Document:

EXHIBIT 4.3

 

NEITHER THIS SECURITY NOR THE SECURITIES FOR WHICH
THIS SECURITY IS EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND
EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON
AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT
OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO,
THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO
THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY
ACCEPTABLE TO THE COMPANY.  THIS SECURITY
AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS SECURITY MAY BE PLEDGED
IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH
SECURITIES.

 

SERIES II COMMON STOCK PURCHASE WARRANT

 

ETELOS, INC.

 

	
  Warrant Shares:

  	
  Initial Exercise Date: September     ,
  2009

  

 

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

 

Section 1.                                            Definitions.  Capitalized terms used and not otherwise
defined herein shall have the meanings set forth in that certain Securities
Purchase Agreement (the “Purchase Agreement”), dated September     ,
2009, among the Company and the purchasers signatory thereto.

 

Section 2.                                            Exercise.

 

a)                                      Exercise of Warrant. 
Exercise of the purchase rights represented by this Warrant may be made,
in whole or in part, at any time or times on or after the Initial Exercise Date
and on or before the Termination Date by delivery to the Company (or such other
office or agency of the Company as it may designate by notice in writing to 

 

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the registered Holder at
the address of the Holder appearing on the books of the Company) of a duly
executed facsimile copy of the Notice of Exercise Form annexed hereto;
and, within three (3) Trading Days of the date said Notice of Exercise is
delivered to the Company, the Company shall have received payment of the
aggregate Exercise Price of the shares thereby purchased by wire transfer or
cashier’s check drawn on a United States bank or, if available, pursuant to the
cashless exercise procedure specified in Section 2(c) below.  Notwithstanding anything herein to the
contrary, the Holder shall not be required to physically surrender this Warrant
to the Company until the Holder has purchased all of the Warrant Shares
available hereunder and the Warrant has been exercised in full, in which case,
the Holder shall surrender this Warrant to the Company for cancellation within
three (3) Trading Days of the date the final Notice of Exercise is
delivered to the Company.  Partial
exercises of this Warrant resulting in purchases of a portion of the total
number of Warrant Shares available hereunder shall have the effect of lowering
the outstanding number of Warrant Shares purchasable hereunder in an amount
equal to the applicable number of Warrant Shares purchased.  The Holder and the Company shall maintain
records showing the number of Warrant Shares purchased and the date of such
purchases.  The Company shall deliver any
objection to any Notice of Exercise Form within 1 Business Day of receipt
of such notice.  In the event of any
dispute or discrepancy, the records of the Holder shall be controlling and
determinative in the absence of manifest error. The Holder
and any assignee, by acceptance of this Warrant, acknowledge and agree that, by
reason of the provisions of this paragraph, following the purchase of a portion
of the Warrant Shares hereunder, the number of Warrant Shares available for
purchase hereunder at any given time may be less than the amount stated on the
face hereof.

 

b)                                     Exercise Price. 
The exercise price per share of the Common Stock under this Warrant
shall be $0.01, subject to adjustment hereunder
(the “Exercise Price”).

 

c)                                      Cashless Exercise. 
If at any time after the issuance hereof, there is no effective
Registration Statement registering, or no current prospectus available for, the
resale of the Warrant Shares by the Holder, then this Warrant may also be
exercised, in whole or in part, at such time by means of a “cashless exercise”
in which the Holder shall be entitled to receive a certificate for the number
of Warrant Shares equal to the quotient obtained by dividing [(A-B) (X)] by
(A), where:

 

 (A) = the
VWAP on the Trading Day immediately preceding the date on which Holder elects
to exercise this Warrant by means of a “cashless exercise,” as set forth in the
applicable Notice of Exercise;

 

(B) = the Exercise Price of this Warrant, as
adjusted hereunder; and

 

(X) = the number of Warrant Shares that would be
issuable upon exercise of this Warrant in accordance with the terms of this
Warrant if such exercise were by means of a cash exercise rather than a cashless
exercise.

 

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Notwithstanding anything herein to the contrary, on
the Termination Date, this Warrant shall be automatically exercised via
cashless exercise pursuant to this Section 2(c).

 

d)                                     Mechanics of Exercise.

 

i.      Delivery of Certificates Upon Exercise. 
Certificates for shares purchased hereunder shall be transmitted by the
Transfer Agent to the Holder by crediting the account of the Holder’s prime
broker with the Depository Trust Company through its Deposit Withdrawal Agent
Commission (“DWAC”) system if the Company is then a participant in such
system and either (A) there is an effective Registration Statement
permitting the issuance of the Warrant Shares to or resale of the Warrant
Shares by the Holder or (B) the shares are eligible for resale by the
Holder without volume or manner-of-sale limitations pursuant to Rule 144,
and otherwise by physical delivery to the address specified by the Holder in
the Notice of Exercise by the date that is three (3) Trading Days after
the latest of (A) the delivery to the Company of the Notice of Exercise
Form, (B) surrender of this Warrant (if required), and (C) payment of
the aggregate Exercise Price as set forth above (including by cashless
exercise, if permitted) (such date, the “Warrant Share Delivery Date”).  This Warrant shall be deemed to have been
exercised on the first date on which all of the foregoing have been delivered
to the Company.  The Warrant Shares shall
be deemed to have been issued, and Holder or any other person so designated to
be named therein shall be deemed to have become a holder of record of such
shares for all purposes, as of the date the Warrant has been exercised, with
payment to the Company of the Exercise Price (or by cashless exercise, if
permitted) and all taxes required to be paid by the Holder, if any, pursuant to
Section 2(d)(vi) prior to the issuance of such shares, having been
paid.  If the Company fails for any
reason to deliver to the Holder certificates evidencing the Warrant Shares
subject to a Notice of Exercise by the Warrant Share Delivery Date, the Company
shall pay to the Holder, in cash, as liquidated damages and not as a penalty,
for each $1,000 of Warrant Shares subject to such exercise (based on the VWAP
of the Common Stock on the date of the applicable Notice of Exercise), $10 per
Trading Day (increasing to $20 per Trading Day on the fifth Trading Day after
such liquidated damages begin to accrue) for each Trading Day after such
Warrant Share Delivery Date until such certificates are delivered or Holder
rescinds such exercise.

 

ii.     Delivery of New Warrants Upon Exercise. 
If this Warrant shall have been exercised in part, the Company shall, at
the request of a Holder and upon surrender of this Warrant certificate, at the
time of delivery of the certificate or certificates representing Warrant
Shares, deliver to Holder a new Warrant evidencing the rights of Holder to
purchase the unpurchased Warrant Shares called for by this Warrant, 

 

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which new Warrant shall
in all other respects be identical with this Warrant.

 

iii.                        Rescission Rights. 
If the Company fails to cause the Transfer Agent to transmit to the
Holder a certificate or the certificates representing the Warrant Shares
pursuant to Section 2(d)(i) by the Warrant Share Delivery Date, then,
the Holder will have the right to rescind such exercise.

 

iv.                       Compensation for Buy-In on Failure to
Timely Deliver Certificates Upon Exercise.  In addition
to any other rights available to the Holder, if the Company fails to cause the
Transfer Agent to transmit to the Holder a certificate or the certificates
representing the Warrant Shares pursuant to an exercise on or before the
Warrant Share Delivery Date, and if after such date the Holder is required by
its broker to purchase (in an open market transaction or otherwise) or the
Holder’s brokerage firm otherwise purchases, shares of Common Stock to deliver
in satisfaction of a sale by the Holder of the Warrant Shares which the Holder
anticipated receiving upon such exercise (a “Buy-In”), then the Company
shall (A) pay in cash to the Holder the amount, if any, by which (x) the
Holder’s total purchase price (including brokerage commissions, if any) for the
shares of Common Stock so purchased exceeds (y) the amount obtained by
multiplying (1) the number of Warrant Shares that the Company was required
to deliver to the Holder in connection with the exercise at issue times (2) the
price at which the sell order giving rise to such purchase obligation was
executed, and (B) at the option of the Holder, either reinstate the
portion of the Warrant and equivalent number of Warrant Shares for which such
exercise was not honored (in which case such exercise shall be deemed
rescinded) or deliver to the Holder the number of shares of Common Stock that
would have been issued had the Company timely complied with its exercise and
delivery obligations hereunder.  For
example, if the Holder purchases Common Stock having a total purchase price of
$11,000 to cover a Buy-In with respect to an attempted exercise of shares of
Common Stock with an aggregate sale price giving rise to such purchase
obligation of $10,000, under clause (A) of the immediately preceding
sentence the Company shall be required to pay the Holder $1,000. The Holder
shall provide the Company written notice indicating the amounts payable to the
Holder in respect of the Buy-In and, upon request of the Company, evidence of
the amount of such loss.  Nothing herein
shall limit a Holder’s right to pursue any other remedies available to it
hereunder, at law or in equity including, without limitation, a decree of
specific performance and/or injunctive relief with respect to the Company’s
failure to timely deliver certificates representing shares of Common Stock upon
exercise of the Warrant as required pursuant to the terms hereof.

 

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v.                          No Fractional Shares or Scrip. 
No fractional shares or scrip representing fractional shares shall be
issued upon the exercise of this Warrant. 
As to any fraction of a share which the Holder would otherwise be
entitled to purchase upon such exercise, the Company shall, at its election,
either pay a cash adjustment in respect of such final fraction in an amount
equal to such fraction multiplied by the Exercise Price or round up to the next
whole share.

 

vi.                       Charges, Taxes and Expenses. 
Issuance of certificates for Warrant Shares shall be made without charge
to the Holder for any issue or transfer tax or other incidental expense in
respect of the issuance of such certificate, all of which taxes and expenses
shall be paid by the Company, and such certificates shall be issued in the name
of the Holder or in such name or names as may be directed by the Holder; provided,
however, that in the event certificates for Warrant Shares are to be
issued in a name other than the name of the Holder, this Warrant when
surrendered for exercise shall be accompanied by the Assignment Form attached
hereto duly executed by the Holder and the Company may require, as a condition
thereto, the payment of a sum sufficient to reimburse it for any transfer tax
incidental thereto.

 

vii.                    Closing of Books. 
The Company will not close its stockholder books or records in any
manner which prevents the timely exercise of this Warrant, pursuant to the
terms hereof.

 

e)                                      Holder’s Exercise Limitations. 
The Company shall not effect any exercise of this Warrant, and a Holder
shall not have the right to exercise any portion of this Warrant, pursuant to Section 2
or otherwise, to the extent that after giving effect to such issuance after
exercise as set forth on the applicable Notice of Exercise, the Holder
(together with the Holder’s Affiliates, and any other Persons acting as a group
together with the Holder or any of the Holder’s Affiliates), would beneficially
own in excess of the Beneficial Ownership Limitation (as defined below). 
For purposes of the foregoing sentence, the number of shares of Common Stock
beneficially owned by the Holder and its Affiliates shall include the number of
shares of Common Stock issuable upon exercise of this Warrant with respect to
which such determination is being made, but shall exclude the number of shares
of Common Stock which would be issuable upon (i) exercise of the remaining,
nonexercised portion of this Warrant beneficially owned by the Holder or any of
its Affiliates and (ii) exercise or conversion of the unexercised or
nonconverted portion of any other securities of the Company (including, without
limitation, any other Common Stock Equivalents) 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 2(e),
beneficial ownership shall be calculated in accordance with Section 13(d) of
the Exchange Act and the rules and regulations promulgated thereunder, it
being acknowledged by the Holder that the Company is not representing to the 

 

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Holder that such calculation is in compliance with Section 13(d) of
the Exchange Act and the Holder is solely responsible for any schedules
required to be filed in accordance therewith. 
To the extent that the limitation contained in this Section 2(e) applies,
the determination of whether this Warrant is exercisable (in relation to other
securities owned by the Holder together with any Affiliates) and of which
portion of this Warrant is exercisable shall be in the sole discretion of the
Holder, and the submission of a Notice of Exercise shall be deemed to be the
Holder’s determination of whether this Warrant is exercisable (in relation to
other securities owned by the Holder together with any Affiliates) and of which
portion of this Warrant is exercisable, in each case subject to the Beneficial
Ownership Limitation, and the Company shall have no obligation to verify or
confirm the accuracy of such determination.  
In addition, a determination as to any group status as contemplated
above shall be determined in accordance with Section 13(d) of the
Exchange Act and the rules and regulations promulgated thereunder.  For purposes of this Section 2(e), in
determining the number of outstanding shares of Common Stock, a Holder may rely
on the number of outstanding shares of Common Stock as reflected in (A) the
Company’s most recent periodic or annual report filed with the Commission, as
the case may be, (B) a more recent public announcement by the Company or (C) a
more recent written notice by the Company or the Transfer Agent setting forth
the number of shares of Common Stock outstanding.  Upon the written or
oral request of a Holder, the Company shall within two Trading Days 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 Warrant, by the Holder or its Affiliates
since the date as of which such number of outstanding shares of Common Stock
was reported.  The “Beneficial
Ownership Limitation” shall be 4.99% of the number of shares of the Common
Stock outstanding immediately after giving effect to the issuance of shares of
Common Stock issuable upon exercise of this Warrant.  The Holder, upon not less than 61 days’ prior
notice to the Company, may increase or decrease the Beneficial Ownership
Limitation provisions of this Section 2(e), provided that the Beneficial
Ownership Limitation in no event exceeds 9.99% of the number of shares of the
Common Stock outstanding immediately after giving effect to the issuance of
shares of Common Stock upon exercise of this Warrant held by the Holder and the
provisions of this Section 2(e) shall continue to apply.  Any such increase or decrease will not be effective until the 61st day after such notice is delivered to the
Company.  The provisions of this paragraph shall be
construed and implemented in a manner otherwise than in strict conformity with
the terms of this Section 2(e) to correct this paragraph (or any
portion hereof) which may be defective or inconsistent with the intended
Beneficial Ownership Limitation herein contained or to make changes or
supplements necessary or desirable to properly give effect to such limitation.
The limitations contained in this paragraph shall apply to a successor holder
of this Warrant.

