qualified or to take any action that would subject it to general
service of process in any such jurisdiction where it is not then so subject or
subject the Company to any tax in any such jurisdiction where it is not then so
subject.

 

(i)                                     Cooperate
with the Holders to facilitate the timely preparation and delivery of
certificates representing Registrable Securities to be sold pursuant to a
Registration Statement and to enable such Registrable Securities to be in such
denominations and registered in such names as the Holders may request at least
two (2) Business Days prior to any sale of Registrable Securities.

 

6

 

(j)                                     Upon
the occurrence of any event contemplated by Section 3(c)(v), promptly prepare a
supplement or amendment, including a post-effective amendment, to the
Registration Statement or a supplement to the related Prospectus or any
document incorporated or deemed to be incorporated therein by reference, and
file any other required document so that, as thereafter delivered, neither the
Registration Statement nor such Prospectus will contain an untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.

 

(k)                                  Use
its commercially reasonable efforts to cause all Registrable Securities
relating to such Registration Statement to be listed on any securities
exchange, quotation system, market or over-the-counter bulletin
board, if any, on which the same securities issued by the Company are then
listed as and when required pursuant to the Purchase Agreement.

 

(l)                                     Comply
in all material respects with all applicable rules and regulations of the
Commission and make generally available to its security holders earning
statements satisfying the provisions of Section 11(a) of the Securities Act and
Rule 158 not later than forty-five (45) days after the end of any twelve (12) month
period (or ninety (90) days after the end of any twelve (12) month period if
such period is a fiscal year) commencing on the first day of the first fiscal
quarter of the Company after the effective date of the Registration Statement,
which statement shall conform to the requirements of Rule 158.

 

(m)                               If
(i) there is material non-public information regarding the Company which the
Company’s Board of Directors (the “Board”) reasonably determines not to
be in the Company’s best interest to disclose and which the Company is not
otherwise required to disclose, or (ii) there is a significant business
opportunity (including, but not limited to, the acquisition or disposition of
assets (other than in the ordinary course of business) or any merger,
consolidation, tender offer or other similar transaction) available to the
Company which the Board reasonably determines not to be in the Company’s best
interest to disclose and which the Company would be required to disclose under
the Registration Statement, then the Company may suspend effectiveness of a
Registration Statement and suspend the sale of Registrable Securities under a
Registration Statement one (1) time every three (3) months or three (3) times
in any twelve month period, provided that the Company may not suspend its
obligation for more than thirty (30) days in the aggregate in any twelve month
period if suspension is for any of the reasons listed above or sixty (60) days
in the aggregate in any twelve month period for any other reason (each, a “Blackout
Period”); provided, however, that no such suspension shall be
permitted for more than thirty (30) consecutive days, arising out of the same
set of facts, circumstances or transactions.

 

(n)                                 Within
two (2) Business Days after the Registration Statement which includes the
Registrable Securities is ordered effective by the Commission, the Company
shall deliver, and shall cause legal counsel for the Company to deliver, to the
transfer agent for such Registrable Securities (with copies to each Holder
whose Registrable Securities are included in such Registration Statement)
confirmation that the Registration Statement has been declared effective by the
Commission in the form attached hereto as Exhibit C.

 

7

 

(o)                                 Use
its commercially reasonable efforts to prevent all executive officers and
directors of the Company from selling or otherwise disposing of any Common
Stock prior to the Effectiveness Date.

 

4.                                       Registration Procedures; Holders’ Obligations

 

In connection with the registration of the Registrable
Securities, each Holder shall:

 

(a)                                  If
the Registration Statement refers to the Holder by name or otherwise as the
holder of any securities of the Company, have the right to require (if such
reference to the Holder by name or otherwise is not required by the Securities
Act or any similar federal statute then in force) the deletion of the reference
to the Holder in any amendment or supplement to the Registration Statement
filed or prepared subsequent to the time that such reference ceases to be
required.

 

(b)                                 (i)
not sell any Registrable Securities under the Registration Statement until it
has received copies of the Prospectus as then amended or supplemented as
contemplated in Section 3(g) and notice from the Company that such Registration
Statement and any post-effective amendments thereto have become effective as
contemplated by Section 3(c), (ii) comply with the prospectus delivery
requirements of the Securities Act as applicable to it in connection with sales
of Registrable Securities pursuant to the Registration Statement, and (iii)
furnish to the Company information regarding such Holder and the distribution
of such Registrable Securities as is required by law to be disclosed in the
Registration Statement, and the Company may exclude from such registration the
Registrable Securities of the Holder if it fails to furnish such information
within a reasonable time prior to the filing of each Registration Statement,
supplemented Prospectus and/or amended Registration Statement.

 

(c)                                  upon
receipt of a notice from the Company of the occurrence of any event of the kind
described in Section 3(c)(ii), 3(c)(iii), 3(c)(iv), 3(c)(v) or 3(m), forthwith
discontinue disposition of such Registrable Securities under the Registration
Statement until the Holder’s receipt of the copies of the supplemented
Prospectus and/or amended Registration Statement contemplated by Section 3(j),
or until it is advised in writing by the Company that the use of the applicable
Prospectus may be resumed, and, in either case, has received copies of any
additional or supplemental filings that are incorporated or deemed to be
incorporated by reference in such Prospectus or Registration Statement.

 

5.                                       Registration Expenses

 

All reasonable fees and expenses of the Company
incident to the performance of or compliance with this Agreement by the Company
shall be borne by the Company whether or not the Registration Statement is
filed or becomes effective and whether or not any Registrable Securities are
sold pursuant to the Registration Statement. The fees and expenses referred to
in the foregoing sentence shall include, without limitation, the following: (i)
all registration and filing fees (including, without limitation, fees and
expenses (A) with respect to filings required to be made with each securities
exchange or market on which Registrable Securities are required hereunder to be
listed, (B) with respect to filings required to be made with the Commission,
and

 

8

 

(C) in compliance with
state securities or Blue Sky laws); (ii) printing expenses (including, without
limitation, expenses of printing certificates for Registrable Securities and of
printing prospectuses if the printing of prospectuses is requested by the holders
of a majority of the Registrable Securities included in the Registration
Statement); (iii) messenger, telephone and delivery expenses; (iv) fees and
disbursements of counsel for the Company; and (v) fees and expenses of all
other Persons retained by the Company in connection with the consummation of
the transactions contemplated by this Agreement, including, without limitation,
the Company’s independent public accountants (including the expenses of any
comfort letters or costs associated with the delivery by independent public
accountants of a comfort letter or comfort letters). In addition, the Company
shall be responsible for all of its internal expenses incurred in connection
with the consummation of the transactions contemplated by this Agreement (including,
without limitation, all salaries and expenses of its officers and employees
performing legal or accounting duties), the expense of any annual audit, and
the fees and expenses incurred in connection with the listing of the
Registrable Securities on any securities exchange as required hereunder. All
fees and expenses of the Holders (including the attorneys’ fees of the Special
Counsel) shall be borne pro rata by each Holder based on the number of
Registrable Securities owned by such Holder.

 

6.                                       Indemnification

 

(a)                                  Indemnification
by the Company. The Company shall, notwithstanding any termination of this
Agreement, indemnify and hold harmless each Holder, its permitted assignees,
officers, directors, agents, brokers (including brokers who offer and sell
Registrable Securities as principal as a result of a pledge or any failure to
perform under a margin call of Common Stock), investment advisors and
employees, each Person who controls any Holder or permitted assignee (within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act) and the officers, directors, agents and employees of each such controlling
Person, and the respective successors, assigns, estate and personal
representatives of each of the foregoing, to the fullest extent permitted by
applicable law, from and against any and all claims, losses, damages,
liabilities, penalties, judgments, costs (including, without limitation, costs
of investigation) and expenses (including, without limitation, reasonable
attorneys’ fees and expenses) (collectively, “Losses”), as incurred,
arising out of or relating to any untrue or alleged untrue statement of a
material fact contained in the Registration Statement, any Prospectus, as
supplemented or amended, if applicable, or arising out of or relating to any
omission or alleged omission of a material fact required to be stated therein
or necessary to make the statements therein (in the case of any Prospectus or
form of prospectus or supplement thereto, in the light of the circumstances under
which they were made) not misleading, except (i) to the extent, but only to the
extent, that such untrue statements or omissions are based solely upon
information regarding such Holder furnished in writing to the Company by such
Holder expressly for use therein, which information was reviewed and expressly
approved by such Holder or Special Counsel expressly for use in the
Registration Statement, such Prospectus or such form of Prospectus or in any
amendment or supplement thereto, or (ii) as a result of the failure of such
Holder to deliver a Prospectus, as amended or supplemented, to the purchaser in
connection with an offer or sale. The Company shall notify the Holders promptly
of the institution, threat or assertion of any Proceeding of which the Company
is aware in connection with the transactions contemplated by this Agreement.
Such indemnity shall remain in full force and effect regardless

 

9

 

of any investigation made by or on behalf of an
Indemnified Party (as defined in Section 6(c) hereof) and shall survive the
transfer of the Registrable Securities by the Holders.

 

(b)                                 Indemnification
by the Purchasers. Each Holder, severally but not jointly, shall indemnify
and hold harmless the Company, its directors, officers, agents and employees,
each Person who controls the Company (within the meaning of Section 15 of the
Securities Act and Section 20 of the Exchange Act), and the directors,
officers, agents or employees of such controlling Persons, and the respective
successors, assigns, estate and personal representatives of each of the
foregoing, to the fullest extent permitted by applicable law, from and against
any and all Losses, as incurred, arising out of or relating to any untrue or
alleged untrue statement of a material fact contained in the Registration
Statement, any Prospectus, as supplemented or amended, if applicable, or
arising out of or relating to any omission or alleged omission of a material
fact required to be stated therein or necessary to make the statements therein
(in the case of any Prospectus or form of prospectus or supplement thereto, in
the light of the circumstances under which they were made) not misleading, to
the extent, but only to the extent, that (i) such untrue statement or omission
is contained in or omitted from any information so furnished in writing by such
Holder to the Company specifically for inclusion in the Registration Statement
or such Prospectus, and (ii) such information was reasonably relied upon by the
Company for use in the Registration Statement, such Prospectus or such form of
prospectus or, to the extent that such information relates to such Holder or
such Holder’s proposed method of distribution of Registrable Securities, was
reviewed and expressly approved in writing by such Holder expressly for use in
the Registration Statement, such Prospectus or such form of Prospectus
Supplement.  Notwithstanding anything to
the contrary contained herein, no Holder shall be liable under this Section
6(b) for any amount that exceeds the net proceeds to such Holder as a result of
the sale of Registrable Securities pursuant to such Registration Statement.

 

(c)                                  Conduct
of Indemnification Proceedings. If any Proceeding shall be brought or
asserted against any Person entitled to indemnity pursuant to Section 6(a) or
6(b) hereunder (an “Indemnified Party”), such Indemnified Party promptly
shall notify the Person from whom indemnity is sought (the “Indemnifying
Party) in writing, and the Indemnifying Party shall assume the defense
thereof, including the employment of counsel reasonably satisfactory to the
Indemnified Party and the payment of all fees and expenses incurred in
connection with defense thereof; provided, that the failure of any
Indemnified Party to give such notice shall not relieve the Indemnifying Party
of its obligations or liabilities pursuant to this Agreement, except (and only)
to the extent that it shall be finally determined by a court of competent
jurisdiction (which determination is not subject to appeal or further review)
that such failure shall have materially and adversely prejudiced the
Indemnifying Party.

 

An Indemnified Party shall have the right to employ
separate counsel in any such Proceeding and to participate in the defense
thereof, but the fees and expenses of such counsel shall be at the expense of
such Indemnified Party or Parties unless: (i) the Indemnifying Party has agreed
in writing to pay such fees and expenses; or (ii) the Indemnifying Party shall
have failed promptly to assume the defense of such Proceeding and to employ
counsel reasonably satisfactory to such Indemnified Party in any such
Proceeding; or (iii) the named parties to any such Proceeding (including any
impleaded parties) include both such Indemnified Party and the Indemnifying Party,
and such Indemnified Party shall have been advised by counsel that a conflict
of interest is likely to exist if the same counsel were to represent such
Indemnified Party

 

10

 

and the Indemnifying Party
(in which case, if such Indemnified Party notifies the Indemnifying Party in
writing that it elects to employ separate counsel at the expense of the
Indemnifying Party, the Indemnifying Party shall not have the right to assume
the defense thereof and such counsel shall be at the expense of the
Indemnifying Party). The Indemnifying Party shall not be liable for any
settlement of any such Proceeding effected without its written consent, which
consent shall not be unreasonably withheld, conditioned or delayed. No
Indemnifying Party shall, without the prior written consent of the Indemnified
Party, which consent shall not unreasonably be withheld, conditioned or
delayed, effect any settlement of any pending Proceeding in respect of which
any Indemnified Party is a party, unless such settlement includes an
unconditional release of such Indemnified Party from all liability on claims
that are the subject matter of such Proceeding.

 

All reasonable fees and expenses of the Indemnified
Party (including reasonable fees and expenses to the extent incurred in
connection with investigating or preparing to defend such Proceeding in a
manner not inconsistent with this Section) shall be paid to the Indemnified
Party, as incurred, within ten (10) Business Days of written notice thereof to
the Indemnifying Party (regardless of whether it is ultimately determined that
an Indemnified Party is not entitled to indemnification hereunder;  provided,
that the Indemnifying Party may require such Indemnified Party to undertake to
reimburse all such fees and expenses to the extent it is finally judicially
determined that such Indemnified Party is not entitled to indemnification
hereunder or pursuant to applicable law).

 

(d)                                 Contribution.
If a claim for indemnification under Section 6(a) or 6(b) is unavailable to an
Indemnified Party because of a failure or refusal of a governmental authority
to enforce such indemnification in accordance with its terms (by reason of
public policy or otherwise), then each Indemnifying Party, in lieu of indemnifying
such Indemnified Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such Losses, in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Party and
Indemnified Party in connection with the actions, statements or omissions that
resulted in such Losses as well as any other relevant equitable considerations.
The relative fault of such Indemnifying Party and Indemnified Party shall be
determined by reference to, among other things, whether any action in question,
including any untrue or alleged untrue statement of a material fact or omission
or alleged omission of a material fact, has been taken or made by, or relates
to information supplied by, such Indemnifying Party or Indemnified Party, and
the  parties’
relative intent, knowledge, access to information and opportunity to correct or
prevent such action, statement or omission. The amount paid or payable by a
party as a result of any Losses shall be deemed to include, subject to the
limitations set forth in Section 6(c), any reasonable attorneys’ or other
reasonable fees or expenses incurred by such party in connection with any
Proceeding to the extent such party would have been indemnified for such fees
or expenses if the indemnification provided for under Section 6(a) or 6(b) was
available to such party in accordance with its terms. Notwithstanding anything
to the contrary contained herein, no Holder shall be liable or required to
contribute under this Section 6(d) for any amount that exceeds the net proceeds
to such Holder as a result of the sale of Registrable Securities pursuant to
the Registration Statement.

 

The parties hereto agree that it would not be just and
equitable if contribution pursuant to this Section 6(d) were determined by pro
rata allocation or by any other method of

 

11

 

allocation that does not
take into account the equitable considerations referred to in the immediately
preceding paragraph. No Person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any Person who was not guilty of such fraudulent
misrepresentation.

