Document:

EX-10.1 SECURITIES PURCHASE AGREEMENT

Exhibit 10.1

SECURITIES PURCHASE AGREEMENT

     SECURITIES
PURCHASE AGREEMENT (the “Agreement”), dated as
of September 12, 2008, by and among
Stinger Systems, Inc., a Nevada corporation, with headquarters located at 2701 N. Rocky Point
Drive, Suite 1130, Tampa, Florida 33607 (the “Company”), and the investors listed on the Schedule
of Buyers attached hereto (individually, a “Buyer” and collectively, the “Buyers”).

WHEREAS:

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

     B. The Company has authorized a new series of senior secured convertible notes of the Company
which notes shall be convertible into the Company’s common stock, par value $0.001 per share (the
“Common Stock”), in accordance with the terms of the Notes (as defined below).

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

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

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

     F. The Company and Castlerigg Investment Partners, Ltd. (“Castlerigg”) entered into that
certain Securities Purchase Agreement, dated as of August 2, 2007 (the “August 2007 Securities
Purchase Agreement”), whereby the Company, among other things, issued to Castlerigg at the Closing
(as defined in the August 2007 Securities Purchase Agreement), senior secured convertible notes (as
such notes were amended and restated on February 29, 2008) (the “Amended and Restated Notes”) and
warrants (the “August 2007 Warrants”) to acquire shares of Common Stock.

     G. The Company and Castlerigg entered into that certain Securities Purchase Agreement, dated
as of February 29, 2008 (the “February 2008 Securities Purchase Agreement”), whereby the Company,
among other things, issued to Castlerigg at the Closing (as defined in the February 2008 Securities
Purchase Agreement), senior secured convertible notes (the “February 2008 Notes”) and warrants (the
“February 2008 Warrants”) to acquire shares of Common Stock.

     H. On even date herewith, the Company and Castlerigg entered into an Amendment and Exchange
Agreement, pursuant to which, among other things, the Company and Caslterigg (i) amended and
restated the Amended and Restated Notes (the “Exchanged Amended and Restated Notes”), and (ii)
amended and restated the February 2008 Notes (the “Exchanged 2008 Notes,” together with the
Exchanged Amended and Restated Notes, the “Exchanged Notes”)

     I. The Notes will rank senior to all outstanding indebtedness (other than the Exchanged Notes)
and all future indebtedness of the Company and will be secured by a first priority, perfected
security interest in all of the assets of the Company (subject only to the Exchanged Notes) and in
connection therewith the Company shall enter into a Security Agreement in the form attached hereto
as Exhibit C (the “Security Agreement”). All payments due

 

 

under the Notes and the Exchanged Notes shall rank pari passu.

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

     1. PURCHASE AND SALE OF NOTES AND WARRANTS.

          (a) Purchase of Notes and Warrants. Subject to the satisfaction (or waiver) of the
conditions set forth in Sections 6 and 7 below, (i) the Company shall issue and sell to each Buyer,
and each Buyer severally, but not jointly, agrees to purchase, as set
forth in Section 1(e), from the Company on the Closing Date
(as defined below), (A) a principal amount of Notes as is set forth opposite such Buyer’s name in
column (3) on the Schedule of Buyers, and (B) Warrants to acquire that number of Warrant Shares as
is set forth opposite such Buyer’s name in column (4) on the Schedule of Buyers (the “Closing”).

          (b) Closing. The Closing shall occur on the Closing Date at the offices of Bush Ross,
P.A., 1801 N. Highland Ave., Tampa, Florida 33602, or as otherwise mutually agreed to by Company
and each Buyer.

          (c) Purchase Price. The purchase price for each Buyer of the Notes and the Warrants
to be purchased by each such Buyer at the Closing shall be the amount set forth opposite such
Buyer’s name in column (5) of the Schedule of Buyers (the “Purchase Price”). The Notes will be
issued with an original issue discount of two percent (2%). Each Buyer shall pay $0.98 for each
$1.00 of principal amount of Notes and Warrants to be purchased at the Closing. The Buyers and the
Company agree that the Notes and the Warrants constitute an “investment unit” for purposes of
Section 1273(c)(2) of the Internal Revenue Code of 1986, as amended (the “Code”).

          (d) Closing Date. The date and time of the Closing (the “Closing Date”) shall be
10:00 a.m., New York City Time, on the date hereof after notification of satisfaction (or waiver)
of the conditions to the Closing set forth in Sections 6 and 7 below (or such later date as is
mutually agreed to by the Company and each Buyer).

          (e) Form of
Payment. (i) Each Buyer shall pay (a) twenty five and one/half percent (25.5%) of its Purchase Price to the
Company for the Notes and the Warrants to be issued and sold to such Buyer at the Closing less, in
the case of the Debt Opportunity Fund, LLLP, the amounts withheld pursuant to Section 4(g), by wire
transfer of immediately available funds in accordance with the Company’s written wire instructions
on the Closing Date, (b) forty one (41%) percent of its Purchase Price no later than September 19,
2008, and (c) the remaining portion of the Purchase Price no later than September 26, 2008, and
(ii) on the Closing Date, the Company shall deliver to each Buyer (a) the Notes (in the principal
amounts as such Buyer shall request) which such Buyer is purchasing, and (b) the Warrants
(allocated in the amounts as such Buyer shall request) to acquire up to an aggregate number of
Warrant Shares which such Buyer is purchasing, in each case duly executed on behalf of the Company
and registered in the name of such Buyer or its designee. Each partial payment made by Buyer as to
the Purchase Price hereunder shall constitute a separate Advance (as defined in the Notes) made by
Buyer under its respective Notes in an amount corresponding to that same portion of the principal
amount of the Notes set forth opposite such Buyer’s name in column (3) on the Schedule of Buyers
without regard to the actual amount of the payment.

     2. BUYER’S REPRESENTATIONS AND WARRANTIES. Each Buyer represents and warrants with
respect to only itself that:

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

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

          (c) Reliance on Exemptions. Such Buyer understands that the Securities are being
offered and sold to it in reliance on specific exemptions from the registration requirements of
United States federal and state securities laws and that the Company is relying in part upon the
truth and accuracy of, and such Buyer’s compliance with, the

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representations, warranties, agreements, acknowledgments and understandings of such Buyer set forth
herein in order to determine the availability of such exemptions and the eligibility of such Buyer
to acquire the Securities.

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

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

          (f) Transfer or Resale. Such Buyer understands that except as provided in Section
4(u) hereof: (i) the Securities have not been and are not being registered under the 1933 Act or
any state securities laws, and may not be offered for sale, sold, assigned or transferred unless
(A) subsequently registered thereunder, (B) such Buyer shall have delivered to the Company an
opinion of counsel, in a generally acceptable form, to the effect that such Securities to be sold,
assigned or transferred may be sold, assigned or transferred pursuant to an exemption from such
registration, or (C) such Buyer provides the Company with reasonable assurance that such Securities
can be sold, assigned or transferred pursuant to Rule 144 or Rule 144A promulgated under the 1933
Act, as amended, (or a successor rule thereto) (collectively, “Rule 144”); (ii) any sale of the
Securities made in reliance on Rule 144 may be made only in accordance with the terms of Rule 144
and further, if Rule 144 is not applicable, any resale of the Securities under circumstances in
which the seller (or the Person (as defined in Section 3(s)) through whom the sale is made) may be
deemed to be an underwriter (as that term is defined in the 1933 Act) may require compliance with
some other exemption under the 1933 Act or the rules and regulations of the SEC thereunder; and
(iii) neither the Company nor any other Person is under any obligation to register the Securities
under the 1933 Act or any state securities laws or to comply with the terms and conditions of any
exemption thereunder. The Securities may be pledged in connection with a bona fide margin account
or other loan or financing arrangement secured by the Securities and such pledge of Securities
shall not be deemed to be a transfer, sale or assignment of the Securities hereunder, and no Buyer
effecting a pledge of Securities shall be required to provide the Company with any notice thereof
or otherwise make any delivery to the Company pursuant to this Agreement or any other Transaction
Document (as defined in Section 3(b)), including, without limitation, this Section 2(f).

          (g) Legends. Such Buyer understands that the certificates or other instruments
representing the Notes and the Warrants and, until such time as the resale of the Interest Shares,
Conversion Shares and the Warrant Shares have been registered under the 1933 Act as contemplated by
Section 4(u) hereof, the stock certificates representing the Conversion Shares and the Warrant
Shares, except as set forth below, shall bear any legend as required by the “blue sky” laws of any
state and a restrictive legend in substantially the following form (and a stop-transfer order may
be placed against transfer of such stock certificates):

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

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The legend set forth above shall be removed and the Company shall issue a certificate without such
legend to the holder of the Securities upon which it is stamped or issue to such holder by
electronic delivery at the applicable balance account at DTC (as defined below), unless otherwise
required by state securities laws, (i) such Securities are registered for resale under the 1933
Act, (ii) in connection with a sale, assignment or other transfer, such holder provides the Company
with an opinion of counsel, in a generally acceptable form, to the effect that such sale,
assignment or transfer of the Securities may be made without registration under the applicable
requirements of the 1933 Act, or (iii) such holder provides the Company with reasonable assurance
that the Securities can be sold, assigned or transferred pursuant to Rule 144 or Rule 144A.

          (h) Validity; Enforcement. This Agreement and the Security Agreement to which such
Buyer is a party have been duly and validly authorized, executed and delivered on behalf of such
Buyer and shall constitute the legal, valid and binding obligations of such Buyer enforceable
against such Buyer in accordance with their respective terms, except as such enforceability may be
limited by general principles of equity or to applicable bankruptcy, insolvency, reorganization,
moratorium, liquidation and other similar laws relating to, or affecting generally, the enforcement
of applicable creditors’ rights and remedies.

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

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

     3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants
to each of the Buyers that:

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

          (b) Authorization; Enforcement; Validity. The Company has the requisite power and
authority to enter into and perform its obligations under this Agreement, the Notes, the Security
Agreement, the Irrevocable Transfer Agent Instructions (as defined in Section 5(b)), the Warrants,
and each of the other agreements entered into by the parties hereto in connection with the
transactions contemplated by this Agreement (collectively, the “Transaction Documents”) and to
issue the Securities in accordance with the terms hereof and thereof. The execution and delivery
of the Transaction Documents by the Company and the consummation by the Company of the transactions
contemplated hereby and thereby, including, without limitation, the issuance of the Notes and the
Warrants, the reservation for issuance and the issuance of the Conversion Shares issuable upon
conversion of the Notes, the reservation for issuance and issuance of Warrant Shares issuable upon
exercise of the Warrants, the

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reservation for issuance and issuance of Interest Shares, if any, and the granting of a security
interest in the Collateral (as defined in the Security Agreement) have been duly authorized by the
Company’s Board of Directors and (other than (i) the filing of appropriate UCC financing statements
with the appropriate states and other authorities pursuant to the Security Agreement, (ii) the
filing with the SEC of one or more registration statements in accordance with the requirements of
Section 4(u) hereof) no further filing, consent, or authorization is required by the Company, its
Board of Directors or its stockholders, and (iii) the filing of a definitive Schedule 14C with the
SEC in accordance with the Capitalization Letter Agreement (as defined below).

This Agreement and the other Transaction Documents of even date herewith have been duly executed
and delivered by the Company, and constitute the legal, valid and binding obligations of the
Company, enforceable against the Company in accordance with their respective terms, except as such
enforceability may be limited by general principles of equity or applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation or similar laws relating to, or affecting generally, the
enforcement of applicable creditors’ rights and remedies.

          (c) Issuance of Securities. The issuance of the Notes and the Warrants are duly
authorized and are free from all taxes, liens and charges with respect to the issue thereof. As of
the applicable Closing, but subject to the conditions set forth in the Capitalization Letter
Agreement, a number of shares of Common Stock shall have been duly authorized and reserved for
issuance which equals at least 130% of the sum of the maximum number of shares Common Stock
issuable (A) as Interest Shares pursuant to the terms of the Notes, (B) upon conversion of the
Notes issued at such Closing and issued at all prior Closings and (C) upon exercise of the
Warrants. Upon conversion or payment in accordance with the Notes or exercise in accordance with
the Warrants, as the case may be, but subject to the conditions set forth in the Capitalization
Letter Agreement, the Conversion Shares, the Interest Shares and the Warrant Shares, respectively,
will be validly issued, fully paid and nonassessable and free from all preemptive or similar
rights, taxes, liens and charges with respect to the issue thereof, with the holders being entitled
to all rights accorded to a holder of Common Stock. The offer and issuance by the Company of the
Securities is exempt from registration under the 1933 Act.

          (d) No Conflicts. The execution, delivery and performance of the Transaction
Documents by the Company and the consummation by the Company of the transactions contemplated
hereby and thereby (including, without limitation, the issuance of the Notes and the Warrants, the
granting of a security interest in the Collateral and reservation for issuance and issuance of the
Conversion Shares, the Interest Shares and the Warrant Shares) will not (i) result in a violation
of the Articles of Incorporation (as defined in Section 3(r)) of the Company or any of its
Subsidiaries, any capital stock of the Company or Bylaws (as defined in Section 3(r)) of the
Company or any of its Subsidiaries (other than as described in the Capitalization Letter Agreement)
or (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or
both would become a default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any agreement, indenture or instrument to which the Company or any
of its Subsidiaries is a party (other than such as have been waived), or (iii) result in a
violation of any law, rule, regulation, order, judgment or decree (including federal and state
securities laws and regulations and the rules and regulations of the OTC Bulletin Board) (the
“Principal Market”) applicable to the Company or any of its Subsidiaries or by which any property
or asset of the Company or any of its Subsidiaries is bound or affected.

          (e) Consents. Neither the Company nor any of its Subsidiaries is required to obtain
any consent, authorization or order of, or make any filing or registration with, any court,
governmental agency or any regulatory or self-regulatory agency or any other Person in order for it
to execute, deliver or perform any of its obligations under or contemplated by the Transaction
Documents (other than such as have been obtained), in each case in accordance with the terms hereof
or thereof. All consents, authorizations, orders, filings and registrations which the Company is
required to obtain pursuant to the preceding sentence have been obtained or effected on or prior to
the Closing Date, and the Company and its Subsidiaries are unaware of any facts or circumstances
which might prevent the Company from obtaining or effecting any of the registration, application or
filings pursuant to the preceding sentence. The Company is not in violation of the listing
requirements of the Principal Market and has no knowledge of any facts which would reasonably lead
to delisting or suspension of the Common Stock in the foreseeable future.

          (f) Acknowledgment Regarding Buyer’s Purchase of Securities. The Company
acknowledges and agrees that each Buyer is acting solely in the capacity of arm’s length purchaser
with respect to the Transaction Documents and the transactions contemplated hereby and thereby and
that no Buyer is (i) an officer or director of

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

          (g) No General Solicitation; Placement Agent’s Fees. Neither the Company, nor any of
its affiliates, nor any Person acting on its or their behalf, has engaged in any form of general
solicitation or general advertising (within the meaning of Regulation D) in connection with the
offer or sale of the Securities. The Company shall be responsible for the payment of any placement
agent’s fees, financial advisory fees, or brokers’ commissions (other than for persons engaged by
any Buyer or its investment advisor) relating to or arising out of the transactions contemplated
hereby. The Company shall pay, and hold each Buyer harmless against, any liability, loss or
expense (including, without limitation, attorney’s fees and out-of-pocket expenses) arising in
connection with any such claim. The Company acknowledges that it has engaged Midtown Partners &
Co., LLC as placement agent (the “Placement Agent”) in connection with the sale of the Securities.
Other than the Placement Agent, the Company has not engaged any placement agent or other agent in
connection with the sale of the Securities.

          (h) No Integrated Offering. None of the Company, its Subsidiaries, any of their
affiliates, and any Person acting on their behalf has, directly or indirectly, made any offers or
sales of any security or solicited any offers to buy any security, under circumstances that would
require registration of any of the Securities under the 1933 Act or cause this offering of the
Securities to be integrated with prior offerings by the Company for purposes of the 1933 Act or any
applicable stockholder approval provisions, including, without limitation, under the rules and
regulations of any exchange or automated quotation system on which any of the securities of the
Company are listed or designated. None of the Company, its Subsidiaries, their affiliates and any
Person acting on their behalf will take any action or steps referred to in the preceding sentence
that would require registration of any of the Securities under the 1933 Act or cause the offering
of the Securities to be integrated with other offerings.

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

          (j) Application of Takeover Protections; Rights Agreement. The Company and its board
of directors have taken all necessary action, if any, in order to render inapplicable any control
share acquisition, business combination, poison pill (including any distribution under a rights
agreement) or other similar anti-takeover provision under the Articles of Incorporation or the laws
of the jurisdiction of its formation which is or could become applicable to any Buyer as a result
of the transactions contemplated by this Agreement, including, without limitation, the Company’s
issuance of the Securities and any Buyer’s ownership of the Securities. The Company has not
adopted a stockholder rights plan or similar arrangement relating to accumulations of beneficial
ownership of Common Stock or a change in control of the Company.

          (k) SEC Documents; Financial Statements. Except as disclosed in Schedule
3(k), during the two (2) years prior to the date hereof, the Company has filed all reports,
schedules, forms, statements and other documents required to be filed by it with the SEC pursuant
to the reporting requirements of the 1934 Act (all of the foregoing filed prior to the date hereof
and all exhibits included therein and financial statements, notes and schedules thereto and
documents incorporated by reference therein being hereinafter referred to as (the “SEC
Documents”)). The Company has delivered to the Buyers or their respective representatives true,
correct and complete copies of the SEC Documents not available on the EDGAR system. As of their
respective dates, the SEC Documents complied in all material respects with the requirements of the
1934 Act and the rules and regulations of

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the SEC promulgated thereunder applicable to the SEC Documents, and none of the SEC Documents, at
the time they were filed with the SEC, contained any untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not misleading. As of their
respective dates, the financial statements of the Company included in the SEC Documents complied as
to form in all material respects with applicable accounting requirements and the published rules
and regulations of the SEC with respect thereto. Such financial statements have been prepared in
accordance with generally accepted accounting principles, consistently applied, during the periods
involved (except (i) as may be otherwise indicated in such financial statements or the notes
thereto, or (ii) in the case of unaudited interim statements, to the extent they may exclude
footnotes or may be condensed or summary statements) and fairly present in all material respects
the financial position of the Company as of the dates thereof and the results of its operations and
cash flows for the periods then ended (subject, in the case of unaudited statements, to normal
year-end audit adjustments). No other information provided by or on behalf of the Company to the
Buyers which is not included in the SEC Documents, including, without limitation, information
referred to in Section 2(d) of this Agreement, contains any untrue statement of a material fact or
omits to state any material fact necessary in order to make the statements therein, in the light of
the circumstance under which they are or were made, not misleading.

          (l) Absence of Certain Changes. Except as disclosed in Schedule 3(l), since
December 31, 2007, there has been no material adverse change and no material adverse development in
the business, properties, operations, condition (financial or otherwise), results of operations or
prospects of the Company or its Subsidiaries. Except as disclosed in Schedule 3(l), since
December 31, 2007, the Company has not (i) declared or paid any dividends, (ii) sold any assets,
individually or in the aggregate, in excess of $100,000 outside of the ordinary course of business
or (iii) had capital expenditures, individually or in the aggregate, in excess of $100,000. The
Company has not taken any steps to seek protection pursuant to any bankruptcy law nor does the
Company have any knowledge or reason to believe that its creditors intend to initiate involuntary
bankruptcy proceedings or any actual knowledge of any fact which would reasonably lead a creditor
to do so. The Company is not as of the date hereof, and after giving effect to the transactions
contemplated hereby to occur at the Closing, will not be Insolvent (as defined below). For
purposes of this Section 3(l), “Insolvent” means with respect to any Person, (i) the present fair
saleable value of such Person’s assets is less than the amount required to pay such Person’s total
Indebtedness (as defined in Section 3(s)), (ii) such Person is unable to pay its debts and
liabilities, subordinated, contingent or otherwise, as such debts and liabilities become absolute
and matured, (iii) the Company intends to incur or believes that it will incur debts that would be
beyond its ability to pay as such debts mature or (iv) such Person has unreasonably small capital
with which to conduct the business in which it is engaged as such business is now conducted and is
proposed to be conducted.