 

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Section 3.                                            Certain Adjustments.

 

a)                                      Stock Dividends and Splits. If the Company, at any time while this
Warrant is outstanding: (i) pays a stock dividend or otherwise makes a
distribution or distributions on shares of its Common Stock or any other equity
or equity equivalent securities payable in shares of Common Stock (which, for
avoidance of doubt, shall not include any shares of Common Stock issued by the
Company upon exercise of this Warrant), (ii) subdivides outstanding shares
of Common Stock into a larger number of shares, (iii) combines (including
by way of reverse stock split) outstanding shares of Common Stock into a
smaller number of shares or (iv) issues by reclassification of shares of
the Common Stock any shares of capital stock of the Company, then in each case
the Exercise Price shall be multiplied by a fraction of which the numerator
shall be the number of shares of Common Stock (excluding treasury shares, if
any) outstanding immediately before such event and of which the denominator
shall be the number of shares of Common Stock outstanding immediately after
such event, and the number of shares issuable upon exercise of this Warrant
shall be proportionately adjusted such that the aggregate Exercise Price of
this Warrant shall remain unchanged.  Any
adjustment made pursuant to this Section 3(a) shall become effective
immediately after the record date for the determination of stockholders
entitled to receive such dividend or distribution and shall become effective
immediately after the effective date in the case of a subdivision, combination
or re-classification.

 

b)                                     [RESERVED]

 

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

 

d)                                     Pro Rata Distributions. 
If the Company, at any time while this Warrant is outstanding, shall
distribute to all holders of Common Stock (and not to the Holders) evidences of
its indebtedness or assets (including cash and cash dividends) or rights or
warrants to subscribe for or purchase any security other than the Common Stock
(which shall be subject to Section 3(b)), then in each such case the
Exercise Price shall be adjusted by multiplying the Exercise Price in effect
immediately prior to the record date fixed for determination of stockholders
entitled to receive such distribution by a fraction of which the denominator
shall be the VWAP determined as of the record date mentioned above, and of
which the numerator shall be such VWAP on such record date less the then 

 

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per share fair market
value at such record date of the portion of such assets or evidence of
indebtedness or rights or warrants so distributed applicable to one outstanding
share of the Common Stock as determined by the Board of Directors in good
faith.  In either case the adjustments
shall be described in a statement provided to the Holder of the portion of
assets or evidences of indebtedness so distributed or such subscription rights
applicable to one share of Common Stock. 
Such adjustment shall be made whenever any such distribution is made and
shall become effective immediately after the record date mentioned above.

 

e)                                      Fundamental Transaction. If, at any time while this Warrant is
outstanding, (i) the Company,
directly or indirectly, in one or more related transactions effects any merger or consolidation of
the Company with or into another Person, (ii) the Company, directly or indirectly, effects any sale, lease,
license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets
in one or a series of related transactions, (iii) any, direct or indirect,
purchase offer, tender offer or exchange offer (whether by the Company or
another Person) is completed pursuant to which holders of Common Stock are
permitted to sell, tender or exchange their shares for other securities, cash
or property and has been accepted by the holders of 50% or more of the
outstanding Common Stock, (iv) the Company,
directly or indirectly, in one or more related transactions effects any reclassification,
reorganization or recapitalization of the Common Stock or any compulsory share
exchange pursuant to which the Common Stock is effectively converted into or
exchanged for other securities, cash or property, (v) the Company, directly or indirectly, in one or more related transactions  consummates
a stock or share 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 50% of the
outstanding shares of Common Stock
(not including any shares of Common 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 or share purchase agreement or other
business combination) (each a “Fundamental Transaction”),
then, upon any subsequent exercise of
this Warrant, the Holder shall have the
right to receive, for each Warrant Share that would have been issuable upon
such exercise immediately prior to the occurrence of such Fundamental
Transaction, at the option of the Holder (without regard to any limitation in Section 2(e) on
the exercise of this Warrant), the number of
shares of Common Stock of the successor or acquiring corporation or of the
Company, if it is the surviving corporation, and any additional consideration (the
“Alternate Consideration”) receivable as
a result of such Fundamental Transaction by a holder of the number of shares of
Common Stock for which this Warrant is exercisable immediately prior to such
Fundamental Transaction (without regard to any limitation in Section 2(e) on
the exercise of this Warrant).  For purposes of any such exercise, the
determination of the Exercise Price shall be appropriately adjusted to apply to
such Alternate Consideration based on the amount of Alternate Consideration
issuable in respect of one share of Common Stock in such Fundamental
Transaction, and the Company shall apportion the Exercise Price among the
Alternate Consideration in a reasonable manner reflecting the relative value of
any different components of the Alternate Consideration.  If holders of Common Stock are given any
choice as to the securities, cash or property to be received in a Fundamental
Transaction, then the Holder shall be given the same choice as to the Alternate

 

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Consideration it receives
upon any exercise of this Warrant following such Fundamental Transaction.  Notwithstanding anything to the contrary, in
the event of a Fundamental Transaction that is (1) an all cash
transaction, (2) a “Rule 13e-3 transaction” as defined in Rule 13e-3
under the Exchange Act, or (3) a Fundamental Transaction involving a
person or entity not traded on a national securities exchange, the Company or
any Successor Entity (as defined below) shall, at the Holder’s option,
exercisable at any time concurrently with, or within 30 days after, the consummation
of the Fundamental Transaction, purchase this Warrant from the Holder by paying
to the Holder an amount of cash equal to the Black Scholes Value of the
remaining unexercised portion of this Warrant on the date of the consummation
of such Fundamental Transaction.  “Black Scholes Value” means the
value of this Warrant based on the Black and Scholes Option Pricing Model
obtained from the “OV” function on Bloomberg, L.P. (“Bloomberg”)
determined as of the day of consummation of the applicable Fundamental Transaction
for pricing purposes and reflecting (A) a risk-free interest rate
corresponding to the U.S. Treasury rate for a period equal to the time between
the date of the public announcement of the applicable Fundamental Transaction
and the Termination Date, (B) an expected volatility equal to the greater
of 100% and the 100 day volatility obtained from the HVT function on Bloomberg
as of the Trading Day immediately following the public announcement of the
applicable Fundamental Transaction, (C) the underlying price per share
used in such calculation shall be the sum of the price per share being offered
in cash, if any, plus the value of any non-cash consideration, if any, being
offered in such Fundamental Transaction and (D) a remaining option time
equal to the time between the date of the public announcement of the applicable
Fundamental Transaction and the Termination Date.  The Company shall cause any
successor entity in a Fundamental Transaction in which the Company is not the
survivor (the “Successor Entity”) to assume in writing all of the
obligations of the Company under this Warrant and the other Transaction
Documents in accordance with the provisions of this Section 3(e) pursuant
to written agreements in form and substance reasonably satisfactory to the
Holder and approved by the Holder (without unreasonable delay) prior to such
Fundamental Transaction and shall, at the option of the holder of this Warrant,
deliver to the Holder in exchange for this Warrant a security of the Successor
Entity evidenced by a written instrument substantially similar in form and
substance to this Warrant which is exercisable for a corresponding number of
shares of capital stock of such Successor Entity (or its parent entity)
equivalent to the shares of Common Stock acquirable and receivable upon
exercise of this Warrant (without regard to any limitations on the exercise of
this Warrant) prior to such Fundamental Transaction, and with an exercise price
which applies the exercise price hereunder to such shares of capital stock (but
taking into account the relative value of the shares of Common Stock pursuant
to such Fundamental Transaction and the value of such shares of capital stock,
such number of shares of capital stock and such exercise price being for the
purpose of protecting the economic value of this Warrant immediately prior to
the consummation of such Fundamental Transaction), and which is reasonably
satisfactory in form and substance to the Holder. Upon the occurrence of any
such 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 Warrant and the other Transaction Documents
referring to the “Company” shall refer instead to the Successor Entity), and 

 

9

 

may
exercise every right and power of the Company and shall assume all of the
obligations of the Company under this Warrant and the other Transaction
Documents with the same effect as if such Successor Entity had been named as
the Company herein.

 

f)                                        Calculations. All calculations under this Section 3
shall be made to the nearest cent or the nearest 1/100th of a share, as the
case may be. For purposes of this Section 3, the number of shares of Common
Stock deemed to be issued and outstanding as of a given date shall be the sum
of the number of shares of Common Stock (excluding treasury shares, if any)
issued and outstanding.

 

g)                                     Notice to Holder.

 

i.                  Adjustment to Exercise Price. Whenever the Exercise Price is adjusted
pursuant to any provision of this Section 3, the Company shall promptly
mail to the Holder a notice setting forth the Exercise Price after such
adjustment and setting forth a brief statement of the facts requiring such
adjustment. If the Company enters into a Variable Rate Transaction, despite the
prohibition thereon in the Purchase Agreement, the Company shall be deemed to
have issued Common Stock or Common Stock Equivalents at the lowest possible
conversion or exercise price at which such securities may be converted or
exercised.

 

ii.               Notice to Allow Exercise by Holder. If (A) the Company shall declare a
dividend (or any other distribution in whatever form) on the Common Stock, (B) the
Company shall declare a special nonrecurring cash dividend on or a redemption
of the Common Stock, (C) the Company shall authorize the granting to all
holders of the Common Stock rights or warrants to subscribe for or purchase any
shares of capital stock of any class or of any rights, (D) the approval of
any stockholders of the Company shall be required in connection with any
reclassification of the Common Stock, any consolidation or merger to which the
Company is a party, any sale or transfer of all or substantially all of the
assets of the Company, or any compulsory share exchange whereby the Common
Stock is converted into other securities, cash or property, or (E) the
Company shall authorize the voluntary or involuntary dissolution, liquidation
or winding up of the affairs of the Company, then, in each case, the Company
shall cause to be mailed to the Holder at its last address as it shall appear
upon the Warrant Register of the Company, at least 20 calendar days prior to
the applicable record or effective date hereinafter specified, a notice stating
(x) the date on which a record is to be taken for the purpose of such
dividend, distribution, redemption, rights or warrants, or if a record is not
to be taken, the date as of which the holders of the Common Stock of record to
be entitled to such dividend, distributions, redemption, rights or warrants are
to be determined or (y) the date on which such reclassification,
consolidation, merger, sale, transfer or share exchange is expected to become
effective or close, and the date as of which it is expected that holders of the
Common Stock of record shall be entitled to 

 

10

 

exchange their shares of
the Common Stock for securities, cash or other property deliverable upon such
reclassification, consolidation, merger, sale, transfer or share exchange;
provided that the failure to mail such notice or any defect therein or in the
mailing thereof shall not affect the validity of the corporate action required
to be specified in such notice.  To the
extent that any notice provided hereunder constitutes, or contains, material,
non-public information regarding the Company or any of the Subsidiaries, the
Company shall simultaneously file such notice with the Commission pursuant to a
Current Report on Form 8-K.  The
Holder shall remain entitled to exercise this Warrant during the period
commencing on the date of such notice to the effective date of the event
triggering such notice except as may otherwise be expressly set forth herein.