 

The indemnity and contribution agreements contained in
this Section are in addition to any liability that the Indemnifying Parties may
have to the Indemnified Parties.

 

7.                                       Rule 144.

 

As long as any Holder owns Registrable Securities, the
Company covenants to timely file (or obtain extensions in respect thereof and
file within the applicable grace period) all reports required to be filed by
the Company after the date hereof pursuant to Section 13(a) or 15(d) of the
Exchange Act and to promptly furnish the Holders with true and complete copies
of all such filings. As long as any Holder owns Registrable Securities, if the
Company is not required to file reports pursuant to Section 13(a) or 15(d) of
the Exchange Act, it will prepare and furnish to the Holders and make publicly
available in accordance with Rule 144(c) promulgated under the Securities Act
annual and quarterly financial statements, together with a discussion and
analysis of such financial statements in form and substance substantially
similar to those that would otherwise be required to be included in reports required
by Section 13(a) or 15(d) of the Exchange Act, as well as any other information
required thereby, in the time period that such filings would have been required
to have been made under the Exchange Act. The Company further covenants that it
will take such further action as any Holder may reasonably request, all to the
extent required from time to time to enable such Holder to sell Common Shares
without registration under the Securities Act within the limitation of the
exemptions provided by Rule 144 promulgated under the Securities Act, including
providing any legal opinions of counsel to the Company referred to in the
Purchase Agreement. Upon the request of any Holder, the Company shall deliver
to such Holder a written certification of a duly authorized officer as to
whether it has complied with such requirements.

 

8.                                       Miscellaneous.

 

(a)                                  Remedies.
The remedies provided in this Agreement and the Purchase Agreement are
cumulative and not exclusive of any remedies provided by law. In the event of a
breach by the Company or by any Holder of any of their obligations under this
Agreement, the Holders or the Company, as the case may be, in addition to being
entitled to exercise all rights granted by law and under this Agreement,
including recovery of damages, will be entitled to specific performance of its
rights under this  Agreement. The Company and each Holder agree that monetary
damages would not provide  adequate compensation for any losses
incurred by reason of a breach by it of any of the provisions of this Agreement
and hereby further agrees that, in the event of any action for specific
performance in respect of such breach, it shall waive the defense that a remedy
at law would be adequate.

 

(b)                                 No
Inconsistent Agreements. Neither the Company nor any of its Affiliates has
as of the date hereof entered into, nor shall the Company or any of its
Affiliates, on or after the date of this Agreement, enter into, any agreement
with respect to its securities that is inconsistent with the rights granted to
the Holders in this Agreement or otherwise conflicts with

 

12

 

the provisions hereof. Without limiting the generality
of the foregoing, without the written consent of the Holders, the Company shall
not grant to any Person the right to request the Company to register any
securities of the Company under the Securities Act if the rights so granted are
inconsistent with the rights granted to the Holders set forth herein, or
otherwise prevent the Company with complying with all of its obligations
hereunder.

 

(c)                                  No
Piggyback on Registrations. Neither the Company nor any of its security
holders (other than the Holders) may include securities of the Company in the
Registration Statement.

 

(d)                                 Failure
to File Registration Statement and Other Events. The Company and the
Holders agree that the Holders will suffer damages if the Registration
Statement is not filed on or prior to the Filing Date or is not declared
effective by the Commission on or prior to the Effectiveness Date and
maintained in the manner contemplated herein during the Effectiveness Period or
if certain other events occur. The Company and the Holders further agree that
it would not be feasible to ascertain the extent of such damages with
precision. Accordingly, if (i) the Registration Statement is not filed on or
prior to the Filing Date, or is not declared effective by the Commission on or
prior to the Effectiveness Date, except where such failure results from a Holder’s or the
Special Counsel’s failure to return at least one (1) Business Day prior to
filing any comments to the Registration Statement or any related Prospectus
delivered thereto pursuant to Section 3(a) or otherwise to deliver information
regarding a Holder required to be included therein or to comply with its
obligations thereunder, or (ii) the Company fails to
file with the Commission a request for acceleration in accordance with Rule
12dl-2 promulgated under the Exchange Act within five (5) Business Days of the
date that the Company is notified (orally or in writing, whichever is earlier)
by the Commission that a Registration Statement will not be “reviewed,” or not
subject to further review, or (iii) the Registration Statement is filed with
and declared effective by the Commission but thereafter ceases to be effective
or available as to all Registrable Securities at any time during the
Effectiveness Period other than in connection with a Blackout Period permitted
by Section 3(m), without being succeeded within a reasonable period by a
subsequent Registration Statement filed with and declared effective by the
Commission, or (iv) other than in connection with a Blackout Period permitted
by Section 3(m), the Company suspends the use of the Prospectus forming a part
of such Registration Statement for more than thirty (30) days in any period of
365 consecutive days if the Company suspends in reliance on its ability to do
so due to the existence of a development that, in the good faith discretion of
the Board, makes it appropriate to so suspend or which renders the Company
unable to comply with the Commission requirements, or the Company suspends the
use of the Prospectus forming a part of such Registration Statement for more
than sixty (60) days in any period of 365 consecutive days for any other reason
(any such failure or breach being referred to as an “Event”), the
Company shall pay as liquidated damages for such failure or breach and not as a
penalty (the “Liquidated Damages”) to each Holder an amount equal to two
percent (2%) of the purchase price of the Preferred Stock and Warrants paid by
such Holder pursuant to the Purchase Agreement for each thirty (30) day period,
pro rated for any period less than thirty (30) days, following the Event until
the applicable Event has been cured. Payments to be made pursuant to this
Section 8(d) shall be due and payable immediately upon demand in cash. The
parties agree that the Liquidated Damages represent a reasonable estimate on
the part of the parties, as of the date of this Agreement, of the amount of
damages that may be incurred by the Holders if the Registration Statement is
not filed on or prior to the Filing Date or has not been

 

13

 

declared effective by the Commission on or prior to
the Effectiveness Date and maintained in the manner contemplated herein during
the Effectiveness Period or if any other Event as described herein has
occurred.

 

(e)                                  Consent
to Jurisdiction. The Company and each Holder (i) hereby irrevocably submit
to the jurisdiction of the United States District Court for the Northern
District of Texas and the courts of the State of Texas located in Dallas County
for the purposes of any suit, action or proceeding arising out of or relating
to this Agreement or the Purchase Agreement, and (ii) hereby waive, and agree
not to assert in any such suit, action or proceeding, any claim that it is not
personally subject to the jurisdiction of such court, that the suit, action or
proceeding is brought in an inconvenient forum or that the venue of the suit, action
or proceeding is improper. The Company and each Holder consent to process being
served in any such suit, action or proceeding by mailing a copy thereof to such
party at the address in effect for notices to it under this Agreement and
agrees that such service shall constitute good and sufficient service of
process and notice thereof. Nothing in this Section 8(e) shall affect or limit
any right to serve process in any other manner permitted by law.

 

(f)                                    Amendments
and Waivers. The provisions of this Agreement, including the provisions of
this sentence, may not be amended, modified or supplemented, and waivers or
consents to departures from the provisions hereof may not be given, unless the
same shall be in writing and signed by the Company and the Holders.

 

(g)                                 Notices.
Any and all notices or other communications or deliveries required or permitted
to be provided hereunder shall be in writing and shall be deemed given and
effective on the earlier of (i) the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile telephone number
specified for notice prior to 5:00 p.m., Central Time, on a Business Day, (ii)
the first Business Day after the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile telephone number
specified for notice later than 5:00 p.m., Central Time, on any date and
earlier than 11:59 p.m., Central Time, on such date, (iii) the Business Day
following the date of mailing, if sent by nationally recognized overnight
courier service, or (iv) actual receipt by the party to whom such notice is
required to be given.

 

(x)                                   if
to the Company:

 

Intrusion Inc.

1101 East Arapaho Road

Richardson, Texas 
75081

Attention:  G. Ward Paxton, Chairman, CEO and President

Telecopier:  (972) 234-1467

Telephone:  (972) 301-3633

 

with a
copy to:

 

14

 

Patton Boggs LLP

2001 Ross Avenue

Suite 3000

Dallas, Texas  75201

Attention: Thomas R.
Nelson, Esq.

Telecopier:  (214) 758-1550

Telephone:  (214) 758-1500

 

(y)                                 if
to any Purchaser:

 

At the address of such
Purchaser set forth on Exhibit A to this Agreement.

 

or to such other address
or addresses or facsimile number or numbers as any such party may most recently
have designated in writing to the other parties hereto by such notice.

 

(h)                                 Successors
and Assigns. This Agreement shall be binding upon and inure to the benefit
of the parties and their successors and permitted assigns and shall inure to
the benefit of the Holders and their respective successors and assigns. The
Company may not assign this Agreement or any of its respective rights or
obligations hereunder without the prior written consent of the Holders. Each
Purchaser may assign its rights hereunder in the manner and to the Persons as permitted
under the Purchase Agreement.

 

(i)                                     Assignment
of Registration Rights. The rights of the Holders hereunder, including the
right to have the Company register for resale Registrable Securities in
accordance with the terms of this Agreement, shall be assignable by each Holder
to any transferee of such Holder of all or a portion  of the shares of Registrable
Securities if:  (i) such Holder agrees
in writing with the transferee or assignee to assign such rights, and a copy of
such agreement is furnished to the Company within a reasonable time after such
assignment; (ii) the Company is, within a reasonable time after such transfer
or assignment, furnished with written notice of (A) the name and address of
such transferee or assignee, and (B) the securities with respect to which such
registration rights are being transferred or assigned; (iii) following such
transfer or assignment the further disposition of such securities by the
transferee or assignees is restricted under the Securities Act and applicable
state securities laws; (iv) at or before the time the Company receives the
written notice contemplated by clause (ii) of this Section, the transferee or
assignee agrees in writing with the Company to be bound by all of the
provisions of this Agreement; and (v) such transfer shall have been made in
accordance with the applicable requirements of the Purchase Agreement and shall
be for no less than 50% of the Registrable Securities held by such Holder. In
addition, each Holder shall have the right to assign its rights hereunder to
any other Person with the prior written consent of the Company. The rights to
assignment shall apply to each Holder and to its subsequent successors and
assigns. In the event of an assignment pursuant to this Section 8(i), the
assigning Holder shall pay all incremental costs and expenses incurred by the
Company in connection with filing a Registration Statement (or an amendment to
the Registration Statement) to register the shares of Registrable Securities
assigned to any assignee or transferee of such Holder.

 

15

 

(j)                                     Counterparts.
This Agreement may be executed in any number of counterparts, each of which
when so executed shall be deemed to be an original, and all of which taken
together shall constitute one and the same Agreement. In the event that any
signature is delivered by facsimile transmission, such signature shall create a
valid binding obligation of the party executing (or on whose behalf such
signature is executed) the same with the same force and effect as if such
facsimile signature were the original thereof.

 

(k)                                  Governing
Law. This Agreement shall be governed by and construed in accordance with
the laws of the State of Delaware, without regard to principles of conflicts of
law thereof. This Agreement shall not be interpreted or construed with any
presumption against the party causing this Agreement to be drafted.

 

(l)                                     Cumulative
Remedies. The remedies provided herein are cumulative and not exclusive of
any remedies provided by law.

 

(m)                               Termination.
This Agreement shall terminate on the date on which all remaining Registrable
Securities may be sold without restriction pursuant to Rule 144(k) of the
Securities Act.

 

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

 

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

 

 

[Signature Pages
Follow]

 

16

 

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

 

 

	
   

  	
  INTRUSION
  INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ G. WARD PAXTON

  	
   

  
	
   

  	
  Name:

  	
  G. Ward Paxton

  
	
   

  	
  Title:

  	
  Chairman, CEO and President

  
					

 

[Signatures of Purchasers to follow
on next pages.]

 

 

[Signature page to Registration
Rights Agreement dated March 25, 2004,

by and among Intrusion Inc. and the
Purchasers named therein]

 

 

	
   

  	
  BLACK POINT PARTNERS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ CHARLES MANUEL

  	
   

  
	
   

  	
  Name:

  	
  Charles Manuel

  	
   

  
	
   

  	
  Title:

  	
  President

  	
   

  
								

 

 

[Signature page to Registration
Rights Agreement dated March 25, 2004,

by and among Intrusion Inc. and the
Purchasers named therein]

 

 

	
   

  	
  CRESTVIEW CAPITAL MASTER, L.L.C.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ ROBERT HOYT

  	
   

  
	
   

  	
   

  	
  Robert Hoyt,
  Managing Member

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  ,

  	
   

  
					

 

 

[Signature page to Registration
Rights Agreement dated March 25, 2004,

by and among Intrusion Inc. and the
Purchasers named therein]

 

 

	
   

  	
  ENABLE GROWTH PARTNERS L.P.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ BRENDAN O’NEIL

  	
   

  
	
   

  	
  Name:

  	
  Brendan O’Neil

  	
   

  
	
   

  	
  Title:

  	
  Principal

  	
   

  
						

 

 

[Signature
page to Registration Rights Agreement dated March 25, 2004,

by and among Intrusion Inc. and the
Purchasers named therein]

 

 

	
   

  	
  /s/ JAMES F. GERO

  	
   

  
	
   

  	
  James F. Gero

  

 

 

[Signature page to Registration
Rights Agreement dated March 25, 2004,

by and among Intrusion Inc. and the
Purchasers named therein]

 

 

	
   

  	
  GRYPHON MASTER FUND, L.P.

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  Gryphon Partners, L.P., its General Partner

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:  

  	
  Gryphon Management Partners, L.P.,

  	
   

  
	
   

  	
  its General Partner

  	
   

  
	
   

  
	
   

  	
  By:

  	
  Gryphon Advisors, LLC, its General Partner

  
	
   

  
	
   

  
	
   

  	
  By:

  	
  /s/ E.B. LYON, IV

  	
   

  
	
   

  	
   

  	
    E.B. Lyon, IV, Authorized Agent

  
									

 

 

[Signature page to Registration
Rights Agreement dated March 25, 2004,

by and among Intrusion Inc. and the
Purchasers named therein]

 

 

	
   

  	
  /s/ G.WARD PAXTON

  	
   

  
	
   

  	
  G. Ward Paxton

  

 

 

[Signature page to Registration
Rights Agreement dated March 25, 2004,

by and among Intrusion Inc. and the
Purchasers named therein]

 

 

	
   

  	
  /s/ MARSHALL B. PAYNE

  	
   

  
	
   

  	
  Marshall B. Payne

  

 

 

[Signature
page to Registration Rights Agreement dated March 25, 2004,

by and among Intrusion Inc. and the
Purchasers named therein]

 

 

	
   

  	
  RENAISSANCE
  CAPITAL GROWTH & INCOME

  FUND III, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ RUSSELL CLEVELAND

  	
   

  
	
   

  	
   

  	
  Russell Cleveland, President

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  RENAISSANCE US GROWTH INVESTMENT

  TRUST PLC

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ RUSSELL CLEVELAND

  	
   

  
	
   

  	
   

  	
  Russell Cleveland, Director

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  BFS US SPECIAL OPPORTUNITIES TRUST
  PLC

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ RUSSELL CLEVELAND

  	
   

  
	
   

  	
   

  	
  Russell Cleveland, Director

  	
   

  

 

 

EXHIBIT A

 

THE PURCHASERS

 

Black Point Partners, Inc.