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

          (n) Conduct of Business; Regulatory Permits. Neither the Company nor its
Subsidiaries is in violation of any term of or in default under any certificate of designations of
any outstanding series of preferred stock of the Company, its Articles of Incorporation or Bylaws
or their organizational charter or certificate of incorporation or bylaws, respectively. Neither
the Company nor any of its Subsidiaries is in violation of any judgment, decree or order or any
statute, ordinance, rule or regulation applicable to the Company or its Subsidiaries, and neither
the Company nor any of its Subsidiaries will conduct its business in violation of any of the
foregoing, except for possible violations which would not, individually or in the aggregate, have a
Material Adverse Effect. Without limiting the generality of the foregoing, the Company is not in
violation of any of the rules, regulations or requirements of the Principal Market and has no
knowledge of any facts or circumstances which would reasonably lead to delisting or suspension of
the Common Stock by the Principal Market in the foreseeable future. During the two years prior to
the date hereof, the Common Stock has been designated for quotation on the Principal Market. During
the two years prior to the date hereof, (i) trading in the Common Stock has not been suspended by
the SEC or the Principal Market and (ii) the Company has received no communication, written or
oral, from the SEC or the Principal Market regarding the suspension or delisting of the Common
Stock from the Principal Market. The

- 7 -

 

Company and its Subsidiaries possess all certificates, authorizations and permits issued by the
appropriate regulatory authorities necessary to conduct their respective businesses, except where
the failure to possess such certificates, authorizations or permits would not have, individually or
in the aggregate, a Material Adverse Effect, and neither the Company nor any such Subsidiary has
received any notice of proceedings relating to the revocation or modification of any such
certificate, authorization or permit.

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

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

          (q) Transactions With Affiliates. Except as set on Schedule 3(q), none of
the officers, directors or employees of the Company is presently a party to any transaction with
the Company or any of its Subsidiaries (other than for ordinary course services as employees,
officers or directors), including any contract, agreement or other arrangement providing for the
furnishing of services to or by, providing for rental of real or personal property to or from, or
otherwise requiring payments to or from any such officer, director or employee or, to the knowledge
of the Company or any of its Subsidiaries, any corporation, partnership, trust or other entity in
which any such officer, director, or employee has a substantial interest or is an officer,
director, trustee or partner.

          (r) Equity Capitalization. As of the date hereof, the authorized capital stock of
the Company consists of 50,000,000 shares of Common Stock, of which as of the date hereof,
20,009,230 are issued and outstanding. As of the date hereof, 4,000,000 shares are reserved for
issuance pursuant to the Company’s stock option and purchase plans and 36,022,715 shares are
reserved for issuance pursuant to securities (other than the aforementioned options, the Notes and
the Warrants) exercisable or exchangeable for, or convertible into, shares of Common Stock. All of
such outstanding shares have been, or upon issuance will be, validly issued and are fully paid and
nonassessable. Except as disclosed in Schedule 3(r): (i) none of the Company’s capital
stock is subject to preemptive rights or any other similar rights or any liens or encumbrances
suffered or permitted by the Company; (ii) there are no outstanding options, warrants, scrip,
rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities
or rights convertible into, or exercisable or exchangeable for, any capital stock of the Company or
any of its Subsidiaries, or contracts, commitments, understandings or arrangements by which the
Company or any of its Subsidiaries is or may become bound to issue additional capital stock of the
Company or any of its Subsidiaries or options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights convertible into, or
exercisable or exchangeable for, any capital stock of the Company or any of its Subsidiaries; (iii)
there are no outstanding debt securities, notes, credit agreements, credit facilities or other
agreements, documents or instruments evidencing Indebtedness of the Company or any of its
Subsidiaries or by which the Company or any of its Subsidiaries is or may become bound; (iv) there
are no financing statements securing obligations in any material amounts, either singly or in the
aggregate, filed in connection with the Company or any of its Subsidiaries; (v) there are no
agreements or arrangements under which the Company or any of its Subsidiaries is obligated to
register the sale of any of their securities under the 1933 Act (except pursuant to Section 4(u)
hereof); (vi) there are no outstanding securities or instruments of the Company or any of its
Subsidiaries which contain any redemption or similar provisions, and there are no contracts,
commitments, understandings or arrangements by which the Company or any of its Subsidiaries is or
may become bound to redeem a security of the Company or any of its Subsidiaries; (vii) there are no
securities or instruments containing anti-dilution or similar provisions that will be triggered by
the issuance of the Securities; (viii) the Company does not have any stock appreciation rights or
“phantom stock” plans or agreements or any similar plan or agreement; and (ix) the Company and its
Subsidiaries have no liabilities or obligations required to be disclosed in the SEC Documents but
not so disclosed in the SEC Documents, other than those incurred in the ordinary course of the
Company’s or its Subsidiaries’ respective businesses and which, individually or in the aggregate,
do not or would not have a Material

- 8 -

 

Adverse Effect. The Company has furnished to the Buyers true, correct and complete copies of the
Company’s Articles of Incorporation, as amended and as in effect on the date hereof (the “Articles
of Incorporation”), and the Company’s Bylaws, as amended and as in effect on the date hereof (the
“Bylaws”), and the terms of all securities convertible into, or exercisable or exchangeable for,
shares of Common Stock and the material rights of the holders thereof in respect thereto.

          (s) Indebtedness and Other Contracts. Except as disclosed in Schedule 3(s),
neither the Company nor any of its Subsidiaries (i) has any outstanding Indebtedness (as defined
below), (ii) is a party to any contract, agreement or instrument, the violation of which, or
default under which, by the other party(ies) to such contract, agreement or instrument would result
in a Material Adverse Effect, (iii) is in violation of any term of or in default under any
contract, agreement or instrument relating to any Indebtedness, except where such violations and
defaults would not result, individually or in the aggregate, in a Material Adverse Effect, or (iv)
is a party to any contract, agreement or instrument relating to any Indebtedness, the performance
of which, in the judgment of the Company’s officers, has or is expected to have a Material Adverse
Effect. Schedule 3(s) provides a detailed description of the material terms of any such
outstanding Indebtedness. For purposes of this Agreement: (x) “Indebtedness ” of any Person means,
without duplication (a) all indebtedness for borrowed money, (b) all obligations issued, undertaken
or assumed as the deferred purchase price of property or services (other than trade payables
entered into in the ordinary course of business), (c) all reimbursement or payment obligations with
respect to letters of credit, surety bonds and other similar instruments, (d) all obligations
evidenced by notes, bonds, debentures or similar instruments, including obligations so evidenced
incurred in connection with the acquisition of property, assets or businesses, (e) all indebtedness
created or arising under any conditional sale or other title retention agreement, or incurred as
financing, in either case with respect to any property or assets acquired with the proceeds of such
indebtedness (even though the rights and remedies of the seller or bank under such agreement in the
event of default are limited to repossession or sale of such property), (f) all monetary
obligations under any leasing or similar arrangement which, in connection with generally accepted
accounting principles, consistently applied for the periods covered thereby, is classified as a
capital lease, (g) all indebtedness referred to in clauses (a) through (f) above secured by (or for
which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured
by) any mortgage, lien, pledge, charge, security interest or other encumbrance upon or in any
property or assets (including accounts and contract rights) owned by any Person, even though the
Person which owns such assets or property has not assumed or become liable for the payment of such
indebtedness, and (h) all Contingent Obligations in respect of indebtedness or obligations of
others of the kinds referred to in clauses (a) through (g) above; (y) “Contingent Obligation”
means, as to any Person, any direct or indirect liability, contingent or otherwise, of that Person
with respect to any indebtedness, lease, dividend or other obligation of another Person if the
primary purpose or intent of the Person incurring such liability, or the primary effect thereof, is
to provide assurance to the obligee of such liability that such liability will be paid or
discharged, or that any agreements relating thereto will be complied with, or that the holders of
such liability will be protected (in whole or in part) against loss with respect thereto; and (z)
“Person” means an individual, a limited liability company, a partnership, a joint venture, a
corporation, a trust, an unincorporated organization and a government or any department or agency
thereof.

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

          (u) Insurance. The Company and each of its Subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in such amounts as management
of the Company believes to be prudent and customary in the businesses in which the Company and its
Subsidiaries are engaged. Neither the Company nor any such Subsidiary has been refused any
insurance coverage sought or applied for and neither the Company nor any such Subsidiary has any
reason to believe that it will not be able to renew its existing insurance coverage as and when
such coverage expires or to obtain similar coverage from similar insurers as may be necessary to
continue its business at a cost that would not have a Material Adverse Effect.

          (v) Employee Relations. (i) Neither the Company nor any of its Subsidiaries is a party
to any collective bargaining agreement or employs any member of a union. The Company and its
Subsidiaries believe that their relations with their employees are good. No executive officer of
the Company or any of its Subsidiaries (as defined

- 9 -

 

in Rule 501(f) of the 1933 Act) has notified the Company or any such Subsidiary that such officer
intends to leave the Company or otherwise terminate such officer’s employment with the Company or
any such Subsidiary. No executive officer of the Company or any of its Subsidiaries, to the
knowledge of the Company, is, or is now expected to be, in violation of any material term of any
employment contract, confidentiality, disclosure or proprietary information agreement,
non-competition agreement, or any other contract or agreement or any restrictive covenant, and the
continued employment of each such executive officer does not subject the Company or any of its
Subsidiaries to any liability with respect to any of the foregoing matters. (ii) The Company and
its Subsidiaries are in compliance with all federal, state, local and foreign laws and regulations
respecting labor, employment and employment practices and benefits, terms and conditions of
employment and wages and hours, except where failure to be in compliance would not, either
individually or in the aggregate, reasonably be expected to result in a Material Adverse Effect.

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

          (x) Intellectual Property Rights. The Company and its Subsidiaries own or possess
adequate rights or licenses to use all trademarks, trade names, service marks, service mark
registrations, service names, patents, patent rights, copyrights, inventions, licenses, approvals,
governmental authorizations, trade secrets and other intellectual property rights (“Intellectual
Property Rights”) necessary to conduct their respective businesses as now conducted. Except as set
forth in Schedule 3(x), none of the Company’s Intellectual Property Rights have expired or
terminated, or are expected to expire or terminate, within three years from the date of this
Agreement. The Company does not have any knowledge of any infringement by the Company or its
Subsidiaries of Intellectual Property Rights of others. There is no claim, action or proceeding
being made or brought, or to the knowledge of the Company, being threatened, against the Company or
its Subsidiaries regarding its Intellectual Property Rights. The Company is unaware of any facts or
circumstances which might give rise to any of the foregoing infringements or claims, actions or
proceedings. The Company and its Subsidiaries have taken reasonable security measures to protect
the secrecy, confidentiality and value of all of their intellectual properties.

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

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

          (aa) Tax Status. The Company and each of its Subsidiaries (i) has made or filed all
foreign, federal and state income and all other tax returns, reports and declarations required by
any jurisdiction to which it is subject, (ii) has paid all taxes and other governmental assessments
and charges that are material in amount, shown or determined to be due on such returns, reports and
declarations, except those being contested in good faith and

- 10 -

 

(iii) has set aside on its books provision reasonably adequate for the payment of all taxes for
periods subsequent to the periods to which such returns, reports or declarations apply. There are
no unpaid taxes in any material amount claimed to be due by the taxing authority of any
jurisdiction, and the officers of the Company know of no basis for any such claim.

          (bb) Internal Accounting and Disclosure Controls. The Company and each of its
Subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable
assurance that (i) transactions are executed in accordance with management’s general or specific
authorizations, (ii) transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to maintain asset and
liability accountability, (iii) access to assets or incurrence of liabilities is permitted only in
accordance with management’s general or specific authorization and (iv) the recorded accountability
for assets and liabilities is compared with the existing assets and liabilities at reasonable
intervals and appropriate action is taken with respect to any difference. The Company maintains
disclosure controls and procedures (as such term is defined in Rule 13a-14 under the 1934 Act) that
are effective in ensuring that information required to be disclosed by the Company in the reports
that it files or submits under the 1934 Act is recorded, processed, summarized and reported, within
the time periods specified in the rules and forms of the SEC, including, without limitation,
controls and procedures designed in to ensure that information required to be disclosed by the
Company in the reports that it files or submits under the 1934 Act is accumulated and communicated
to the Company’s management, including its principal executive officer or officers and its
principal financial officer or officers, as appropriate, to allow timely decisions regarding
required disclosure.

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

          (dd) Ranking of Notes. Except as set forth on Schedule (dd), no Indebtedness
of the Company is senior to or ranks pari passu with the Notes in right of payment, whether with
respect of payment of redemptions, interest, damages or upon liquidation or dissolution or
otherwise. The Notes and the Exchanged Notes shall rank pari passu with each other.

          (ee) Form S-1 Eligibility. The Company is eligible to register the Conversion Shares
and the Warrant Shares for resale by the Buyers using Form S-1 promulgated under the 1933 Act.

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

          (gg) Manipulation of Price. The Company has not, and to its knowledge no one acting
on its behalf has, (i) taken, directly or indirectly, any action designed to cause or to result in
the stabilization or manipulation of the price of any security of the Company to facilitate the
sale or resale of any of the Securities, (ii) other than the Placement Agent, sold, bid for,
purchased, or paid any compensation for soliciting purchases of, any of the Securities, or (iii)
other than the Placement Agent, paid or agreed to pay to any person any compensation for soliciting
another to purchase any other securities of the Company.

          (hh) Acknowledgement Regarding Buyers’ Trading Activity. It is understood and
acknowledged by the Company that, except as provided in Section 4(s), (i) none of the Buyers have
been asked to agree, nor has any Buyer agreed, to desist from purchasing or selling, long and/or
short, securities of the Company, or “derivative” securities based on securities issued by the
Company or to hold the Securities for any specified term; (ii) any Buyer, and counter parties in
“derivative” transactions to which any such Buyer is a party, directly or indirectly, presently may
have a “short” position in the Common Stock, and (iii) each Buyer shall not be deemed to have any
affiliation with or control over any arm’s length counter-party in any “derivative” transaction.
The Company further understands and acknowledges that (a) one or more Buyers may engage in hedging
and/or trading activities at various times during the period that the Securities are outstanding,
including, without limitation, during the periods that the value of the Conversion Shares, the
Warrant Shares and any Interest Shares deliverable with respect to

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Securities are being determined and (b) such hedging and/or trading activities, if any, can reduce
the value of the existing stockholders’ equity interest in the Company both at and after the time
the hedging and/or trading activities are being conducted. The Company acknowledges that such
aforementioned hedging and/or trading activities do not constitute a breach of this Agreement, the
Notes, the Warrants or any of the documents executed in connection herewith.

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

          (jj) Bank Holding Company Act. Neither the Company nor any of its Subsidiaries or
affiliates is subject to the Bank Holding Company Act of 1956, as amended (the “BHCA”) and to
regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve”).
Neither the Company nor any of its Subsidiaries or affiliates owns or controls, directly or
indirectly, five percent or more of the outstanding shares of any class of voting securities or
twenty-five percent or more of the total equity of a bank or any entity that is subject to the BHCA
and to regulation by the Federal Reserve. Neither the Company nor any of its Subsidiaries or
affiliates exercises a controlling influence over the management or policies of a bank or any
entity that is subject to the BHCA and to regulation by the Federal Reserve.

          (kk) Disclosure. The Company confirms that neither it nor any other Person acting on
its behalf has provided any of the Buyers or their agents or counsel with any information that
constitutes or could reasonably be expected to constitute material, nonpublic information other
than as set forth in the following sentence. The report titled the Pipeline Report dated August 26,
2008. The Company understands and confirms that each of the Buyers will rely on the foregoing
representations in effecting transactions in securities of the Company. All disclosure provided to
the Buyers regarding the Company, its business and the transactions contemplated hereby, including
the Schedules to this Agreement, furnished by or on behalf of the Company is true and correct and
does not contain any untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements made therein, in the light of the circumstances under
which they were made, not misleading. Each press release issued by the Company during the twelve
(12) months preceding the date of this Agreement did not at the time of release contain any untrue
statement of a material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the circumstances under which
they are made, not misleading. No event or circumstance has occurred or information exists with
respect to the Company or any of its Subsidiaries or its or their business, properties, prospects,
operations or financial conditions, which, under applicable law, rule or regulation, requires
public disclosure or announcement by the Company but which has not been so publicly announced or
disclosed.

     4. COVENANTS.

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

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

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

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          (d) Use of Proceeds. The Company will use the proceeds from the sale of the
Securities for general corporate purposes, including general and administrative expenses, and not
for (i) the repayment of any outstanding Indebtedness of the Company or any of its Subsidiaries,
(ii) the redemption or repurchase of any of its or its Subsidiaries’ equity securities, or
(iii) the settlement of any claims, actions or proceedings against the Company or any of its
Subsidiaries.

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

          (f) Listing. The Company shall promptly secure the listing of all of the Interest
Shares, Conversion Shares and Warrant Shares (the “Registrable Securities”) upon each national
securities exchange and automated quotation system, if any, upon which the Common Stock is then
listed (subject to official notice of issuance) and shall maintain such listing of all Registrable
Securities from time to time issuable under the terms of the Transaction Documents. The Company
shall maintain the Common Stocks’ authorization for quotation on the Principal Market. Neither the
Company nor any of its Subsidiaries shall take any action which would be reasonably expected to
result in the delisting or suspension of the Common Stock on the Principal Market. The Company
shall pay all fees and expenses in connection with satisfying its obligations under this
Section 4(f).

          (g) Fees; Stamp Taxes. The Company shall reimburse Debt Opportunity Fund, LLLP
(“DOF”) (a Buyer) or its designee(s) (in addition to any other expense amounts paid to any Buyer
prior to the date of this Agreement) $40,000 as payment for all costs and expenses incurred in
connection with the transactions contemplated by the Transaction Documents (including all
reasonable legal fees and disbursements in connection therewith, documentation and implementation
of the transactions contemplated by the Transaction Documents and due diligence in connection
therewith), which amount shall be withheld by such Buyer from its Purchase Price at the Closing.
The Company shall be responsible for the payment of any placement agent’s fees, financial advisory
fees, or broker’s commissions (other than for Persons engaged by any Buyer) relating to or arising
out of the transactions contemplated hereby, including, without limitation, any fees or commissions
payable to the Placement Agent. The Company shall pay, and hold each Buyer harmless against, any
liability, loss or expense (including, without limitation, reasonable attorney’s fees and
out-of-pocket expenses) arising in connection with any claim relating to any such payment. The
Company shall pay any and all transfer, stamp and similar taxes that may be payable with respect to
the issuance and delivery of the Notes. Except as otherwise set forth in the Transaction Documents,
each party to this Agreement shall bear its own expenses in connection with the sale of the
Securities to the Buyers.