 

Section 4.                                            Transfer of
Warrant.

 

a)                                      Transferability. 
Subject to compliance with any applicable securities laws and the
conditions set forth in Section 4(d) hereof and to the provisions of Section 4.1
of the Purchase Agreement, this Warrant and all rights hereunder (including,
without limitation, any registration rights) are transferable, in whole or in
part, upon surrender of this Warrant at the principal office of the Company or
its designated agent, together with a written assignment of this Warrant
substantially in the form attached hereto duly executed by the Holder or its
agent or attorney and funds sufficient to pay any transfer taxes payable upon
the making of such transfer.  Upon such
surrender and, if required, such payment, the Company shall execute and deliver
a new Warrant or Warrants in the name of the assignee or assignees, as
applicable, and in the denomination or denominations specified in such
instrument of assignment, and shall issue to the assignor a new Warrant
evidencing the portion of this Warrant not so assigned, and this Warrant shall
promptly be cancelled.  The Warrant, if
properly assigned in accordance herewith, may be exercised by a new holder for
the purchase of Warrant Shares without having a new Warrant issued.

 

b)                                     New Warrants. This Warrant may be divided or combined
with other Warrants upon presentation hereof at the aforesaid office of the
Company, together with a written notice specifying the names and denominations
in which new Warrants are to be issued, signed by the Holder or its agent or
attorney.  Subject to compliance with Section 4(a),
as to any transfer which may be involved in such division or combination, the
Company shall execute and deliver a new Warrant or Warrants in exchange for the
Warrant or Warrants to be divided or combined in accordance with such notice.
All Warrants issued on transfers or exchanges shall be dated the original Issue
Date and shall be identical with this Warrant except as to the number of
Warrant Shares issuable pursuant thereto.

 

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

 

11

 

exercise hereof or any
distribution to the Holder, and for all other purposes, absent actual notice to
the contrary.

 

d)                                     Transfer Restrictions. If, at the time of the surrender of
this Warrant in connection with any transfer of this Warrant, the transfer of
this Warrant shall not be either (i) registered pursuant to an effective
registration statement under the Securities Act and under applicable state
securities or blue sky laws or (ii) eligible for resale without volume or
manner-of-sale restrictions or current public information requirements pursuant
to Rule 144, the Company may require, as a condition of allowing such
transfer, that the Holder or transferee of this Warrant, as the case may be,
comply with the provisions of Section 5.7 of the Purchase Agreement.

 

e)                                      Representation by the Holder. 
The Holder, by the acceptance hereof, represents and warrants that it is
acquiring this Warrant and, upon any exercise hereof, will acquire the Warrant
Shares issuable upon such exercise, for its own account and not with a view to
or for distributing or reselling such Warrant Shares or any part thereof in
violation of the Securities Act or any applicable state securities law, except
pursuant to sales registered or exempted under the Securities Act.

 

Section 5.                                            Miscellaneous.

 

a)                                      No Rights as Stockholder Until Exercise. 
This Warrant does not entitle the Holder to any voting rights, dividends
or other rights as a stockholder of the Company prior to the exercise hereof as
set forth in Section 2(d)(i).

 

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

 

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

 

d)                                     Authorized Shares.

 

The Company covenants that, during the period the Warrant is
outstanding, it will reserve from its authorized and unissued Common Stock a
sufficient number of shares to provide for the issuance of the Warrant Shares
upon the exercise of any purchase rights under this Warrant.  The Company further covenants that its
issuance of this Warrant shall constitute full authority to its officers who
are charged with the duty of executing stock certificates to 

 

12

 

execute and issue the necessary certificates for the
Warrant Shares upon the exercise of the purchase rights under this
Warrant.  The Company will take all such
reasonable action as may be necessary to assure that such Warrant Shares may be
issued as provided herein without violation of any applicable law or
regulation, or of any requirements of the Trading Market upon which the Common
Stock may be listed.  The Company
covenants that all Warrant Shares which may be issued upon the exercise of the
purchase rights represented by this Warrant will, upon exercise of the purchase
rights represented by this Warrant and payment for such Warrant Shares in
accordance herewith, be duly authorized, validly issued, fully paid and
nonassessable and free from all taxes, liens and charges created by the Company
in respect of the issue thereof (other than taxes in respect of any transfer
occurring contemporaneously with such issue).

 

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

 

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

 

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

 

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

 

13

 

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

 

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

 

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

 

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

 

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

 

l)                                         Amendment.  This Warrant
may be modified or amended or the provisions hereof waived with the written
consent of the Company and Holders holding Series II Warrants at least
equal to 67% of the Warrant Shares issuable upon exercise of all then
outstanding Series II Warrants.

 

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

 

14

 

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

 

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

 

(Signature Pages Follow)

 

15

 

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

 

 

	
   

  	
  ETELOS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name: 

  
	
   

  	
   

  	
  Title:

  

 

16

 

NOTICE OF EXERCISE

 

TO:                            ETELOS, INC.

 

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

 

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

 

o   in lawful money of the
United States; or

 

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

 

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

 

                                                   

 

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

 

                                                                      

 

                                                                      

 

                                                                      

 

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

 

[SIGNATURE OF HOLDER]

 

	
  Name of
  Investing Entity:

  	
   

  	
   

  	
   

  
	
  Signature
  of Authorized Signatory of Investing Entity:

  	
   

  
	
  Name of
  Authorized Signatory:

  	
   

  	
   

  
	
  Title of
  Authorized Signatory:

  	
   

  	
   

  
	
  Date:

  	
   

  	
   

  	
   

  
						

 

 

ASSIGNMENT FORM

 

(To assign the foregoing warrant, execute

this form and supply required information. 

Do not use this form to exercise the warrant.)

 

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

 

	
   

  	
  whose address is

  
	
   

  	
   

  
	
   

  	
   

  	
  .

  
	
   

  	
   

  	
   

  
	
   

  	
  Dated:

  	
                

  	
  ,

  	
   

  	
   

  
						

 

	
  Holder’s
  Signature: 

  	
   

  
	
   

  	
   

  
	
  Holder’s
  Address: 

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  Signature
  Guaranteed:

  	
   

  	
   

  	
   

  
				

 

NOTE:  The signature to this
Assignment Form must correspond with the name as it appears on the face of
the Warrant, without alteration or enlargement or any change whatsoever, and
must be guaranteed by a bank or trust company. 
Officers of corporations and those acting in a fiduciary or other
representative capacity should file proper evidence of authority to assign the
foregoing Warrant.Exhibit
10.1

 

SECURITIES PURCHASE AGREEMENT

 

This Securities Purchase
Agreement (this “Agreement”) is dated as of September 29, 2009,
between Etelos, Inc., a Delaware corporation (the “Company”), and
each purchaser identified on the signature pages hereto (each, including
its successors and assigns, a “Purchaser” and collectively, the “Purchasers”).

 

WHEREAS, subject to the
terms and conditions set forth in this Agreement and pursuant to Section 4(2) of
the Securities Act of 1933, as amended (the “Securities Act”), and Rule 506
promulgated thereunder, the Company desires to issue and sell to each
Purchaser, and each Purchaser, severally and not jointly, desires to purchase
from the Company, securities of the Company as more fully described in this
Agreement.

 

NOW, THEREFORE, IN
CONSIDERATION of the mutual covenants contained in this Agreement, and for
other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the Company and each Purchaser agree as follows:

 

ARTICLE I.

DEFINITIONS

 

1.1           Definitions.  In addition to the terms defined elsewhere in
this Agreement: (a) capitalized terms that are not otherwise defined
herein have the meanings given to such terms in the Debentures (as defined
herein), and (b) the following terms have the meanings set forth in this Section 1.1:

 

“Acquiring
Person” shall have the meaning ascribed to such term in Section 4.7.

 

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

 

“Affiliate”
means any Person that, directly or indirectly through one or more
intermediaries, controls or is controlled by or is under common control with a
Person, as such terms are used in and construed under Rule 405 under the
Securities Act.

 

“Board
of Directors” means the board of directors of the Company.

 

“Business
Day” means any day except any Saturday, any Sunday, any day which is a
federal legal holiday in the United States or any day on which banking
institutions in the State of New York are authorized or required by law or
other governmental action to close.

 

“Closings”
shall mean the First Closing and the Second Closing.

 

“Closing
Statement” means the Closing Statement in the form on Annex A
attached hereto.

 

“Commission”
means the United States Securities and Exchange Commission.

 

1

 

“Common
Stock” means the common stock of the Company, par value $0.01 per share,
and any other class of securities into which such securities may hereafter be
reclassified or changed.

 

“Common
Stock Equivalents” means any securities of the Company or the Subsidiaries
which would entitle the holder thereof to acquire at any time Common Stock,
including, without limitation, any debt, preferred stock, rights, options,
warrants or other instrument that is at any time convertible into or
exercisable or exchangeable for, or otherwise entitles the holder thereof to
receive, Common Stock.

 

“Company
Counsel” means Sheppard, Mullin, Richter & Hampton LLP, with
offices located at 12275 El Camino Real, Suite 200, San Diego, California
92130.

 

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

 

“Debentures”
means the 10% Senior Secured Convertible Debentures due, subject to the terms
therein, two (2) years from the date of the First Closing, issued by the
Company to the Purchasers hereunder, in the form of Exhibit A
attached hereto.

 

“Disclosure
Schedules” shall have the meaning ascribed to such term in Section 3.1.

 

“Effective
Date” means the earlier of the date that (a) all of the Shares and
Underlying Shares have been registered for resale by the holders thereof
pursuant to a registration statement(s) declared effective by the
Commission and (b) all of the Shares and Underlying Shares have been sold
pursuant to Rule 144 or may be sold pursuant to Rule 144 without the
requirement for the Company to be in compliance with the current public
information requirements of Rule 144 and without volume or manner-of-sale
restrictions.

 

“Evaluation
Date” shall have the meaning ascribed to such term in Section 3.1(r).

 

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

 

“Exempt Issuance” means the issuance of (a) shares of
Common Stock or options to employees, officers or directors of the Company
pursuant to any stock or option plan duly adopted for such purpose, by a
majority of the non-employee members of the Board of Directors or a majority of
the members of a committee of non-employee directors established for such
purpose, (b) securities upon the exercise or exchange of or conversion of
any Securities issued hereunder and/or other securities exercisable or
exchangeable for or convertible into shares of Common Stock issued and
outstanding on the date of this Agreement, provided that such securities have
not been amended since the date of this Agreement to increase the number of
such securities or to decrease the exercise price, exchange price or conversion
price of such securities, and (c) securities 

 

2

 

issued pursuant to acquisitions or strategic transactions approved by a
majority of the disinterested directors of the Company, provided that any such
issuance shall only be to a Person (or to the equityholders of a Person) which
is, itself or through its subsidiaries, an operating company or an asset in a
business synergistic with the business of the Company and shall provide to the
Company additional benefits in addition to the investment of funds, but shall
not include a transaction in which the Company is issuing securities primarily
for the purpose of raising capital or to an entity whose primary business is
investing in securities.

 

“First Closing” means the closing of the purchase and sale of
the Securities pursuant to Section 2.1(a).

 

“First Closing Date” means the Trading Day on which all of the
Transaction Documents have been executed and delivered by the applicable
parties thereto pursuant to Section 2.2(a) and Section 2.2(b),
and all conditions precedent to (i) the Purchasers’ obligation to pay the
Subscription Amount as of the First Closing and (ii) the Company’s
obligations to deliver the Securities as of the First Closing, in each case,
have been satisfied or waived.

 

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

 

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

 

“Intellectual
Property Rights” shall have the meaning ascribed to such term in Section 3.1(o).

 

“Legend
Removal Date” shall have the meaning ascribed to such term in Section 4.1(c).

 

“Liens”
means a lien, charge, security interest, encumbrance, right of first refusal,
preemptive right or other restriction.

 

“Material
Adverse Effect” shall have the meaning assigned to such term in Section 3.1(b).

 

“Material
Permits” shall have the meaning ascribed to such term in Section 3.1(m).

 

“Maximum
Rate” shall have the meaning ascribed to such term in Section 5.17.