100 Cummings Center, Suite 335A

Beverly, MA  01915

Attention:  Charles Manuel

 

Crestview Capital Master, L.L.C

95 Revere Drive, Suite F

Northbrook, IL 
60062

Attention: Robert M. Hoyt

Telecopier:  (847)
559-5807

Telephone:  (847)-559-0060

 

Enable Growth Partners L.P.

c/o Enable Capital Management

One Sansome Street, Suite 2900

San Francisco, CA 
94104

Telecopier: 
(415) 835-3843

Telephone:  (415)
835-3839

 

James F. and Catherine A. Gero

11900 N. Anna Cade Road

Rockwall, TX  75087

 

Gryphon Master Fund, L.P.

100 Crescent Court, Suite
490

Dallas, TX  75201

Attention:  Ryan R. Wolters

Telecopier: (214)
871-6711

Telephone: (214)
871-6783

 

with a copy to:

 

Warren W. Garden, P.C.

100 Crescent Court, Suite
400

Dallas, TX  75201

Attention:  Warren W. Garden, Esq.

Telecopier: (214)
871-6711

Telephone: (214)
871-6710

 

G. Ward Paxton

c/o Intrusion Inc.

1101 E. Arapaho Road

Richardson, TX 
75081

Telecopier: (972) 301-3892

 

Marshall B. Payne

500 Crescent Court, Suite 250

Dallas, TX 
75201

Telecopier: 
(214) 880-4491

Telephone: 
(214) 871-6807

 

A-1

 

Renaissance
Capital Growth & Income Fund III, Inc.

Renaissance
US Growth Investment Trust PLC

BFS
US Special Opportunities Trust PLC

c/o Renaissance Capital Group, Inc.

8080 N. Central
Expressway,  Suite 210-LB -59

Dallas, TX  75206

Telecopier:  (214) 891-8291

Telephone:  (214) 891-8294

 

A-2

 

EXHIBIT B

 

PLAN OF DISTRIBUTION

 

We are registering the shares of common stock on
behalf of the selling stockholders.  The
shares of common stock may be sold in one or more transactions at fixed prices,
at prevailing market prices at the time of sale, at prices related to the
prevailing market prices, at varying prices determined at the time of sale, or
at negotiated prices. These sales may be effected at various times in one or
more of the following transactions, or in other kinds of transactions:

 

•                  transactions
on any national securities exchange or U.S. inter-dealer system of a registered
national securities association on which the common stock may be listed or
quoted at the time of sale;

 

•                  in
the over-the-counter market;

 

•                  in
private transactions and transactions otherwise than on these exchanges or
systems or in the over-the-counter market;

 

•                  in
connection with short sales of the shares;

 

•                  by
pledge to secure or in payment of debt and other obligations;

 

•                  through
the writing of options, whether the options are listed on an options exchange
or otherwise;

 

•                  in
connection with the writing of non-traded and exchange-traded call options, in
hedge transactions and in settlement of other transactions in standardized or
over-the-counter options; or

 

through a combination of
any of the above transactions.

 

The selling stockholders
and their successors, including their transferees, pledgees or donees or their
successors, may sell the common stock directly to the purchaser or through
underwriters, broker-dealers or agents, who may receive compensation in the
form of discounts, concessions or commissions from the selling stockholders or
the purchasers. These discounts, concessions or commissions as to any
particular underwriter, broker-dealer or agent may be in excess of those
customary in the types of transactions involved.

 

In addition, any
securities covered by this prospectus which qualify for sale pursuant to Rule
144 of the Securities Act may be sold under Rule 144 rather than pursuant to
this prospectus.

 

We entered into a
registration rights agreement for the benefit of the selling stockholders to
register the common stock under applicable federal and state securities laws.
The registration rights agreement provides for cross-indemnification of the
selling stockholders and us and our respective directors, officers and
controlling persons against specific liabilities in connection

 

B-1

 

with the offer and sale
of the common stock, including liabilities under the Securities Act. We will
pay substantially all of the expenses incurred by the selling stockholders
incident to the offering and sale of the common stock.

 

B-2

 

EXHIBIT C

 

FORM OF NOTICE OF EFFECTIVENESS

OF REGISTRATION STATEMENT

 

[Name and address of Transfer Agent]

	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Attn:

  	
   

  	
   

  	
   

  
				

 

Re:                               Intrusion
Inc.

 

Ladies and Gentlemen:

 

We are counsel to
Intrusion Inc., a Delaware corporation (the “Company”), and have
represented the Company in connection with that certain Securities Purchase
Agreement (the “Purchase Agreement”), dated as of March 25, 2004, by and
between the Company and the Purchasers (the “Purchasers”) named therein
pursuant to which the Company issued to the Purchasers shares of its 5%
Convertible Preferred Stock, $0.01 par value, and warrants to purchase shares
of its common stock, $0.01 par value. Pursuant to the Purchase Agreement, the
Company has also entered into a Registration Rights Agreement with the
Purchasers (the “Registration Rights Agreement”), dated as of March 25, 2004,
pursuant to which the Company agreed, among other things, to register the
Registrable Securities (as defined in the Registration Rights Agreement) under
the Securities Act of 1933, as amended (the “1933 Act”). In connection
with the Company’s obligations under the Registration Rights Agreement, on
             
     , 2004, the Company filed a Registration
Statement on Form S-3 (File No. 333-                )
(the “Registration
Statement”) with the Securities and Exchange Commission (the “SEC”)
relating to the resale of the Registrable Securities which names the Purchasers
as selling stockholders thereunder.

 

In connection with the
foregoing, we advise you that a member of the SEC’s staff has advised us by
telephone that the SEC has entered an order declaring the Registration
Statement effective under the 1933 Act at [ENTER TIME OF EFFECTIVENESS] on [ENTER DATE
OF EFFECTIVENESS] and we have no knowledge, after telephonic inquiry
of a member of the SEC’s staff, that any stop order suspending its effectiveness
has been issued or that any proceedings for that purpose are pending before, or
threatened by, the SEC, and, accordingly, the Registrable Securities are
available for resale under the 1933 Act in the manner specified in, and
pursuant to the terms of, the Registration Statement.

 

	
   

  	
  Very truly yours,

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  
	
   

  	
   

  
	
  cc:

  	
  Warren W. Garden, P.C.

  	
   

  
			

 

C-1Exhibit
10.1

 

SECURITIES PURCHASE AGREEMENT

 

 

Dated as of March 25, 2004

 

 

among

 

 

INTRUSION INC.

 

 

and

 

 

THE PURCHASERS LISTED ON EXHIBIT A

 

 

TABLE OF CONTENTS

 

	
  ARTICLE I Purchase and Sale of Preferred
  Stock and Warrants

  	
   

  
	
   

  	
   

  
	
  Section
  1.1

  	
  Purchase
  and Sale of Preferred Stock and Warrants

  	
   

  
	
  Section
  1.2

  	
  Purchase
  Price and Closing

  	
   

  
	
  Section
  1.3

  	
  Warrants

  	
   

  
	
  Section
  1.4

  	
  Conversion
  Shares and Warrant Shares

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE II Representations and Warranties

  	
   

  
	
   

  	
   

  
	
  Section
  2.1

  	
  Representations
  and Warranties of the Company

  	
   

  
	
  Section
  2.2

  	
  Representations,
  Warranties and Covenants of the Purchasers

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE III Covenants

  	
   

  
	
   

  	
   

  
	
  Section
  3.1

  	
  Disclosure
  of Transactions and Other Material Information

  	
   

  
	
  Section
  3.2

  	
  Registration
  and Listing

  	
   

  
	
  Section
  3.3

  	
  Inspection
  Rights

  	
   

  
	
  Section
  3.4

  	
  Compliance
  with Laws

  	
   

  
	
  Section
  3.5

  	
  Keeping
  of Records and Books of Account

  	
   

  
	
  Section
  3.6

  	
  Other
  Agreements

  	
   

  
	
  Section
  3.7

  	
  Reservation
  of Shares

  	
   

  
	
  Section
  3.8

  	
  Non-public
  Information

  	
   

  
	
  Section
  3.9

  	
  Preemptive
  Rights; Rights of First Refusal.

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE IV Conditions

  	
   

  
	
   

  	
   

  
	
  Section
  4.1

  	
  Conditions
  Precedent to the Obligation of the Company to Close and to Sell the Shares
  and Warrants

  	
   

  
	
  Section
  4.2

  	
  Conditions
  Precedent to the Obligation of the Purchasers to Close and to Purchase the
  Shares and Warrants

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE V Certificate Legend

  	
   

  
	
   

  	
   

  
	
  Section
  5.1

  	
  Legend

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE VI Termination

  	
   

  
	
   

  	
   

  
	
  Section
  6.1

  	
  Termination
  by Mutual Consent

  	
   

  
	
  Section
  6.2

  	
  Effect
  of Termination

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE VII Indemnification

  	
   

  
	
   

  	
   

  
	
  Section
  7.1

  	
  General
  Indemnity

  	
   

  
	
  Section
  7.2

  	
  Indemnification
  Procedure

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE VIII Miscellaneous

  	
   

  
	
   

  	
   

  
	
  Section
  8.1

  	
  Fees
  and Expenses

  	
   

  
	
  Section
  8.2

  	
  Specific
  Enforcement; Consent to Jurisdiction.

  	
   

  
	
  Section
  8.3

  	
  Entire
  Agreement; Amendment

  	
   

  
	
  Section
  8.4

  	
  Notices

  	
   

  

 

i

 

	
  Section
  8.5

  	
  Waivers

  	
   

  
	
  Section
  8.6

  	
  Headings

  	
   

  
	
  Section
  8.7

  	
  Successors
  and Assigns

  	
   

  
	
  Section
  8.8

  	
  No
  Third Party Beneficiaries

  	
   

  
	
  Section
  8.9

  	
  Governing
  Law

  	
   

  
	
  Section
  8.10

  	
  Counterparts

  	
   

  
	
  Section
  8.11

  	
  Severability

  	
   

  
	
  Section
  8.12

  	
  Further
  Assurances

  	
   

  
	
  Section
  8.13

  	
  Nature
  of Purchaser’s Obligations and Rights.

  	
   

  

 

ii

 

SECURITIES PURCHASE AGREEMENT

 

 

This SECURITIES PURCHASE AGREEMENT this (“Agreement”),
dated as of March 25, 2004, by and among Intrusion Inc., a Delaware corporation
(the “Company”), and the entities listed on Exhibit A hereto
(each a “Purchaser” and collectively, the “Purchasers”), for the
purchase and sale to the Purchasers of shares of the Company’s 5% Convertible
Preferred Stock, par value $0.01 per share (the “Preferred Stock”), and
warrants to purchase shares of the Company’s common stock, par value $0.01 per
share (the “Common Stock”).

 

The parties hereto agree as follows:

 

ARTICLE I

 

Purchase and Sale of Preferred Stock and Warrants

 

Section 1.1                                      Purchase
and Sale of Preferred Stock and Warrants. Upon the following terms and
conditions, the Company shall issue and sell to the Purchasers, and the
Purchasers shall purchase from the Company, up to 1,000,000 shares of Preferred
Stock (the “Shares”) at a price per share of $5.00 for an aggregate
purchase price of $5,000,000 (the “Purchase Price”), and warrants to
purchase shares of Common Stock, in substantially the form attached hereto as Exhibit
B (the “Warrants”). The Company and the Purchasers are executing and
delivering this Agreement in accordance with and in reliance upon the exemption
from securities registration afforded by Section 4(2) of the U.S. Securities
Act of 1933, as amended, and the rules and regulations promulgated thereunder
(the “Securities Act”), including Regulation D (“Regulation D”),
and/or upon such other exemption from the registration requirements of the
Securities Act as may be available with respect to any or all of the
investments to be made hereunder. The Preferred Stock shall have such powers,
preferences and rights, and the qualifications, limitations or restrictions
thereof, as set forth in the Certificate of Designations of Preferred Stock
attached hereto as Exhibit D, subject to the applicable terms and
conditions of this Agreement and the Registration Rights Agreement (as defined
below).

 

Section 1.2                                      Purchase
Price and Closing. The Company agrees to issue and sell to the Purchasers
and, in consideration of and in express reliance upon the representations,
warranties, covenants, terms and conditions of this Agreement, the Purchasers,
severally but not jointly, agree to purchase the number of Shares and Warrants
set forth opposite their respective names on Exhibit A. The closing of
the purchase and sale of the Shares and Warrants to be acquired by the
Purchasers from the Company under this Agreement shall take place at the
offices of the Company’s legal counsel located at 2001 Ross Avenue, Suite 3000,
Dallas, Texas 75201 (the “Closing”) at 10:00 a.m., Central Time (i) on
or before March 25, 2004, provided, that all of the conditions set forth
in Article IV hereof and applicable to the Closing shall have been fulfilled or
waived in accordance herewith, or (ii) at such other time and place or on such
date as the Purchasers and the Company may agree upon (the  “Closing Date”).

 

Section 1.3                                      Warrants.
At the Closing, the Company shall issue to the Purchasers Warrants to purchase
up to an aggregate of 2,226,463 shares of Common Stock. The

 

1

 

Warrants shall be exercisable for five (5) years from the date of
issuance and shall have an initial exercise price equal to $0.786 per share.

 

Section 1.4                                      Conversion
Shares and Warrant Shares. The Company has authorized and reserved and
covenants to continue to reserve, free of preemptive rights and other similar
contractual rights of stockholders, out of its authorized but unissued Common
Stock or its Common Stock held in treasury, a number of shares of Common Stock
equal to the aggregate number of shares of Common Stock necessary to effect the
conversion of the Shares and the exercise of the Warrants. The Company shall,
from time to time, in accordance with the Delaware General Corporation Law,
increase the authorized amount of its Common Stock if at any time the
authorized amount of its Common Stock remaining unissued shall not be
sufficient to permit the conversion of all Shares at the time outstanding,
subject, however, to stockholder approval. If any shares of Common Stock
required to be reserved for issuance upon conversion of the Shares or exercise
of the Warrants hereunder require registration with or approval of any
governmental authority under any federal or state law before the shares may be
issued, the Company will cause the shares to be so registered and approved
subject to the provisions of the Registration Rights Agreement. All shares of
Common Stock delivered upon conversion of the Shares or exercise of the Warrants
shall, upon conversion or exercise pursuant to the terms thereof, be duly
authorized and validly issued, fully paid and nonassessable, free from all
taxes, liens and charges with respect to the issue thereof. Any shares of
Common Stock issuable upon conversion of the Shares (and such shares when
issued) are herein referred to as the “Conversion Shares”. Any shares of
Common Stock issuable upon exercise of the Warrants (and such shares when
issued) are herein referred to as the “Warrant Shares”. The Shares, the
Conversion Shares, the Warrants and the Warrant Shares are sometimes
collectively referred to herein as the “Securities”.