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

          (i) Disclosure of Transactions and Other Material Information. On or before 8:00
a.m., New York City Time, on the first Business Day following the date of this Agreement, the
Company shall issue a press release and

- 13 -

 

file a Current Report on Form 8-K describing the terms of the transactions contemplated by the
Transaction Documents in the form required by the 1934 Act and attaching the material Transaction
Documents (including, without limitation, this Agreement (and all schedules to this Agreement), the
form of the Notes, the form of Warrant and the form of Security Agreement) as exhibits to such
filing (including all attachments, the “8-K Filing”). From and after the filing of the 8-K Filing
with the SEC, no Buyer shall be in possession of any material, nonpublic information received from
the Company, any of its Subsidiaries or any of their respective officers, directors, employees or
agents, that is not disclosed in the 8-K Filing. The Company shall not, and shall cause each of
its Subsidiaries and its and each of their respective officers, directors, employees and agents,
not to, provide any Buyer with any material, nonpublic information regarding the Company or any of
its Subsidiaries from and after the filing of the 8-K Filing with the SEC without the express
written consent of such Buyer. If a Buyer has, or believes it has, received any such material,
nonpublic information regarding the Company or any of its Subsidiaries, it shall provide the
Company with written notice thereof. The Company shall, within two (2) Trading Days of receipt of
such notice, make public disclosure of such material, nonpublic information. In the event of a
breach of the foregoing covenant by the Company, any of its Subsidiaries, or any of its or their
respective officers, directors, employees and agents, in addition to any other remedy provided
herein or in the Transaction Documents, a Buyer shall have the right to make a public disclosure,
in the form of a press release, public advertisement or otherwise, of such material, nonpublic
information without the prior approval by the Company, its Subsidiaries, or any of its or their
respective officers, directors, employees or agents. No Buyer shall have any liability to the
Company, its Subsidiaries, or any of its or their respective officers, directors, employees,
stockholders or agents for any such disclosure. Subject to the foregoing, neither the Company, its
Subsidiaries nor any Buyer shall issue any press releases or any other public statements with
respect to the transactions contemplated hereby; provided, however, that the Company shall be
entitled, without the prior approval of any Buyer, to make any press release or other public
disclosure with respect to such transactions (i) in substantial conformity with the 8-K Filings and
contemporaneously therewith and (ii) as is required by applicable law and regulations (provided
that in the case of clause (i) each Buyer shall be consulted by the Company in connection with any
such press release or other public disclosure prior to its release). Without the prior written
consent of any applicable Buyer, neither the Company nor any of its Subsidiaries or affiliates
shall disclose the name of such Buyer in any filing, announcement, release or otherwise.

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

          (k) Additional Notes; Variable Securities; Dilutive Issuances. So long as any Buyer
beneficially owns any Securities, the Company will not issue any Notes other than to the Buyers as
contemplated hereby and the Company shall not issue any other securities that would cause a breach
or default under the Notes. For long as any Notes or Warrants remain outstanding, the Company
shall not, in any manner, issue or sell any rights, warrants or options to subscribe for or
purchase Common Stock or directly or indirectly convertible into or exchangeable or exercisable for
Common Stock at a price which varies or may vary with the market price of the Common Stock,
including by way of one or more reset(s) to any fixed price unless the conversion, exchange or
exercise price of any such security cannot be less than the then applicable Conversion Price (as
defined in the Notes) with respect to the Common Stock into which any Note is convertible or the
then applicable Exercise Price (as defined in the Warrants) with respect to the Common Stock into
which any Warrant is exercisable. For long as any Notes or Warrants remain outstanding, the
Company shall not, in any manner, enter into or affect any Dilutive Issuance (as defined in the
Notes) if the effect of such Dilutive Issuance is to cause the Company to be required to issue upon
conversion of any Note or exercise of any Warrant any shares of Common Stock in excess of that
number of shares of Common Stock which the Company may issue upon conversion of the Notes and
exercise of the Warrants without breaching the Company’s obligations under the rules or regulations
of the Principal Market or any applicable Eligible Market. “Eligible Market” means any of the of
The New York Stock Exchange, the American Stock Exchange, The NASDAQ Global Select Market, The
NASDAQ Global Market, The NASDAQ Capital Market or OTC Bulletin Board.

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

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          (m) Reservation of Shares. So long as any Buyer owns any Securities, the Company
shall take all action necessary to at all times have authorized, and reserved for the purpose of
issuance, no less than 130% of the sum of the number of shares of Common Stock issuable (i) as
Interest Shares pursuant to the terms of the Notes, (ii) upon conversion of the Notes, and (iii)
upon exercise of the Warrants then outstanding (without taking into account any limitations on the
conversion of the Notes or exercise of the Warrants set forth in the Notes and Warrants,
respectively).

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

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

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

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

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

          (ii) From the date hereof until the date that is 30 Business Days following the date upon
which all Registrable Securities have been registered or eligible for resale under Rule 144 without
the requirement to be in compliance with Rule 144(c)(1) and otherwise without restriction or
limitation pursuant to Rule 144 (the “Trigger Date”), the Company will not, (i) directly or
indirectly, offer, sell, grant any option to purchase, or otherwise dispose of (or announce any
offer, sale, grant or any option to purchase or other disposition of) any of its debt, equity or
equity equivalent securities, including without limitation any debt, preferred stock or other
instrument or security that is, at any time during its life and under any circumstances,
convertible into or exchangeable or exercisable for shares of Common Stock or Common Stock
Equivalents (any such offer, sale, grant, disposition or announcement being referred to as a
“Subsequent Placement”) or (ii) be party to any solicitations, negotiations or discussions with
regard to the foregoing.

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

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

               (2) To accept an Offer, in whole or in part, such Buyer must deliver a written notice to the
Company prior to the end of the tenth 

(10 th ) Business Day after such Buyer’s receipt
of the Offer Notice (the “Offer Period”), setting forth the portion of such Buyer’s Basic Amount
that such Buyer elects to purchase and, if such Buyer shall elect to purchase all of its Basic
Amount, the Undersubscription Amount, if any, that such Buyer elects to purchase (in either case,
the “Notice of Acceptance”). If the Basic Amounts subscribed for by all Buyers are less than the
total of all of the Basic Amounts, then each Buyer who has set forth an Undersubscription Amount in
its Notice of Acceptance shall be entitled to purchase, in addition to the Basic Amounts subscribed
for, the Undersubscription Amount it has subscribed for; provided , however , that
if the Undersubscription Amounts

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subscribed for exceed the difference between the total of all the Basic Amounts and the Basic
Amounts subscribed for (the “Available Undersubscription Amount”), each Buyer who has subscribed
for any Undersubscription Amount shall be entitled to purchase only that portion of the Available
Undersubscription Amount as the Basic Amount of such Buyer bears to the total Basic Amounts of all
Buyers that have subscribed for Undersubscription Amounts, subject to rounding by the Company to
the extent its deems reasonably necessary.

               (3) The Company shall have five (5) Business Days from the expiration of the Offer Period
above to offer, issue, sell or exchange all or any part of such Offered Securities as to which a
Notice of Acceptance has not been given by the Buyers (the “Refused Securities”), but only to the
offerees described in the Offer Notice (if so described therein) and only upon terms and conditions
(including, without limitation, unit prices and interest rates) that are not more favorable to the
acquiring person or persons or less favorable to the Company than those set forth in the Offer
Notice.

               (4) In the event the Company shall propose to sell less than all the Refused Securities (any
such sale to be in the manner and on the terms specified in Section 4(o)(iii)(3) above), then each
Buyer may, at its sole option and in its sole discretion, reduce the number or amount of the
Offered Securities specified in its Notice of Acceptance to an amount that shall be not less than
the number or amount of the Offered Securities that such Buyer elected to purchase pursuant to
Section 4(o)(iii)(2) above multiplied by a fraction, (i) the numerator of which shall be the number
or amount of Offered Securities the Company actually proposes to issue, sell or exchange (including
Offered Securities to be issued or sold to Buyers pursuant to Section 4(o)(iii)(3) above prior to
such reduction) and (ii) the denominator of which shall be the original amount of the Offered
Securities. In the event that any Buyer so elects to reduce the number or amount of Offered
Securities specified in its Notice of Acceptance, the Company may not issue, sell or exchange more
than the reduced number or amount of the Offered Securities unless and until such securities have
again been offered to the Buyers in accordance with Section 4(o)(iii)(1) above.

               (5) Upon the closing of the issuance, sale or exchange of all or less than all of the Refused
Securities, the Buyers shall acquire from the Company, and the Company shall issue to the Buyers,
the number or amount of Offered Securities specified in the Notices of Acceptance, as reduced
pursuant to Section 4(o)(iii)(3) above if the Buyers have so elected, upon the terms and conditions
specified in the Offer. The purchase by the Buyers of any Offered Securities is subject in all
cases to the preparation, execution and delivery by the Company and the Buyers of a purchase
agreement relating to such Offered Securities reasonably satisfactory in form and substance to the
Buyers and their respective counsel.

               (6) Any Offered Securities not acquired by the Buyers or other persons in accordance with
Section 4(o)(iii)(3) above may not be issued, sold or exchanged until they are again offered to the
Buyers under the procedures specified in this Agreement.

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

          (p) Additional Registration Statements. Until the Trigger Date, the Company will not
file a registration statement under the 1933 Act relating to securities that are not the Securities
or securities that were issued pursuant to the August Purchase Agreement or the February Purchase
Agreement, without the prior written consent of the Buyer.

          (q) Collateral Agent. (i) Each Buyer hereby (a) appoints DOP as the collateral agent
hereunder and under the Security Agreement (in such capacity, the “Collateral Agent”), and
(b) authorizes the Collateral Agent (and its officers, directors, employees and agents) to take
such action on such Buyer’s behalf in accordance with the terms hereof and thereof. The Collateral
Agent shall not have, by reason hereof or the Security Agreement, a fiduciary relationship in
respect of any Buyer. Neither the Collateral Agent nor any of its officers, directors, employees
and agents shall have any liability to any Buyer for any action taken or omitted to be taken in
connection hereof or the Security Agreement except to the extent caused by its own gross negligence
or willful misconduct, and each Buyer agrees to defend, protect, indemnify and hold harmless the
Collateral Agent and all of its officers, directors, employees and agents (collectively, the
“Indemnitees”) from and against any losses, damages, liabilities, obligations, penalties, actions,
judgments, suits, fees, costs and expenses (including, without limitation, reasonable attorneys’
fees, costs and expenses) incurred by such Indemnitee, whether direct, indirect or consequential,
arising

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from or in connection with the performance by such Indemnitee of the duties and obligations of
Collateral Agent pursuant hereto or the Security Agreement. (ii) The Collateral Agent shall be
entitled to rely upon any written notices, statements, certificates, orders or other documents or
any telephone message believed by it in good faith to be genuine and correct and to have been
signed, sent or made by the proper Person, and with respect to all matters pertaining to this
Agreement or any of the other Transaction Documents and its duties hereunder or thereunder, upon
advice of counsel selected by it. (iii) The Collateral Agent may resign from the performance of all
its functions and duties hereunder and under the Notes and the Agreement at any time by giving at
least ten (10) Business Days prior written notice to the Company and each holder of the Notes.
Such resignation shall take effect upon the acceptance by a successor Collateral Agent of
appointment as provided below. Upon any such notice of resignation, the holders of a majority of
the outstanding principal under the Notes shall appoint a successor Collateral Agent. Upon the
acceptance of the appointment as Collateral Agent, such successor Collateral Agent shall succeed to
and become vested with all the rights, powers, privileges and duties of the retiring Collateral
Agent, and the retiring Collateral Agent shall be discharged from its duties and obligations under
this Agreement, the Notes and the Security Agreement. After any Collateral Agent’s resignation
hereunder, the provisions of this Section 4(q) shall inure to its benefit. If a successor
Collateral Agent shall not have been so appointed within said ten (10) Business Day period, the
retiring Collateral Agent shall then appoint a successor Collateral Agent who shall serve until
such time, if any, as the holders of a majority of the outstanding principal under the Notes
appoint a successor Collateral Agent as provided above.

          (r) Stockholder Approval. If the Common Stock is listed on an Eligible Market other
than the Principal Market (the “New Principal Market”) and the issuance of the Conversion Shares,
the Interest Shares and Warrant Shares as contemplated under the Transaction Documents would exceed
that number of shares of Common Stock which the Company may issue without breaching the Company’s
obligations under the rules orregulations of the New Principal Market, then the Company shall
obtain the approval of its stockholders as required by the applicable rules of the New Principal
Market for issuances of the Conversion Shares, Warrant Shares and Interest Shares in excess of such
amount. At such time, the Company shall provide each stockholder entitled to vote at a special or
annual meeting of stockholders of the Company (the “Stockholder Meeting”), which shall be promptly
called and held not later than 75 days after the earlier of (i) the New Principal Market indication
of and (ii) the Company becoming aware of, any limitation imposed by the New Principal Market on
the issuance of Conversion Shares or Warrant Shares (the “Stockholder Meeting Deadline”), a proxy
statement, substantially in the form which has been previously reviewed by the Buyers and Bush
Ross, P.A. at the expense of the Company, soliciting each such stockholder’s affirmative vote at
the Stockholder Meeting for approval of resolutions providing for the Company’s issuance of all of
the Securities as described in the Transaction Documents in accordance with applicable law and the
rules and regulations of the New Principal Market and such affirmative approval being referred to
herein as (the “Stockholder Approval”), and the Company shall use its reasonable best efforts to
solicit its stockholders’ approval of such resolutions and to cause the Board of Directors of the
Company to recommend to the stockholders that they approve such resolutions. The Company shall be
obligated to use its reasonable best efforts to obtain the Stockholder Approval by the Stockholder
Meeting Deadline. If, despite the Company’s reasonable best efforts the Stockholder Approval is not
obtained on or prior to the Stockholder Meeting Deadline, the Company shall cause an additional
Stockholder Meeting to be held every six (6) months thereafter until such Stockholder Approval is
obtained or the Notes are no longer outstanding.

          (s) Trading in Common Stock. For the period commencing on the date hereof and
ending on the earlier of (i) the date that the Conversion Shares and Warrant Shares may be resold
without restriction pursuant to Rule 144 without the requirement to be in compliance with
Rule 144(c)(1) and otherwise without restriction or limitation pursuant to Rule 144, or (ii) a
registration statement for the resale of the Conversion Shares and Warrant Shares is declared
effective by the SEC , each Buyer, severally and not jointly with the other Buyers, covenants that
neither it nor any affiliate acting on its behalf or pursuant to any understanding with it will
execute any “short sales” as defined in Rule 200 of Regulation SHO under the Exchange Act), whether
or not against the box, establish any “put equivalent position” (as defined in Rule 16a-l(h) under
the 1934 Act) with respect to the Common Stock, or grant any other right (including any put or call
option) with respect to the Common Stock or with respect to any security that includes, relates to
or derived any significant part of its value from the Common Stock. For so long as each Buyer owns
any Notes, such Buyer shall not maintain a Net Short Position. For purposes of this Section, a
“Net Short Position” by a person means a position whereby such person has executed one or more
sales of Common Stock that is marked as a short sale and that is executed at a time when such Buyer
has no equivalent offsetting long position in the Common Stock or contract for the foregoing. For
purposes of determining whether a Buyer has an

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equivalent offsetting long position in the Common Stock, all Common Stock (i) that is owned by such
Buyer, (ii) that may be issued as Interest Shares pursuant to the terms of the Notes to the Buyer,
or (iii) that would be issuable upon conversion or exercise in full of all Securities then held by
such Buyer (assuming that such Securities were then fully convertible or exercisable,
notwithstanding any provisions to the contrary, and giving effect to any conversion or exercise
price adjustments that would take effect given only the passage of time) shall be deemed to be held
long by such Buyer.

          (t) Closing Documents. On or prior to five (5) calendar days after the Closing Date,
the Company agrees to deliver, or cause to be delivered, to each Buyer and Bush Ross, P.A. executed
copies of the Transaction Documents, Securities and any other document required to be delivered to
any party pursuant to Section 7 hereof.

          (u) Piggy-Back Registrations (i) If at any time the Company shall determine to
prepare and file with the Commission a registration statement relating to an offering for its own
account or the account of others under the Securities Act of any of its equity securities (other
than on Form S-4 or Form S-8 (each as promulgated under the Securities Act) or their then
equivalents relating to equity securities to be issued solely in connection with any acquisition of
any entity or business or equity securities issuable in connection with stock option or other
employee or director benefit plans), then the Company shall send to each Buyer written notice of
such determination and, if within twenty days after receipt of such notice, any such holder shall
so request in writing, the Company shall include in such registration statement all or any part of
such Registrable Securities such holder requests to be registered, subject to customary underwriter
cutbacks applicable to all holders of registration rights on a pro rata basis (along with other
holders of piggyback registration rights with respect to the Company); provided, that (A) the
Company shall not be required to register any Registrable Securities pursuant to this Section 4(u)
that are (I) eligible for resale under Rule 144 without the requirement to be in compliance with
Rule 144(c)(1) and otherwise without restriction or limitation pursuant to Rule 144, or (II) that
are the subject of a then effective registration statement and (B) if at any time after giving
written notice of its intention to register any securities and prior to the effective date of the
registration statement filed in connection with such registration, the Company shall determine for
any reason not to register or to delay registration of such securities, the Company may, at its
election, give written notice of such determination to such Holder and, thereupon, (i) in the case
of a determination not to register, shall be relieved of its obligation to register any Registrable
Securities pursuant to this Section 4(u) in connection with such registration (but not from its
obligation to pay expenses in accordance with Section 4(u) hereof), and (ii) in the case of a
determination to delay registering, shall be permitted to delay registering any Registrable
Securities being registered pursuant to this Section 4(u) for the same period as the delay in
registering such other securities.

                 (ii) Registration Expenses. All fees and expenses incident to the Company’s
performance of or compliance with its obligations under this Agreement (excluding any underwriting
discounts and selling commissions and all legal fees and expenses of legal counsel for any Buyer)
shall be borne by the Company whether or not any Registrable Securities are sold pursuant to a
Registration Statement. The fees and expenses referred to in the foregoing sentence shall include,
without limitation, (i) all registration and filing fees (including, without limitation, fees and
expenses (A) with respect to filings required to be made with any Trading Market on which the
Common Stock is then listed for trading, (B) in compliance with applicable state securities or Blue
Sky laws (including, without limitation, fees and disbursements of counsel for the Company in
connection with Blue Sky qualifications or exemptions of the Registrable Securities and
determination of the eligibility of the Registrable Securities for investment under the laws of
such jurisdictions as requested by the Holders) and (C) with respect to any filing that may be
required to be made by any broker through which a Holder intends to make sales of Registrable
Securities with the Corporate Financing Department of Financial Industry Regulatory Authority, Inc.
(“FINRA”) pursuant NASD Rule 2710(b)(10)(A)(i), so long as the broker is receiving no more than a
customary brokerage commission in connection with such sale, (ii) printing expenses (including,
without limitation, expenses of printing certificates for Registrable Securities and of printing
prospectuses if the printing of prospectuses is reasonably 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, (v) Securities Act
liability insurance, if the Company so desires such insurance, and (vi) fees and expenses of all
other Persons retained by the Company in connection with the consummation of the transactions
contemplated by this Section. 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 Section (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

- 18 -

 

securities exchange as required hereunder. In no event shall the Company be responsible for any
broker or similar commissions of any Holder.

          (v) Public Information. At any time during the period commencing on the six
(6) month anniversary of the Closing Date and ending at such time that all of the Securities can be
sold without the requirement to be in compliance with Rule 144(c)(1) and otherwise without
restriction or limitation pursuant to Rule 144, if a registration statement is not available for
the resale of all of the Securities and the Company shall fail for any reason to satisfy the
current public information requirement under Rule 144 (a “Public Information Failure”) then, as
partial relief for the damages to any holder of Securities by reason of any such delay in or
reduction of its ability to sell the Securities (which remedy shall not be exclusive of any other
remedies available at law or in equity), the Company shall pay to each such holder an amount in
cash equal to two percent (2.0%) of the aggregate Purchase Price of such holder’s Securities on the
day of a Public Information Failure and on every thirtieth day (pro rated for periods totaling less
than thirty days) thereafter until the earlier of (i) the date such Public Information Failure is
cured and (ii) such time that such public information is no longer required pursuant to Rule 144.
The payments to which a holder shall be entitled pursuant to this Section 4(v) are referred to
herein as “Public Information Failure Payments”. Public Information Failure Payments shall be paid
on the earlier of (I) the last day of the calendar month during which such Public Information
Failure Payments are incurred and (II) the third Business Day after the event or failure giving
rise to the Public Information Failure Payments is cured. In the event the Company fails to make
Public Information Failure Payments in a timely manner, such Public Information Failure Payments
shall bear interest at the rate of 1.5% per month (prorated for partial months) until paid in full.
Notwithstanding anything herein to the contrary, no Public Information Failure Payments shall be
due and payable hereunder for any date after the first anniversary of the Closing Date.