 

“Participation
Maximum” shall have the meaning ascribed to such term in Section 4.12(a).

 

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

 

3

 

“Pre-Notice”
shall have the meaning ascribed to such term in Section 4.12(b).

 

“Pro
Rata Portion” shall have the meaning ascribed to such term in Section 4.12(e).

 

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

 

“Public
Information Failure” shall have the meaning ascribed to such term in Section 4.3(b).

 

“Public
Information Failure Payments” shall have the meaning ascribed to such term
in Section 4.3(b).

 

“Purchaser
Party” shall have the meaning ascribed to such term in Section 4.10.

 

“Registration
Statement” means a registration statement filed, registering the resale, by
the Purchasers, of all of the Shares and Underlying Shares.

 

“Required
Approvals” shall have the meaning ascribed to such term in Section 3.1(e).

 

“Required
Minimum” means, as of any date, the maximum aggregate number of shares of
Common Stock then issued or potentially issuable in the future pursuant to the
Transaction Documents, including any Underlying Shares issuable upon exercise
in full of all Warrants or conversion in full of all Debentures, ignoring any
conversion or exercise limits set forth therein, and assuming that the
Conversion Price is at all times on and after the date of determination 75% of
the then Conversion Price on the Trading Day immediately prior to the date of
determination.

 

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

 

“Rule 424”
means Rule 424 promulgated by the Commission pursuant to the Securities
Act, as such Rule may be amended or interpreted from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same purpose and effect as such Rule.

 

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

 

“Second
Closing” means the closing of the purchase and sale of the Securities
pursuant to Section 2.1(b).

 

4

 

“Second
Closing Notice” shall have the meaning ascribed to such term in Section 2.1(b).

 

“Second
Closing Date” means the date of the Second Closing.

 

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

 

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

 

“Series I
Warrant” shall mean the Common Stock purchase warrants, delivered to the
Purchasers at each Closing in accordance with Sections 2.2(a)(iv) which
shall be exercisable immediately and have a term of exercise equal to five (5) years,
in the form of Exhibit C-I attached hereto.

 

“Series II
Warrant” shall mean the Common Stock purchase warrants delivered to the
Purchasers at each Closing in accordance with Section 2.2(a)(v) which
shall be exercisable immediately and have a term of exercise equal to seven (7) years,
in the form of Exhibit C-II attached hereto.

 

“Security Agreement” means the Security Agreement, dated the
date hereof, among the Company and the Purchasers, in the form of Exhibit D
attached hereto.

 

“Security
Documents” shall mean the Security Agreement, the Subsidiary Guarantees and
any other documents and filing required thereunder in order to grant the
Purchasers a first priority security interest in the assets of the Company and
the Subsidiaries as provided in the Security Agreement, including all UCC-1
filing receipts.

 

“Shares”
means the shares of Common Stock issued or issuable to each Purchaser pursuant
to this Agreement.

 

“Short Sales” means all “short sales”
as defined in Rule 200 of Regulation SHO under the Exchange Act (but shall
not be deemed to include the location and/or reservation of borrowable shares
of Common Stock).

 

“Subscription
Amount” means, as to each Purchaser, the aggregate amount to be paid for
Debentures and Warrants purchased at the First and Second Closing and as
specified below such Purchaser’s name on the signature page of this
Agreement and next to the heading “Subscription Amount,” in United States
dollars and in either (x) immediately available funds or (y) through
the cancellation of indebtedness as described in Section 2.1 below.

 

“Subsequent
Financing” shall have the meaning ascribed to such term in Section 4.12(a).

 

5

 

“Subsequent
Financing Notice” shall have the meaning ascribed to such term in Section 4.12(b).

 

“Subsidiary”
means any subsidiary of the Company as set forth on Schedule 3.1(a) and
shall, where applicable, also include any direct or indirect subsidiary of the
Company formed or acquired after the date hereof.

 

“Subsidiary
Guarantee” means the Subsidiary Guarantee, dated the date hereof, by each
Subsidiary in favor of the Purchasers, in the form of Exhibit E
attached hereto.

 

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

 

“Trading
Market” means any of the following markets or exchanges on which the Common
Stock is listed or quoted for trading on the date in question: the NYSE AMEX,
the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select
Market, the New York Stock Exchange or the OTC Bulletin Board (or any
successors to any of the foregoing).

 

“Transaction
Documents” means this Agreement, the Debentures, the Warrants, the Shares,
the Security Agreement, the Subsidiary Guarantee, the subordination agreements,
all exhibits and schedules thereto and hereto and any other documents or
agreements executed in connection with the transactions contemplated hereunder.

 

“Transfer
Agent” means Mellon Investor Services LLC, the current transfer agent of
the Company, with a mailing address of P.O. Box 358016, Pittsburgh,
Pennsylvania 15252, and any successor transfer agent of the Company.

 

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

 

“Variable
Rate Transaction” shall have the meaning ascribed to such term in Section 4.13(b).

 

“VWAP”
means, for any date, the price determined by the first of the following clauses
that applies: (a) if the Common Stock is then listed or quoted on a
Trading Market, the daily volume weighted average price of the Common Stock for
such date (or the nearest preceding date) on the Trading Market on which the
Common Stock is then listed or quoted as reported by Bloomberg L.P. (based on a
Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New
York City time)), (b) if the OTC Bulletin Board is not a Trading Market,
the volume weighted average price of the Common Stock for such date (or the
nearest preceding date) on the OTC Bulletin Board, (c) if the Common Stock
is not then listed or quoted for trading on the OTC Bulletin Board and if
prices for the Common Stock are then reported in the “Pink Sheets” published by
Pink OTC Markets, Inc. (or a similar organization or agency succeeding to
its functions of reporting prices), the most recent bid price per share of the
Common Stock so reported, or (d) in all other cases, the fair market value
of a share of Common Stock as determined 

 

6

 

by an independent appraiser
selected in good faith by the Purchasers of a majority in interest of the
Securities then outstanding and reasonably acceptable to the Company, the fees
and expenses of which shall be paid by the Company.

 

“Warrants”
means, collectively, Series I Warrants and Series II Warrants.

 

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

 

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

 

ARTICLE II.

PURCHASE AND SALE

 

2.1           Closings.

 

(a)   First Closing. On the First
Closing Date, upon the terms and subject to the conditions set forth herein,
substantially concurrent with the execution and delivery of this Agreement by
the parties hereto, the Company agrees to sell, and the Purchasers, severally
and not jointly, agree to purchase, up to an aggregate of $2,000,000 in
principal amount of the Debentures.  Each
Purchaser shall deliver to the Company via wire transfer or a certified check
of immediately available funds equal to such Purchaser’s Subscription Amount as
set forth on the signature page hereto executed by such Purchaser, and the
Company shall deliver to each Purchaser its respective Debenture, Warrants and
Shares, as determined pursuant to Section 2.2(a), and the Company and each
Purchaser shall deliver the other items set forth in Section 2.2
deliverable at the First Closing. 
Notwithstanding the foregoing, the Purchasers listed on Schedule 2.1
hereto shall be permitted to pay all or a portion of their Subscription Amount
for the First Closing through the cancellation of indebtedness (plus accrued
but unpaid interest thereon) owed to such Purchasers by the Company as
evidenced by certain promissory notes described on Schedule 2.1.  Upon satisfaction of the covenants and
conditions set forth in Sections 2.2 and 2.3, the First Closing shall occur at
the offices of WS or such other location as the parties shall mutually agree.

 

(b)   Second Closing.  On the Second Closing Date, upon the terms
and subject to the conditions set forth herein, the Company agrees to sell, and
the Purchasers, severally and not jointly, agree to purchase, up to an
aggregate of $1,000,000 in principal amount of the Debentures.  Upon the sole determination by the Company
for a Second Closing at any time after December 15, 2009 and before January 15,
2010, the Company shall deliver written notice to each Purchaser of the Second
Closing (“Second Closing Notice”). Upon satisfaction of the covenants
and conditions set forth in Sections 2.2 and 2.3, the Second Closing shall
occur at the offices of WS or such other location as the parties shall mutually
agree within 10 Trading Days from the date of the Second Closing Notice (but
prior to January 15, 2010).

 

7

 

2.2           Deliveries.

 

(a)           On or prior to each Closing
Date (except as noted), the Company shall deliver or cause to be delivered to
each Purchaser the following:

 

(i)            as to the First Closing
only, this Agreement duly executed by the Company;

 

(ii)           a legal opinion of Company
Counsel, substantially in the form of Exhibit B attached hereto;

 

(iii)          a Debenture with a principal
amount equal to such Purchaser’s Subscription Amount as to the applicable
Closing, registered in the name of such Purchaser;

 

(iv)          as to the First Closing
only, a Series I Warrant registered in the name of such Purchaser to
purchase up to a number of shares of Common Stock equal to 50% of such
Purchaser’s aggregate Subscription Amount hereunder divided by $0.50, with an
exercise price equal to $0.60, subject to adjustment therein;

 

(v)           as to the First Closing
only, with respect to each Purchaser listed on Schedule 2.2(a)(v), a Series II
Warrant registered in the name of such Purchaser to purchase up to a number of
shares of Common Stock equal to such Purchaser’s aggregate Subscription Amount
hereunder, with an exercise price equal to $0.01;

 

(vi)          as to the First Closing
only, with respect to each Purchaser not listed on Schedule 2.2(a)(v), a
copy of the irrevocable instructions to the Transfer Agent instructing the
Transfer Agent to deliver, on an expedited basis, a certificate evidencing a
number of Shares equal to such Purchaser’s aggregate Subscription Amount
hereunder; and

 

(vii)         as to the First Closing, the
Security Agreement, duly executed by the Company and each Subsidiary, along
with all of the Security Documents, including the Subsidiary Guarantee, duly
executed by the parties thereto.

 

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

 

(i)            as to the First Closing
only, this Agreement duly executed by such Purchaser;

 

(ii)           with respect to Subscription
Amounts paid in cash, such Purchaser’s Subscription Amount as to the applicable
Closing by wire transfer to the account as specified in writing by the Company;
and

 

8

 

(iii)          as to the First Closing
only, the Security Agreement duly executed by such Purchaser.

 

2.3           Closing Conditions.

 

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

 

(i)            the accuracy in all material
respects on the applicable Closing of the representations and warranties of the
Purchasers contained herein (unless as of a
specific date therein);

 

(ii)           all obligations, covenants
and agreements of each Purchaser required to be performed at or prior to the
applicable Closing shall have been performed (); and

 

(iii)          the delivery by each
Purchaser of the items set forth in Section 2.2(b) of this Agreement,
as applicable.

 

(b)             The respective
obligations of the Purchasers hereunder in connection with each Closing are
subject to the following conditions being met:

 

(i)            the accuracy in all material
respects when made and on the applicable Closing of the representations and
warranties of the Company contained herein (unless
as of a specific date therein) (and the Company shall have delivered the
Purchasers an officer’s certificate with respect thereto and a bring-down of
the Disclosure Schedules (with respect to the Second Closing);

 

(ii)           all obligations, covenants
and agreements of the Company required to be performed at or prior to the
applicable Closing shall have been performed (and the Company shall have
delivered the Purchaser’s an officer’s certificate thereto);

 

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

 

(iv)          the
delivery of subordination agreements, in form and substance acceptable to the
Purchasers (the “Subordination Agreements”), duly executed by the
Company, its Subsidiaries and all debt holders of the Company other than the
Purchasers;

 

(v)           as to the
Second Closing, such Closing shall occur on or before January 15, 2010;

 

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

 

9

 

(vii)         from the date hereof to the
applicable Closing, trading in the Common Stock shall not have been suspended
by the Commission or the Company’s principal Trading Market (except for any
suspension of trading of limited duration agreed to by the Company, which
suspension shall be terminated prior to the applicable Closing), and, at any
time prior to the applicable Closing, trading in securities generally as
reported by Bloomberg L.P. shall not have been suspended or limited, or minimum
prices shall not have been established on securities whose trades are reported
by such service, or on any Trading Market, nor shall a banking moratorium have
been declared either by the United States or New York State authorities nor
shall there have occurred any material outbreak or escalation of hostilities or
other national or international calamity of such magnitude in its effect on, or
any material adverse change in, any financial market which, in each case, in
the reasonable judgment of each Purchaser, makes it impracticable or
inadvisable to purchase the Securities at the applicable Closing.