 

ARTICLE II

 

Representations and Warranties

 

Section 2.1                                      Representations
and Warranties of the Company. In order to induce the Purchasers to enter
into this Agreement and to purchase the Shares and Warrants, the Company hereby
makes the following representations and warranties to the Purchasers:

 

(a)                                  Organization,
Good Standing and Power. The Company is a corporation duly incorporated,
validly existing and in good standing under the laws of the State of Delaware
and has the requisite corporate power to own, lease and operate its properties
and assets and to conduct its business as it is now being conducted except to
the extent that any failure will not have a Material Adverse Effect. The
Company and each such Subsidiary is duly qualified as a foreign corporation to
do business and is in good standing in every jurisdiction in which the nature
of the business conducted or property owned by it makes such qualification
necessary, except for any jurisdiction(s) (alone or in the aggregate) in which
the failure to be so qualified will not have a Material Adverse Effect. For the
purposes of this Agreement, “Material Adverse Effect” means any adverse
effect on the business, operations, assets or financial condition of the
Company or its Subsidiaries and which is material to such entity or other
entities controlling or controlled by such entity or the Company or which is
likely to materially hinder the performance

 

2

 

by the Company of
its obligations hereunder and under the other Transaction Documents (as defined
in Section 2.1(b) hereof), but shall not
include any of the following, either alone or in combination: (i) any effect or
change occurring as a result of (A) general economic or financial conditions or
(B) other developments which are not unique to the Company but also affect
other persons or entities in the Company’s industry; (ii) any change or effect
resulting from a delay in the Closing not caused directly or indirectly by the
Company; or (iii) failure of the Company’s results of operations to meet any
internal or external projections, predictions, estimates or expectations.

 

(b)                                 Authorization;
Enforcement. The Company has the requisite corporate power and authority to
enter into and perform this Agreement, the Registration Rights Agreement, the
Warrants, and the other agreements and documents contemplated hereby and
thereby and executed by the Company or to which the Company is party
(collectively, the “Transaction Documents”), and to issue and sell the
Shares and the Warrants in accordance with the terms hereof. The execution,
delivery and performance of the Transaction Documents by the Company and the
consummation by it of the transactions contemplated thereby have been duly and
validly authorized by all necessary corporate action, and, except as set forth
in Schedule 2.1(b), no further consent or authorization of the Company
or its Board of Directors or stockholders is required. This Agreement has been
duly executed and delivered by the Company. 
The other Transaction Documents will have been duly executed and
delivered by the Company at the Closing. Each of the Transaction Documents constitutes,
or shall constitute when executed and delivered, a valid and binding obligation
of the Company enforceable against the Company in accordance with its terms,
except as such enforceability may be limited by applicable bankruptcy,
reorganization, moratorium, liquidation, conservatorship, receivership or
similar laws relating to, or affecting generally the enforcement of, creditor’s
rights and remedies, by equitable principles or remedies of general application
and to the extent the indemnification agreements may be limited by applicable
federal or state securities laws.

 

(c)                                  Capitalization.
The authorized capital stock of the Company and the shares thereof currently
issued and outstanding as of March 25, 2004 are set forth on Schedule 2.1(c)
hereto. All of the outstanding shares of the Company’s Common Stock and any
other security of the Company have been duly and validly authorized. Except as
set forth on Schedule 2.1(c) hereto or in any Commission Documents (as
defined in Section 2.1(f) below), no shares of Common Stock or any other
security of the Company are entitled to preemptive rights or registration
rights and there are no outstanding options, warrants, scrip, rights to
subscribe to, call or commitments of any character whatsoever relating to, or
securities or rights convertible into, any shares of capital stock of the
Company. Furthermore, except as set forth on Schedule 2.1(c) hereto or
in any Commission Documents and except for the Transaction Documents, there are
no contracts, commitments, understandings, or arrangements by which the Company
is or may become bound to issue additional shares of the capital stock of the
Company or options, securities or rights convertible into shares of capital
stock of the Company. Except for customary transfer restrictions contained in
agreements entered into by the Company in order to sell restricted securities
or as provided on Schedule 2.1(c) hereto and except as disclosed in any
Commission Documents, the Company is not a party to or bound by any agreement or
understanding granting registration or anti-dilution rights to any person with
respect to any of its equity or debt securities. Except as set forth on Schedule
2.1(c) or in any Commission Documents, the Company is not a party to, and
it has no knowledge of, any agreement or

 

3

 

understanding
restricting the voting or transfer of any shares of the capital stock of the
Company.  Except as set forth on Schedule
2.1(c) hereto or in any Commission Documents, the offer and sale of all
capital stock, convertible securities, rights, warrants, or options of the
Company issued prior to the Closing complied with all applicable federal and
state securities laws, and to the best knowledge of the Company, no holder of such
securities has a right of rescission or has made or threatened to make a claim
for rescission or damages with respect thereto which could have a Material
Adverse Effect. The Company has furnished or made available to the Purchasers
true and correct copies of the Company’s Certificate of Incorporation as in
effect on the date hereof (the “Certificate”), and the Company’s Bylaws
as in effect on the date hereof (the “Bylaws”).

 

(d)                                 Issuance
of Securities. The Shares and the Warrants to be issued at the Closing have
been duly authorized by all necessary corporate action and, when paid for or
issued in accordance with the terms hereof, the Shares shall be validly issued
and outstanding, fully paid and nonassessable and free and clear of all liens,
encumbrances and rights of first refusal of any kind and the holders shall be
entitled to all rights accorded to a holder of Preferred Stock.  When the Conversion Shares are issued in
accordance with the terms of the Preferred Stock, such shares will be duly
authorized by all necessary corporate action and validly issued and
outstanding, fully paid and nonassessable, free and clear of all liens,
encumbrances and rights of first refusal of any kind and the holders shall be
entitled to all rights accorded to a holder of Common Stock. When the Warrant
Shares are issued and paid for in accordance with the terms of this Agreement
and as set forth in the Warrants, such shares will be duly authorized by all
necessary corporate action and validly issued and outstanding, fully paid and
nonassessable, free and clear of all liens, encumbrances and rights of first
refusal of any kind and the holders shall be entitled to all rights accorded to
a holder of Common Stock.

 

(e)                                  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 do not and will not (i) violate
any provision of the Certificate or Bylaws or any Subsidiary’s comparable
charter documents, (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 Material Agreement (as defined in Section 2.1(u)), (iii)
create or impose a lien, mortgage, security interest, charge or encumbrance of
any nature on any property or asset of the Company or any of its Subsidiaries
under any Material Agreement, or (iv) result in a violation of any federal, state,
local or foreign statute, rule, regulation, order, judgment or decree
(including federal and state securities laws and regulations) 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, except, in all cases
other than violations pursuant to clauses (i) or (iv) (with respect to federal
and state securities laws) above, for such conflicts, defaults, terminations,
amendments, acceleration, cancellations and violations as would not,
individually or in the aggregate, have a Material Adverse Effect. The business
of the Company and its Subsidiaries is being conducted in all material respects
with any applicable laws, ordinances or regulations of any governmental entity,
except for possible violations which singularly or in the aggregate do not and
will not have a Material Adverse Effect. Neither the Company nor any of its
Subsidiaries is required under federal, state, foreign or local law, rule or
regulation to obtain any consent, authorization or order of, or make any filing
or registration with, any court or governmental agency in order for it to
execute, deliver or perform any of its obligations under the Transaction
Documents or issue and

 

4

 

sell the Shares,
the Conversion Shares, the Warrants or the Warrant Shares in accordance with
the terms hereof or thereof (other than any filings which may be required to be
made by the Company with the Securities and Exchange Commission (the “Commission”)
or state securities administrators subsequent to the Closing, or any
registration statement which may be filed pursuant hereto or thereto).

 

(f)                                    Commission
Documents; Commission Filings; Financial Statements. The Common Stock is
registered pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of
1934, as amended (the “Exchange Act”), and, except as disclosed on Schedule
2.1(f) hereto, the Company has timely filed all reports, schedules, forms,
statements and other documents required to be filed by it with the Commission
pursuant to the reporting requirements of the Exchange Act, including material
filed pursuant to Section 13(a) or 15(d) of the Exchange Act since January 1,
2002 (all of the foregoing, including filings incorporated by reference
therein, being referred to herein as the “Commission Documents”).  The Company has not provided to the
Purchasers any material non-public information or other information which,
according to applicable law, rule or regulation, should have been disclosed
publicly by the Company but which has not been so disclosed, other than with
respect to the transactions contemplated by this Agreement or pursuant to a
confidentiality agreement. At the time of its filing, the Company’s Form 10-Q for
the fiscal quarter ended September 30, 2003 (the “Form 10-Q”) complied
in all material respects with the requirements of the Exchange Act and the
rules and regulations of the Commission promulgated thereunder and other
federal, state and local laws, rules and regulations applicable to such
documents, and the Form 10-Q did not contain 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 light of the
circumstances under which they were made, not misleading. At the time of its
filing, the Company’s Form 10-K for the fiscal year ended December 31, 2002
(the “Form 10-K”) complied in all material respects with the
requirements of the Exchange Act and the rules and regulations of the
Commission promulgated thereunder and other federal, state and local laws,
rules and regulations applicable to such documents, and the Form 10-K did not
contain 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 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 Commission Documents complied as to form in all
material respects with applicable accounting requirements and the published
rules and regulations of the Commission or other applicable rules and
regulations with respect thereto. Such financial statements have been prepared
in accordance with generally accepted accounting principles (“GAAP”)
applied on a consistent basis 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 not include
footnotes or may be condensed or summary statements), and fairly present in all
material respects the financial position of the Company and its Subsidiaries as
of the dates thereof and the results of operations and cash flows for the
periods then ended (subject, in the case of unaudited statements, to normal
year-end audit adjustments).

 

(g)                                 Subsidiaries.
Schedule 2.1(g) hereto sets forth each Subsidiary of the Company,
showing the jurisdiction of its incorporation or organization and showing the
percentage of each person’s ownership of the outstanding stock or other
interests of such Subsidiary. For the purposes of this Agreement, “Subsidiary”
shall mean any corporation or

 

5

 

other entity of
which at least a majority of the securities or other ownership interest having
ordinary voting power (absolutely or contingently) for the election of
directors or other persons performing similar functions are at the time owned
directly or indirectly by the Company and/or any of its other Subsidiaries. All
of the outstanding shares of capital stock of each Subsidiary have been duly
authorized and validly issued, and are fully paid and nonassessable. There are
no outstanding preemptive, conversion or other rights, options, warrants or
agreements granted or issued by or binding upon any Subsidiary for the purchase
or acquisition of any shares of capital stock of any Subsidiary or any other
securities convertible into, exchangeable for or evidencing the rights to
subscribe for any shares of such capital stock. Neither the Company nor any
Subsidiary is subject to any obligation (contingent or otherwise) to repurchase
or otherwise acquire or retire any shares of the capital stock of any
Subsidiary or any convertible securities, rights, warrants or options of the
type described in the preceding sentence except as set forth on Schedule
2.1(g) hereto. Neither the Company nor any Subsidiary is party to, nor has
any knowledge of, any agreement restricting the voting or transfer of any
shares of the capital stock of any Subsidiary.

 

(h)                                 No
Material Adverse Change. Since September 30, 2003, the Company has not
experienced or suffered any Material Adverse Effect, except as disclosed on Schedule
2.1(h) hereto or in the Commission Documents filed after such date but
prior to the date hereof.

 

(i)                                     No
Undisclosed Liabilities. Except as disclosed on Schedule 2.1(i)
hereto or in the Commission Documents filed after such date but prior to the
date hereof, neither the Company nor any of its Subsidiaries has any
liabilities, obligations, claims or losses (whether liquidated or unliquidated,
secured or unsecured, absolute, accrued, contingent or otherwise) other than
those reflected on the balance sheet included in the Form 10-Q or incurred in
the ordinary course of the Company’s or its Subsidiaries respective businesses
since September 30, 2003, and which, individually or in the aggregate, do not
or would not have a Material Adverse Effect on the Company or its Subsidiaries.

 

(j)                                     No
Undisclosed Events or Circumstances. Since September 30, 2003, except as
disclosed on Schedule 2.1(j) hereto or in the Commission Documents filed
after such date but prior to the date hereof, no event or circumstance has
occurred or exists with respect to the Company or its Subsidiaries or their
respective businesses, properties, operations or financial condition, 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.

 

(k)                                  Indebtedness.
Schedule 2.1(k) hereto sets forth as of the date hereof all outstanding
secured and unsecured Indebtedness of the Company or any Subsidiary, or for
which the Company or any Subsidiary has commitments, which Indebtedness is not
disclosed in any Commission Documents. 
For the purposes of this Agreement, “Indebtedness” shall mean (i)
any liabilities for borrowed money in excess of $100,000 (other than trade
accounts payable incurred in the ordinary course of business), (ii) all
guaranties, endorsements and other contingent obligations in respect of
Indebtedness of others in excess of $100,000, whether or not the same are or
should be reflected in the Company’s balance sheet (or the Notes thereto),
except guaranties by endorsement of negotiable instruments for deposit or
collection or similar transactions in the ordinary course of business, and
(iii) the present value of any lease payments in excess of $100,000 due under leases
required to be capitalized in accordance with GAAP.

 

6

 

Except as
disclosed on Schedule 2.1(k) or in any Commission Documents, neither the
Company nor any Subsidiary is in default with respect to any Indebtedness.

 

(l)                                     Title
to Assets. Each of the Company and the Subsidiaries has good and valid
title to all of its real and personal property, free and clear of any
mortgages, pledges, charges, liens, security interests or other encumbrances of
any nature whatsoever, except for (i) those liens indicated on Schedule
2.1(l) hereto or otherwise disclosed in any Commission Documents, (ii) liens for taxes not yet due
and payable, (iii) statutory or contractual landlords’ liens or other liens
created by the operation of law, (iv) retention of title agreements with
suppliers, (v) the rights of others to customer deposits, or (vi) such other
liens  that, individually or in the aggregate, do
not have a Material Adverse Effect. All material leases of the Company and each
of its Subsidiaries are valid and subsisting and in full force and effect.

 

(m)                               Actions
Pending. Except as set forth in the Commission Documents or Schedule
2.1(m) hereto, there is no action, suit, claim, arbitration, alternate
dispute resolution proceeding or other proceeding pending or to the knowledge
of the Company, investigation, or, to the knowledge of the Company, threatened
against the Company or any Subsidiary which questions the validity of this
Agreement or any of the other Transaction Documents or any of the transactions
contemplated hereby or thereby or any action taken or to be taken pursuant
hereto or thereto. Except as set forth in any Commission Document or on Schedule
2.1(m) hereto: (i) there is no action, suit, claim, arbitration, alternate
dispute resolution proceeding or other proceeding or to the knowledge of the
Company, investigation pending or, to the knowledge of the Company, threatened
against or involving the Company, any Subsidiary or any of their respective
properties or assets, which individually or in the aggregate, would have a
Material Adverse Effect, and (ii) there are no outstanding orders, judgments,
injunctions, awards or decrees of any court, arbitrator or governmental or
regulatory body against the Company or any Subsidiary or any officers or
directors of the Company or any Subsidiary in their capacities as such, which
individually, or in the aggregate, would have a Material Adverse Effect.