     5. REGISTER; TRANSFER AGENT INSTRUCTIONS.

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

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

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     6. CONDITIONS TO THE COMPANY’S OBLIGATION TO SELL. The obligation of the Company
hereunder to issue and sell the Notes and the related Warrants to each Buyer at the Closing is
subject to the satisfaction, at or before the Closing Date, of each of the following conditions,
provided that these conditions are for the Company’s sole benefit and may be waived by the Company
at any time in its sole discretion by providing each Buyer with prior written notice thereof:
(i) Such Buyer shall have executed each of the Transaction Documents to which it is a party and
delivered the same to the Company; (ii) Such Buyer and each other Buyer shall have delivered to the
Company 25.5% of the Purchase Price less, in the case of DOP, the amounts withheld pursuant to Section 4(g)
for the Notes and Warrants being purchased by such Buyer at the Closing by wire transfer of
immediately available funds pursuant to the wire instructions provided by the Company; (iii) the
representations and warranties of such Buyer 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 speak as of a specific date), and such Buyer shall have
performed, satisfied and complied in all material respects with the covenants, agreements and
conditions required by this Agreement to be performed, satisfied or complied with by such Buyer at
or prior to the Closing Date.

     7. CONDITIONS TO EACH BUYER’S OBLIGATION TO PURCHASE. The obligation of each Buyer
hereunder to purchase the Notes and the related Warrants at the Closing is subject to the
satisfaction, at or before the Closing Date, of each of the following conditions, provided that
these conditions are for each Buyer’s sole benefit and may be waived by such Buyer at any time in
its sole discretion by providing the Company with prior written notice thereof: (i) The Company
shall have executed and delivered to such Buyer (A) each of the Transaction Documents, (B) the
Notes (in such principal amounts as such Buyer shall request) being purchased by such Buyer at the
Closing pursuant to this Agreement, and (C) the Warrants (in such amounts as such Buyer shall
request) being purchased by such Buyer at the Closing pursuant to this Agreement. (ii) Such Buyer
shall have received the opinion of DLA Piper US LLP, the Company’s outside counsel, and Jones
Vargas, LLP, the Company’s special outside counsel, dated as of the Closing Date, in substantially
the form of Exhibit E attached hereto. (iii) The Company shall have delivered to such Buyer
a copy of the Irrevocable Transfer Agent Instructions, in the form of Exhibit D attached
hereto, which instructions shall have been delivered to and acknowledged in writing by the
Company’s transfer agent. (iv) The Company shall have delivered to such Buyer a certificate
evidencing the formation and good standing of the Company and each of its Subsidiaries in such
entity’s jurisdiction of formation issued by the Secretary of State (or comparable office) of such
jurisdiction, as of a date within 10 days of the Closing Date. (v) The Company shall have delivered
to such Buyer a certificate evidencing the Company’s qualification as a foreign corporation and
good standing issued by the Secretary of State (or comparable office) of each jurisdiction in which
the Company conducts business, as of a date within 10 days of the Closing Date. (vi) The Company
shall have delivered to such Buyer a certified copy of the Articles of Incorporation as certified
by the Secretary of State of the State (or comparable office of Nevada) within ten (10) days of the
Closing Date. (vii) The Company shall have delivered to such Buyer a certificate, executed by the
Secretary of the Company and dated as of the Closing Date, as to (i) the resolutions consistent
with Section 3(b) as adopted by the Company’s Board of Directors in a form reasonably acceptable to
such Buyer, (ii) the Articles of Incorporation and (iii) the Bylaws, each as in effect at the
Closing, in the form attached hereto as Exhibit F. (viii) The representations and
warranties of the Company shall be true and correct as of the date when made and as of the Closing
Date as though made at that time (except for representations and warranties that speak as of a
specific date) and the Company shall have performed, satisfied and complied in all respects with
the covenants, agreements and conditions required by the Transaction Documents to be performed,
satisfied or complied with by the Company at or prior to the Closing Date. Such Buyer shall have
received a certificate, executed by the Chief Executive Officer of the Company, dated as of the
Closing Date, to the foregoing effect and as to such other matters as may be reasonably requested
by such Buyer in the form attached hereto as Exhibit G. (ix) The Company shall have
delivered to such Buyer a letter from the Company’s transfer agent certifying the number of shares
of Common Stock outstanding as of a date within five days of the Closing Date. (x) The Common Stock
(I) shall be designated for quotation or listed on the Principal Market and (II) shall not have
been suspended, as of the Closing Date, by the SEC or the Principal Market from trading on the
Principal Market nor shall suspension by the SEC or the Principal Market have been threatened, as
of the Closing Date, either (A) in writing by the SEC or the Principal Market or (B) by falling
below the minimum listing maintenance requirements of the Principal Market. (xi) The Company shall
have obtained all governmental, regulatory or third party consents and approvals, if any, necessary
for the sale of the Securities. (xii) In accordance with the terms of the Security Agreement, the
Company shall have delivered to the Collateral Agent appropriate financing statements on Form UCC-1
to be duly filed in such office or offices as may be necessary or, in the opinion

- 20 -

 

of the Collateral Agent, desirable to perfect the security interests purported to be created by
each Security Agreement. (xiii) Within six (6) Business Days prior to the Closing, the Company
shall have delivered or caused to be delivered to each Buyer (A) certified copies of UCC search
results, listing all effective financing statements which name as debtor the Company or any of its
Subsidiaries filed in the prior five years to perfect an interest in any assets thereof, together
with copies of such financing statements, none of which, except as otherwise agreed in writing by
the Buyers, shall cover any of the Collateral (as defined in the Security Agreement) and the
results of searches for any tax lien and judgment lien filed against such Person or its property,
which results, except as otherwise agreed to in writing by the Buyers shall not show any such Liens
(as defined in the Security Agreement); and (B) a perfection certificate, duly completed and
executed by the Company and each of its Subsidiaries, in form and substance satisfactory to the
Buyers. (xiv) The Company shall have delivered to such Buyer a copy of the Capitalization Letter
Agreement providing for an increase in the authorized capital stock, in the form of
Exhibit H attached hereto, which instructions shall have been delivered to and acknowledged
in writing by the Company’s transfer agent. (xv) the Buyers shall have received an inter-creditor
agreement and a forbearance and modification agreement from the holder(s) of the Exchanged Notes,
in form satisfactory to the Buyers in their sole discretion. (xvi) The Company shall have
delivered to such Buyer such other documents relating to the transactions contemplated by this
Agreement as such Buyer or its counsel may reasonably request.

     8. TERMINATION.

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

     9. MISCELLANEOUS.

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

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

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

- 21 -

 

          (d) Severability. If any provision of this Agreement is prohibited by law or
otherwise determined to be invalid or unenforceable by a court of competent jurisdiction, the
provision that would otherwise be prohibited, invalid or unenforceable shall be deemed amended to
apply to the broadest extent that it would be valid and enforceable, and the invalidity or
unenforceability of such provision shall not affect the validity of the remaining provisions of
this Agreement so long as this Agreement as so modified continues to express, without material
change, the original intentions of the parties as to the subject matter hereof and the prohibited
nature, invalidity or unenforceability of the provision(s) in question does not substantially
impair the respective expectations or reciprocal obligations of the parties or the practical
realization of the benefits that would otherwise be conferred upon the parties. The parties will
endeavor in good faith negotiations to replace the prohibited, invalid or unenforceable
provision(s) with a valid provision(s), the effect of which comes as close as possible to that of
the prohibited, invalid or unenforceable provision(s).

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

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

If to the Company:

Stinger Systems, Inc.

2701 N. Rocky Point Drive,

Suite 1130

Tampa, Florida 33607

Telephone: (410) 281-1061

Facsimile: (813) 288-9148

Attention: Chief Financial Officer

With a copy to:

DLA Piper US LLP

6225 Smith Avenue

Baltimore, Maryland 21209-3600

Telephone: (410) 580-4170

Facsimile: (410) 580-3170

Attention: Jason C. Harmon, Esq.

- 22 -

 

If to the Transfer Agent:

Colonial Stock Transfer

66 Exchange Place

Salt Lake City, UT 84111

Telephone: (801) 355-5740

Facsimile: (801) 355-6505

If to a Buyer, to its address and facsimile number set forth on the Schedule of Buyers, with copies
to such Buyer’s representatives as set forth on the Schedule of Buyers, with a copy (for
informational purposes only) to:

Bush Ross, P.A.

1801 N. Highlands Ave.

Tampa, Florida 33602

Telephone: (813) 224-9255

Facsimile: (813) 223-9620

Attention: Brent A. Jones, Esq.

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

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

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

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

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

          (k) Indemnification.

               (i) In consideration of each Buyer’s execution and delivery of the Transaction Documents and
acquiring the Securities thereunder and in addition to all of the Company’s other obligations under
the Transaction Documents, the Company shall defend, protect, indemnify and hold harmless each
Buyer and each other holder of the Securities and all of their stockholders, partners, members,
officers, directors, employees and direct or indirect investors and any of the foregoing Persons’
agents or other representatives (including, without limitation,

- 23 -

 

those retained in connection with the transactions contemplated by this Agreement) (collectively,
the “Indemnitees”) from and against any and all actions, causes of action, suits, claims, losses,
costs, penalties, fees, liabilities and damages, and expenses in connection therewith (irrespective
of whether any such Indemnitee is a party to the action for which indemnification hereunder is
sought), and including reasonable attorneys’ fees and disbursements (a “Claim” or the “Indemnified
Liabilities”), incurred by any Indemnitee as a result of, or arising out of, or relating to (1) any
misrepresentation or breach of any representation or warranty made by the Company in the
Transaction Documents or any other certificate, instrument or document contemplated hereby or
thereby, (2) any breach of any covenant, agreement or obligation of the Company contained in the
Transaction Documents or any other certificate, instrument or document contemplated hereby or
thereby or (3) any cause of action, suit or claim brought or made against such Indemnitee by a
third party (including for these purposes a derivative action brought on behalf of the Company) and
arising out of or resulting from (i) the execution, delivery, performance or enforcement of the
Transaction Documents or any other certificate, instrument or document contemplated hereby or
thereby, (ii) any transaction financed or to be financed in whole or in part, directly or
indirectly, with the proceeds of the issuance of the Securities, (iii) any disclosure made by such
Buyer pursuant to Section 4(i), or (iv) the status of such Buyer or holder of the Securities as an
investor in the Company pursuant to the transactions contemplated by the Transaction Documents. To
the extent that the foregoing undertaking by the Company may be unenforceable for any reason, the
Company shall make the maximum contribution to the payment and satisfaction of each of the
Indemnified Liabilities which is permissible under applicable law.

               (ii) Promptly after receipt by an Indemnitee of notice of the commencement of any action or
proceeding (including any governmental action or proceeding) involving the Indemnified Liabilities,
such Indemnitee shall, if a Claim in respect thereof is to be made against any indemnifying party
under this clause (k), deliver to the indemnifying party a written notice of the commencement
thereof, and the indemnifying party shall have the right to participate in, and, to the extent the
indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to
assume control of the defense thereof with counsel mutually satisfactory to the indemnifying party
and the Indemnitees; provided, however, that the Indemnitees shall have the right to retain its own
counsel with the fees and expenses of not more than one counsel for all such Indemnitees to be paid
by the indemnifying party, if, in the reasonable opinion of counsel retained by the indemnifying
party, the representation by such counsel of the Indemnitees and the indemnifying party would be
inappropriate due to actual or potential differing interests between such Indemnitees and any other
party represented by such counsel in such proceeding. In the case of Indemnitees legal counsel
referred to in the immediately preceding sentence, such counsel shall be selected by the Buyers
holding at least a majority in interest of the principal of the Notes. The Indemnitees shall
cooperate reasonably 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 available to the Indemnitees which relates to such action or Claim. The
indemnifying party shall keep the Indemnitees fully apprised at all times as to the status of the
defense or any settlement negotiations with respect thereto. No indemnifying party shall be liable
for any settlement of any action, claim or proceeding effected without its prior written consent,
provided, however, that the indemnifying party shall not unreasonably withhold, delay or condition
its consent. No indemnifying party shall, without the prior written consent of the Indemnitees,
consent to entry of any judgment or enter into any settlement or other compromise which does not
include as an unconditional term thereof the giving by the claimant or plaintiff to such
Indemnitees of a release from all liability in respect to such Claim or litigation, and such
settlement shall not include any admission as to fault on the part of the Indemnitees. Following
indemnification as provided for hereunder, the indemnifying party shall be subrogated to all rights
of the Indemnitees with respect to all third parties, firms or corporations relating to the matter
for which indemnification has been made. The failure to deliver written notice to the indemnifying
party within a reasonable time of the commencement of any such action shall not relieve such
indemnifying party of any liability to the Indemnitees under this section, except to the extent
that the indemnifying party is prejudiced in its ability to defend such action. The
indemnification required by this section shall be made by periodic payments of the amount thereof
during the course of the investigation or defense, as and when bills are received or Indemnified
Liabilities are incurred. The indemnity agreements contained herein shall be in addition to
(1) any cause of action or similar right of the Indemnitees against the indemnifying party or
others, and (2) any liabilities the indemnifying party may be subject to pursuant to the law.

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

- 24 -

 

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

          (n) Rescission and Withdrawal Right. Notwithstanding anything to the contrary
contained in (and without limiting any similar provisions of) the Transaction Documents, whenever
any Buyer exercises a right, election, demand or option under a Transaction Document and the
Company does not timely perform its related obligations within the periods therein provided, then
such Buyer may rescind or withdraw, in its sole discretion from time to time upon written notice to
the Company, any relevant notice, demand or election in whole or in part without prejudice to its
future actions and rights.

          (o) Payment Set Aside. To the extent that the Company makes a payment or payments to
the Buyers hereunder or pursuant to any of the other Transaction Documents or the Buyers enforce or
exercise their rights hereunder or thereunder, and such payment or payments or the proceeds of such
enforcement or exercise or any part thereof are subsequently invalidated, declared to be fraudulent
or preferential, set aside, recovered from, disgorged by or are required to be refunded, repaid or
otherwise restored to the Company, a trustee, receiver or any other Person under any law
(including, without limitation, any bankruptcy law, foreign, state or federal law, common law or
equitable cause of action), then to the extent of any such restoration the obligation or part
thereof originally intended to be satisfied shall be revived and continued in full force and effect
as if such payment had not been made or such enforcement or setoff had not occurred.

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

          (q) Specific Performance. Each party hereto acknowledges that irreparable damage would
result if this Agreement is not specifically enforced. Therefore, the rights and obligations of
the parties under the Agreement shall be enforceable by a decree of specific performance issued by
any court of competent jurisdiction, and appropriate injunctive relief may be applied for and
granted in connection therewith. Each party hereto agrees that monetary damages would not be
adequate compensation for any loss incurred by reason of a breach by it of the provisions of this
Agreement and hereby agrees to waive the defense that a remedy at law would be adequate in any
action for specific performance or injunctive relief hereunder.

- 25 -

 

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

	 	 	 	 	 
	 	

COMPANY:

STINGER SYSTEMS, INC.

 	 
	 	By:  	

/s/ Robert F. Gruder
 	 
	 	 	Name:  	Robert Gruder  	 
	 	 	Title:  	President 	 

- 26 -

 

	 	 	 	 	 

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

	 	 	 	 	 
	 	

BUYERS:

DEBT OPPORTUNITY FUND, LLLP

By: Total Capital Management, LLC

 	 
	 	By:  	/s/ Sean Lyons
 	 
	 	Name:  Sean Lyons 	 
	 	Title:    Manager 	 

- 27 -

 

	 	 	 	 	 

SCHEDULE OF BUYERS

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	(1)	 	(2)	 	3)	 	(4)	 	(5)	 	(8)
	 	 	 	 	 	 	 	 	Aggregate	 	 
	Buyer	 	Address and Facsimile Number	 	Aggregate Principal	 	Number of	 	Purchase	 	Legal Representative’s Address and
	 	 	 	 	Amount of New Notes	 	Warrant Shares	 	Price	 	Facsimile Number
	Debt Opportunity

	 	20711 Sterlington Drive
	 	$	3,000,000	 	 	 	12,931,035	 	 	$	2,940,000	 	 	Bush Ross, P.A.
	Fund, LLP

	 	Land O’Lakes, Florida
	 	 	 	 	 	 	 	 	 	 	 	 	 	1801 N. Highland Ave.
	 

	 	34638
	 	 	 	 	 	 	 	 	 	 	 	 	 	Tampa, Florida 33602
	 

	 	Attention: Sean Lyons
	 	 	 	 	 	 	 	 	 	 	 	 	 	Attention: Brent A. Jones, Esq.
	 

	 	Fax: (813) 388-4430
	 	 	 	 	 	 	 	 	 	 	 	 	 	Facsimile: (813) 223-9620
	 

	 	Telephone: (813) 909-
	 	 	 	 	 	 	 	 	 	 	 	 	 	Telephone: (813) 224-9255
	 

	 	2233
	 	 	 	 	 	 	 	 	 	 	 	 	 	
	 

	 	Residence: Florida
	 	 	 	 	 	 	 	 	 	 	 	 	 	 

- 28 -

 

	 	 	 	 	 
	Facsimile Number:
	 	 	 	 
	 

	 	 

	 	 
	Authorization:
	 	 	 	 
	 

	 	 

	 	 
	By:
	 	 	 	 
	 

	 	 

	 	 
	Title:
	 	 	 	 
	 

	 	 

	 	 
	Dated:
	 	 	 	 
	 

	 	 

	 	 
	Account Number:
	 	 	 	 
	 

	 	 

	 	 

	 	 	 	 	 
	(if electronic book entry transfer)
	 
	 	 	 	 
	Transaction Code Number:
	 	 	 	 
	(if electronic book entry transfer)

ACKNOWLEDGMENT

     The Company hereby acknowledges this Conversion Notice and hereby directs Colonial Stock
Transfer Company, Inc. to issue the above indicated number of shares of Common Stock in accordance
with the Transfer Agent Instructions dated September 12, 2008 from the Company and acknowledged and
agreed to by Colonial Stock Transfer Company, Inc.

	 	 	 	 	 
	 	

STINGER SYSTEMS, INC.

 	 
	 	By:  	

 	 
	 	 	Name:  	 	 
	 	 	Title:  	 	 
	 

- 29 -EX-10.2 SENIOR SECURED CONVERTIBLE NOTE

Exhibit 10.2

SENIOR SECURED CONVERTIBLE NOTE

NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES
INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD,
TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE
SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL, IN A
GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD
PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES
MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT
SECURED BY THE SECURITIES. ANY TRANSFEREE OF THIS NOTE SHOULD CAREFULLY REVIEW THE TERMS OF THIS
NOTE, INCLUDING SECTIONS 3(c)(iii) AND 20(a) HEREOF. THE HOLDER OF THIS NOTE AGREES TO THE TERMS
AND PROVISIONS SET FORTH IN SECTION 4(q) OF THE SECURITIES PURCHASE AGREEMENT REGARDING THE
COLLATERAL AGENT (AS DEFINED IN THE SECURITIES PURCHASE AGREEMENT). THE PRINCIPAL AMOUNT
REPRESENTED BY THIS NOTE AND, ACCORDINGLY, THE SECURITIES ISSUABLE UPON CONVERSION HEREOF MAY BE
LESS THAN THE AMOUNTS SET FORTH ON THE FACE HEREOF PURSUANT TO SECTION 3(c)(iii) OF THIS NOTE.