 

ARTICLE III.

REPRESENTATIONS AND WARRANTIES

 

3.1           Representations
and Warranties of the Company.  Except as set forth in the Disclosure
Schedules, which Disclosure Schedules shall be deemed a part hereof and shall
qualify any representation or otherwise made herein to the extent of the
disclosure contained in the corresponding section of the Disclosure Schedules,
the Company hereby makes the following representations and warranties to each
Purchaser:

 

(a)           Subsidiaries.  All of the direct and indirect subsidiaries
of the Company are set forth on Schedule 3.1(a).  The Company owns, directly or indirectly, all
of the capital stock or other equity interests of each Subsidiary free and
clear of any Liens, and all of the issued and outstanding shares of capital
stock of each Subsidiary are validly issued and are fully paid, non-assessable
and free of preemptive and similar rights to subscribe for or purchase
securities.  If the Company has no
subsidiaries, all other references to the Subsidiaries or any of them in the
Transaction Documents shall be disregarded.

 

(b)           Organization
and Qualification.  The Company
and each of the Subsidiaries is an entity duly incorporated or otherwise
organized, validly existing and in good standing under the laws of the jurisdiction
of its incorporation or organization, with the requisite power and authority to
own and use its properties and assets and to carry on its business as currently
conducted.  Neither the Company nor any
Subsidiary is in violation nor default of any of the provisions of its
respective certificate or articles of incorporation, bylaws or other
organizational or charter documents. 
Each of the Company and the Subsidiaries is duly qualified to conduct
business and is in good standing as a foreign corporation or other entity in
each jurisdiction in which the nature of the business conducted or property
owned by it makes such qualification necessary, except where the failure to be
so qualified or in good standing, as the case may be, could not have or reasonably
be expected to result in: (i) a material adverse effect on the 

 

10

 

legality, validity or enforceability of any Transaction Document, (ii) a
material adverse effect on the results of operations, assets, business or
condition (financial or otherwise) of the Company and the Subsidiaries, taken
as a whole, or (iii) a material adverse effect on the Company’s ability to
perform in any material respect on a timely basis its obligations under any
Transaction Document (any of (i), (ii) or (iii), a “Material Adverse
Effect”) and no Proceeding has been instituted in any such jurisdiction
revoking, limiting or curtailing or seeking to revoke, limit or curtail such
power and authority or qualification.

 

(c)           Authorization;
Enforcement.  The Company
has the requisite corporate power and authority to enter into and to consummate
the transactions contemplated by each of the Transaction Documents and
otherwise to carry out its obligations hereunder and thereunder.  The execution and delivery of each of the
Transaction Documents by the Company and the consummation by it of the
transactions contemplated hereby and thereby have been duly authorized by all
necessary action on the part of the Company and no further action is required
by the Company, the Board of Directors or the Company’s stockholders in
connection therewith other than in connection with the Required Approvals.  Each Transaction Document to which it is a
party has been (or upon delivery will have been) duly executed by the Company
and, when delivered in accordance with the terms hereof and thereof, will
constitute the valid and binding obligation of the Company enforceable against
the Company in accordance with its terms, except: (i) as limited by
general equitable principles and applicable bankruptcy, insolvency,
reorganization, moratorium and other laws of general application affecting
enforcement of creditors’ rights generally, (ii) as limited by laws
relating to the availability of specific performance, injunctive relief or
other equitable remedies and (iii) insofar as indemnification and
contribution provisions may be limited by applicable law.

 

(d)           No Conflicts.  The execution, delivery and performance by
the Company of the Transaction Documents, the issuance and sale of the
Securities and the consummation by it of the transactions contemplated hereby
and thereby to which it is a party do not and will not: (i) conflict with
or violate any provision of the Company’s or any Subsidiary’s certificate or
articles of incorporation, bylaws or other organizational or charter documents,
(ii) conflict with, or constitute a default (or an event that with notice
or lapse of time or both would become a default) under, result in the creation
of any Lien upon any of the properties or assets of the Company or any
Subsidiary, or give to others any rights of termination, amendment,
acceleration or cancellation (with or without notice, lapse of time or both)
of, any agreement, credit facility, debt or other instrument (evidencing a Company
or Subsidiary debt or otherwise) or other understanding to which the Company or
any Subsidiary is a party or by which any property or asset of the Company or
any Subsidiary is bound or affected, or (iii) subject to the Required
Approvals, conflict with or result in a violation of any law, rule, regulation,
order, judgment, injunction, decree or other restriction of any court or
governmental authority to which the Company or a Subsidiary is subject
(including federal and state securities laws and regulations), or by which any
property or asset of the Company or a Subsidiary is bound or affected; except
in the case of each of clauses (ii) and (iii), such as could not have or
reasonably be expected to result in a Material Adverse Effect.

 

11

 

 

(e)           Filings, Consents and
Approvals.  The Company
is not required to obtain any consent, waiver, authorization or order of, give
any notice to, or make any filing or registration with, any court or other
federal, state, local or other governmental authority or other Person in
connection with the execution, delivery and performance by the Company of the
Transaction Documents, other than: (i) the filings required pursuant to Section 4.6
of this Agreement, (ii) the notice and/or application(s) to each
applicable Trading Market for the issuance and sale of the Securities and the
listing of the Underlying Shares for trading thereon in the time and manner
required thereby and (iii) the filing of Form D with the Commission
and such filings as are required to be made under applicable state securities
laws (collectively, the “Required Approvals”).

 

(f)            Issuance of the Securities.  The Securities are duly authorized and, when
issued and paid for in accordance with the applicable Transaction Documents,
will be duly and validly issued, fully paid and nonassessable, free and clear
of all Liens imposed by the Company other than restrictions on transfer
provided for in the Transaction Documents. 
The Underlying Shares, when issued in accordance with the terms of the
Transaction Documents, will be validly issued, fully paid and nonassessable,
free and clear of all Liens imposed by the Company other than restrictions on
transfer provided for in the Transaction Documents.  The Company has reserved from its duly
authorized capital stock a number of shares of Common Stock issuable pursuant
to this Agreement and for issuance of the Underlying Shares at least equal to
the Required Minimum on the date hereof.

 

(g)           Capitalization.  The capitalization of the Company is as set
forth on Schedule 3.1(g), which Schedule 3.1(g) shall also
include the number of shares of Common Stock owned beneficially, and of record,
by Affiliates of the Company as of the date hereof. The Company has not issued
any capital stock since its most recently filed
periodic report under the Exchange Act, other than pursuant to the
exercise of employee stock options under the Company’s stock option plans, the
issuance of shares of Common Stock to employees pursuant to the Company’s
employee stock purchase plans and pursuant to the conversion and/or exercise of
Common Stock Equivalents outstanding as of the date of the most recently filed
periodic report under the Exchange Act. 
No Person has any right of first refusal, preemptive right, right of
participation, or any similar right to participate in the transactions
contemplated by the Transaction Documents. 
Except as a result of the purchase and sale of the Securities, there are
no outstanding options, warrants, scrip rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities, rights or
obligations convertible into or exercisable or exchangeable for, or giving any
Person any right to subscribe for or acquire any shares of Common Stock, or
contracts, commitments, understandings or arrangements by which the Company or
any Subsidiary is or may become bound to issue additional shares of Common
Stock or Common Stock Equivalents. The issuance and sale of the Securities will
not obligate the Company to issue shares of Common Stock or other securities to
any Person (other than the Purchasers) and will not result in a right of any
holder of Company securities to adjust the exercise, conversion, exchange or
reset price under any of such securities. All of the outstanding shares of
capital stock of the Company are validly issued, fully paid and nonassessable,
have been issued in compliance with all federal and 

 

12

 

state securities laws, and
none of such outstanding shares was issued in violation of any preemptive
rights or similar rights to subscribe for or purchase securities.  No further approval or authorization of any
stockholder, the Board of Directors or others is required for the issuance and
sale of the Securities.  There are no stockholders
agreements, voting agreements or other similar agreements with respect to the
Company’s capital stock to which the Company is a party or, to the knowledge of
the Company, between or among any of the Company’s stockholders.

 

(h)           SEC Reports;
Financial Statements.  The Company
has filed all reports, schedules, forms, statements and other documents
required to be filed by the Company under the Securities Act and the Exchange
Act, including pursuant to Section 13(a) or 15(d) thereof, for
the two years preceding the date hereof (or such shorter period as the Company
was required by law or regulation to file such material) (the foregoing
materials, including the exhibits thereto and documents incorporated by
reference therein, being collectively referred to herein as the “SEC Reports”)
on a timely basis or has received a valid extension of such time of filing and
has filed any such SEC Reports prior to the expiration of any such
extension.  As of their respective dates,
the SEC Reports complied in all material respects with the requirements of the
Securities Act and the Exchange Act, as applicable, and none of the SEC
Reports, when filed, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading. 
The Company has never been an issuer subject to Rule 144(i) under
the Securities Act. The financial statements of the Company included in the SEC
Reports comply in all material respects with applicable accounting requirements
and the rules and regulations of the Commission with respect thereto as in
effect at the time of filing.  Such
financial statements have been prepared in accordance with United States
generally accepted accounting principles applied on a consistent basis during
the periods involved (“GAAP”), except as may be otherwise specified in
such financial statements or the notes thereto and except that unaudited financial
statements may not contain all footnotes required by GAAP, and fairly present
in all material respects the financial position of the Company and its
consolidated Subsidiaries as of and for the dates thereof and the results of
operations and cash flows for the periods then ended, subject, in the case of
unaudited statements, to normal, immaterial, year-end audit adjustments.

 

(i)            Material Changes;
Undisclosed Events, Liabilities or Developments.  Since the date of the latest audited
financial statements included within the SEC Reports, except as specifically
disclosed in a subsequent SEC Report filed prior to the date hereof: (i) there
has been no event, occurrence or development that has had or that could
reasonably be expected to result in a Material Adverse Effect, (ii) the
Company has not incurred any liabilities (contingent or otherwise) other than (A) trade
payables and accrued expenses incurred in the ordinary course of business
consistent with past practice and (B) liabilities not required to be reflected
in the Company’s financial statements pursuant to GAAP or disclosed in filings
made with the Commission, (iii) the Company has not altered its method of
accounting, (iv) the Company has not declared or made any dividend or
distribution of cash or other property to its stockholders or purchased, 

 

13

 

redeemed or made any
agreements to purchase or redeem any shares of its capital stock and (v) the
Company has not issued any equity securities to any officer, director or
Affiliate, except pursuant to existing Company stock option plans. The Company
does not have pending before the Commission any request for confidential
treatment of information.  Except for the
issuance of the Securities contemplated by this Agreement or as set forth on Schedule
3.1(i), no event, liability, fact, circumstance, occurrence or development
has occurred or exists or is reasonably expected to occur or exist with respect
to the Company or its Subsidiaries or their respective business, properties,
operations, assets or financial condition, that would be required to be
disclosed by the Company under applicable securities laws at the time this
representation is made or deemed made that has not been publicly disclosed at
least 1 Trading Day prior to the date that this representation is made.

 

(j)            Litigation.  There is no action, suit, inquiry, notice of
violation, proceeding or investigation pending or, to the knowledge of the
Company, threatened against or affecting the Company, any Subsidiary or any of
their respective properties before or by any court, arbitrator, governmental or
administrative agency or regulatory authority (federal, state, county, local or
foreign) (collectively, an “Action”) which (i) adversely affects or
challenges the legality, validity or enforceability of any of the Transaction
Documents or the Securities or (ii) could, if there were an unfavorable
decision, have or reasonably be expected to result in a Material Adverse
Effect.  Neither the Company nor any
Subsidiary, nor any director or officer thereof, is or has been the subject of
any Action involving a claim of violation of or liability under federal or
state securities laws or a claim of breach of fiduciary duty.  There has not been, and to the knowledge of the
Company, there is not pending or contemplated, any investigation by the
Commission involving the Company or any current or former director or officer
of the Company.  The Commission has not
issued any stop order or other order suspending the effectiveness of any
registration statement filed by the Company or any Subsidiary under the
Exchange Act or the Securities Act.