 

(n)                                 Compliance
with Law. To the knowledge of the Company, the business of the Company and
the Subsidiaries has been and is presently being conducted in accordance with
all applicable federal, state and local governmental laws, rules, regulations
and ordinances, except as set forth in the Commission Documents or on Schedule
2.1(n) hereto or such that, individually or in the aggregate, the
noncompliance therewith would not have a Material Adverse Effect. The Company
and each of its Subsidiaries have all franchises, permits, licenses, consents
and other governmental or regulatory authorizations and approvals necessary for
the conduct of its business as now being conducted by it unless the failure to
possess such franchises, permits, licenses, consents and other governmental or
regulatory authorizations and approvals, individually or in the aggregate,
could not reasonably be expected to have a Material Adverse Effect.

 

(o)                                 Taxes.
Except as set forth on Schedule 2.1(o) hereto or disclosed in the
Commission Documents, the Company and each of the Subsidiaries has accurately
prepared and filed all federal, state and other tax returns required by law to
be filed by it, has paid or made provisions for the payment of all taxes shown
to be due and all additional assessments, other than taxes being disputed in
good faith in appropriate proceedings. Except as disclosed on Schedule
2.1(o) hereto, none of the federal income tax returns of the Company or any
Subsidiary filed for

 

7

 

fiscal years ended
from and after December 31, 1997, have been audited by the Internal Revenue
Service. Except as disclosed in the Commission Documents, the Company has no
knowledge of any additional assessments, adjustments or contingent tax
liability (whether federal or state) of any nature whatsoever, whether pending
or threatened against the Company or any Subsidiary for any period, nor of any
basis for any such assessment, adjustment or contingency.

 

(p)                                 Certain
Fees. Except as set forth on Schedule 2.1(p) hereto, the Company has
not employed any broker or finder or incurred any liability for any brokerage
or investment banking fees, commissions, finders’ structuring fees, financial
advisory fees or other similar fees in connection with the Transaction
Documents.

 

(q)                                 Disclosure.
To the best of the Company’s knowledge, neither this Agreement nor any other
documents, certificates or instruments furnished to the Purchasers by or on
behalf of the Company or any Subsidiary in connection with the transactions
contemplated by this Agreement contains any untrue statement of a material fact
or omits to state a material fact necessary in order to make the statements
made herein or therein, in the light of the circumstances under which they were
made herein or therein, not misleading.

 

(r)                                    Intellectual
Property. Schedule 2.1(r) contains a complete and correct list of
all patents, trademarks, domain names (whether or not registered), service
marks, trade names and registered copyrights held by the Company or any of its
Subsidiaries (collectively, the “Proprietary Rights”). To the knowledge
of the Company (without any special investigation or patent search), the
Company and each of the Subsidiaries owns or possesses all the Proprietary
Rights which are necessary for the conduct of its business as now conducted
without any conflict with the rights of others. Except as disclosed in the
Commission Documents or Schedule 2.1(r) hereto, (i) as of the date of
this Agreement, neither the Company nor any of its Subsidiaries has received
any written notice that any Proprietary Rights have been declared unenforceable
or otherwise invalid by any court or governmental agency, and (ii) as of the
date of this Agreement, there is, to the knowledge of the Company, no material
existing infringement, misuse or misappropriation of any Proprietary Rights by
others that could have a Material Adverse Effect. From September 30, 2003 to
the date of this Agreement, neither the Company nor any of its Subsidiaries has
received any written notice alleging that the operation of the business of the
Company or any of its Subsidiaries infringes in any material respect upon the
intellectual property rights of others.

 

(s)                                  Environmental
Compliance. Except as disclosed on Schedule 2.1(s) hereto or the
Commission Documents, the Company and each of its Subsidiaries have obtained
all material approvals, authorization, certificates, consents, licenses, orders
and permits or other similar authorizations of all governmental authorities, or
from any other person, that are required under any Environmental Laws. Schedule
2.1(s) hereto sets forth all material permits, licenses and other
authorizations issued under any Environmental Laws to the Company or its
Subsidiaries. “Environmental Laws” shall mean all U.S. Federal or state
laws applicable to the Company or any of its Subsidiaries relating to the
protection of the environment including, without limitation, all requirements
pertaining to reporting, licensing, permitting, controlling, investigating or
remediating emissions, discharges, releases or threatened releases of hazardous
substances, chemical substances, pollutants, contaminants or toxic substances,
materials or wastes, whether solid, liquid or gaseous in nature, into the air,
surface water, groundwater or

 

8

 

land, or relating
to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of hazardous substances, chemical substances,
pollutants, contaminants or toxic substances, material or wastes, whether
solid, liquid or gaseous in nature. Except as set forth on Schedule 2.1(s)
hereto, the Company has all necessary governmental approvals required under all
Environmental Laws and used in its business or in the business of any of its
Subsidiaries, except for such instances as would not individually or in the
aggregate have a Material Adverse Effect. The Company and each of its
Subsidiaries are also in compliance with all other limitations, restrictions,
conditions, standards, requirements, schedules and timetables required or
imposed under all Environmental Laws where non-compliance could have a Material
Adverse Effect. Except for such instances as would not individually or in the
aggregate have a Material Adverse Effect or as disclosed in the Commission
Documents, there are no past or present events, conditions, circumstances,
incidents, actions or omissions relating to or in any way affecting the Company
or its Subsidiaries that violate or may violate any Environmental Law after the
Closing or that may give rise to any Environmental Liabilities, or otherwise
form the basis of any claim, action, demand, suit, proceeding, hearing, study
or investigation (i) under any Environmental Law, or (ii) based on or related
to the manufacture, processing, distribution, use, treatment, storage
(including, without limitation, underground storage tanks), disposal, transport
or handling, or the emission, discharge, release or threatened release of any
hazardous substance. “Environmental Liabilities” means all liabilities
of a person (whether such liabilities are owed by such person to governmental
authorities, third parties or otherwise) currently in existence or arising
hereafter and which arise under or relate to any Environmental Law.

 

(t)                                    [Intentionally
omitted].

 

(u)                                 Material
Agreements. Except for the Transaction Documents or as set forth on Schedule
2.1(u) hereto, or those that are included as exhibits to the Commission
Documents, neither the Company nor any Subsidiary is a party to any written or
oral contract, instrument, agreement, commitment, obligation, plan or
arrangement, a copy of which would be required to be filed with the Commission
if the Company or any Subsidiary were registering securities under the
Securities Act (collectively, “Material Agreements”). Except as set
forth in the Commission Documents or on Schedule 2.1(u) hereto, the
Company and each Subsidiary has in all material respects performed all the
obligations required to be performed by them to date under the foregoing
agreements, have received no notice of default and, to the best of the Company’s
knowledge, are not in default under any Material Agreement now in effect, the
result of which could cause a Material Adverse Effect. No written or oral
contract, instrument, agreement (other than the Certificate of Designation with
respect to the Preferred Stock, this Agreement or any other Transaction
Document(s)), commitment, obligation (other than any obligation imposed by
state law), plan or arrangement of the Company or of any Subsidiary limits or
shall limit the payment of dividends on its Common Stock.

 

(v)                                 Transactions
with Affiliates. Except as set forth on Schedule 2.1(v) hereto or
disclosed in any of the Commission Documents, there are no loans, leases,
agreements, contracts, royalty agreements, management contracts or arrangements
or other continuing transactions between (i) the Company, any Subsidiary or any
of their respective its customers or suppliers, on the one hand, and (ii) on
the other hand, any officer, employee, consultant or director of the Company,
or any of its Subsidiaries, or any person owning any capital stock of the
Company or any Subsidiary or any member of the immediate family of such
officer, employee,

 

9

 

consultant,
director or stockholder or any corporation or other entity controlled by such
officer, employee, consultant, director or stockholder.

 

(w)                               Securities
Act of 1933. Assuming the accuracy and completeness of the representations,
warranties and covenants of the Purchasers contained herein, the Company has
complied and will comply with all applicable federal and state securities laws
in connection with the offer, issuance and sale of the Shares, the Conversion
Shares, the Warrants and the Warrant Shares hereunder. Neither the Company nor
anyone acting on its behalf, directly or indirectly, has or will sell, offer to
sell or solicit offers to buy any of the Securities, or similar securities to,
or solicit offers with respect thereto from, or enter into any preliminary
conversations or negotiations relating thereto with, any person, or has taken
or will take any action so as to require registration of the issuance and sale
of any of the Securities under the registration provisions of the Securities
Act and applicable state securities laws. 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 under the Securities Act) in connection with the offer or sale of
any of the Securities.

 

(x)                                   Governmental
Approvals. Except as set forth on Schedule 2.1(x) hereto, and except
for the filing of any notice prior or subsequent to the Closing that may be
required under applicable state and/or federal securities laws (which if
required, shall be filed on a timely basis), no authorization, consent,
approval, license, exemption of, filing or registration with any court or
governmental department, commission, board, bureau, agency or instrumentality,
domestic or foreign, is or will be necessary for, or in connection with, the
execution or delivery of the Shares and the Warrants, or, except as set forth
in this Agreement or any other Transaction Document, for the performance by the
Company of its obligations under the Transaction Documents.

 

(y)                                 Employees.
Neither the Company nor any Subsidiary has any collective bargaining
arrangements or agreements covering any of its employees. Except as set forth
in the Commission Documents or on Schedule 2.1(y) hereto, neither the
Company nor any Subsidiary has any employment contract, agreement regarding
proprietary information, non-competition agreement, non-solicitation agreement,
confidentiality agreement, or any other similar contract or restrictive
covenant, relating to the right of any officer, employee or consultant to be
employed or engaged by the Company or such Subsidiary. Since September 30,
2003, no officer, consultant or key employee of the Company or any Subsidiary
whose termination, either individually or in the aggregate, could have a
Material Adverse Effect, has terminated or, to the knowledge of the Company,
has any present intention of terminating his or her employment or engagement
with the Company or any Subsidiary.

 

(z)                                   [Intentionally
omitted.]

 

(aa)                            Use
of Proceeds. Except as set forth on Schedule 2.1(aa), the proceeds
from the sale of the Shares and the Warrants will be used by the Company for
general corporate and working capital purposes.

 

(bb)                          Public
Utility Holding Company Act and Investment Company Act Status.  The Company is not a “holding company” or a
“public utility company” as such terms are

 

10

 

defined in the
Public Utility Holding Company Act of 1935, as amended. The Company is not, and
as a result of and immediately upon Closing will not be, an “investment
company” or a company “controlled” by an “investment company”, within the
meaning of the Investment Company Act of 1940, as amended.

 

(cc)                            ERISA.
No liability to the Pension Benefit Guaranty Corporation has been incurred with
respect to any Plan by the Company or any of its Subsidiaries which is or would
cause a Material Adverse Effect. The execution and delivery of this Agreement
and the issue and sale of the Shares and the Warrants will not involve any
transaction which is subject to the prohibitions of Section 406 of ERISA or in
connection with which a tax could be imposed pursuant to Section 4975 of the
Internal Revenue Code of 1986, as amended (the “Code”). As used in this
Section 2.1(cc), the term “Plan” shall mean an “employee pension benefit
plan” (as defined in Section 3 of ERISA) which is or has been established or
maintained, or to which contributions are or have been made, by the Company or
any Subsidiary or by any trade or business, whether or not incorporated, which,
together with the Company or any Subsidiary, is under common control, as
described in Section 414(b) or (c) of the Code.

 

(dd)                          Sarbanes-Oxley.
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 Commission
thereunder that are effective as of the date hereof, except where such
noncompliance would not have, individually or in the aggregate, a Material
Adverse Effect.

 

Section 2.2                                      Representations,
Warranties and Covenants of the Purchasers.  Each of the Purchasers hereby makes the following
representations, warranties and covenants to and for the benefit of the Company
with respect solely to itself and not with respect to any other Purchaser:

 

(a)                                  Organization
and Standing of the Purchasers. If the Purchaser is an entity, such
Purchaser is a corporation, limited liability company or partnership duly
incorporated or organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation or organization.

 

(b)                                 Authorization
and Power. Each Purchaser has the requisite power and authority to enter
into and perform this Agreement, the Registration Rights Agreement, the
Warrants, and the other agreements and documents contemplated hereby and
thereby and executed by the Purchaser or to which the Purchaser is party
(collectively, the “Purchaser Transaction Documents”) and to purchase
the Shares and Warrants being sold to it hereunder.  The execution, delivery and performance of the Purchaser
Transaction Documents by each Purchaser and the consummation by it of the
transactions contemplated hereby have been duly authorized by all necessary
corporate or partnership action, and no further consent or authorization of
such Purchaser or its Board of Directors, stockholders, or partners, as the
case may be, is required. This Agreement has been duly authorized, executed and
delivered by each Purchaser. Each of the Purchaser Transaction Documents
constitutes, or shall constitute when executed and delivered, valid and binding
obligations of each Purchaser enforceable against such Purchaser in accordance
with its terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation,
conservatorship,

 

11

 

receivership or
similar laws relating to, or affecting generally the enforcement of, creditor’s
rights and remedies or by equitable principles or remedies of general
application.

 

(c)                                  Acquisition
for Investment. Each Purchaser is purchasing the Securities solely for its
own account for the purpose of investment and not with a view to or for sale in
connection with any distribution thereof. Each Purchaser does not have a
present intention to sell any of the Securities, nor a present arrangement
(whether or not legally binding) or intention to effect any distribution of any
of the Securities to or through any person or entity; provided, however,
that by making the representations herein and subject to Section 2.2(e) below,
each Purchaser does not agree to hold any of the Securities for any minimum or
other specific term and reserves the right to dispose of any of the Securities
at any time in accordance with federal and state securities laws applicable to
such disposition provided that the Company receives an opinion of the
Purchaser’s counsel, which opinion and counsel shall be reasonably satisfactory
to the Company, to the effect that such disposition complies with such laws.
Each Purchaser acknowledges that it (i) has such knowledge and experience in
financial and business matters such that such Purchaser is capable of
evaluating the merits and risks of its investment in the Company, (ii) is able
to bear the financial risks associated with an investment in the Securities,
and (iii) has been given full access to such records of the Company and the
Subsidiaries and to the officers of the Company and the Subsidiaries as it has
deemed necessary or appropriate to conduct its due diligence investigation.

 

(d)                                 Rule
144. Each Purchaser understands that the Securities must be held
indefinitely unless such Securities are registered under the Securities Act or
an exemption from registration is available. Each Purchaser acknowledges that
it is familiar with Rule 144 of the rules and regulations of the Commission, as
amended, promulgated pursuant to the Securities Act (“Rule 144”), and
that such Purchaser has been advised that Rule 144 permits resales only under
certain circumstances. Each Purchaser understands that to the extent that Rule
144 is not available, such Purchaser will be unable to sell any Securities
without either registration under the Securities Act or the existence of
another exemption from such registration requirement, provided that the Company
receives an opinion of Purchaser’s counsel, which opinion and counsel shall be
reasonably satisfactory to the Company, to the effect that such sale is exempt
from such registration requirement.

 

(e)                                  General.
Each Purchaser understands that the Securities are being offered and sold in
reliance on a transactional exemption from the registration requirements of
federal and state securities laws and the Company is relying upon the truth,
accuracy and completeness of the representations, warranties, agreements,
acknowledgments and understandings of such Purchaser set forth herein and in
the other Purchaser Transaction Documents in order to determine the
applicability of such exemptions and the suitability of such Purchaser to
acquire the Securities. Each Purchaser understands that no United States
federal or state agency or any government or governmental agency has passed
upon or made any recommendation or endorsement with respect to any of the
Securities.