THIS NOTE HAS BEEN ISSUED WITH ORIGINAL ISSUE DISCOUNT (“OID”). PURSUANT TO TREASURY REGULATION
§1.1275-3(b)(1), BRIAN GANNON, A REPRESENTATIVE OF THE BORROWER HEREOF WILL, BEGINNING TEN DAYS
AFTER THE ISSUE DATE OF THIS NOTE, PROMPTLY MAKE AVAILABLE TO THE HOLDER UPON REQUEST THE
INFORMATION DESCRIBED IN TREASURY REGULATION §1.1275-3(b)(1)(i). BRIAN GANNON MAY BE REACHED AT
TELEPHONE NUMBER (813) 221-1061.

STINGER SYSTEMS, INC.

SENIOR SECURED CONVERTIBLE NOTE

			
	 	 	 
	Original Issuance Date:
September 12, 2008
	 	Original Principal Amount: U.S. $3,000,000.00

     FOR VALUE RECEIVED, Stinger Systems, Inc., a Nevada corporation (the “Company”), hereby promises to pay to the order of
DEBT OPPORTUNITY FUND, LLLP or registered assigns (“Holder”) the amount set out above as the
Original Principal Amount or so much thereof as may from time to time be advanced hereunder
(without deduction by the Company for the original issue discount taken by the Holder pursuant to
Section 1(c) of the Securities Purchase Agreement, each an “Advance” and collectively the
“Advances”) (as reduced pursuant to the terms hereof pursuant to redemption, conversion or
otherwise, the “Principal”) when due, whether upon the Maturity Date (as defined below),
acceleration, redemption or otherwise (in each case in accordance with the terms hereof) and to pay
interest (“Interest”) on any outstanding Principal at the applicable Interest Rate from the date
set out above as the Original Issuance Date (the “Issuance Date”) until the same becomes due and
payable, whether upon an Interest Date (as defined below) or the Maturity Date, acceleration,
conversion, redemption or otherwise (in each case in accordance with the terms hereof). This Note
is one of an issue of Senior Secured Convertible Notes issued pursuant to Section 1(a) of the
Securities Purchase Agreement on the Closing Date (collectively, the “Notes” and such other Senior
Secured Convertible Notes, if any, the “Other Notes”). All Advances made to the Company shall be
recorded by the holder hereof on Schedule A attached to this Note, which schedule is incorporated
herein by reference and made a part hereof. Certain capitalized terms used herein are defined in Section 30.

     (1) PAYMENTS OF PRINCIPAL. On August 3, 2010 (the “August Payment Date”), the Company shall pay to the Holder an amount in
cash equal to sixty percent (60%) of the outstanding Principal (as a lump sum principal payment)
(the “August Principal Payment”), accrued and unpaid Interest on the August Principal Payment, and
accrued and unpaid Late Charges, if any, related to such August Principal Payment and Interest
accrued on the August Principal Payment. On the Maturity Date, the Company shall pay to the Holder
an amount in cash representing all remaining outstanding Principal, accrued and unpaid Interest and accrued
and unpaid Late Charges, if any, on such Principal and Interest. The “Maturity Date” shall be March
1, 2011, as may be extended at the option of the Holder (i) in the event that, and for so long as,
an Event of Default (as defined in Section 4(a)) shall have occurred and be continuing on the
Maturity Date (as may be extended pursuant to this Section 1) or any event shall have occurred and
be continuing on the Maturity Date (as may be extended pursuant to this Section 1) that with the

 

 

passage of time and the failure to cure would result in an Event of Default and (ii) through the
date that is ten (10) Business Days after the consummation of a Change of Control in the event that
a Change of Control is publicly announced or a Change of Control Notice (as defined in Section
5(b)) is delivered prior to the Maturity Date. Other than as specifically permitted by this Note,
the Company may not prepay any portion of the outstanding Principal, accrued and unpaid Interest or
accrued and unpaid Late Charges on Principal and Interest, if any.

     (2) INTEREST; INTEREST RATE.

          (a) Interest on this Note shall commence accruing on the Issuance Date and shall be computed
on the basis of a 360-day year comprised of twelve (12) thirty (30) day months and shall be payable
in arrears for each Calendar Quarter on the first day of the succeeding Calendar Quarter during the
period beginning on the Issuance Date and ending on, and including, the Maturity Date (each, an
“Interest Date”) with the first Interest Date being January 1, 2009. Interest shall be payable on
each Interest Date to the record holder of this Note on the applicable Interest Date in shares of
Common Stock (“Interest Shares”) so long as there has been no Equity Conditions Failure; provided
however, that the Company may, at its option following notice to the Holder, pay Interest on any
Interest Date in cash (“Cash Interest ”) or in a combination of Cash Interest and Interest Shares.
The Company shall deliver a written notice (each, an “Interest Election Notice”) to each holder of
the Notes on or prior to the Interest Notice Due Date (the date such notice is delivered to all of
the holders, the “Interest Notice Date”) which notice (1) either (A) confirms that Interest to be
paid on such Interest Date shall be paid entirely in Interest Shares or (B) elects to pay Interest
as Cash Interest or a combination of Cash Interest and Interest Shares and specifies the amount of
Interest that shall be paid as Cash Interest and the amount of Interest, if any, that shall be paid
in Interest Shares and (2) certifies that there has been no Equity Conditions Failure; provided,
however, that the Company shall not be entitled to pay any portion of Interest on an Interest Date
in Interest Shares in excess of the Holder Pro Rata Amount of the applicable Volume Limitation. If
any portion of Interest for a particular Interest Date shall be paid in Interest Shares, then the
Company shall pay to the Holder, in accordance with Section 2(b), a number of shares of Common
Stock equal to (x) the amount of Interest payable on the applicable Interest Date in Interest
Shares divided by (y) the applicable Interest Conversion Price. Interest to be paid on an Interest
Date in Interest Shares shall be paid in a number of fully paid and nonassessable shares of Common
Stock (rounded to the nearest whole share). If the Equity Conditions are not satisfied as of the
Interest Notice Date, then, unless the Company has elected to pay such Interest in cash, the
Interest Notice shall indicate that unless the Holder waives the Equity Conditions, the Interest
shall be paid in cash. If the Equity Conditions were satisfied as of the Interest Notice Date but
the Equity Conditions are no longer satisfied at any time prior to the Interest Date, the Company
shall provide the Holder a subsequent notice to that effect indicating that unless the Holder
waives the Equity Conditions, the Interest shall be paid in cash.

          (b) When any Interest Shares are to be paid on an Interest Date, the Company shall (i) (A)
provided that the Company’s transfer agent (the “Transfer Agent”) is participating in the
Depository Trust Company (“DTC”) Fast Automated Securities Transfer Program and such action is not
prohibited by applicable law or regulation or any applicable policy of DTC, credit such aggregate
number of Interest Shares to which the Holder shall be entitled to the Holder’s or its designee’s
balance account with DTC through its Deposit Withdrawal Agent Commission system, or (B) if the
foregoing shall not apply, issue and deliver on the applicable Interest Date, to the address set
forth in the register maintained by the Company for such purpose pursuant to the Securities
Purchase Agreement or to such address as specified by the Holder in writing to the Company at least
two (2) Business Days prior to the applicable Interest Date, a certificate, registered in the name
of the Holder or its designee, for the number of Interest Shares to which the Holder shall be
entitled and (ii) with respect to each Interest Date, pay to the Holder, in cash by wire transfer
of immediately available funds, the amount of any Cash Interest.

          (c) From and after the occurrence and during the continuance of an Event of Default, the
Interest Rate shall be increased to fifteen percent (15.0%) per annum. In the event that such
Event of Default is subsequently cured, the adjustment referred to in the preceding sentence shall
cease to be effective as of the date of such cure; provided that the Interest as calculated and
unpaid at such increased rate during the continuance of such Event of Default shall continue to
apply to the extent relating to the days after the occurrence of such Event of Default through and
including the date of cure of such Event of Default. The Company shall pay any and all taxes that
may be payable with respect to the issuance and delivery of Interest Shares.

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     (3) CONVERSION OF NOTES. This Note shall be convertible into shares of the Company’s
common stock, par value $0.001 per share (the “Common Stock”), on the terms and conditions set
forth in this Section 3.

          (a) Conversion Right. Subject to the provisions of Section 3(d), at any time or times
on or after the Issuance Date, the Holder shall be entitled to convert any portion of the
outstanding and unpaid Conversion Amount (as defined below) into fully paid and nonassessable
shares of Common Stock in accordance with Section 3(c), at the Conversion Rate (as defined below).
The Company shall not issue any fraction of a share of Common Stock upon any conversion. If the
issuance would result in the issuance of a fraction of a share of Common Stock, the Company shall
round such fraction of a share of Common Stock up to the nearest whole share. The Company shall
pay any and all transfer, stamp and similar taxes that may be payable with respect to the issuance
and delivery of Common Stock upon conversion of any Conversion Amount.

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

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

          (ii) “Conversion Price” means, as of any Conversion Date (as defined below) or other
date of determination, $0.29, subject to adjustment as provided herein.

          (c) Mechanics of Conversion.

          (i) Optional Conversion. To convert any Conversion Amount into shares of Common Stock
on any date (a “Conversion Date”), the Holder shall (A) transmit by facsimile (or otherwise
deliver), for receipt on or prior to 11:59 p.m., New York Time, on such date, a copy of an executed
notice of conversion in the form attached hereto as Exhibit I (the “Conversion Notice”) to
the Company and (B) if required by Section 3(c)(iii), surrender this Note to a common carrier for
delivery to the Company as soon as practicable on or following such date (or an indemnification
undertaking with respect to this Note in the case of its loss, theft or destruction). On or before
the first (1 st) Business Day following the date of receipt of a Conversion Notice, the
Company shall transmit by facsimile a confirmation (the “Conversion Confirmation”) of receipt of
such Conversion Notice to the Holder and the Company’s Transfer Agent. On or before the (2
nd) second Business Day following the date of receipt of a Conversion Notice (the “Share
Delivery Date”), the Company shall (X) provided that the Transfer Agent is participating in the DTC
Fast Automated Securities Transfer Program, credit such aggregate number of shares of Common Stock
(including any Interest Shares) to which the Holder shall be entitled to the Holder’s or its
designee’s balance account with DTC through its Deposit Withdrawal Agent Commission system or
(Y) if the Transfer Agent is not participating in the DTC Fast Automated Securities Transfer
Program, issue and deliver to the address as specified in the Conversion Notice, a certificate,
registered in the name of the Holder or its designee, for the number of shares of Common Stock
(including any Interest Shares) to which the Holder shall be entitled. If this Note is physically
surrendered for conversion as required by Section 3(c)(iii) and the outstanding Principal of this
Note is greater than the Principal portion of the Conversion Amount being converted, then the
Company shall as soon as practicable and in no event later than three (3) Business Days after
receipt of this Note and at its own expense, issue and deliver to the holder a new Note (in
accordance with Section 20(d)) representing the outstanding Principal not converted. The Person or
Persons entitled to receive the shares of Common Stock issuable upon a conversion of this Note
shall be treated for all purposes as the record holder or holders of such shares of Common Stock on
the Conversion Date.

          (ii) Company’s Failure to Timely Convert. If the Company shall fail to issue a
certificate to the Holder or credit the Holder’s balance account with DTC, as applicable, for the
number of shares of Common Stock to which the Holder is entitled upon conversion of any Conversion
Amount on or prior to the date which is three (3) Trading Days after the Conversion Date (a
“Conversion Failure”), then (A) the Company shall pay damages to the Holder for each Trading Day of
such Conversion Failure in an amount equal to 1.5% of the product of (I) the

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sum of the number of shares of Common Stock not issued to the Holder on or prior to the Share
Delivery Date and to which the Holder is entitled, and (II) the Closing Sale Price of the Common
Stock on the Share Delivery Date and (B) the Holder, upon written notice to the Company, may void
its Conversion Notice with respect to, and retain or have returned, as the case may be, any portion
of this Note that has not been converted pursuant to such Conversion Notice, provided that
the voiding of a Conversion Notice shall not affect the Company’s obligations to make any payments
which have accrued prior to the date of such notice pursuant to this Section 3(c)(ii) or otherwise.
In addition to the foregoing, if within three (3) Trading Days after the Company’s receipt of the
facsimile copy of a Conversion Notice the Company shall fail to issue and deliver a certificate to
the Holder or credit the Holder’s balance account with DTC for the number of shares of Common Stock
to which the Holder is entitled upon such holder’s conversion of any Conversion Amount, and if on
or after such Trading Day the Holder purchases (in an open market transaction or otherwise) Common
Stock to deliver in satisfaction of a sale by the Holder of Common Stock issuable upon such
conversion that the Holder anticipated receiving from the Company (a “Buy-In”), then the Company
shall, within three (3) Business Days after the Holder’s request and in the Holder’s discretion,
either (A) pay cash to the Holder in an amount equal to the Holder’s total purchase price
(including brokerage commissions and other out of pocket expenses, if any) for the shares of Common
Stock so purchased (the “Buy-In Price”), at which point the Company’s obligation to issue and
deliver such certificate or to credit the Holder’s balance account with DTC for the number of
shares of Common Stock to which the Holder is entitled upon such Holder’s conversion of any
Conversion Amount shall terminate, or (B) promptly honor its obligation to deliver to the Holder a
certificate or certificates representing such Common Stock and pay cash to the Holder in an amount
equal to the excess (if any) of the Buy-In Price over the product of (1) such number of shares of
Common Stock, times (2) the Closing Bid Price on the Conversion Date.

          (iii) Registration; Book-Entry. The Company shall maintain a register (the
“Register”) for the recordation of the names and addresses of the holders of each Note and the
principal amount of the Notes held by such holders (the “Registered Notes”). The entries in the
Register shall be conclusive and binding for all purposes absent manifest error. The Company and
the holders of the Notes shall treat each Person whose name is recorded in the Register as the
owner of a Note for all purposes, including, without limitation, the right to receive payments of
Principal and Interest hereunder, notwithstanding notice to the contrary. A Registered Note may be
assigned or sold in whole or in part only by registration of such assignment or sale on the
Register. Upon its receipt of a request to assign or sell all or part of any Registered Note by a
Holder, the Company shall record the information contained therein in the Register and issue one or
more new Registered Notes in the same aggregate principal amount as the principal amount of the
surrendered Registered Note to the designated assignee or transferee pursuant to Section 20.
Notwithstanding anything to the contrary set forth herein, upon conversion of any portion of this
note in accordance with the terms hereof, the Holder shall not be required to physically surrender
this Note to the Company unless (A) the full Conversion Amount represented by this Note is being
converted or (B) the Holder has provided the Company with prior written notice (which notice may be
included in a Conversion Notice) requesting reissuance of this Note upon physical surrender of this
Note. The Holder and the Company shall maintain records showing the Principal, Interest and Late
Charges, if any, converted and the dates of such conversion or shall use such other method,
reasonable satisfactory to the Holder and the Company, so as not to require physical surrender of
this Note upon conversion.

          (iv) Pro Rata Conversion; Disputes. In the event that the Company receives a
Conversion Notice from more than one holder of Notes for the same Conversion Date and the Company
can convert some, but not all, of such portions of the Notes submitted for conversion, the Company,
subject to Section 3(d), shall convert from each holder of Notes electing to have Notes converted
on such date a pro rata amount of such holder’s portion of its Notes submitted for conversion based
on the principal amount of Notes submitted for conversion on such date by such holder relative to
the aggregate principal amount of all Notes submitted for conversion on such date. In the event of
a dispute as to the number of shares of Common Stock issuable to the Holder in connection with a
conversion of this Note, the Company shall issue to the Holder the number of shares of Common Stock
not in dispute and resolve such dispute in accordance with Section 25.

          (d) Limitations on Conversions.

          (i) Beneficial Ownership. The Company shall not effect any conversion of this Note,
and the Holder of this Note shall not have the right to convert any portion of this Note pursuant
to Section 3(a), to the extent

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that after giving effect to such conversion, the Holder (together with the Holder’s affiliates)
would beneficially own in excess of 9.99% (the “Maximum Percentage”) of the number of shares of
Common Stock outstanding immediately after giving effect to such conversion. For purposes of the
foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its
affiliates shall include the number of shares of Common Stock issuable upon conversion of this Note
with respect to which the determination of such sentence is being made, but shall exclude the
number of shares of Common Stock which would be issuable upon (A) conversion of the remaining,
nonconverted portion of this Note beneficially owned by the Holder or any of its affiliates and
(B) exercise or conversion of the unexercised or nonconverted portion of any other securities of
the Company (including, without limitation, any Other Notes or warrants) subject to a limitation on
conversion or exercise analogous to the limitation contained herein beneficially owned by the
Holder or any of its affiliates. Except as set forth in the preceding sentence, for purposes of
this Section 3(d)(i), beneficial ownership shall be calculated in accordance with Section 13(d) of
the Securities Exchange Act of 1934, as amended (the “1934 Act”). For purposes of this
Section 3(d)(i), in determining the number of outstanding shares of Common Stock, the Holder may
rely on the number of outstanding shares of Common Stock as reflected in (x) the Company’s most
recent Form 10-K, Form 10-Q, Form 8-K or other public filing with the Securities Exchange
Commission, as the case may be (y) a more recent public announcement by the Company or (z) any
other notice by the Company or the Transfer Agent setting forth the number of shares of Common
Stock outstanding. For any reason at any time, upon the written or oral request of the Holder, the
Company shall within one (1) Business Day confirm orally and in writing to the Holder the number of
shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common
Stock shall be determined after giving effect to the conversion or exercise of securities of the
Company, including this Note, by the Holder or its affiliates since the date as of which such
number of outstanding shares of Common Stock was reported. By written notice to the Company, the
Holder may increase or decrease the Maximum Percentage to any other percentage not in excess of
9.99% specified in such notice; provided that (i) any such increase will not be effective until the
sixty-first (61 st) day after such notice is delivered to the Company, and (ii) any such
increase or decrease will apply only to the Holder and not to any other holder of Notes.

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

          (4) RIGHTS UPON EVENT OF DEFAULT.