 

(k)           Labor Relations.  No material labor dispute exists or, to the
knowledge of the Company, is imminent with respect to any of the employees of
the Company, which could reasonably be expected to result in a Material Adverse
Effect.  None of the Company’s or its
Subsidiaries’ employees is a member of a union that relates to such employee’s
relationship with the Company or such Subsidiary, and neither the Company nor
any of its Subsidiaries is a party to a collective bargaining agreement, and
the Company and its Subsidiaries believe that their relationships with their
employees are good.  No executive officer,
to the knowledge of the Company, is, or is now expected to be, in violation of
any material term of any employment contract, confidentiality, disclosure or
proprietary information agreement or non-competition agreement, or any other
contract or agreement or any restrictive covenant in favor of any third party,
and the continued employment of each such executive officer does not subject
the Company or any of its Subsidiaries to any liability with respect to any of
the foregoing matters.  The Company and
its Subsidiaries are in compliance with all U.S. federal, state, local and
foreign laws and regulations relating to employment and employment practices,
terms and conditions of employment and wages and hours, except where the
failure to be in 

 

14

 

compliance could not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect.

 

(l)            Compliance.  Neither the Company nor any Subsidiary: (i) is
in default under or in violation of (and no event has occurred that has not
been waived that, with notice or lapse of time or both, would result in a
default by the Company or any Subsidiary under), nor has the Company or any
Subsidiary received notice of a claim that it is in default under or that it is
in violation of, any indenture, loan or credit agreement or any other agreement
or instrument to which it is a party or by which it or any of its properties is
bound (whether or not such default or violation has been waived), (ii) is
in violation of any judgment, decree or order of any court, arbitrator or
governmental body or (iii) is or has been in violation of any statute,
rule, ordinance or regulation of any governmental authority, including without
limitation all foreign, federal, state and local laws applicable to its business
and all such laws that affect the environment, except in each case as could not
have or reasonably be expected to result in a Material Adverse Effect.

 

(m)          Regulatory
Permits.  The Company and the
Subsidiaries possess all certificates, authorizations and permits issued by the
appropriate federal, state, local or foreign regulatory authorities necessary
to conduct their respective businesses as described in the SEC Reports, except
where the failure to possess such permits could not reasonably be expected to
result in a Material Adverse Effect (“Material Permits”), and neither
the Company nor any Subsidiary has received any notice of proceedings relating
to the revocation or modification of any Material Permit.

 

(n)           Title to Assets.  The Company and the Subsidiaries have good
and marketable title in fee simple to all real property owned by them and good
and marketable title in all personal property owned by them that is material to
the business of the Company and the Subsidiaries, in each case free and clear
of all Liens, except for Liens as do not materially affect the value of such
property and do not materially interfere with the use made and proposed to be
made of such property by the Company and the Subsidiaries and Liens for the
payment of federal, state or other taxes, the payment of which is neither
delinquent nor subject to penalties.  Any
real property and facilities held under lease by the Company and the
Subsidiaries are held by them under valid, subsisting and enforceable leases
with which the Company and the Subsidiaries are in compliance.

 

(o)           Patents and Trademarks.  The Company and the Subsidiaries have, or
have rights to use, all patents, patent applications, trademarks, trademark
applications, service marks, trade names, trade secrets, inventions,
copyrights, licenses and other intellectual property rights and similar rights
as described in the SEC Reports as necessary or material for use in connection
with their respective businesses and which the failure to so have could have a
Material Adverse Effect (collectively, the “Intellectual Property Rights”).  Neither the Company nor any Subsidiary has
received a notice (written or otherwise) that any of the Intellectual Property
Rights used by the Company or any Subsidiary violates or infringes upon the
rights of any Person. To the knowledge of the 

 

15

 

Company, all such
Intellectual Property Rights are enforceable and there is no existing
infringement by another Person of any of the Intellectual Property Rights.  The Company and its Subsidiaries have taken
reasonable security measures to protect the secrecy, confidentiality and value
of all of their intellectual properties, except where failure to do so could not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect.

 

(p)           Insurance.  The Company and the Subsidiaries are insured
by insurers of recognized financial responsibility against such losses and
risks and in such amounts as are prudent and customary in the businesses in
which the Company and the Subsidiaries are engaged, including, but not limited
to, directors and officers insurance coverage at least equal to the aggregate
Subscription Amount.  Neither the Company
nor any Subsidiary has any reason to believe that it will not be able to renew
its existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business without a significant increase in cost.

 

(q)           Transactions
With Affiliates and Employees.  Except as set forth in the SEC Reports, none
of the officers or directors of the Company and, to the knowledge of the
Company, none of the employees of the Company is presently a party to any
transaction with the Company or any Subsidiary (other than for services as
employees, officers and directors), including any contract, agreement or other
arrangement providing for the furnishing of services to or by, providing for
rental of real or personal property to or from, or otherwise requiring payments
to or from any officer, director or such employee or, to the knowledge of the
Company, any entity in which any officer, director, or any such employee has a
substantial interest or is an officer, director, trustee or partner, in each
case in excess of $120,000 other than for: (i) payment of salary or
consulting fees for services rendered, (ii) reimbursement for expenses
incurred on behalf of the Company and (iii) other employee benefits,
including stock option agreements under any stock option plan of the Company.

 

(r)            Sarbanes-Oxley; Internal
Accounting Controls.  The Company
is in material compliance with all provisions of the Sarbanes-Oxley Act of 2002
which are applicable to it as of each Closing. 
The Company and the Subsidiaries
maintain a system of internal accounting controls sufficient to provide
reasonable assurance that: (i) transactions are executed in accordance
with management’s general or specific authorizations, (ii) transactions
are recorded as necessary to permit preparation of financial statements in
conformity with GAAP and to maintain asset accountability, (iii) access to
assets is permitted only in accordance with management’s general or specific
authorization, and (iv) the recorded accountability for assets is compared
with the existing assets at reasonable intervals and appropriate action is
taken with respect to any differences. The Company has established disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the Company and designed such disclosure controls and procedures
to ensure that information required to be disclosed by the Company in the
reports it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the 

 

16

 

Commission’s
rules and forms.  The Company’s
certifying officers have evaluated the effectiveness of the Company’s
disclosure controls and procedures as of the end of the period covered by the
Company’s most recently filed periodic report under the Exchange Act (such
date, the “Evaluation Date”).  The
Company presented in its most recently filed periodic report under the Exchange
Act the conclusions of the certifying officers about the effectiveness of the
disclosure controls and procedures based on their evaluations as of the
Evaluation Date.  Since the Evaluation
Date, there have been no changes in the Company’s internal control over
financial reporting (as such term is defined in the Exchange Act) that has
materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.

 

(s)           Certain Fees.  No brokerage or finder’s fees or commissions
are or will be payable by the Company to any broker, financial advisor or
consultant, finder, placement agent, investment banker, bank or other Person
with respect to the transactions contemplated by the Transaction
Documents.  The Purchasers shall have no
obligation with respect to any fees or with respect to any claims made by or on
behalf of other Persons for fees of a type contemplated in this Section that
may be due in connection with the transactions contemplated by the Transaction
Documents.

 

(t)            Private Placement.  Assuming the accuracy of the Purchasers’
representations and warranties set forth in Section 3.2, no registration
under the Securities Act is required for the offer and sale of the Securities
by the Company to the Purchasers as contemplated hereby. The issuance and sale
of the Securities hereunder does not contravene the rules and regulations
of the Trading Market.

 

(u)           Investment Company. The Company
is not, and is not an Affiliate of, and immediately after receipt of payment
for the Securities, will not be or be an Affiliate of, an “investment company”
within the meaning of the Investment Company Act of 1940, as amended.  The Company shall conduct its business in a
manner so that it will not become an “investment company” subject to
registration under the Investment Company Act of 1940, as amended.

 

(v)           Registration Rights.  Other than each of the Purchasers, no Person
has any right to cause the Company to effect the registration under the
Securities Act of any securities of the Company.

 

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

 

17

 

to believe that it will not
in the foreseeable future continue to be, in compliance with all such listing
and maintenance requirements.

 

(x)            Application of Takeover
Protections.  The Company
and the Board of Directors have taken all necessary action, if any, in order to
render inapplicable any control share acquisition, business combination, poison
pill (including any distribution under a rights agreement) or other similar
anti-takeover provision under the Company’s certificate of incorporation (or
similar charter documents) or the laws of its state of incorporation that is or
could become applicable to the Purchasers as a result of the Purchasers and the
Company fulfilling their obligations or exercising their rights under the
Transaction Documents, including without limitation as a result of the Company’s
issuance of the Securities and the Purchasers’ ownership of the Securities.

 

(y)           Disclosure.  Except with respect to the material terms and
conditions of the transactions contemplated by the Transaction Documents, the
Company confirms that neither it nor any other Person acting on its behalf has
provided any of the Purchasers or their agents or counsel with any information
that it believes constitutes or might constitute material, non-public
information.  The Company understands and
confirms that the Purchasers will rely on the foregoing representation in
effecting transactions in securities of the Company.  All of the disclosure furnished by or on
behalf of the Company to the Purchasers regarding the Company, its business and
the transactions contemplated hereby, including the Disclosure Schedules to
this Agreement, 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 light of the circumstances under which
they were made, not misleading.   The
press releases disseminated by the Company during the twelve months preceding
the date of this Agreement taken as a whole do not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made and when made, not misleading.  The Company acknowledges and agrees that no
Purchaser makes or has made any representations or warranties with respect to
the transactions contemplated hereby other than those specifically set forth in
Section 3.2 hereof.

 

(z)            No Integrated
Offering. Assuming the accuracy of the Purchasers’ representations
and warranties set forth in Section 3.2, neither the Company, nor any of
its Affiliates, nor any Person acting on its or their behalf has, directly or
indirectly, made any offers or sales of any security or solicited any offers to
buy any security, under circumstances that would cause this offering of the
Securities to be integrated with prior offerings by the Company for purposes of
(i) the Securities Act which would require the registration of any such
securities under the Securities Act, or (ii) any applicable shareholder
approval provisions of any Trading Market on which any of the securities of the
Company are listed or designated.

 

(aa)         Solvency.  Based on the consolidated financial condition
of the Company as of each Closing, after giving effect to the receipt by the
Company of the proceeds from the sale of the Securities hereunder: (i) the
fair saleable value of the Company’s assets 

 

18

 

exceeds
the amount that will be required to be paid on or in respect of the Company’s
existing debts and other liabilities (including known contingent liabilities)
as they mature, (ii) the Company’s assets do not constitute unreasonably
small capital to carry on its business as now conducted and as proposed to be
conducted including its capital needs taking into account the particular
capital requirements of the business conducted by the Company, and projected
capital requirements and capital availability thereof, and (iii) the
current cash flow of the Company, together with the proceeds the Company would
receive, were it to liquidate all of its assets, after taking into account all
anticipated uses of the cash, would be sufficient to pay all amounts on or in
respect of its liabilities when such amounts are required to be paid.  The Company does not intend to incur debts
beyond its ability to pay such debts as they mature (taking into account the
timing and amounts of cash to be payable on or in respect of its debt).  The Company has no knowledge of any facts or circumstances
which lead it to believe that it will file for reorganization or liquidation
under the bankruptcy or reorganization laws of any jurisdiction within one year
from each Closing.  Schedule 3.1(aa)
sets forth as of the date hereof all outstanding secured and unsecured
Indebtedness of the Company or any Subsidiary, or for which the Company or any
Subsidiary has commitments.  For the
purposes of this Agreement, “Indebtedness” means (x) any
liabilities for borrowed money or amounts owed in excess of $50,000 (other than
trade accounts payable incurred in the ordinary course of business), (y) all
guaranties, endorsements and other contingent obligations in respect of
indebtedness of others, whether or not the same are or should be reflected in
the Company’s balance sheet (or the notes thereto), except guaranties by
endorsement of negotiable instruments for deposit or collection or similar
transactions in the ordinary course of business; and (z) the present value
of any lease payments in excess of $50,000 due under leases required to be
capitalized in accordance with GAAP. 
Neither the Company nor any Subsidiary is in default with respect to any
Indebtedness.

 

(bb)         Tax Status.            Except for matters that
would not, individually or in the aggregate, have or reasonably be expected to
result in a Material Adverse Effect, the Company and each Subsidiary has filed
all necessary federal, state and foreign income and franchise tax returns and
has paid or accrued all taxes shown as due thereon, and the Company has no knowledge
of a tax deficiency which has been asserted or threatened against the Company
or any Subsidiary.