 

(f)                                    Opportunities
for Additional Information. Each Purchaser acknowledges that such Purchaser
has had the opportunity to ask questions of and receive answers from, or obtain
additional information from, the executive officers of the Company concerning
the financial and other affairs of the Company, and to the extent deemed
necessary by such

 

12

 

Purchaser in light
of such Purchaser’s personal knowledge of the Company’s affairs, such Purchaser
has asked such questions and received answers to the full satisfaction of such
Purchaser, and such Purchaser desires to invest in the Company.

 

(g)                                 No
General Solicitation. Each Purchaser acknowledges that the Securities were
not offered to such Purchaser by means of any form of general or public
solicitation or general advertising, or publicly disseminated advertisements or
sales literature, including (i) any advertisement, article, notice or other
communication published in any newspaper, magazine, or similar media, or broadcast
over television or radio, or (ii) any seminar or meeting to which such
Purchaser was invited by any of the foregoing means of communications.

 

(h)                                 Accredited
Investor. Each Purchaser is an accredited investor (as defined in Rule 501
of Regulation D), and such Purchaser has such experience in business and
financial matters that it is capable of evaluating the merits and risks of an
investment in the Securities.  Each
Purchaser acknowledges that an investment in the Securities is speculative and
involves a high degree of risk.

 

(i)                                     Dispositions.
No Purchaser will, prior to the effectiveness of the Registration Statement (as
defined in the Registration Rights Agreement), if then prohibited by law or
regulation, sell, offer to sell, solicit offers to buy, dispose of, loan,
pledge or grant any right with respect to the Securities. Without limiting the
generality of the foregoing, no Purchaser will, prior to the effectiveness of
the Registration Statement, sell any of the Securities short “against the box”.

 

ARTICLE III

 

Covenants

 

The Company covenants with each Purchaser as follows,
which covenants are for the benefit of each Purchaser and their respective
permitted assignees.

 

Section 3.1                                      Disclosure
of Transactions and Other Material Information. On or before 8:30 a.m., New
York City time, on or before the third Business Day immediately following the
Closing Date, the Company shall file a Current Report on Form 8-K with the
Commission describing the terms of the transactions contemplated by the
Transaction Documents and including as exhibits to such Current Report on Form
8-K this Agreement, the Certificate of Designations, the Warrants and the
Registration Rights Agreement in the form required by the Exchange Act
(including all attachments, the “8-K Filing”). For purposes of this Agreement, a “Business Day” means
any day except Saturday, Sunday and any day which is a legal holiday or a day
on which banking institutions in the State of Texas generally are authorized or
required by law or other government actions to close. 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 Purchaser 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 Commission
without the express written consent of such Purchaser. Neither the Company nor
any Purchaser 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,

 

13

 

without the prior approval of the Purchasers, 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) above, the Purchasers shall be consulted by the Company (although the
consent of the Purchasers shall not be required) in connection with any such
press release or other public disclosure prior to its release).

 

Section 3.2                                      Registration
and Listing. The Company will cause its Common Stock to continue to be
registered under Section 12(b) or 12(g) of the Exchange Act, will comply in all
respects with its reporting and filing obligations under the Exchange Act, will
comply with all requirements related to any registration statement filed
pursuant to this Agreement, and will not take any action or file any document
(whether or not permitted by the Securities Act or the rules promulgated
thereunder) to terminate or suspend such registration or to terminate or
suspend its reporting and filing obligations under the Exchange Act or
Securities Act, except as permitted herein. The Company will promptly file the
“Listing Application” for, or in connection with, the issuance and delivery of
the Conversion Shares and the Warrant Shares.

 

Section 3.3                                      Inspection
Rights. In the event the Registration Statement is not effective, has been
suspended or is otherwise no longer effective, the Company shall permit, during
normal business hours and upon reasonable request and reasonable notice, any
Purchaser or any employees, agents or representatives thereof that are parties
to an effective confidentiality agreement with the Company of appropriate
scope, so long as such Purchaser shall be obligated hereunder to purchase the
Shares or shall beneficially own the Shares or Conversion Shares, or shall own
Warrant Shares or the Warrants which, in the aggregate, represent more than two
percent (2%) of the total combined voting power of all voting securities then
outstanding, to examine and make reasonable copies of and extracts from the records
and books of account of, and visit and inspect, during the term of the
Warrants, the properties, assets, operations and business of the Company and
any Subsidiary, and to discuss the affairs, finances and accounts of the
Company and any Subsidiary with any of its officers, consultants, directors,
and key employees.

 

Section 3.4                                      Compliance
with Laws. The Company shall comply, and cause each Subsidiary to comply,
with all applicable laws, rules, regulations and orders, the noncompliance with
which could have a Material Adverse Effect.

 

Section 3.5                                      Keeping
of Records and Books of Account. The Company shall keep and cause each
Subsidiary to keep adequate records and books of account, in which complete
entries will be made in accordance with GAAP consistently applied.

 

Section 3.6                                      Other
Agreements. The Company shall not enter into any agreement containing any
provision that would violate the terms of, or cause a default under, any
material term of any Transaction Document.

 

Section 3.7                                      Reservation
of Shares. So long as the Shares or Warrants remain outstanding, the
Company shall take all action necessary to at all times have authorized, and
reserved for the purpose of issuance, the maximum number of shares of Common
Stock to effect the conversion of the Shares and the exercise of the Warrants.

 

14

 

Section 3.8                                      Non-public
Information. Neither the Company nor any of its officers or agents shall
disclose any material non-public information about the Company to the Purchasers,
and neither the Purchasers nor any of their affiliates, officers or agents will
solicit any material non-public information from the Company.

 

Section 3.9                                      Preemptive
Rights; Rights of First Refusal.

 

(a)                                  (i)                                     Until
the first anniversary of the Closing Date, the Company hereby grants to each Purchaser
(but not its assigns) that (A) still owns Shares immediately prior to the
issuance of the “New Securities” (as defined in Section 3.9(b)), (B)
purchased Shares on the Closing Date, and (C) was not an officer or director of
the Company as of the Closing Date (any such Purchaser, for such purpose, an “Eligible
Purchaser”), a right (the “Preemptive Right”) to purchase all or any
part of such Eligible Purchaser’s pro rata share of any New Securities that the
Company may, from time to time, propose to sell and issue. The pro rata share
for each Eligible Purchaser, for purposes of the Preemptive Right, is the ratio
of (x) the number of shares of Common Stock then held or deemed to be held
by such Eligible Purchaser immediately prior to the issuance of the New
Securities (assuming the full conversion of the Shares and the full exercise of
the Warrants), to (y) the total number of shares of Common Stock of the
Company outstanding immediately prior to the issuance of the New Securities (after
giving effect to the full conversion of the Shares and the full exercise of the
Warrants).

 

(ii)                                  Notwithstanding
the provisions of subsection (a)(i) above, if the Company proposes to issue or
sell any New Securities at a price per share less than the Current Market Price
per share of Common Stock, then the Eligible Purchasers shall have a right (the
“Right of First Refusal”) to purchase all or any part of such Eligible
Purchaser’s pro rata share of any such New Securities that the Company may,
from time to time, propose to issue or sell. The pro rata share for each
Eligible Purchaser, for purposes of the Right of First Refusal, is the ratio of
(x) the number of shares of Common Stock then held or deemed to be held by
such Eligible Purchaser immediately prior to the issuance of the New Securities
(assuming the full conversion of the Shares and the full exercise of the
Warrants), to (y) the total number of shares of Common Stock of the
Company then held or deemed to be held by all Eligible Purchasers immediately
prior to the issuance of the New Securities (assuming the full conversion of the
Shares and the full exercise of the Warrants). In determining whether any
rights, warrants, options or convertible securities included in such New
Securities entitle the holders to subscribe for or purchase shares of Common
Stock at less than such Current Market Price, and in determining the aggregate
offering price of shares of Common Stock so proposed to be issued or sold,
there shall be taken into account any consideration received by the Company for
such Common Stock, rights, warrants, options, or convertible securities, the
value of such consideration, if other than cash, to be determined by the Board
of Directors, whose determination shall be conclusive and described in a
certificate filed with the records of corporate proceedings of the Company. For
purposes of this Section 3.9(a)(ii), the “Current Market Price” per
share of Common Stock on any date shall mean the volume weighted average price of such security on the ten (10)
consecutive trading days immediately preceding such date as reported for
consolidated transactions with respect to securities listed on the principal
national securities exchange on which such security is listed or admitted to
trading or, if such security is not listed or admitted to trading on any
national securities exchange, the volume weighted average price of such
security on the ten (10) consecutive trading days immediately preceding such
date in the over-the-counter

 

15

 

market, as reported by the National Association of Securities Dealers,
Inc. Automated Quotations System or such other system then in use or, if such
security is not quoted by any such organization, the volume weighted average
price of such security as of the ten (10) consecutive trading days immediately
preceding such date furnished by a New York Stock Exchange member firm selected
by the Company, or if such security is not quoted by any such organization and
no such New York Stock Exchange member firm is able to provide such prices,
such price as is determined by the Board of Directors in good faith.

 

(b)                                 For
purposes of this Section 3.9, “New Securities” shall mean any
Common Stock or Preferred Stock of the Company, whether or not authorized on
the date hereof, and rights, options or warrants to purchase Common Stock or
Preferred Stock and securities of any type whatsoever that are, or may become,
convertible into Common Stock or Preferred Stock; provided, however,
that “New Securities” does not include the following:

 

(i)                                     shares
of capital stock of the Company issuable upon conversion or exercise of any
currently outstanding securities or any Shares, Warrants or New Securities
issued in accordance with this Agreement (including the Warrant Shares);

 

(ii)                                  shares
or options or warrants for Common Stock granted to officers, directors and
employees of, and consultants to, the Company pursuant to stock option or
purchase plans or other compensatory agreements approved by the Compensation
Committee of the Board of Directors;

 

(iii)                               shares of Common Stock
or Preferred Stock issued in connection with any pro rata stock split or stock
dividend in respect of any series or class of capital stock of the Company or recapitalization
by the Company;

 

(iv)                              shares
of capital stock, or options or warrants to purchase capital stock, issued to a
strategic investor in connection with a strategic commercial agreement as
determined by the Board of Directors;

 

(v)                                 shares
of capital stock, or options or warrants to purchase capital stock, issued
pursuant to commercial borrowing, secured lending or lease financing
transaction approved by the Board of Directors;

 

(vi)                              shares
of capital stock, or options or warrants to purchase capital stock, issued
pursuant to the acquisition of another corporation or entity by the Company by
consolidation, merger, purchase of all or substantially all of the assets, or
other reorganization in which the Company acquires, in a single transaction or series
of related transactions, all or substantially all of the assets of such other
corporation or entity or fifty percent
(50%) or more of the voting power of such other corporation or entity or fifty
percent (50%) or more of the equity ownership of such other corporation or
entity;

 

(vii)                           shares of capital stock
issued in an underwritten public securities offering pursuant to a registration
statement filed under the Securities Act;

 

(viii)                        shares of capital stock, or
options or warrants to purchase capital stock, issued to current or prospective
customers or suppliers of the Company approved by the

 

16

 

Board of Directors
as compensation or accommodation in lieu of other payment, compensation or
accommodation to such customer or supplier;

 

(ix)                                shares
of capital stock, or warrants to purchase capital stock, issued to any person
or entity that provides services to the Company as compensation therefor
pursuant to an agreement approved by the Board of Directors;

 

(x)                                   shares
of capital stock, or options or warrants to purchase capital stock, offered in
a transaction where purchase of such securities by any Purchaser would cause
such transaction to fail to comply with applicable federal or state securities
laws or would cause an applicable registration or qualification exemption to
fail to be available to the Company; provided, however, that this
clause (x) shall apply only to the Purchaser or Purchasers who would cause any
such failure, and not to any of the other Purchasers;

 

(xi)                                securities
issuable upon conversion or exercise of the securities set forth in paragraphs
(i) – (x) above.

 

In the event that the Company proposes to undertake an
issuance of New Securities, it shall give each Eligible Purchaser written notice
(the “Notice”) of its intention, describing the type of New Securities,
the price, and the general terms upon which the Company proposes to issue the
same.  Each Eligible Purchaser shall
have twenty (20) Business Days after receipt of such notice to agree to
purchase all or any portion of its pro rata share of such New Securities at the
price and upon the terms specified in the notice by giving written notice to
the Company and stating therein the quantity of New Securities to be purchased.
In the event that any New Securities subject to the Preemptive Right or the
Right of First Refusal, as the case may be, are not purchased by the Eligible Purchaser
within the twenty (20) Business Day period specified above, the Company shall
have ninety (90) days thereafter to sell (or enter into an agreement pursuant
to which the sale of New Securities that had been subject to the Preemptive
Right or the Right of First Refusal shall be closed, if at all, within sixty
(60) days from the date of said agreement) the New Securities with respect to
which the rights of the Purchaser were not exercised at a price and upon terms,
including manner of payment, no more favorable to the purchasers thereof than
specified in the Notice. In the event the Company has not sold all offered New
Securities within such ninety (90) day period (or sold and issued New
Securities in accordance with the foregoing within sixty (60) days from the
date of such agreement), the Company shall not thereafter issue or sell any New
Securities, without first complying again with the procedures set forth in this
Section 3.9.

 

ARTICLE IV

 

Conditions

 

Section 4.1                                      Conditions
Precedent to the Obligation of the Company to Close and to Sell the Shares and
Warrants. The obligation hereunder of the Company to close and issue and
sell the Shares and the Warrants to the Purchasers on the Closing Date is
subject to the satisfaction or waiver, at or before the Closing, of the
conditions set forth below. These conditions are for the Company’s sole benefit
and may be waived by the Company at any time in its sole discretion.

 

17

 

(a)                                  Accuracy
of the Purchasers’ Representations and Warranties. The representations and
warranties of each Purchaser in each of the Purchaser Transaction Documents
shall be true and correct in all material 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 are expressly made as of a particular date, which shall be
true and correct in all material respects as of such date.

 

(b)                                 Performance
by the Purchasers. Each Purchaser shall have performed, satisfied and
complied in all material respects with all covenants, agreements and conditions
required by this Agreement to be performed, satisfied or complied with by such
Purchaser at or prior to the Closing Date.

 

(c)                                  No
Injunction.  No statute, rule,
regulation, executive order, decree, ruling or injunction shall have been
enacted, entered, promulgated or endorsed by any court or governmental
authority of competent jurisdiction which prohibits the consummation of any of
the transactions contemplated by this Agreement.

 

(d)                                 Delivery
of Purchase Price. The Purchase Price for the Shares and Warrants shall
have been delivered to the Company at the Closing.

 

(e)                                  Delivery
of Purchaser Transaction Documents. The Purchaser Transaction Documents
shall have been duly executed and delivered by the Purchasers to the Company.

 

Section 4.2                                      Conditions
Precedent to the Obligation of the Purchasers to Close and to Purchase the
Shares and Warrants. The obligation hereunder of the Purchasers to purchase
the Shares and Warrants and consummate the transactions contemplated by this
Agreement is subject to the satisfaction or waiver, at or before the Closing,
of each of the conditions set forth below. These conditions are for the
Purchasers’ sole benefit and may be waived by the Purchasers at any time in
their sole discretion.