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

                         (i) the suspension from trading or failure of the Common Stock to be listed on an Eligible
Market

- 5 -

 

for a period of five (5) consecutive Trading Days or for more than an aggregate of ten (10) Trading
Days in any 365-day period;

          (ii) the Company’s (A) failure to cure a Conversion Failure by delivery of the required number
of shares of Common Stock within ten (10) Business Days after the applicable Conversion Date or
(B) notice, written or oral, to any holder of the Notes, including by way of public announcement or
through any of its agents, at any time, of its intention not to comply with a request for
conversion of any Notes into shares of Common Stock that is tendered in accordance with the
provisions of the Notes, other than pursuant to Section 3(d);

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

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

          (v) any default under, redemption of or acceleration prior to maturity of any Indebtedness of
the Company other than with respect to any Other Notes;

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

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

          (viii) a final judgment or judgments for the payment of money aggregating in excess of (A)
$100,000 are rendered against the Company or (B) $50,000 are rendered against any of the officers
or directors of the Company, and which judgments are not, within sixty (60) days after the entry
thereof, bonded, discharged or stayed pending appeal, or are not discharged within sixty (60) days
after the expiration of such stay; provided, however, that any judgment which is covered by
insurance or an indemnity from a credit worthy party shall not be included in calculating the
amounts set forth above so long as the Company provides the Holder a written statement from such
insurer or indemnity provider (which written statement shall be reasonably satisfactory to the
Holder) to the effect that such judgment is covered by insurance or an indemnity and the Company
will receive the proceeds of such insurance or indemnity within thirty (30) days of the issuance of
such judgment;

          (ix) the Company breaches any representation, warranty, covenant or other term or condition of
any Transaction Document (including the Capitalization Letter Agreement (as defined in the
Securities Purchase Agreement)), except, in the case of a breach of a covenant or other term or
condition of any Transaction Document which is curable, only if such breach continues for a period
of at least ten (10) consecutive Business Days;

          (x) any breach or failure in any respect to comply with either of Sections 8 or 16 of this
Note; or

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

          (b) Redemption Right. Upon the occurrence of an Event of Default, the Company shall
within one

- 6 -

 

(1) Business Day deliver written notice thereof via facsimile and overnight courier (an “Event of
Default Notice”) to the Holder. At any time after the earlier of the Holder’s receipt of an Event
of Default Notice and the Holder becoming aware of an Event of Default, the Holder may require the
Company to redeem all or any portion of this Note by delivering written notice thereof (the “Event
of Default Redemption Notice”) to the Company, which Event of Default Redemption Notice shall
indicate the portion of this Note the Holder is electing to redeem. Each portion of this Note
subject to redemption by the Company pursuant to this Section 4(b) shall be redeemed by the Company
at a price equal to the greater of (i) the product of (A) the Conversion Amount to be redeemed and
(B) the Redemption Premium and (ii) the product of (A) the Conversion Rate with respect to such
Conversion Amount in effect at such time as the Holder delivers an Event of Default Redemption
Notice and (B) the product of (1) the Equity Value Redemption Premium and (2) the greatest Closing
Sale Price of the Common Stock beginning on the date immediately preceding such Event of Default
and ending on the date the Holder delivers the Event of Default Redemption Notice (the “Event of
Default Redemption Price”). Redemptions required by this Section 4(b) shall be made in accordance
with the provisions of Section 14. To the extent redemptions required by this Section 4(b) are
deemed or determined by a court of competent jurisdiction to be prepayments of the Note by the
Company, such redemptions shall be deemed to be voluntary prepayments. The parties hereto agree
that in the event of the Company’s redemption of any portion of the Note under this Section 4(b),
the Holder’s damages would be uncertain and difficult to estimate because of the parties’ inability
to predict future interest rates and the uncertainty of the availability of a suitable substitute
investment opportunity for the Holder. Accordingly, any Redemption Premium due under this Section
4(b) is intended by the parties to be, and shall be deemed, a reasonable estimate of the Holder’s
actual loss of its investment opportunity and not as a penalty.

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

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

          (b) Redemption Right.

          (i) No sooner than fifteen (15) Trading Days nor later than ten (10) Trading Days prior to the
consummation of a Change of Control, but not prior to the public announcement of such Change of
Control, the Company shall deliver written notice thereof via facsimile and overnight courier to
the Holder (a “Change of Control Notice”). At any time during the period beginning after the
Holder’s receipt of a Change of Control Notice and ending twenty (20) Trading Days after the date
of the consummation of such Change of Control, the Holder may require the Company to redeem all or
any portion of this Note by delivering written notice thereof (“Change of

- 7 -

 

Control Redemption Notice”) to the Company, which Change of Control Redemption Notice shall
indicate the Conversion Amount the Holder is electing to redeem. The portion of this Note subject
to redemption pursuant to this Section 5 shall be redeemed by the Company in cash at a price equal
to the greater of (i) 150% of the Conversion Amount being redeemed and (ii) the product of (a) the
Equity Value Redemption Premium and (b) the product of (1) the Conversion Amount being redeemed
multiplied by (2) the quotient determined by dividing (I) the aggregate cash consideration and the
aggregate cash value of any non-cash consideration per Common Share to be paid to the holders of
the Common Shares upon consummation of the Change of Control (any such non-cash consideration
consisting of marketable securities to be valued at the higher of the Closing Sale Price of such
securities as of the Trading Day immediately prior to, the Closing Sale Price as of the Trading Day
immediately following the public announcement of such proposed Change of Control and the Closing
Sale Price of the Common Stock immediately prior to the public announcement of such proposed Change
of Control) by (II) the Conversion Price (the “Change of Control Redemption Price”). Redemptions
required by this Section 5 shall be made in accordance with the provisions of Section 14 and shall
have priority to payments to stockholders in connection with a Change of Control. To the extent
redemptions required by this Section 5(b) are deemed or determined by a court of competent
jurisdiction to be prepayments of the Note by the Company, such redemptions shall be deemed to be
voluntary prepayments. Notwithstanding anything to the contrary in this Section 5, but subject to
Section 3(d), until the Change of Control Redemption Price (together with any interest thereon) is
paid in full, the Conversion Amount submitted for redemption under this Section 5(b) (together with
any interest thereon) may be converted, in whole or in part, by the Holder into Common Stock
pursuant to Section 3. The parties hereto agree that in the event of the Company’s redemption of
any portion of the Note under this Section 5(b), the Holder’s damages would be uncertain and
difficult to estimate because of the parties’ inability to predict future interest rates and the
uncertainty of the availability of a suitable substitute investment opportunity for the Holder.
Accordingly, any Change of Control redemption premium due under this Section 5(b) is intended by
the parties to be, and shall be deemed, a reasonable estimate of the Holder’s actual loss of its
investment opportunity and not as a penalty.

          (ii) Notwithstanding anything to the contrary contained above, if the Successor Entity in a
Change of Control transaction is a Public Successor Entity and has a market capitalization in
excess of $350 million as of the Change of Control Notice Due Date (as defined below) and the
consideration being paid to the holders of Common Stock in such Change of Control consists solely
of its publicly traded common stock, the Successor Entity may, in lieu of paying the Change of
Control Redemption Price in cash, elect to pay some or all of the Conversion Amount to be redeemed
(the “Change of Control Redemption Amount” ) to the Holder of this Note by causing the conversion
of such Change of Control Redemption Amount, provided there has been no Equity Conditions Failure
(other than with respect to clause (vi)(A) of the definition of Equity Condition), in accordance
with this Section 5(b) (a “Successor Conversion”). On or prior to the date which is the tenth
(10th) Trading Day prior to the date of the consummation of the Change of Control
transaction (the “Change of Control Notice Due Date”), the Successor Entity shall deliver written
notice (each, a “Successor Change of Control Notice” and the date all of the holders receive such
notice is referred to as to the “Successor Change of Control Notice Date”), to each holder of
Notes, which Successor Change of Control Notice shall (A) state, if applicable, what portion of the
Change of Control Redemption Amount of such holder’s Note the Successor Entity elects to have
converted upon receipt of a Change of Control Redemption Notice, pursuant to a Successor Conversion
(such amount to be converted, the “Successor Conversion Amount”) and (B) state, if applicable, what
portion of the Change of Control Redemption Amount the Successor Entity elects to have redeemed,
upon receipt of a Change of Control Redemption Notice, or would be required to be redeemed in
accordance with the provisions of the Notes and (ii) if some or all of the Change of Control
Redemption Amount is to be paid pursuant to a Successor Conversion, certify that the Equity
Conditions (other than with respect to clause (vi)(A) of the definition of Equity Condition) have
been satisfied as of the date of the Successor Change of Control Notice. Each Successor Change of
Control Notice shall be irrevocable. If the Successor Entity does not timely deliver a Successor
Change of Control Notice in accordance with this Section 5(b), then the Successor Entity shall be
deemed to have delivered an irrevocable Successor Change of Control Notice stating that the entire
Change of Control Redemption Price shall be paid in cash. Except as expressly provided in this
Section 5(b)(ii), the Company shall convert or redeem the applicable Change of Control Redemption
Amount of this Note pursuant to this Section 5(b) and the corresponding Change of Control
Redemption Amounts of the Other Notes in the same pro rata proportion pursuant to the corresponding
provisions of the Other Notes in the same manner. The Successor Conversion Amount (whether set
forth in the Successor Change of Control Notice or by operation of this Section 5(b)) shall be
converted in accordance with Section 5(b)(iii) and the Successor Entity Redemption Amount shall be
redeemed in accordance with Section 5(b)(i).

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               (iii) Subject to Section 3(d), if the Successor Entity delivers a Successor Change of Control
Notice and elects a Successor Conversion in accordance with Section 5(b)(ii), then the applicable
Change of Control Redemption Price shall be converted by converting such Change of Control
Redemption Price at the Successor Conversion Price (A) on the date of the consummation of the
Change of Control if the Change of Control Redemption Notice is received prior to the consummation
of the Change of Control or (B) within five (5) Business Days after the Company’s receipt of such
Change of Control Redemption Notice otherwise (the “Change of Control Conversion Date”); provided
that the Equity Conditions have been satisfied (or waived in writing by the Holder). If the Equity
Conditions are not satisfied (or waived in writing by the Holder), then at the option of the Holder
designated in writing to the Company and the Successor Entity, the Holder may require the Company
to do any one or more of the following: (i) the Company shall redeem all or any part designated by
the Holder of the unconverted Successor Conversion Amount (such designated amount is referred to as
the “First Redemption Amount”) on the Change of Control Conversion Date and the Company shall pay
to the Holder on the Change of Control Conversion Date, by wire transfer of immediately available
funds, an amount in cash equal to 130% of such First Redemption Amount, and/or (ii) the Successor
Conversion shall be null and void with respect to all or any part designated by the Holder of the
unconverted Change of Control Redemption Price and the Holder shall be entitled to all the rights
of a holder of this Note with respect to such amount of the Change of Control Redemption Price;
provided, however , that the Conversion Price for such unconverted Change of Control
Redemption Price shall thereafter be adjusted to equal the lesser of (A) the Successor Conversion
Price as in effect on the date on which the Holder voided the Successor Conversion and (B) the
Successor Conversion Price that would be in effect as if the Change of Control was consummated on
the date on which the Holder delivers a Conversion Notice. If the Company fails to redeem any First
Redemption Amount on or before the Change of Control Conversion Date by payment of such amount on
the Change of Control Conversion Date, then the Holder shall have the rights set forth in
Section 14 (a) as if the Company failed to pay the applicable Redemption Price and all other rights
under this Note (including, without limitation, such failure constituting an Event of Default
described in Section 4(a)). Notwithstanding anything to the contrary in this Section 5(b)(iii), but
subject to 3(d), until the Company or the Successor Entity, as applicable, delivers the Change of
Control Redemption Price to the Holder, the Change of Control Redemption Price may be converted by
the Holder into Common Stock pursuant to Section 3. Notwithstanding the foregoing, if the Change of
Control Conversion Date occurs after the consummation of the Change of Control, the Successor
Entity shall be obligated, in lieu of the Company, to deliver the Change of Control Redemption
Price, whether by delivery of the Successor Conversion Amount at the Successor Conversion Price or
by delivery of the Change of Control Redemption Amount.

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

               (a) Purchase Rights. If at any time the Company grants, issues or sells any Options,
Convertible Securities or rights to purchase stock, warrants, securities or other property pro rata
to the record holders of any class of Common Stock (the “Purchase Rights”), then the Holder will be
entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase
Rights which the Holder could have acquired if the Holder had held the number of shares of Common
Stock acquirable upon complete conversion of this Note (without taking into account any limitations
or restrictions on the convertibility of this Note) immediately before the date on which a record
is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken,
the date as of which the record holders of Common Stock are to be determined for the grant, issue
or sale of such Purchase Rights.

               (b) Other Corporate Events. In addition to and not in substitution for any other
rights hereunder, prior to the consummation of any Fundamental Transaction pursuant to which
holders of shares of Common Stock are entitled to receive securities or other assets with respect
to or in exchange for shares of Common Stock (a “Corporate Event”), the Company shall make
appropriate provision to insure that the Holder will thereafter have the right to receive upon a
conversion of this Note, at the Holder’s option, (i) in addition to the shares of Common Stock
receivable upon such conversion, such securities or other assets to which the Holder would have
been entitled with respect to such shares of Common Stock had such shares of Common Stock been held
by the Holder upon the consummation of such Corporate Event (without taking into account any
limitations or restrictions on the convertibility of this Note) or (ii) in lieu of the shares of
Common Stock otherwise receivable upon such conversion, such securities or other assets received by
the holders of shares of Common Stock in connection with the consummation of such Corporate Event
in such amounts as the Holder would have been entitled to receive had this

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Note initially been issued with conversion rights for the form of such consideration (as opposed to
shares of Common Stock) at a conversion rate for such consideration commensurate with the
Conversion Rate. Provision made pursuant to the preceding sentence shall be in a form and
substance satisfactory to the Required Holders. The provisions of this Section shall apply
similarly and equally to successive Corporate Events and shall be applied without regard to any
limitations on the conversion or redemption of this Note.

     (7) RIGHTS UPON ISSUANCE OF OTHER SECURITIES.

          (a) Adjustment of Conversion Price upon Issuance of Common Stock. If and whenever on
or after the Subscription Date, the Company issues or sells, or in accordance with this Section
7(a) is deemed to have issued or sold, any shares of Common Stock (including the issuance or sale
of shares of Common Stock owned or held by or for the account of the Company, but excluding shares
of Common Stock deemed to have been issued or sold by the Company in connection with any Excluded
Securities) for a consideration per share (the “New Issuance Price”) less than a price (the
“Applicable Price”) equal to the Conversion Price in effect immediately prior to such issue or sale
or deemed issuance or sale (the foregoing a “Dilutive Issuance”), then immediately after such
Dilutive Issuance the Conversion Price then in effect shall be reduced to an amount equal to the
New Issuance Price. For purposes of determining the adjusted Conversion Price under this Section
7(a), the following shall be applicable:

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

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

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

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such Option or Convertible Security and the Common Stock deemed issuable upon exercise, conversion
or exchange thereof shall be deemed to have been issued as of the date of such increase or
decrease. No adjustment shall be made if such adjustment would result in an increase of the
Conversion Price then in effect.

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

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

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

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

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

          (d) Milestone-Related Adjustment. The Conversion Price shall be permanently and
cumulatively reduced upon the occurrence of any of the following “ Milestone Events ” as follows:
(1) the sale of 9,000 Units during the period beginning on February 29, 2008 and ending on
September 30, 2008, (2) a Gross Margin in excess of 35%, each as reported in a Current Report on
Form 8-K filed with the SEC no later than November 14, 2008 or (3) EBITDA in excess of zero for the
Fiscal Quarter ended on September 30, 2008; the Conversion Price shall be reduced to the lesser of
(i) the existing Conversion Price and (ii) the Average Market Price as of the date that is ten

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(10) business days after the date the applicable Milestone Event is publicly reported by the
Company in a Current Report on Form 8-K. If the Company (A) does not report on a Current Report on
Form 8-K on or prior to November 14, 2008, the number of Units sold between February 29, 2008 and
September 30, 2008, the Gross Margin for such Units and EBITDA for the Fiscal Quarter ended
September 30, 2008 or (B) such information is inconsistent with any such information reported on
any Quarterly Report or Annual Report of the Company, a Milestone Event shall be deemed to have
occurred on November 14, 2008.

     (8) COMPANY’S RIGHT OF MANDATORY CONVERSION.

          (a) Mandatory Conversion. If at any time and from and after the one (1) year
anniversary of the Issuance Date (the “Mandatory Conversion Eligibility Date”), the arithmetic
average of the Weighted Average Price of the Common Stock for twenty (20) Trading Days out of any
thirty (30) consecutive Trading Days after the Mandatory Conversion Eligibility Date exceeds
(i) 150% of the initial Conversion Price and there has been no Equity Conditions Failure, the
Company shall have the right to require the Holder to convert up to 50% of the Conversion Amount of
this Note or (ii) 175% of the initial Conversion Price and there has been no Equity Conditions
Failure, the Company shall have the right to require the Holder to convert up to 100% of the
Conversion Amount of this Note, as designated in the Mandatory Conversion Notice (as defined below)
into fully paid, validly issued and nonassessable shares of Common Stock in accordance with
Section 3(c) hereof at the Conversion Rate as of the Mandatory Conversion Date (as defined below)
(a “Mandatory Conversion”). The Company may exercise its right to require conversion under this
Section 8(a) by delivering within not more than twenty (20) Trading Days following the end of such
Mandatory Conversion Measuring Period a written notice thereof by facsimile and overnight courier
to all, but not less than all, of the holders of Notes and the Transfer Agent (the “Mandatory
Conversion Notice” and the date all of the holders received such notice by facsimile is referred to
as the “Mandatory Conversion Notice Date”). The Mandatory Conversion Notice shall be irrevocable.
The Mandatory Conversion Notice shall state (i) the Trading Day selected for the Mandatory
Conversion in accordance with this Section 8(a), which Trading Day shall be no later than five
(5) Business Days following the Mandatory Conversion Notice Date (the “Mandatory Conversion Date”),
(ii) the aggregate Conversion Amount, of the Notes subject to mandatory conversion from the Holder
and all of the holders of the Notes pursuant to this Section 8 (and analogous provisions under the
Other Notes), (iii) the number of shares of Common Stock to be issued to such Holder on the
Mandatory Conversion Date and (iv) that there has been no Equity Conditions Failure; provided,
however, that the Company may not effect a Mandatory Conversion under this Section in excess of the
Holder Pro Rata Amount of the applicable Mandatory Conversion Volume Limitation. Notwithstanding
the foregoing, the Company may effect only one (1) Mandatory Conversion during any twenty
(20) consecutive Trading Days. Any shares of Common Stock delivered in connection with a Mandatory
Conversion hereunder shall be accompanied by a payment in cash equal to the amount of any accrued
and unpaid Interest with respect to such Conversion Amount subject to such Mandatory Conversion and
accrued and unpaid Late Charges, if any, with respect to such Conversion Amount and Interest.

          (b) Pro Rata Conversion Requirement. If the Company elects to cause a conversion of
any Conversion Amount of this Note pursuant to Section 8(a), then it must simultaneously take the
same action in the same proportion with respect to the Other Notes. If the Company elects a
Mandatory Conversion of this Note pursuant to Section 8(a) (or similar provisions under the Other
Notes) with respect to less than all of the Conversion Amounts of the Notes then outstanding, then
the Company shall require conversion of a Conversion Amount from each of the holders of the Notes
equal to the product of (i) the aggregate Conversion Amount of Notes which the Company has elected
to cause to be converted pursuant to Section 8(a), multiplied by (ii) the fraction, the numerator
of which is the sum of the aggregate Original Principal Amount of the Notes purchased by such
holder of outstanding Notes and the denominator of which is the sum of the aggregate Original
Principal Amount of the Notes purchased by all holders holding outstanding Notes (such fraction
with respect to each holder is referred to as its “Conversion Allocation Percentage,” and such
amount with respect to each holder is referred to as its “Pro Rata Conversion Amount”); provided,
however, that in the event that any holder’s Pro Rata Conversion Amount exceeds the outstanding
Principal amount of such holder’s Note, then such excess Pro Rata Conversion Amount shall be
allocated amongst the remaining holders of Notes in accordance with the foregoing formula. In the
event that the initial holder of any Notes shall sell or otherwise transfer any of such holder’s
Notes, the transferee shall be allocated a pro rata portion of such holder’s Conversion Allocation
Percentage and the Pro Rata Conversion Amount.

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     (9) HOLDER’S RIGHT OF OPTIONAL REDEMPTION. Following each of March 1, 2009 and March
1, 2010, the Holder shall have the right (the “Holder Optional Redemption”), in its sole
discretion, to require that the Company redeem a Principal amount of this Note in an amount up to
the Available Redemption Amount plus accrued and unpaid Interest on such Available Redemption
Amount plus accrued and unpaid Late Charges with respect to such Principal and Interest (the
“Redemption Amount”) by delivering written notice thereof to the Company within five (5) Business
Days following each of the above mentioned anniversary dates (a “Holder Optional Redemption Notice”
and the date the Holder delivers such notice, the “Holder Optional Redemption Notice Date”). The
Company shall redeem any Redemption Amounts within five (5) Trading Days of the Holder Optional
Redemption Notice Date (the “Optional Redemption Date”) in cash at a price equal to the Redemption
Amount (the “Holder Redemption Price ”). Redemptions made pursuant to this Section 9 shall be made
in accordance with Section 14. No later than one (1) Trading Day following any Optional Redemption
Date the Company shall file a Current Report on Form 8-K describing the terms of the applicable
Holder Optional Redemption. Upon a Redemption pursuant to this Section 9, the Redemption Amount shall be allocated ratably
between principal that would be due on the August Payment Date and principal that would be due on
the Maturity Date.