 

(cc)         No General Solicitation. Neither the
Company nor any person acting on behalf of the Company has offered or sold any
of the Securities by any form of general solicitation or general
advertising.  The Company has offered the
Securities for sale only to the Purchasers and certain other “accredited
investors” within the meaning of Rule 501 under the Securities Act.

 

(dd)         Foreign Corrupt Practices.  Neither the Company, nor to the knowledge of
the Company, any agent or other person acting on behalf of the Company, has: (i) directly
or indirectly, used any funds for unlawful contributions, gifts, entertainment
or other unlawful expenses related to foreign or domestic political activity, (ii) made
any unlawful payment to foreign or domestic government officials or employees
or to any foreign or domestic political parties or campaigns from corporate
funds, (iii) failed to 

 

19

 

disclose fully any
contribution made by the Company (or made by any person acting on its behalf of
which the Company is aware) which is in violation of law or (iv) violated
in any material respect any provision of the Foreign Corrupt Practices Act of
1977, as amended.

 

(ee)         Accountants.  The Company’s accounting firm is set forth on
Schedule 3.1(ee) of the Disclosure Schedules.  To the knowledge and belief of the Company,
such accounting firm: (i) is a registered public accounting firm as
required by the Exchange Act and (ii) shall express its opinion with
respect to the financial statements to be included in the Company’s Annual
Report for the year ending December 31, 2009.

 

(ff)           Seniority.  As of each Closing, no Indebtedness or other
claim against the Company is senior to the Debentures in right of payment,
whether with respect to interest or upon liquidation or dissolution, or
otherwise, other than indebtedness secured by purchase money security interests
(which is senior only as to underlying assets covered thereby) and capital
lease obligations (which is senior only as to the property covered thereby).

 

(gg)         No Disagreements with
Accountants and Lawyers. 
There are no disagreements of any kind presently existing, or reasonably
anticipated by the Company to arise, between the Company and the accountants
and lawyers formerly or presently employed by the Company and the Company is
current with respect to any fees owed to its accountants and lawyers which
could affect the Company’s ability to perform any of its obligations under any
of the Transaction Documents.

 

(hh)         Acknowledgment Regarding
Purchasers’ Purchase of Securities.  The Company acknowledges and agrees that each
of the Purchasers is acting solely in the capacity of an arm’s length purchaser
with respect to the Transaction Documents and the transactions contemplated
thereby.  The Company further
acknowledges that no Purchaser is acting as a financial advisor or fiduciary of
the Company (or in any similar capacity) with respect to the Transaction
Documents and the transactions contemplated thereby and any advice given by any
Purchaser or any of their respective representatives or agents in connection
with the Transaction Documents and the transactions contemplated thereby is
merely incidental to the Purchasers’ purchase of the Securities.  The Company further represents to each
Purchaser that the Company’s decision to enter into this Agreement and the
other Transaction Documents has been based solely on the independent evaluation
of the transactions contemplated hereby by the Company and its representatives.

 

(ii)           Acknowledgment Regarding
Purchaser’s Trading Activity.  Anything in this Agreement or elsewhere
herein to the contrary notwithstanding (except for Sections 3.2(f) and
4.16 hereof), it is understood and acknowledged by the Company that: (i) none
of the Purchasers have been asked by the Company to agree, nor has any
Purchaser agreed, to desist from purchasing or selling, long and/or short,
securities of the Company, or “derivative” securities based on securities
issued by the Company or to hold the Securities for any specified term, (ii) past
or future open market or other transactions by 

 

20

 

any Purchaser, specifically
including, without limitation, Short Sales or “derivative” transactions, before
or after the closing of this or future private placement transactions, may
negatively impact the market price of the Company’s publicly-traded securities,
(iii) any Purchaser, and counter-parties in “derivative” transactions to
which any such Purchaser is a party, directly or indirectly, may presently have
a “short” position in the Common Stock and (iv) each Purchaser shall not
be deemed to have any affiliation with or control over any arm’s length
counter-party in any “derivative” transaction. 
The Company further understands and acknowledges that (y) one or
more Purchasers may engage in hedging activities at various times during the
period that the Securities are outstanding, including, without limitation,
during the periods that the value of the Underlying Shares deliverable with
respect to Securities are being determined, and (z) such hedging
activities (if any) could reduce the value of the existing stockholders’ equity
interests in the Company at and after the time that the hedging activities are
being conducted.  The Company acknowledges that such aforementioned
hedging activities do not constitute a breach of any of the Transaction
Documents.

 

(jj)           Regulation M
Compliance.  The Company has not, and to its knowledge no
one acting on its behalf has, (i) taken, directly or indirectly, any
action designed to cause or to result in the stabilization or manipulation of
the price of any security of the Company to facilitate the sale or resale of
any of the Securities, (ii) sold, bid for, purchased, or paid any
compensation for soliciting purchases of, any of the Securities, or (iii) paid
or agreed to pay to any Person any compensation for soliciting another to
purchase any other securities of the Company, other than, in the case of
clauses (ii) and (iii), compensation paid to the Company’s placement agent
in connection with the placement of the Securities.

 

(kk)         Stock Option
Plans. Each stock option granted by the Company under the Company’s stock
option plan was granted (i) in accordance with the terms of the Company’s
stock option plan and (ii) with an exercise price at least equal to the
fair market value of the Common Stock on the date such stock option would be
considered granted under GAAP and applicable law. No stock option granted under
the Company’s stock option plan has been backdated.  The Company has not knowingly granted, and
there is no and has been no Company policy or practice to knowingly grant,
stock options prior to, or otherwise knowingly coordinate the grant of stock
options with, the release or other public announcement of material information
regarding the Company or its Subsidiaries or their financial results or
prospects.

 

3.2           Representations and
Warranties of the Purchasers.  Each Purchaser, for itself and for no other
Purchaser, hereby represents and warrants as of the date hereof to the Company
as follows (unless as of a specific date
therein):

 

(a)           Organization;
Authority.  Such
Purchaser is either an individual or an entity duly organized, validly existing
and in good standing under the laws of the jurisdiction of its organization
with full right, corporate or partnership power and authority to enter into and
to consummate the transactions contemplated by the Transaction Documents and
otherwise to carry out its obligations hereunder and 

 

21

 

thereunder.
The execution and delivery of the Transaction Documents and performance by such
Purchaser of the transactions contemplated by the Transaction Documents have
been duly authorized by all necessary corporate, partnership, limited liability
company or similar action, as applicable, on the part of such Purchaser.  Each Transaction Document to which it is a
party has been duly executed by such Purchaser, and when delivered by such
Purchaser in accordance with the terms hereof, will constitute the valid and
legally binding obligation of such Purchaser, enforceable against it in
accordance with its terms, except: (i) as limited by general equitable
principles and applicable bankruptcy, insolvency, reorganization, moratorium
and other laws of general application affecting enforcement of creditors’
rights generally, (ii) as limited by laws relating to the availability of
specific performance, injunctive relief or other equitable remedies and (iii) insofar
as indemnification and contribution provisions may be limited by applicable
law.

 

(b)           Own Account.  Such Purchaser understands that the
Securities are “restricted securities” and have not been registered under the
Securities Act or any applicable state securities law and is acquiring the
Securities as principal for its own account and not with a view to or for
distributing or reselling such Securities or any part thereof in violation of the
Securities Act or any
applicable state securities law, has no present intention
of distributing any of such Securities in violation of the Securities Act or any applicable state securities law and has no
direct or indirect arrangement or understandings with any other persons to
distribute or regarding the distribution of such Securities in violation of the
Securities Act or any
applicable state securities law (this representation and
warranty not limiting such Purchaser’s right to sell the Securities pursuant to
the Registration Statement or otherwise in compliance with applicable federal
and state securities laws).  Such
Purchaser is acquiring the Securities hereunder in the ordinary course of its
business.

 

(c)           Purchaser Status.  At the time such Purchaser was offered the
Securities, it was, and as of the date hereof it is, and on each date on which
it exercises any Warrants or converts any Debentures it will be either: (i) an
“accredited investor” as defined in Rule 501(a)(1), (a)(2), (a)(3), (a)(7) or
(a)(8) under the Securities Act or (ii) a “qualified institutional
buyer” as defined in Rule 144A(a) under the Securities Act.  Such Purchaser is not required to be
registered as a broker-dealer under Section 15 of the Exchange Act.

 

(d)           Experience of Such Purchaser.  Such Purchaser, either alone or together with
its representatives, has such knowledge, sophistication and experience in
business and financial matters so as to be capable of evaluating the merits and
risks of the prospective investment in the Securities, and has so evaluated the
merits and risks of such investment. 
Such Purchaser is able to bear the economic risk of an investment in the
Securities and, at the present time, is able to afford a complete loss of such
investment.

 

(e)           General Solicitation.  Such Purchaser is not purchasing the
Securities as a result of any advertisement, article, notice or other
communication regarding the Securities published in any newspaper, magazine or
similar media or broadcast over television or radio or presented at any seminar
or any other general solicitation or general advertisement.

 

22

 

 

(f)            Certain Transactions and
Confidentiality.  Other than
consummating the transactions contemplated hereunder, such Purchaser has not
directly or indirectly, nor has any Person acting on behalf of or pursuant to
any understanding with such Purchaser, executed any purchases or sales,
including Short Sales, of the securities of the Company during the period
commencing as of the time that such Purchaser first received a term sheet
(written or oral) from the Company or any other Person representing the Company
setting forth the material terms of the transactions contemplated hereunder and
ending immediately prior to the execution hereof.  Notwithstanding the foregoing, in the case of
a Purchaser that is a multi-managed investment vehicle whereby separate portfolio
managers manage separate portions of such Purchaser’s assets and the portfolio
managers have no direct knowledge of the investment decisions made by the
portfolio managers managing other portions of such Purchaser’s assets, the
representation set forth above shall only apply with respect to the portion of
assets managed by the portfolio manager that made the investment decision to
purchase the Securities covered by this Agreement.  Other than to other Persons party to this
Agreement, such Purchaser has maintained the confidentiality of all disclosures
made to it in connection with this transaction (including the existence and
terms of this transaction). Notwithstanding the foregoing, for avoidance of
doubt, nothing contained herein shall constitute a representation or warranty,
or preclude any actions, with respect to the identification of the availability
of, or securing of, available shares to borrow in order to effect Short Sales
or similar transactions in the future.

 

The Company acknowledges and agrees that the
representations contained in Section 3.2 shall not modify, amend or affect
such Purchaser’s right to rely on the Company’s representations and warranties
contained in this Agreement or any representations and warranties contained in
any other Transaction Document or any other document or instrument executed
and/or delivered in connection with this Agreement or the consummation of the
transaction contemplated hereby.

 

ARTICLE IV.

OTHER AGREEMENTS OF THE PARTIES

 

4.1           Transfer Restrictions.

 

(a)           The Securities may only be
disposed of in compliance with state and federal securities laws.  In connection with any transfer of Securities
other than pursuant to an effective registration statement or Rule 144, to
the Company or to an Affiliate of a Purchaser or in connection with a pledge as
contemplated in Section 4.1(b), the Company may require the transferor
thereof to provide to the Company an opinion of counsel selected by the
transferor and reasonably acceptable to the Company, the form and substance of
which opinion shall be reasonably satisfactory to the Company, to the effect
that such transfer does not require registration of such transferred Securities
under the Securities Act.  As a condition
of transfer, any such transferee shall agree in writing to be bound by the
terms of this Agreement and shall have the rights and obligations of a
Purchaser under this Agreement.

 

23

 

(b)           The Purchasers
agree to the imprinting, so long as is required by this Section 4.1, of a
legend on any of the Securities in the following form:

 

NEITHER THIS SECURITY [NOR
THE SECURITIES INTO WHICH THIS SECURITY IS [EXERCISABLE] [CONVERTIBLE]] HAS
[NOT] BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES
COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND,
ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE
EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO
SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY.  THIS SECURITY [AND THE
SECURITIES ISSUABLE UPON [EXERCISE] [CONVERSION] OF THIS SECURITY] MAY BE
PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT WITH A REGISTERED
BROKER-DEALER OR OTHER LOAN WITH A FINANCIAL INSTITUTION THAT IS AN “ACCREDITED
INVESTOR” AS DEFINED IN RULE 501(a) UNDER THE SECURITIES ACT OR OTHER LOAN
SECURED BY SUCH SECURITIES.