 

(a)                                  Accuracy
of the Company’s Representations and Warranties. Each of the representations
and warranties of the Company in this Agreement and in each of the Transaction
Documents shall be true and correct in all material respects as of the Closing
Date, except for representations and warranties that are expressly made as of a
particular date, which shall be true and correct in all material respects as of
such date.

 

(b)                                 Performance
by the Company. The Company shall have performed, satisfied and complied in
all respects with all covenants, agreements and conditions required by this
Agreement to be performed, satisfied or complied with by the Company at or
prior to the Closing Date.

 

(c)                                  No
Suspension, Etc.  Trading in the
Company’s Common Stock shall not have been suspended by the Commission (except
for any suspension of trading of limited duration agreed to by the Company,
which suspension shall be terminated prior to the Closing), and, at any time
prior to the Closing Date, trading in securities generally as reported by
Bloomberg Financial Markets (“Bloomberg”) shall not have been suspended
or limited, or minimum prices shall not have been established on securities
generally whose trades are reported by Bloomberg, nor shall a banking
moratorium have been declared either by the United States or

 

18

 

Delaware State
authorities, nor shall there have occurred any national or international
calamity or crisis of such magnitude in its effect on any financial market
which, in each case, in the reasonable judgment of the Purchasers, makes it impracticable
or inadvisable to purchase the Shares.

 

(d)                                 No
Injunction. No statute, rule, regulation, executive order, decree, ruling
or injunction shall have been enacted, entered, promulgated or endorsed by any
court or governmental authority of competent jurisdiction which prohibits the
consummation of any of the transactions contemplated by this Agreement.

 

(e)                                  No
Proceedings or Litigation. No action, suit or proceeding before any
arbitrator or any governmental authority shall have been commenced, and no
investigation by any governmental authority shall have been threatened, against
the Company or any Subsidiary, or any of the officers, directors or affiliates
of the Company or any Subsidiary, seeking to restrain, prevent or change the
transactions contemplated by this Agreement, or seeking damages in connection
with such transactions.

 

(f)                                    Opinion
of Counsel, Etc. The Purchasers shall have received an opinion of counsel
to the Company, dated the Closing Date, substantially in the form of Exhibit
C hereto, and such other certificates and documents as the Purchasers or
their counsel shall reasonably require incident to the Closing.

 

(g)                                 Warrants
and Shares. The Company shall have delivered to the Purchasers the
originally executed Warrants (in such denominations as each Purchaser may
request but in no event in denominations of less than 100) and shall have
delivered certificates representing the Shares (in such denominations as each
Purchaser may request) being acquired by the Purchasers at the Closing.

 

(h)                                 Resolutions.
The Board of Directors of the Company shall have adopted resolutions consistent
with Section 2.1(b) hereof in a form reasonably acceptable to the Purchasers
(the “Resolutions”).

 

(i)                                     Certificate
of Designations. As of the Closing Date, the Company shall have filed with
the Delaware Secretary of State a Certificate of Designations authorizing the
Preferred Stock in substantially the Form of Exhibit D attached hereto.

 

(j)                                     Reservation
of Shares. As of the Closing Date, the Company shall have reserved out of
its authorized and unissued Preferred Stock, solely for the purpose of
effecting the issuance of the Shares, a number of shares of Preferred Stock
equal to the aggregate number of the Shares. As of the Closing Date, the
Company shall have reserved out of its authorized and unissued Common Stock,
solely for the purpose of effecting the conversion of the Shares and the
exercise of the Warrants, a number of shares of Common Stock equal to the
number of Conversion Shares and the number of Warrant Shares issuable upon
conversion of the Preferred Stock and the exercise of the Warrants,
respectively, assuming the Warrants are exercised and the Shares are converted
on the Closing Date (assuming the Warrants are fully exercisable and the Shares
fully convertible on such date regardless of any limitation on the timing or
amount of such exercise or conversion).

 

19

 

(k)                                  Secretary’s
Certificate. The Company shall have delivered to the Purchasers a
secretary’s certificate, dated as of the Closing Date, as to (i) the
Resolutions, (ii) the Certificate, (iii) the Bylaws, each as in effect at the
Closing, and (iv) the authority and incumbency of the officers of the Company
executing the Transaction Documents and any other documents required to be
executed or delivered in connection therewith.

 

(l)                                     Officer’s
Certificate. On the Closing Date, the Company shall have delivered to the
Purchasers a certificate of an executive officer of the Company, dated as of
the Closing Date, confirming the accuracy of the Company’s representations,
warranties and covenants contained herein and in each of the other Transaction
Documents as of the Closing Date and confirming the compliance by the Company
with the conditions precedent set forth in this Section 4.2 as of the Closing
Date.

 

(m)                               Fees
and Expenses. As of the Closing Date, all fees and expenses required to be
paid by the Company in connection with the transactions contemplated by this
Agreement shall have been, or authorized to be, paid by the Company.

 

(n)                                 Registration
Rights Agreement. As of the Closing Date, the parties shall have entered
into the Registration Rights Agreement in the Form of Exhibit E attached
hereto.

 

(o)                                 Material
Adverse Effect. No Material Adverse Effect shall have occurred and be
continuing.

 

ARTICLE V

 

Certificate Legend

 

Section 5.1                                      Legend.
Each certificate representing the Shares, the Conversion Shares, the Warrants
and the Warrant Shares shall be stamped or otherwise imprinted with a legend
substantially in the following form (in addition to any legend required by
applicable state securities or “blue sky” laws):

 

THE SECURITIES
REPRESENTED BY THIS CERTIFICATE (THE “SECURITIES”) HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”) OR ANY
STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF
UNLESS REGISTERED UNDER THE SECURITIES ACT AND UNDER APPLICABLE STATE
SECURITIES LAWS OR INTRUSION INC. SHALL HAVE RECEIVED AN OPINION OF COUNSEL
THAT REGISTRATION OF SUCH SECURITIES UNDER THE SECURITIES ACT AND UNDER THE
PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED, WHICH OPINION
AND COUNSEL SHALL BE REASONABLY SATISFACTORY TO INTRUSION INC.

 

Each certificate representing any Shares shall also be
stamped or otherwise imprinted with a legend substantially in the following
form:

 

20

 

INTRUSION INC. WILL
FURNISH TO EACH HOLDER OF ITS 5% CONVERTIBLE PREFERRED STOCK WHO SO REQUESTS
WITHOUT CHARGE A COPY OF THE CERTIFICATE OF DESIGNATIONS SETTING FORTH THE
POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR
OTHER SPECIAL RIGHTS OF SUCH STOCK AND ANY OTHER CLASS OR SERIES THEREOF AND
THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR
RIGHTS.

 

The Company agrees to reissue certificates
representing any of the Securities, without the legend set forth above, if at
such time, prior to making any transfer of any such Securities, such holder
thereof shall give written notice to the Company describing the manner and
terms of such transfer and removal as the Company may reasonably request. Such
proposed transfer will not be effected until: (a) the Company has notified such
holder that either (i) in the opinion of Company counsel, the registration of
the Shares, the Conversion Shares, Warrants or Warrant Shares under the
Securities Act is not required in connection with such proposed transfer, or
(ii) a registration statement under the Securities Act covering such proposed
disposition has been filed by the Company with the Commission and has become
effective under the Securities Act; and (b) the Company has notified such
holder that either (i) in the opinion of Company counsel, the registration or
qualification under the securities or “blue sky” laws of any state is not
required in connection with such proposed disposition, or (ii) compliance with
applicable state securities or “blue sky” laws has been effected. The Company
will use its best efforts to respond to any such notice from a holder within
five (5) Business Days. In the case of any proposed transfer under this Section
5.1, the Company will use reasonable efforts to comply with any such applicable
state securities or “blue sky” laws, but shall in no event be required, in
connection therewith, to qualify to do business in any state where it is not
then qualified or to take any action that would subject it to tax or to the
general service of process in any state where it is not then subject. The
restrictions on transfer contained in this Section 5.1 shall be in addition to,
and not by way of limitation of, any other restrictions on transfer contained
in any other section of this Agreement.

 

ARTICLE VI

 

Termination

 

Section 6.1                                      Termination
by Mutual Consent. This Agreement may be terminated at any time prior to
the Closing Date by the mutual written consent of the Company and the
Purchasers.

 

Section 6.2                                      Effect
of Termination. In the event of termination by the Company or the
Purchasers, written notice thereof shall forthwith be given to the other party
and the transactions contemplated by this Agreement shall be terminated without
further action by any party. If this Agreement is terminated as provided in
Section 6.1 herein, this Agreement shall become void and of no further force
and effect, except for Sections 8.1 and 8.2, and Article VII  herein. Nothing in this Section 6.2 shall be
deemed to release the Company or any Purchaser from any liability for any
breach under this Agreement, or to impair the rights of the Company or

 

21

 

such Purchaser to compel specific performance by the other party of its
obligations under this Agreement.

 

ARTICLE VII

 

Indemnification

 

Section 7.1                                      General
Indemnity. The Company agrees to indemnify and hold harmless each Purchaser
(and its respective equityholders, directors, officers, employees, affiliates,
agents, successors and assigns) from and against any and all losses,
liabilities, deficiencies, costs, damages and expenses (including, without
limitation, reasonable attorneys’ fees, charges and disbursements) incurred by
each Purchaser or any such person as a result of any inaccuracy in or breach of
the representations, warranties or covenants made by the Company herein, other than losses or other amounts
that are consequential, in the nature of lost profits, diminution in the value
of the property, special or punitive or otherwise not actual damages, which
representations, warranties and covenants shall survive until the later of (i)
the first anniversary of the Closing Date, and (ii) the specified date of
performance. Each Purchaser severally but not jointly
agrees to indemnify and hold harmless the Company and its directors, officers,
employees, affiliates, agents, successors and assigns from and against any and
all losses, liabilities, deficiencies, costs, damages and expenses (including,
without limitation, reasonable attorneys’ fees, charges and disbursements)
incurred by the Company as result of any inaccuracy in or breach of the
representations, warranties or covenants made by such Purchaser herein.

 

Section 7.2                                      Indemnification
Procedure. Any party entitled to indemnification under this Article VII (an
“indemnified party”) will give written notice to the indemnifying party of any
matters giving rise to a claim for indemnification; provided, that the
failure of any party entitled to indemnification hereunder to give notice as
provided herein shall not relieve the indemnifying party of its obligations
under this Article VII except to the extent that the indemnifying party is
actually prejudiced by such failure to give notice. In case any action,
proceeding or claim is brought against an indemnified party in respect of which
indemnification is sought hereunder, the indemnifying party shall be entitled
to participate in and, unless in the reasonable judgment of the indemnified
party a conflict of interest between it and the indemnifying party may exist
with respect to such action, proceeding or claim, to assume the defense thereof
with counsel reasonably satisfactory to the indemnified party. In the event
that the indemnifying party advises an indemnified party that it will contest
such a claim for indemnification hereunder, or fails, within thirty (30) days
of receipt of any indemnification notice to notify such person in writing of
the indemnifying party’s election to defend, settle or compromise, at its sole
cost and expense, any action, proceeding or claim (or discontinues its defense
at any time after it commences such defense), then the indemnified party may,
at its option, defend, settle or otherwise compromise or pay such action or
claim.  In any event, unless and until
the indemnifying party elects in writing to assume and does so assume the
defense of any such claim, proceeding or action, the indemnified party’s costs
and expenses arising out of the defense, settlement or compromise of any such
action, claim or proceeding shall be losses subject to indemnification
hereunder. The indemnified party shall cooperate fully with the indemnifying
party in connection with any negotiation or defense of any such action or claim
by the indemnifying party and shall furnish to the indemnifying party all
information reasonably

 

22

 

available to the indemnified party which relates to such action or
claim. The indemnifying party shall keep the indemnified party fully apprised
at all times as to the status of the defense or any settlement negotiations
with respect thereto. If the indemnifying party elects to defend any such
action or claim, then the indemnified party shall be entitled to participate in
such defense with counsel of its choice but at its sole cost and expense. The
indemnifying party shall not be liable for any settlement of any action, claim
or proceeding effected without its prior written consent.  Notwithstanding anything in this Article VII
to the contrary, the indemnifying party shall not, without the indemnified
party’s prior written consent, which consent may not be unreasonably withheld,
settle or compromise any claim or consent to entry of any judgment in respect
thereof which imposes any future obligation on the indemnified party or which
does not include, as an unconditional term thereof, the giving by the claimant
or the plaintiff to the indemnified party of a release from all liability in
respect of such claim. If the indemnifying party fails or refuses to promptly
assume the defense of any such claim, proceeding or action, then the
indemnification required by this Article VII shall be made by periodic payments
of the amount thereof during the course of investigation or defense, as and
when bills are received or expense, loss, damage or liability is incurred, so
long as the indemnified party irrevocably agrees to refund such moneys if it is
ultimately determined by a court of competent jurisdiction that such party was
not entitled to indemnification. The indemnity agreements contained herein
shall be in addition to (a) any cause of action or similar rights of the
indemnified party against the indemnifying party or others, and (b) any
liabilities the indemnifying party may be subject to pursuant to applicable
law.

 

ARTICLE VIII

 

Miscellaneous

 

Section 8.1                                      Fees
and Expenses.  Each party shall pay
the fees and expenses of its advisors, counsel, accountants and other experts,
if any, and all other expenses, incurred by such party incident to the
negotiation, preparation, execution, delivery and performance of this
Agreement; provided, however, that the Company shall pay $30,000
to counsel for Gryphon Master Fund, L.P., the lead Purchaser (“Gryphon”),
to reimburse Gryphon for the fees and expenses (including attorneys’ fees and
expenses) incurred by it in connection with its due diligence review of the
Company and the preparation, negotiation, execution, delivery and performance
of this Agreement and the other Transaction Documents and the transactions
contemplated thereunder (including Gryphon’s counsel’s review of the
Registration Statement (as contemplated by the Registration Rights Agreement)
as special counsel), $10,000 of which has already been paid and is
non-refundable, and the remaining $20,000 of which shall be due and payable in
cash at Closing (and only if the Closing occurs). If the Closing occurs, the
Company hereby authorizes and directs Gryphon to deduct $20,000 from the
Purchase Price to be paid by Gryphon at Closing and remit such amount directly
to Gryphon’s counsel in payment and satisfaction of such remaining $20,000 due
and payable by the Company at Closing.

 

Section 8.2                                      Specific
Enforcement; Consent to Jurisdiction.

 

(a)                                  The
Company and the Purchasers acknowledge and agree that irreparable damage would
occur in the event that any of the provisions of this Agreement or the other
Transaction Documents were not performed in accordance with their specific
terms or were

 

23

 

otherwise
breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent or cure breaches of the provisions of this
Agreement or the other Transaction Documents and to enforce specifically the
terms and provisions hereof or thereof, this being in addition to any other
remedy to which any of them may be entitled by law or equity.