     (10) HOLDER’S RIGHT OF OPTIONAL CONVERSION/REDEMPTION

          (a) General. At any time and from time to time after the six (6) month anniversary of
the Issuance Date, the Holder shall have the right, in its sole discretion, to require that the
Company, convert, or, at the Company’s election, redeem all or a portion of the Conversion Amount
(the “Conversion/Redemption Amount”) by delivering written notice thereof (a “Holder Optional
Conversion/Redemption Notice” and the date the Holder delivers such notice, the “Holder Optional
Conversion/Redemption Notice Date”). Within one (1) Business Day of the Holder Optional
Conversion/Redemption Notice Date, the Company shall deliver to the Holder a written notice (a
“Company Conversion/Redemption Notice” and the date the Holder receives such written notice, the
“Company Conversion/Redemption Notice Date”) which notice shall (i) either (A) confirm that the
Conversion/Redemption Amount shall be converted (an “Optional Conversion”) in whole or in part or
(B)(1) state that the Company elects to redeem (an “Optional Redemption”), in whole or in part, the
Conversion/Redemption Amount and (2) specify the portion which the Company elects to redeem
pursuant to an Optional Redemption (such amount to be redeemed, the “Optional Redemption Amount”)
and the portion, if any, that the Company elects to convert pursuant to an Optional Conversion
(such amount also, an “Optional Conversion Amount”) and (ii) if the Conversion/Redemption Amount is
to be paid, in whole or in part, pursuant to an Optional Conversion, certify that there has been no
Equity Conditions Failure (other than with respect to clause (iv)(A) of the definition of Equity
Conditions). Each Company Conversion/Redemption Notice shall be irrevocable. The Company shall
redeem and convert any Optional Redemption Amounts and Optional Conversion Amounts within five
(5) Trading Days of the Company Conversion/Redemption Notice Date (the “Optional
Conversion/Redemption Date”) and shall make the same conversion and redemption decisions as to all
the Notes for which the Company has received a Holder Optional Conversion/Redemption Notice. The
portion of this Note subject to redemption pursuant to this Section 10 shall be redeemed by the
Company in cash at a price equal to the Optional Redemption Amount (the “Holder Optional Redemption
Price”).

          (b) Mechanics of Holder Optional Conversion. If the Company delivers a Company
Conversion/Redemption Notice electing an Optional Conversion in accordance with Section 10(a),
then, on the Optional Conversion/Redemption Date, the Company shall, or shall direct the Transfer
Agent to, deliver to the Holder’s account with DTC, or issue the Holder a certificate for, a number
of shares of Common Stock equal to the quotient of (A) such Optional Conversion Amount divided by
(B) the Optional Conversion Price (the “Optional Conversion Shares”) on the Optional
Conversion/Redemption Date. If the Company has elected an Optional Conversion, in whole or in
part, and there is an Equity Conditions Failure (other than with respect to clause (iv)(A) of the
definition of Equity Conditions) at the Holder Optional Conversion/Redemption Date, then at the
option of the Holder designated in writing to the Company, the Holder may require the Company to do
either one or both of the following: (A) the Company shall redeem all or any part designated by the
Holder of the unconverted Holder Optional Conversion Amount (such designated amount is referred to
as the “Holder Designated Redemption Amount”) on such Holder Optional Conversion/Redemption Date
and the Company shall pay to the Holder on such Holder Optional Conversion/Redemption Date by wire
transfer of immediately available funds, an amount in cash equal to 125% of such Holder Designated
Redemption Amount, and/or (B) the Holder Optional Conversion shall be null and void with respect to
all or any part designated by the Holder of the unconverted Holder Optional

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Conversion Amount and the Holder shall be entitled to all the rights of a holder of this Note with
respect to such amount of the Holder Optional Conversion Amount; provided, however, that the
Conversion Price for such unconverted Holder Optional Conversion Amount shall thereafter be
adjusted to equal the lowest the Optional Conversion Price as in effect during the period beginning
on the date on which the Holder voided the Holder Optional Conversion and ending on the date on
which the Holder delivers a Conversion Notice relating thereto. If the Company fails to redeem the
Holder Designated Redemption Amount on or before the Holder Optional Conversion/Redemption Date by
payment of such amount on such Holder Optional Conversion/Redemption Date then the Holder shall
have the rights set forth in Section 14(a) as if the Company failed to pay the applicable Holder
Optional Redemption Price and all other rights under this Note (including, without limitation, such
failure constituting an Event of Default described in Section 4(a)(iv)).

          (c) Mechanics of Holder Optional Redemption. Optional Redemptions made pursuant to
this Section 10 shall be made in accordance with Section 14.

     (11) SECURITY. This Note and the Other Notes are secured to the extent and in the
manner set forth in the Security Agreement (as defined in the Securities Purchase Agreement).

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

     (13) RESERVATION OF AUTHORIZED SHARES.

          (a) Reservation. The Company shall reserve out of its authorized and unissued Common
Stock a number of shares of Common Stock for each of the Notes equal to 130% of the Conversion Rate
with respect to the Conversion Amount of each such Note as of the Issuance Date, subject to the
Capitalization Letter Agreement (as defined in the Securities Purchase Agreement). So long as any
of the Notes are outstanding, the Company shall take all action necessary to reserve and keep
available out of its authorized and unissued Common Stock, solely for the purpose of effecting the
conversion of the Notes, 130% of the number of shares of Common Stock as shall from time to time be
necessary to effect the conversion of all of the Notes then outstanding; provided that at no time
shall the number of shares of Common Stock so reserved be less than the number of shares required
to be reserved by the previous sentence (without regard to any limitations on conversions) (the
“Required Reserve Amount”). The initial number of shares of Common Stock reserved for conversions
of the Notes and each increase in the number of shares so reserved shall be allocated pro rata
among the holders of the Notes based on the principal amount of the Notes held by each holder at
the Closing (as defined in the Securities Purchase Agreement) or increase in the number of reserved
shares, as the case may be (the “Authorized Share Allocation”). In the event that a holder shall
sell or otherwise transfer any of such holder’s Notes, each transferee shall be allocated a pro
rata portion of such holder’s Authorized Share Allocation. Any shares of Common Stock reserved and
allocated to any Person which ceases to hold any Notes shall be allocated to the remaining holders
of Notes, pro rata based on the principal amount of the Notes then held by such holders.

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

- 14 -

 

cause its board of directors to recommend to the stockholders that they approve such proposal.

     (14) HOLDER’S REDEMPTIONS.

          (a) Mechanics. The Company shall deliver the applicable Event of Default Redemption
Price to the Holder within five (5) Business Days after the Company’s receipt of the Holder’s Event
of Default Redemption Notice. If the Holder has submitted a Change of Control Redemption Notice in
accordance with Section 5(b), other than with respect to any Successor Conversion Amount, which
shall be governed by Section 5(b), the Company shall deliver the applicable Change of Control
Redemption Price to the Holder concurrently with the consummation of such Change of Control if such
notice is received prior to the consummation of such Change of Control and within five (5) Business
Days after the Company’s receipt of such notice otherwise. The Company shall deliver the
applicable Holder Optional Redemption Price on the applicable Redemption Date. In the event of a
redemption of less than all of the Conversion Amount of this Note, the Company shall promptly cause
to be issued and delivered to the Holder a new Note (in accordance with Section 20(d)) representing
the outstanding Principal which has not been redeemed. In the event that the Company does not pay
the applicable Redemption Price to the Holder within the time period required, at any time
thereafter and until the Company pays such unpaid Redemption Price in full, the Holder shall have
the option, in lieu of redemption, to require the Company to promptly return to the Holder all or
any portion of this Note representing the Conversion Amount that was submitted for redemption and
for which the applicable Redemption Price (together with any Late Charges thereon) has not been
paid. Upon the Company’s receipt of such notice, (x) the applicable Redemption Notice shall be
null and void with respect to such Conversion Amount, (y) the Company shall immediately return or
reinstate this Note, or issue a new Note (in accordance with Section 20(d)) to the Holder
representing the sum of such Conversion Amount to be redeemed together with accrued and unpaid
Interest with respect to such Conversion Amount and accrued and unpaid Late Charges with respect to
such Conversion Amount and Interest and (z) the Conversion Price of this Note or such new Notes
shall be adjusted to the lesser of (A) the Conversion Price as in effect on the date on which the
applicable Redemption Notice is voided and (B) the lowest Closing Bid Price of the Common Stock
during the period beginning on and including the date on which the applicable Redemption Notice is
delivered to the Company and ending on and including the date on which the applicable Redemption
Notice is voided. The Holder’s delivery of a notice voiding a Redemption Notice and exercise of
its rights following such notice shall not affect the Company’s obligations to make any payments of
Late Charges which have accrued prior to the date of such notice with respect to the Conversion
Amount subject to such notice.

          (b) Redemption by Other Holders. Upon the Company’s receipt of notice from any of the
holders of the Other Notes for redemption or repayment as a result of an event or occurrence
substantially similar to the events or occurrences described in Section 4(b), Section 5(b) or
Section 9 (each, an “Other Redemption Notice”), the Company shall immediately, but no later than
one (1) Business Day of its receipt thereof, forward to the Holder by facsimile a copy of such
notice. If the Company receives a Redemption Notice and one or more Other Redemption Notices,
during the seven (7) Business Day period beginning on and including the date which is three (3)
Business Days prior to the Company’s receipt of the Holder’s Redemption Notice and ending on and
including the date which is three (3) Business Days after the Company’s receipt of the Holder’s
Redemption Notice and the Company is unable to redeem all principal, interest and other amounts
designated in such Redemption Notice and such Other Redemption Notices received during such seven
(7) Business Day period, then the Company shall redeem a pro rata amount from each holder of the
Notes (including the Holder) based on the principal amount of the Notes submitted for redemption
pursuant to such Redemption Notice and such Other Redemption Notices received by the Company during
such seven Business Day period.

     (15) VOTING RIGHTS. The Holder shall have no voting rights as the holder of this
Note, except as required by law, including, but not limited to, the Nevada Business Corporation
Act, and as expressly provided in this Note.

     (16) COVENANTS. So long as this Note is outstanding:

          (a) Rank. All payments due under this Note (a) shall rank pari passu with all Other
Notes, the August 2007 Notes, and the February 2008 Notes and (b) shall be senior to all other
Indebtedness of the Company and its Subsidiaries.

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          (b) Incurrence of Indebtedness. The Company shall not, and the Company shall not
permit any of its Subsidiaries to, directly or indirectly, incur or guarantee, assume or suffer to
exist any Indebtedness, other than the Indebtedness evidenced by this Note and the Other Notes and
other Permitted Indebtedness.

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

          (d) Restricted Payments. The Company shall not, and the Company shall not permit any
of its Subsidiaries to, directly or indirectly, redeem, defease, repurchase, repay or make any
payments in respect of, by the payment of cash or cash equivalents (in whole or in part, whether by
way of open market purchases, tender offers, private transactions or otherwise), all or any portion
of any Permitted Indebtedness (other than the Other Notes, the August 2007 Notes, and the February
2008 Notes), whether by way of payment in respect of principal of (or premium, if any) or interest
on, such Indebtedness if at the time such payment is due or is otherwise made or, after giving
effect to such payment, an event constituting, or that with the passage of time and without being
cured would constitute, an Event of Default has occurred and is continuing.

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

          (f) Use of Proceeds. The Company will use the proceeds from the sale of the Notes
substantially as set forth in Section 4(d) of the Securities Purchase Agreement.

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

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

     (19) TRANSFER. This Note and any shares of Common Stock issued upon conversion of
this Note may be offered, sold, assigned or transferred by the Holder without the consent of the
Company, subject only to the provisions of Section 2(f) of the Securities Purchase Agreement.

     (20) REISSUANCE OF THIS NOTE.

          (a) Transfer. If this Note is to be transferred, the Holder shall surrender this Note
to the Company, whereupon the Company will forthwith issue and deliver upon the order of the Holder
a new Note (in accordance with Section 20(d)), registered as the Holder may request, representing
the outstanding Principal being transferred by the Holder and, if less then the entire outstanding
Principal is being transferred, a new Note (in accordance with Section 20(d)) to the Holder
representing the outstanding Principal not being transferred. The Holder and any assignee, by
acceptance of this Note, acknowledge and agree that, by reason of the provisions of
Section 3(c)(iii) following conversion or redemption of any portion of this Note, the outstanding
Principal represented by this Note may be less than the Principal stated on the face of this Note.

          (b) Lost, Stolen or Mutilated Note. Upon receipt by the Company of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Note,
and, in the case of loss, theft or destruction, of any indemnification undertaking by the Holder to
the Company in customary form and, in the case of

- 16 -

 

mutilation, upon surrender and cancellation of this Note, the Company shall execute and deliver to
the Holder a new Note (in accordance with Section 20(d)) representing the outstanding Principal.

          (c) Note Exchangeable for Different Denominations. This Note is exchangeable, upon
the surrender hereof by the Holder at the principal office of the Company, for a new Note or Notes
(in accordance with Section 20(d) representing in the aggregate the outstanding Principal of this
Note, and each such new Note will represent such portion of such outstanding Principal as is
designated by the Holder at the time of such surrender.

          (d) Issuance of New Notes. Whenever the Company is required to issue a new Note
pursuant to the terms of this Note, such new Note (i) shall be of like tenor with this Note, (ii)
shall represent, as indicated on the face of such new Note, the Principal remaining outstanding (or
in the case of a new Note being issued pursuant to Section 20(a) or Section 20(c), the Principal
designated by the Holder which, when added to the principal represented by the other new Notes
issued in connection with such issuance, does not exceed the Principal remaining outstanding under
this Note immediately prior to such issuance of new Notes), (iii) shall have an issuance date, as
indicated on the face of such new Note, which is the same as the Issuance Date of this Note, (iv)
shall have the same rights and conditions as this Note, and (v) shall represent accrued and unpaid
Interest and Late Charges, if any, on the Principal and Interest of this Note, from the Issuance
Date.

     (21) REMEDIES, CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF.
The remedies provided in this Note shall be cumulative and in addition to all other remedies
available under this Note and any of the other Transaction Documents at law or in equity (including
a decree of specific performance and/or other injunctive relief), and nothing herein shall limit
the Holder’s right to pursue actual and consequential damages for any failure by the Company to
comply with the terms of this Note. Amounts set forth or provided for herein with respect to
payments, conversion and the like (and the computation thereof) shall be the amounts to be received
by the Holder and shall not, except as expressly provided herein, be subject to any other
obligation of the Company (or the performance thereof). The Company acknowledges that a breach by
it of its obligations hereunder will cause irreparable harm to the Holder and that the remedy at
law for any such breach may be inadequate. The Company therefore agrees that, in the event of any
such breach or threatened breach, the Holder shall be entitled, in addition to all other available
remedies, to an injunction restraining any breach, without the necessity of showing economic loss
and without any bond or other security being required.

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

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

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

     (25) DISPUTE RESOLUTION. In the case of a dispute as to the determination of (a) the
Closing Bid Price, the Closing Sale Price or the Weighted Average Price or (b) the arithmetic
calculation of the Conversion Rate or any Redemption Price, the Company shall submit the disputed
determinations or arithmetic calculations via facsimile within one (1) Business Day of receipt, or
deemed receipt, of the Conversion Notice or Redemption Notice or other event giving rise to such
dispute, as the case may be, to the Holder. If the Holder and the Company are unable to agree upon
such determination or calculation within one (1) Business Day of such disputed determination or
arithmetic calculation being submitted to the Holder, then the Company shall, within one (1)
Business Day submit

- 17 -

 

via facsimile (a) the disputed determination of the Closing Bid Price, the Closing Sale Price or
the Weighted Average Price to an independent, reputable investment bank selected by the Company and
approved by the Holder or (b) the disputed arithmetic calculation of the Conversion Rate or any
Redemption Price to the Company’s independent, outside accountant. The Company, at the Company’s
expense, shall cause the investment bank or the accountant, as the case may be, to perform the
determinations or calculations and notify the Company and the Holder of the results no later than
five (5) Business Days from the time it receives the disputed determinations or calculations. Such
investment bank’s or accountant’s determination or calculation, as the case may be, shall be
binding upon all parties absent demonstrable error.

     (26) NOTICES; PAYMENTS.

          (a) Notices. Whenever notice is required to be given under this Note, unless
otherwise provided herein, such notice shall be given in accordance with Section 10(f) of the
Securities Purchase Agreement. The Company shall provide the Holder with prompt written notice of
all actions taken pursuant to this Note, including in reasonable detail a description of such
action and the reason therefore. Without limiting the generality of the foregoing, the Company will
give written notice to the Holder (i) immediately upon any adjustment of the Conversion Price,
setting forth in reasonable detail, and certifying, the calculation of such adjustment and (ii) at
least twenty (20) days prior to the date on which the Company closes its books or takes a record
(A) with respect to any dividend or distribution upon the Common Stock, (B) with respect to any pro
rata subscription offer to holders of Common Stock or (C) for determining rights to vote with
respect to any Fundamental Transaction, dissolution or liquidation, provided in each case that such
information shall be made known to the public prior to or in conjunction with such notice being
provided to the Holder.

          (b) Payments. Whenever any payment of cash is to be made by the Company to any Person
pursuant to this Note, such payment shall be made in lawful money of the United States of America
by a check drawn on the account of the Company and sent via overnight courier service to such
Person at such address as previously provided to the Company in writing (which address, in the case
of each of the Purchasers, shall initially be as set forth on the Schedule of Buyers attached to
the Securities Purchase Agreement); provided that the Holder may elect to receive a payment of cash
via wire transfer of immediately available funds by providing the Company with prior written notice
setting out such request and the Holder’s wire transfer instructions. Whenever any amount
expressed to be due by the terms of this Note is due on any day which is not a Business Day, the
same shall instead be due on the next succeeding day which is a Business Day and, in the case of
any Interest Date which is not the date on which this Note is paid in full, the extension of the
due date thereof shall not be taken into account for purposes of determining the amount of Interest
due on such date. Any amount of Principal or other amounts due under the Transaction Documents,
other than Interest, which is not paid when due shall result in a late charge being incurred and
payable by the Company in an amount equal to interest on such amount at the rate of eighteen
percent (18%) per annum from the date such amount was due until the same is paid in full (“Late
Charge”).

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

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

     (29) GOVERNING LAW. This Note shall be construed and enforced in accordance with, and
all questions concerning the construction, validity, interpretation and performance of this Note
shall be governed by, the internal laws of the State of New York, without giving effect to any
choice of law or conflict of law provision or rule (whether of the State of New York or any other
jurisdictions) that would cause the application of the laws of any jurisdictions other than the
State of New York. The Company hereby irrevocably submits to the exclusive jurisdiction of the
state and federal courts sitting in The City of New York, Borough of Manhattan, for the
adjudication of any dispute hereunder or in connection herewith or with any transaction
contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in
any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of
any such court, that such suit, action or proceeding is brought in

- 18 -

 

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

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

             (a) “Amendment Agreement” means that certain Amendment and Exchange Agreement, dated as of
September 12, 2008, by and among the Company and Castlerigg Investment Partners, Ltd.
(“Castlerigg”), pursuant to which the Company (i) amended and restated the August 2007 Notes, and
(ii) amended and restated the February 2008 Notes.

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

             (b) “August 2007 Notes” means those certain senior secured convertible notes issued under the
August Securities Purchase Agreement, as subsequently amended and restated pursuant to the
Amendment Agreement.

             (c) “August Securities Purchase Agreement” means that certain Securities Purchase Agreement,
dated as of August 3, 2007, by and among the Company and the investors listed on the Schedule of
Buyers attached thereto.