 

(b)                                 The
Company and each Purchaser (i) hereby irrevocably submit to the exclusive
jurisdiction of the United States District Court sitting in the Northern
District of Texas and the courts of the State of Texas located in Dallas County
for the purposes of any suit, action or proceeding arising out of or relating
to this Agreement or any of the other Transaction Documents or the transactions
contemplated hereby or thereby, and (ii) hereby waive, and agree not to assert
in any such suit, action or proceeding, any claim that it is not personally
subject to the jurisdiction of each such court, that the suit, action or
proceeding is brought in an inconvenient forum or that the venue of the suit,
action or proceeding is improper. The Company and each Purchaser consent to
process being served in any such suit, action or proceeding by mailing a copy
thereof to such party at the address in effect for notices to it under this
Agreement and agrees that such service shall constitute good and sufficient
service of process and notice thereof. Nothing in this Section 8.2 shall affect
or limit any right to serve process in any other manner permitted by law. The
Company and the Purchasers hereby agree that the prevailing party in any suit,
action or proceeding arising out of or relating to the Shares, this Agreement,
the Registration Rights Agreement or the Warrants, shall be entitled to
reimbursement for reasonable legal fees from the non-prevailing party.

 

Section 8.3                                      Entire
Agreement; Amendment. This Agreement, the Transaction Documents and the
Purchaser Transaction Documents contain the entire understanding and agreement
of the parties with respect to the matters covered hereby and, except as
specifically set forth herein or in any of the Transaction Documents or
Purchaser Transaction Documents, neither the Company nor any Purchaser make any
representation, warranty, covenant or undertaking with respect to such matters.
This Agreement, the Transaction Documents and the Purchaser Transaction
Documents supersede all prior understandings and agreements with respect to
said subject matter, all of which are merged herein. No provision of this
Agreement may be waived or amended other than by a written instrument signed by
the Company and the Purchasers and their permitted assigns owning of record at
least a majority in interest of the then-outstanding Shares, and no provision
hereof may be waived other than by a written instrument signed by the party
against whom enforcement of any such waiver is sought. No amendment to this
Agreement shall be effective to the extent that it applies to less than all of
the holders of the Shares then outstanding or violates any provision of the
Delaware General Corporation Law. No consideration shall be offered or paid to
any person to amend or consent to a waiver or modification of any provision of
any of the Transaction Documents unless the same consideration is also offered
to all of the parties to the Transaction Documents or holders of Shares, as the
case may be.

 

Section 8.4                                      Notices.
Any notice, demand, request, waiver or other communication required or
permitted to be given hereunder shall be in writing and shall be deemed given
and received (a) upon hand delivery or delivery by telecopy or facsimile at the
address or number designated below (if delivered on a Business Day during
normal business hours where such notice is to be received), or the first
Business Day following such delivery (if delivered other than on a Business Day
during normal business hours where such notice is to be

 

24

 

received), or (b) on the second Business Day following the date of
mailing by express courier service, fully prepaid, addressed to such address,
or upon actual receipt of such mailing, whichever shall first occur. The
addresses for such communications shall be:

 

If to the Company:                                                                                             Intrusion
Inc.

1101 East Arapaho Road

Richardson, Texas  75081

Attention:  G. Ward Paxton, Chairman, CEO and President

Telecopier:  (972) 234-1467

Telephone:  (972) 301-3633

 

with copies (which copies

shall not constitute
notice

to the Company) to:                                                                                      Patton
Boggs LLP

2001 Ross Avenue

Suite 3000

Dallas, Texas  75201

Attention: Thomas R.
Nelson, Esq.

Telecopier:  (214) 758-1550

Telephone:  (214) 758-1500

 

If to
any Purchaser:                                                                                        At
the address of such Purchaser set forth on Exhibit A to this Agreement.

 

Any party hereto may from time to time change its
address for notices by giving at least ten (10) days written notice of such
changed address to the other party or parties hereto in accordance with the
provisions of this Section 8.4.

 

Section 8.5                                      Waivers.
No waiver by any party of any default with respect to any provision, condition
or requirement of this Agreement shall be deemed to be a continuing waiver in
the future or a waiver of any other provision, condition or requirement hereof,
nor shall any delay or omission of any party to exercise any right hereunder in
any manner impair the exercise of any such right accruing to it thereafter.

 

Section 8.6                                      Headings.
The article, section and subsection headings in this Agreement are for
convenience only and shall not constitute a part of this Agreement for any
other purpose and shall not be deemed to limit or affect any of the provisions
hereof.

 

Section 8.7                                      Successors
and Assigns. This Agreement shall be binding upon and inure to the benefit
of the parties and their successors and permitted assigns. After the Closing,
the assignment by a party to this Agreement of any rights hereunder shall not
affect the obligations of such party under this Agreement.

 

Section 8.8                                      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 (other than indemnified parties, as contemplated by Article VII).

 

25

 

Section 8.9                                      Governing
Law. This Agreement shall be governed by and construed in accordance with
the internal laws of the State of Delaware, without giving effect to the choice
of law provisions. This Agreement shall not be interpreted or construed with
any presumption against the party causing this Agreement to be drafted.

 

Section 8.10                                Counterparts.
This Agreement may be executed in any number of counterparts, all of which
taken together shall constitute one and the same instrument and shall become
effective when counterparts have been signed by each party and delivered to the
other parties hereto, it being understood that all parties need not sign the
same counterpart.

 

Section 8.11                                Severability.
The provisions of this Agreement are severable and, in the event that any court
of competent jurisdiction shall determine that any one or more of the
provisions or part of the provisions contained in this Agreement shall, for any
reason, be held to be invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other provision
or part of a provision of this Agreement and this Agreement shall be reformed
and construed as if such invalid or illegal or unenforceable provision, or part
of such provision, had never been contained herein, so that such provisions
would be valid, legal and enforceable to the maximum extent possible.

 

Section 8.12                                Further
Assurances. From and after the date of this Agreement, upon the request of
the Purchasers or the Company, the Company and each Purchaser shall execute and
deliver such instruments, documents and other writings as may be reasonably
necessary or desirable to confirm and carry out and to effectuate fully the
intent and purposes of this Agreement, the Warrants and the Registration Rights
Agreement.

 

Section 8.13                                Nature
of Purchaser’s Obligations and Rights. The obligations of each Purchaser
under any Transaction Document are several and not joint with the obligations
of any other Purchaser, and no Purchaser shall be responsible in any way for
the performance of the obligations of any other Purchaser under any Purchaser
Transaction Document. Nothing contained herein or in any other Purchaser Transaction
Document, and no action taken by any Purchaser pursuant hereto or thereto,
shall be deemed to constitute the Purchasers as a partnership, an association,
a joint venture or any other kind of entity, or create a presumption that the
Purchasers are in any way acting in concert or as a group with respect to such
obligations or the transactions contemplated by the Purchaser Transaction
Documents. Each Purchaser confirms that it has independently participated in
the negotiation of the transactions contemplated hereby with the advice of its
own counsel and advisors. Each Purchaser shall be entitled to independently
protect and enforce its rights, including, without limitation, the rights
arising out of this Agreement or out of any other Purchaser Transaction
Documents, and it shall not be necessary for any other Purchaser to be joined
as an additional party in any proceeding for such purpose. Each Purchaser
(other than Gryphon) hereby agrees and acknowledges that (a) Warren W.
Garden, P.C. was retained solely by Gryphon in connection with Gryphon’s due
diligence review of the Company and the preparation, negotiation, execution,
delivery and performance of this Agreement and the other Transaction Documents
and the transactions contemplated thereunder, and in such capacity has provided
legal services solely to Gryphon, (b) Warren W. Garden, P.C. has not
represented, nor will it represent, any Purchaser (other than Gryphon) in
connection with the preparation, negotiation, execution, delivery and performance
of this Agreement or the other Transaction Documents or the transactions
contemplated

 

26

 

thereunder, and
(c) each Purchaser (other than Gryphon) should, if it wishes counsel with
respect to the preparation, negotiation, execution, delivery and performance of
this Agreement or the other Transaction Documents or the transactions
contemplated thereunder, retain its own independent counsel with respect
thereto.

 

 

[Signature Pages
Follow]

 

27

 

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

 

	
   

  	
  INTRUSION
  INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ G. WARD PAXTON

  	
   

  
	
   

  	
   

  	
   Name:

  	
  G. Ward Paxton

  
	
   

  	
   

  	
   Title:

  	
  Chairman, CEO and President

  
						

 

 

[Signatures of Purchasers to follow
on next pages.]

 

 

[Signature page to Securities
Purchase Agreement dated March 25, 2004,

by and among Intrusion Inc. and the
Purchasers named therein]

 

 

	
   

  	
  CRESTVIEW CAPITAL MASTER, L.L.C.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ ROBERT HOYT

  	
   

  
	
   

  	
   

  	
  Robert Hoyt,
  Managing Member

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  , 

  
					

 

 

[Signature page to Securities
Purchase Agreement dated March 25, 2004,

by and among Intrusion Inc. and the
Purchasers named therein]

 

 

	
   

  	
  ENABLE GROWTH PARTNERS L.P.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ BRENDAN O’NEIL

  	
   

  
	
   

  	
  Name:

  	
  Brendan O’Neil

  	
   

  
	
   

  	
  Title:

  	
  Principal

  	
   

  
						

 

 

[Signature
page to Securities Purchase Agreement dated March 25, 2004,

by and among Intrusion Inc. and the
Purchasers named therein]

 

 

	
   

  	
  /s/ JAMES F. GERO

  	
   

  
	
   

  	
  James F. Gero

  

 

 

[Signature page to Securities
Purchase Agreement dated March 25, 2004,

by and among Intrusion Inc. and the
Purchasers named therein]

 

 

	
   

  	
  GRYPHON MASTER FUND, L.P.

  
	
   

  	
   

  
	
   

  	
  By:  Gryphon
  Partners, L.P., its General Partner

  
	
   

  	
   

  
	
   

  	
      By:  Gryphon Management Partners, L.P.,

  
	
   

  	
      its
  General Partner

  
	
   

  	
   

  
	
   

  	
         By:  Gryphon Advisors, LLC, its General Partner

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ E.B. LYON, IV

  	
   

  
	
   

  	
  E.B. Lyon, IV, Authorized
  Agent

  

 

 

[Signature page to Securities
Purchase Agreement dated March 25, 2004,

by and among Intrusion Inc. and the
Purchasers named therein]

 

 

	
   

  	
  /s/ G. WARD PAXTON

  	
   

  
	
   

  	
  G. Ward Paxton

  

 

 

[Signature
page to Securities Purchase Agreement dated March 25, 2004,

by and among Intrusion Inc. and the
Purchasers named therein]

 

 

	
   

  	
  RENAISSANCE
  CAPITAL GROWTH & INCOME

  FUND III, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ RUSSELL CLEVELAND

  	
   

  
	
   

  	
   

  	
  Russell Cleveland, President

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  RENAISSANCE US GROWTH INVESTMENT

  TRUST PLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ RUSSELL CLEVELAND

  	
   

  
	
   

  	
   

  	
  Russell Cleveland, Director

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  BFS US SPECIAL OPPORTUNITIES TRUST
  PLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ RUSSELL CLEVELAND

  	
   

  
	
   

  	
   

  	
  Russell Cleveland, Director

  

 

 

[Signature page to Securities
Purchase Agreement dated March 25, 2004,

by and among Intrusion Inc. and the
Purchasers named therein]

 

 

	
   

  	
  /s/ MARSHALL B. PAYNE

  	
   

  
	
   

  	
  Marhsall B. Payne

  

 

 

EXHIBIT A

LIST OF PURCHASERS

 

	
  Names and Addresses of Purchasers

  	
   

  	
  Number of

  Shares

  Purchased

  	
   

  	
  Number of

  Warrants

  Purchased

  	
   

  	
  Dollar Amount of

  Investment

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Crestview Capital
  Master, L.L.C.

  95 Revere Drive, Suite F

  Northbrook, IL  60062

  Attention: Robert M. Hoyt

  Telecopier:  (847) 559-5807
Telephone:  (847)-559-0060

  	
   

  	
  160,000

  	
   

  	
  356,234

  	
   

  	
  $

  	
  800,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Enable Growth Partners
  L.P.

  c/o Enable Capital Management

  One Sansome Street, Suite 2900

  San Francisco, CA  94104

  Telecopier:  (415) 835-3843

  Telephone:  (415) 835-3839

  	
   

  	
  90,000

  	
   

  	
  200,381

  	
   

  	
  $

  	
  450,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  James F. and Catherine
  A. Gero

  11900 N. Anna Cade Road

  Rockwall, TX  75087

  	
   

  	
  60,000

  	
   

  	
  133,587

  	
   

  	
  $

  	
  300,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Gryphon Master Fund,
  L.P

  100 Crescent Court

  Suite 490

  Dallas, Texas  75201

  Attn:  Ryan R. Wolters

  Telecopier: (214) 871-6711

  Telephone: (214) 871-6783

  	
   

  	
  230,000

  	
   

  	
  512,086

  	
   

  	
  $

  	
  1,150,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  with copies to:

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Warren W. Garden, P.C.

  100 Crescent Court

  Suite 400

  Dallas, Texas  75201

  Attn:  Warren W. Garden, Esq.

  Telecopier: (214) 871-6711

  Telephone: (214) 871-6710

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  G. Ward Paxton

  c/o Intrusion Inc.

  1101 E. Arapaho Road

  Richardson, TX  75081

  Telecopier: (972) 301-3892

  	
   

  	
  140,000

  	
   

  	
  311,704

  	
   

  	
  $

  	
  700,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Marshall B. Payne

  500 Crescent Court, Suite 250

  Dallas, TX  75201

  Telecopier:  (214) 880-4491

  Telephone:  (214) 871-6807

  	
   

  	
  20,000

  	
   

  	
  44,529

  	
   

  	
  $

  	
  100,000

  	
   

  

 

A-1

 

	
  Names and Addresses of Purchasers

  	
   

  	
  Number of

  Shares

  Purchased

  	
   

  	
  Number of

  Warrants

  Purchased

  	
   

  	
  Dollar Amount of

  Investment

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Renaissance Capital
  Growth & Income Fund III, Inc.  

  	
   

  	
  100,000

  	
   

  	
  222,646

  	
   

  	
  $

  	
  500,000

  	
   

  
	
  Renaissance US Growth
  Investment Trust PLC

  	
   

  	
  100,000

  	
   

  	
  222,646

  	
   

  	
  $

  	
  500,000

  	
   

  
	
  BFS US Special
  Opportunities Trust PLC

  c/o Renaissance Capital Group, Inc.
8080 N. Central Expressway, 
  Suite 210-LB -59
Dallas, TX  75206
Telecopier:  (214) 891-8291
Telephone:  (214) 891-8294

  	
   

  	
  100,000

  	
   

  	
  222,646

  	
   

  	
  $

  	
  500,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Totals:

  	
   

  	
  1,000,000

  	
   

  	
  2,226,459  

  	
   

  	
  $

  	
  5,000,000

  	
   

  

 

A-2

 

EXHIBIT B

FORM OF WARRANT

 

B-1

 

EXHIBIT C

FORM OF OPINION

 

C-1

 

EXHIBIT D

FORM OF CERTIFICATE OF DESIGNATIONS

 

D-1

 

EXHIBIT E

FORM OF REGISTRATION RIGHTS AGREEMENT

 

E-1

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