             (d) “Available Redemption Amount” means on each of March 1, 2009 and March 1, 2010, if there
has been an Equity Conditions Failure and/or the arithmetic average of the Weighted Average Price
of the Common Stock for the five (5) consecutive Trading Days ending on such date is equal to or
less than 150% of the initial Conversion Price, subject to adjust as
provided herein (a “Pricing Failure”), an amount equal to one-third
of the original Principal amount of this Note on the Issuance Date.

             (e) “Average Market Price” means, for any given date, the lesser of (i) the arithmetic average
of the lowest Weighted Average Price of the Common Stock during the fifteen (15) consecutive
Trading Days ending on the Trading Day immediately prior to such given date (the “Measuring
Period”) and (ii) the arithmetic average of the lowest Weighted Average Price of the Common Stock
during any three (3) consecutive Trading Day period during the Measuring Period; provided, that all
such determinations shall be appropriately adjusted for any stock split, stock dividend, stock
combination or other similar transaction that proportionately decreases or increases the Common
Stock during such periods.

             (f) “Bloomberg” means Bloomberg Financial Markets.

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

             (h) “Calendar Quarter” means each of: the period beginning on and including January 1 and
ending

- 19 -

 

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

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

     (j) “Closing Bid Price” and “Closing Sale Price” means, for any security as of any date, the
last closing bid price and last closing trade price, respectively, for such security on the
Principal Market, as reported by Bloomberg, or, if the Principal Market begins to operate on an
extended hours basis and does not designate the closing bid price or the closing trade price, as
the case may be, then the last bid price or last trade price, respectively, of such security prior
to 4:00:00 p.m., New York Time, as reported by Bloomberg, or, if the Principal Market is not the
principal securities exchange or trading market for such security, the last closing bid price or
last trade price, respectively, of such security on the principal securities exchange or trading
market where such security is listed or traded as reported by Bloomberg, or if the foregoing do not
apply, the last closing bid price or last trade price, respectively, of such security in the
over-the-counter market on the electronic bulletin board for such security as reported by
Bloomberg, or, if no closing bid price or last trade price, respectively, is reported for such
security by Bloomberg, the average of the bid prices, or the ask prices, respectively, of any
market makers for such security as reported in the “pink sheets” by Pink Sheets LLC (formerly the
National Quotation Bureau, Inc.). If the Closing Bid Price or the Closing Sale Price cannot be
calculated for a security on a particular date on any of the foregoing bases, the Closing Bid Price
or the Closing Sale Price, as the case may be, of such security on such date shall be the fair
market value as mutually determined by the Company and the Holder. If the Company and the Holder
are unable to agree upon the fair market value of such security, then such dispute shall be
resolved pursuant to Section 25. All such determinations to be appropriately adjusted for any
stock dividend, stock split, stock combination or other similar transaction during the applicable
calculation period.

     (k) “Closing Date” shall have the meaning set forth in the Securities Purchase Agreement which
corresponds to the date this Note and the Other Notes were initially issued pursuant to the terms
of the Securities Purchase Agreement.

     (l) “Consolidated Net Interest Expense” means, for any applicable period, gross interest
expense of the Company and its Subsidiaries for such period less interest income for such period,
each determined on a consolidated basis and in accordance with GAAP.

     (m) “Consolidated Net Income” means, for any applicable period, the net income (loss) of the
Company and its Subsidiaries for such period, determined on a consolidated basis and in accordance
with GAAP, but excluding from the determination of Consolidated Net Income (without duplication)
(a) any extraordinary or non recurring gains or losses or gains or losses from dispositions, (b)
restructuring charges, (c) any tax refunds, net operating losses or other net tax benefits and (d)
effects of discontinued operations.

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

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

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     (p) “EBITDA” means, with respect to any Person and its Subsidiaries for any applicable Fiscal
Quarters, the Consolidated Net Income of such Person and its Subsidiaries as set forth in the
financial statements of the Company contained in the Form 10-Q or Form 10-K of the Company for the
applicable Fiscal Quarter, plus without duplication, the sum of the following amounts of
the Company and its Subsidiaries for such period to the extent deducted in determining Consolidated
Net Income of such Persons for such period: (i) Consolidated Net Interest Expense, (ii) income tax
expense, (iii) depreciation expense and (iv) amortization expense.

     (q) “Eligible Market” means the Principal Market, The New York Stock Exchange, Inc., the
American Stock Exchange, The NASDAQ Global Select Market, The NASDAQ Global Market or The NASDAQ
Capital Market, or any market that is a successor to any of the foregoing.

     (r) “Equity Conditions” means that each of the following conditions is satisfied: (i) on each
day during the period beginning six (6) month prior to the applicable date of determination and
ending on and including the applicable date of determination (the “Equity Conditions Measuring
Period”), all shares of Common Stock issuable upon conversion of the Notes and exercise of the
Warrants shall be eligible for sale pursuant to Rule 144 without restriction or limitation,
including without requirement to be subject to Rule 144(c)(1), and without the need for
registration under any applicable federal or state securities laws; (ii) on each day during the
Equity Conditions Measuring Period, the Common Stock is designated for quotation on the Principal
Market or any other Eligible Market and shall not have been suspended from trading on such exchange
or market (other than suspensions of not more than two (2) days and occurring prior to the
applicable date of determination due to business announcements by the Company) nor shall delisting
or suspension by such exchange or market been threatened or pending either (A) in writing by such
exchange or market or (B) by falling below the then effective minimum listing maintenance
requirements of such exchange or market; (iii) during the one (1) year period ending on and
including the date immediately preceding the applicable date of determination, the Company shall
have delivered shares of Common Stock upon conversion of the Notes and upon exercise of the
Warrants to the holders on a timely basis as set forth in Section 3(c)(ii) hereof (and analogous
provisions under the Other Notes) and Section 1(a) of the Warrants; (iv) any applicable shares of
Common Stock to be issued in connection with the event requiring determination may be issued in
full without violating (A) Section 3(d)(i) hereof, (B) Section 3(d)(ii) and (C) the rules or
regulations of the Principal Market or any applicable Eligible Market; (v) the Company shall not
have failed to timely make any payments within five (5) Business Days of when such payment is due
pursuant to any Transaction Document; (vi) during the Equity Conditions Measuring Period, there
shall not have occurred either (A) the public announcement of a pending, proposed or intended
Fundamental Transaction which has not been abandoned, terminated or consummated, or (B) an Event of
Default or (C) an event that with the passage of time or giving of notice would constitute an Event
of Default; (vii) the Company shall have no knowledge of any fact that would cause any shares of
Common Stock issuable upon conversion of the Notes and shares of Common Stock issuable upon
exercise of the Warrants not to be eligible for sale pursuant to Rule 144 without restriction or
limitation, including without the requirement to be subject to Rule 144(c)(1) and any applicable
state securities laws; (viii) the Company otherwise shall have been in compliance with and shall
not have breached any provision, covenant, representation or warranty of any Transaction Document
and (ix) if required by the terms of the Securities Purchase Agreement, the Company shall have
obtained the Stockholder Approval on or before the applicable Stockholder Meeting Deadline.

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

     (t) “Equity Value Redemption Premium” means for any Change of Control Notice or Event of
Default Notice, as applicable, delivered or required to be delivered in connection with a Change of
Control or Event of Default, as applicable, 150%.

- 21 -

 

     (u) “Excluded Securities” means any Common Stock issued or issuable: (i) in connection with
any Approved Stock Plan; (ii) upon conversion of the Notes or the exercise of the Warrants; (iii)
in connection with the payment of any Interest Shares on the Notes; and (iv) upon exercise of any
Options or Convertible Securities which are outstanding on the day immediately preceding the
Subscription Date and properly disclosed in the disclosure schedules attached to the Securities
Purchase Agreement, provided that the terms of such Options or Convertible Securities are not
amended, modified or changed on or after the Subscription Date.

     (v) “February 2008 Notes” means those certain senior secured convertible notes issued under
the February 2008 Securities Purchase Agreement, as subsequently amended and restated pursuant to
the Amendment Agreement.

     (w) “February 2008 Securities Purchase Agreement” means that certain Securities Purchase
Agreement, dated as of February 29, 2008, by and among the Company and the investors listed on the
Schedule of Buyers attached thereto.

     (x) “Fiscal Quarters” means each of the fiscal quarters adopted by the Company for financial
reporting purposes that correspond to the Company’s fiscal year that ends on December 31, or such
other fiscal quarter adopted by the Company for financial reporting purposes in accordance with
GAAP.

     (y) “Fundamental Transaction” means that the Company shall, directly or indirectly, in one or
more related transactions, (i) consolidate or merge with or into (whether or not the Company is the
surviving corporation) another Person or Persons, or (ii) sell, assign, transfer, convey or
otherwise dispose of all or substantially all of the properties or assets of the Company to another
Person, or (iii) allow another Person to make a purchase, tender or exchange offer that is accepted
by the holders of more than 50% of the outstanding shares of Voting Stock (not including any shares
of Voting Stock held by the Person or Persons making or party to, or associated or affiliated with
the Persons making or party to, such purchase, tender or exchange offer), or (iv) consummate a
stock purchase agreement or other business combination (including, without limitation, a
reorganization, recapitalization, spin-off or scheme of arrangement) with another Person whereby
such other Person acquires more than the 50% of the outstanding shares of Voting Stock (not
including any shares of Voting Stock held by the other Person or other Persons making or party to,
or associated or affiliated with the other Persons making or party to, such stock purchase
agreement or other business combination), or (v) reorganize, recapitalize or reclassify its Common
Stock or (vi) any “person” or “group” (as these terms are used for purposes of Sections 13(d) and
14(d) of the Exchange Act) is or shall become the “beneficial owner” (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of 50% of the aggregate Voting Stock of the
Company.

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

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

             (bb) “Indebtedness” of any Person means, without duplication (i) all indebtedness for borrowed
money, (ii) all obligations issued, undertaken or assumed as the deferred purchase price of
property or services, including (without limitation) “capital leases” in accordance with GAAP
(other than trade payables entered into in the ordinary course of business), (iii) all
reimbursement or payment obligations with respect to letters of credit, surety bonds and other
similar instruments, (iv) all obligations evidenced by notes, bonds, debentures or similar
instruments, including obligations so evidenced incurred in connection with the acquisition of
property, assets or businesses, (v) all indebtedness created or arising under any conditional sale
or other title retention agreement, or incurred as financing, in either case with respect to any
property or assets acquired with the proceeds of such indebtedness (even though the rights and
remedies of the seller or bank under such agreement in the event of default are limited to
repossession or sale of such property), (vi) all monetary obligations under any leasing or similar
arrangement which, in connection with GAAP, consistently applied for the periods covered thereby,
is classified as a capital lease, (vii) all indebtedness referred to in clauses (i) through (vi)
above secured by (or for which the holder of such Indebtedness has an existing right, contingent or
otherwise, to be secured by) any mortgage, lien, pledge, charge, security interest or other
encumbrance upon or in any property or assets (including accounts and contract

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rights) owned by any Person, even though the Person which owns such assets or property has not
assumed or become liable for the payment of such indebtedness, and (viii) all Contingent
Obligations in respect of indebtedness or obligations of others of the kinds referred to in clauses
(i) through (vii) above.

     (cc) “Interest Conversion Price” means, with respect to any Interest Date that price which
shall be the price computed as 90% of the Average Market Price immediately preceding the applicable
Interest Date or Share Delivery Date, as applicable (each, an “ Interest Measuring Period ”). All
such determinations to be appropriately adjusted for any stock split, stock dividend, stock
combination or other similar transaction that proportionately decreases or increases the Common
Stock during the applicable Interest Measuring Period.

     (dd) “Interest Notice Due Date” means the tenth (10th) Trading Day prior to the
applicable Interest Date.

     (ee) “Interest Rate” means, 10.00% per annum, subject to adjustment as set forth in Section 2
hereof.

     (ff) “Mandatory Conversion Volume Limitation” means 20% of the aggregate dollar trading volume
(as reported on Bloomberg) of the Common Stock on the Principal Market over the twenty (20)
consecutive Trading Day period immediately prior to the applicable Mandatory Conversion Notice
Date.

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

     (hh) “Optional Conversion Price” means, the lower of (i) the applicable Conversion Price and
(ii) that price which shall be computed as 85% of the Average Market Price ending on the Trading
Day immediately prior to the Optional Conversion/Redemption Date. All such determinations shall be
appropriately adjusted for any stock split, stock dividend, stock combination during or other
similar transaction that proportionately decreases or increases the price of the Common Stock
during the applicable period during which the Average Market Price is calculated.

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

     (jj) “Permitted Indebtedness” means (i) Indebtedness evidenced by this Note and the Other
Notes; (ii) Indebtedness evidenced by the February 2008 Notes or the August 2007 Notes;
(iii) Indebtedness described on Schedule 3(s) to the Securities Purchase Agreement;
(iv) Indebtedness incurred solely for the purpose of financing the acquisition or lease of any
Equipment (as defined in the Security Agreement) by the Company or any of its Subsidiaries,
including Capital Lease Obligations with no recourse other than to such Equipment; (v) Indebtedness
solely between the Company and/or one of its domestic Subsidiaries, on the one hand, and the
Company and/or one of its domestic Subsidiaries, on the other which Indebtedness is not secured by
any assets of the Company or any of its Subsidiaries, provided that (x) in each case a majority of
the equity of any such domestic Subsidiary is directly or indirectly owned by the Company, such
domestic Subsidiary is controlled by the Company and such domestic Subsidiary has executed a
guaranty in the form of the Guaranty and a security agreement in the form of the Security Agreement
and (y) any such loan shall be evidenced by an intercompany note that is pledged by the Company or
its Subsidiary, as applicable, as Collateral (as defined in the Security Agreement) pursuant to the
Security Agreement (as defined in the Securities Purchase Agreement); (vi) at any time after the
eight (8) month anniversary of the Issuance Date, other Indebtedness in an amount not to exceed
$250,000 at any one time outstanding; and (vii) renewals, extensions and refinancing of any
Indebtedness described in clauses (i) or (iv) of this subsection.

     (kk) “Permitted Liens” means (i) any Lien for taxes not yet due or delinquent or being
contested in good faith by appropriate proceedings for which adequate reserves have been
established in accordance with GAAP, (ii) any statutory Lien arising in the ordinary course of
business by operation of law with respect to a liability that is not yet due or delinquent, (iii)
any Lien created by operation of law, such as materialmen’s liens, mechanics’ liens

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and other similar liens, arising in the ordinary course of business with respect to a liability
that is not yet due or delinquent or that are being contested in good faith by appropriate
proceedings, (iv) Liens (A) upon or in any equipment (as defined in the Security Agreement)
acquired or held by the Company or any of its Subsidiaries to secure the purchase price of such
equipment or indebtedness incurred solely for the purpose of financing the acquisition or lease of
such equipment, or (B) existing on such equipment at the time of its acquisition, provided that the
Lien is confined solely to the property so acquired and improvements thereon, and the proceeds of
such equipment, (v) Liens incurred in connection with the extension, renewal or refinancing of the
indebtedness secured by Liens of the type described in clauses (i) and (iv) above, provided that
any extension, renewal or replacement Lien shall be limited to the property encumbered by the
existing Lien and the principal amount of the Indebtedness being extended, renewed or refinanced
does not increase, (vi) leases or subleases and licenses and sublicenses granted to others in the
ordinary course of the Company’s business, not interfering in any material respect with the
business of the Company and its Subsidiaries taken as a whole, (vii) Liens in favor of customs and
revenue authorities arising as a matter of law to secure payments of custom duties in connection
with the importation of goods, (viii) Liens arising from judgments, decrees or attachments in
circumstances not constituting an Event of Default under Section 4(a)(ix), (ix) Liens securing the
Company’s obligations under the Notes and (x) Liens securing the Company’s obligations under the
February 2008 Notes or the August 2007 Notes.

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

     (mm) “Principal Market” means the OTC Bulletin Board.

     (nn) “Redemption Notices” means, collectively, any Event of Default Redemption Notices, any
Change of Control Redemption Notices, and any Holder Optional Redemption Notices (if an Optional
Redemption has been elected) each of the foregoing, individually, a Redemption Notice.

     (oo) “Redemption Premium” means (i) in the case of the Events of Default described in Section
4(a)(i) — (v) and (viii) — (xi), 125% or (ii) in the case of the Events of Default described in
Section 4(a)(vi) — (vii), 100%.

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

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

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

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

     (tt) “Subscription
Date” means September 12, 2008.

     (uu) “Successor Conversion Price” means, (i) on or prior to the consummation of the Change of
Control, the lower of (A) the applicable Conversion Price and (B) that price which shall be
computed as 85% of the Average Market Price of the Common Stock of the Company immediately
preceding the consummation of the applicable Change of Control and (ii) after the consummation of
the Change of Control, 85% of the lesser of the Average Market Price of the Successor Entities
common stock on (A) the time of the consummation of the Change of Control and (B) the date the
Change of Control Redemption Notice is delivered by the applicable Holder. All such determinations
to be appropriately adjusted for any stock split, stock dividend, stock combination or other
similar transaction that proportionately decreases or increases the Successor’s common stock during
the applicable measuring period.

- 24 -

 

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

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

             (xx) “Units” means Stinger S-200 units.

             (yy) “Volume Limitation” means 20% of the aggregate dollar trading volume (as reported on
Bloomberg) of the Common Stock on the Principal Market over the twenty (20) consecutive Trading Day
period immediately prior to the applicable Interest Notice Date.

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

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

             (bbb) “Weighted Average Price” means, for any security as of any date, the dollar
volume-weighted average price for such security on the Principal Market during the period beginning
at 9:30:01 a.m., New York Time (or such other time as the Principal Market publicly announces is
the official open of trading), and ending at 4:00:00 p.m., New York Time (or such other time as the
Principal Market publicly announces is the official close of trading) as reported by Bloomberg
through its “Volume at Price” functions, or, if the foregoing does not apply, the dollar
volume-weighted average price of such security in the over-the-counter market on the electronic
bulletin board for such security during the period beginning at 9:30:01 a.m., New York Time (or
such other time as such market publicly announces is the official open of trading), and ending at
4:00:00 p.m., New York Time (or such other time as such market publicly announces is the official
close of trading) as reported by Bloomberg, or, if no dollar volume-weighted average price is
reported for such security by Bloomberg for such hours, the average of the highest closing bid
price and the lowest closing ask price of any of the market makers for such security as reported in
the “pink sheets” by Pink Sheets LLC (formerly the National Quotation Bureau, Inc.). If the
Weighted Average Price cannot be calculated for a security on a particular date on any of the
foregoing bases, the Weighted Average Price of such security on such date shall be the fair market
value as mutually determined by the Company and the Holder. If the Company and the Holder are
unable to agree upon the fair market value of such security, then such dispute shall be resolved
pursuant to Section 25. All such determinations to be appropriately adjusted for any stock
dividend, stock split, stock combination or other similar transaction during the applicable
calculation period.

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

- 25 -

 

allowed to presume that all matters relating to such notice do not constitute material, nonpublic
information relating to the Company or its Subsidiaries.

[Signature Page Follows]

- 26 -

 

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

	 	 	 	 	 
	 	

STINGER SYSTEMS, INC.

 	 
	 	By:  	

/s/ Robert F. Gruder
 	 
	 	 	Name:  	Robert Gruder  	 
	 	 	Title:  	President 	 
	 

- 27 -

 

SCHEDULE A

     This is the schedule referred to in that certain Senior Secured Convertible Note executed by
STINGER SYSTEMS, INC. and payable to the order of DEBT OPPORTUNITY FUND, LLLP or registered
assigns.

Advances

	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 

     The aggregate unpaid principal amount shown on this Schedule shall be rebuttable, presumptive
evidence of the principal amount owing and unpaid on this Note. The failure to record the date and
amount of any loan on this Schedule shall not, however, limit or otherwise affect the obligations
of STINGER SYSTEMS, INC. to pay the principal of and interest on this Note.

- 28 -

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