 

The Company acknowledges and
agrees that a Purchaser may from time to time pledge pursuant to a bona fide
margin agreement with a registered broker-dealer or grant a security interest
in some or all of the Securities to a financial institution that is an “accredited
investor” as defined in Rule 501(a) under the Securities Act and who
agrees to be bound by the provisions of this Agreement and, if required under
the terms of such arrangement, such Purchaser may transfer pledged or secured
Securities to the pledgees or secured parties. 
Such a pledge or transfer would not be subject to approval of the
Company and no legal opinion of legal counsel of the pledgee, secured party or
pledgor shall be required in connection therewith.  Further, no notice shall be required of such
pledge.  At the appropriate Purchaser’s
expense, the Company will execute and deliver such reasonable documentation as
a pledgee or secured party of Securities may reasonably request in connection
with a pledge or transfer of the Securities.

 

(c)           Certificates evidencing the
Shares and the Underlying Shares shall not contain any legend (including the
legend set forth in Section 4.1(b) hereof): (i) while a
registration statement (including the Registration Statement) covering the
resale of such security is effective under the Securities Act, (ii) following
any sale of such Shares or Underlying Shares pursuant to Rule 144, (iii) if
such Shares or Underlying Shares are eligible for sale under Rule 144,
without the requirement for the Company to be in compliance with the current
public information required under Rule 144 as to such Shares and
Underlying Shares and without volume or manner-of-sale restrictions or (iv) if
such legend is not required under applicable requirements of the Securities Act
(including judicial interpretations and pronouncements issued by the staff of
the 

 

24

 

Commission). The Company
shall cause its counsel to issue a legal opinion to the Transfer Agent promptly
after the Effective Date if required by the Transfer Agent to effect the removal
of the legend hereunder.  If all or any
portion of a Debenture is converted or Warrant is exercised at a time when
there is an effective registration statement to cover the resale of the
Underlying Shares, or if such Underlying Shares may be sold under Rule 144
and the Company is then in compliance with the current public information
required under Rule 144, or if such Underlying Shares may be sold under Rule 144
without the requirement for the Company to be in compliance with the current
public information required under Rule 144 as to such Underlying Shares
and without volume or manner-of-sale restrictions or if such legend is not
otherwise required under applicable requirements of the Securities Act
(including judicial interpretations and pronouncements issued by the staff of
the Commission) then such Underlying Shares shall be issued free of all
legends.  The Company agrees that
following the Effective Date or at such time as such legend is no longer
required under this Section 4.1(c), it will, no later than three Trading
Days following the delivery by a Purchaser to the Company or the Transfer Agent
of a certificate representing Shares or Underlying Shares, as applicable,
issued with a restrictive legend (such third Trading Day, the “Legend
Removal Date”), deliver or cause to be delivered to such Purchaser a
certificate representing such shares that is free from all restrictive and
other legends.  The Company may not make
any notation on its records or give instructions to the Transfer Agent that
enlarge the restrictions on transfer set forth in this Section 4.  Certificates for Securities subject to legend
removal hereunder shall be transmitted by the Transfer Agent to the Purchaser
by crediting the account of the Purchaser’s prime broker with the Depository
Trust Company System as directed by such Purchaser.

 

(d)           In addition to such
Purchaser’s other available remedies, the Company shall pay to a Purchaser, in
cash, as partial liquidated damages and not as a penalty, for each $1,000 of
Shares or Underlying Shares (based on the VWAP of the Common Stock on the date
such Securities are submitted to the Transfer Agent) delivered for removal of
the restrictive legend and subject to Section 4.1(c), $10 per Trading Day
(increasing to $20 per Trading Day five (5) Trading Days after such
damages have begun to accrue) for each Trading Day after the Legend Removal
Date until such certificate is delivered without a legend.  Nothing herein shall limit such Purchaser’s
right to pursue actual damages for the Company’s failure to deliver
certificates representing any Securities as required by the Transaction
Documents, and such Purchaser shall have the right to pursue all remedies
available to it at law or in equity including, without limitation, a decree of
specific performance and/or injunctive relief.

 

(e)           Each Purchaser,
severally and not jointly with the other Purchasers, agrees with the Company
that such Purchaser will sell any Securities pursuant to either the
registration requirements of the Securities Act, including any applicable
prospectus delivery requirements, or an exemption therefrom, and that if
Securities are sold pursuant to a Registration Statement, they will be sold in
compliance with the plan of distribution set forth therein, and acknowledges
that the removal of the restrictive legend from certificates representing
Securities as set forth in this Section 4.1 is predicated upon the Company’s
reliance upon this understanding.

 

25

 

4.2           Acknowledgment of Dilution.  The Company acknowledges that the issuance of
the Securities may result in dilution of the outstanding shares of Common
Stock, which dilution may be substantial under certain market conditions.  The Company further acknowledges that its
obligations under the Transaction Documents, including, without limitation, its
obligation to issue the Underlying Shares pursuant to the Transaction
Documents, are unconditional and absolute and not subject to any right of set
off, counterclaim, delay or reduction, regardless of the effect of any such
dilution or any claim the Company may have against any Purchaser and regardless
of the dilutive effect that such issuance may have on the ownership of the
other stockholders of the Company.

 

4.3           Furnishing of Information; Public Information.

 

(a)           Until the earliest of the
time that no Purchaser owns Securities, the Company covenants to maintain the
registration of the Common Stock under Section 12(b) or 12(g) of
the Exchange Act and to timely file (or obtain extensions in respect thereof
and file within the applicable grace period) all reports required to be filed
by the Company after the date hereof pursuant to the Exchange Act even if the
Company is not then subject to the reporting requirements of the Exchange Act.  As long as any Purchaser owns Securities, if
the Company is not required to file reports pursuant to the Exchange Act, it
will prepare and furnish to the Purchasers and make publicly available in
accordance with Rule 144(c) such information as is required for the
Purchasers to sell the Securities, including without limitation, under Rule 144.  The Company further covenants that it will
take such further action as any holder of Securities may reasonably request, to
the extent required from time to time to enable such Person to sell such
Securities without registration under the Securities Act, including without
limitation, within the requirements of the exemption provided by Rule 144.

 

(b)           At any time during the
period commencing from the six (6) month anniversary of the date hereof
and ending at such time that all of the Securities may be sold without the
requirement for the Company to be in compliance with Rule 144(c)(1) and
otherwise without restriction or limitation pursuant to Rule 144, if the
Company shall fail for any reason to satisfy the current public information
requirement under Rule 144(c) (a “Public Information Failure”)
then, in addition to such Purchaser’s other available remedies, the Company
shall pay to a Purchaser, in cash, as partial liquidated damages and not as a
penalty, by reason of any such delay in or reduction of its ability to sell the
Securities, an amount in cash equal to two percent (2.0%) of the aggregate
Subscription Amount of such Purchaser’s Securities on the day of a Public
Information Failure and on every thirtieth (30th) day (pro rated for periods totaling less than
thirty days) thereafter until the earlier of (a) the date such Public
Information Failure is cured and (b) such time that such public
information is no longer required for the Purchasers to transfer the
Underlying Shares pursuant to Rule 144.  The payments to which a
Purchaser shall be entitled pursuant to this Section 4.3(b) 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 (3rd) Business Day after the event or failure giving
rise to the Public Information Failure  Payments
is cured.  In the event the 

 

26

 

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. Nothing herein shall limit such
Purchaser’s right to pursue actual damages for the Public Information Failure,
and such Purchaser shall have the right to pursue all remedies available to it
at law or in equity including, without limitation, a decree of specific
performance and/or injunctive relief.

 

4.4           Integration.  The Company shall not sell, offer for sale or
solicit offers to buy or otherwise negotiate in respect of any security (as
defined in Section 2 of the Securities Act) that would be integrated with
the offer or sale of the Securities in a manner that would require the
registration under the Securities Act of the sale of the Securities or that
would be integrated with the offer or sale of the Securities for purposes of
the rules and regulations of any Trading Market such that it would require
shareholder approval prior to the closing of such other transaction unless
shareholder approval is obtained before the closing of such subsequent
transaction.

 

4.5           Conversion and Exercise Procedures.  Each of the form of Notice of Exercise
included in the Warrants and the form of Notice of Conversion included in the
Debentures  set forth the totality
of the procedures required of the Purchasers in order to exercise the Warrants
or convert the Debentures.  No additional
legal opinion, other information or instructions shall be required of the
Purchasers to exercise their Warrants or convert their Debentures.  The Company shall honor exercises of the
Warrants and conversions of the Debentures and shall deliver Underlying Shares
in accordance with the terms, conditions and time periods set forth in the
Transaction Documents.

 

4.6           Securities Laws Disclosure;
Publicity.  The Company
shall, by 8:30 a.m. (New York City time) on the Trading Day immediately
following the date hereof, issue a press release disclosing the material terms
of the transactions contemplated hereby, and, by 8:30 (a.m. (New York City
time) on the second Trading Day following the date hereof, file a Current
Report on Form 8-K with the Commission, including the Transaction
Documents as exhibits thereto.  From and
after the issuance of such press release, the Company shall have publicly
disclosed all material, non-public information delivered to any of the
Purchasers by the Company or any of its subsidiaries, or any of their
respective officers, directors, employees or agents in connection with the
transactions contemplated by the Transaction Documents. The Company and each
Purchaser shall consult with each other in issuing any other press releases
with respect to the transactions contemplated hereby, and neither the Company
nor any Purchaser shall issue any such press release nor otherwise make any
such public statement without the prior consent of the Company, with respect to
any press release of any Purchaser, or without the prior consent of each
Purchaser, with respect to any press release of the Company, which consent
shall not unreasonably be withheld or delayed, except if such disclosure is required
by law, in which case the disclosing party shall promptly provide the other
party with prior notice of such public statement or communication.  Notwithstanding the foregoing, the Company
shall not publicly disclose the name of any Purchaser, or include the name of
any Purchaser in any filing with the Commission or any regulatory agency or
Trading Market, without the prior written consent of such Purchaser, except: (a) as
required by federal securities law in connection with (i) any registration
statement and (ii) the filing of final Transaction Documents (including
signature pages thereto) with the Commission and (b) to the extent
such disclosure is required by law or 

 

27

 

Trading Market regulations,
in which case the Company shall provide the Purchasers with prior notice of
such disclosure permitted under this clause (b).

 

4.7           Shareholder Rights Plan.  No claim will be made or enforced by the
Company or, with the consent of the Company, any other Person, that any
Purchaser is an “Acquiring Person” under any control share acquisition,
business combination, poison pill (including any distribution under a rights
agreement) or similar anti-takeover plan or arrangement in effect or hereafter
adopted by the Company, or that any Purchaser could be deemed to trigger the
provisions of any such plan or arrangement, by virtue of receiving Securities
under the Transaction Documents or under any other agreement between the
Company and the Purchasers.

 

4.8           Non-Public Information.  Except with respect to the material terms and
conditions of the transactions contemplated by the Transaction Documents, the
Company covenants and agrees that neither it, nor any other Person acting on
its behalf, will provide any Purchaser or its agents or counsel with any
information that the Company believes constitutes material non-public
information, unless prior thereto such Purchaser shall have executed a written
agreement with the Company regarding the confidentiality and use of such information.  The Company understands and confirms that
each Purchaser shall be relying on the foregoing covenant in effecting
transactions in securities of the Company.

 

4.9           Use of Proceeds.  Except as set forth on Schedule 4.9
attached hereto, the Company shall use the net proceeds from the sale of the
Securities hereunder for working capital purposes and shall not use such
proceeds for: (a) the satisfaction of any portion of the Company’s debt
(other than payment of trade payables in the ordinary course of the Company’s
business and prior practices), (b) the redemption of any Common Stock or
Common Stock Equivalents or (c) the settlement of any outstanding
litigation.

 

4.10         Indemnification of
Purchasers.   Subject to
the provisions of this Section 4.10, the Company will indemnify and hold
each Purchaser and its directors, officers, shareholders, members, partners,
employees and agents (and any other Persons with a functionally equivalent role
of a Person holding such titles notwithstanding a lack of such title or any
other title), each Person who controls such Purchaser (within the meaning of Section 15
of the Securities Act and Section 20 of the Exchange Act), and the
directors, officers, shareholders, agents, members, partners or employees (and
any other Persons with a functionally equivalent role of a Person holding such
titles notwithstanding a lack of such title or any other title) of such
controlling persons (each, a “Purchaser Party”) harmless from any and
all losses, liabilities, obligations, claims, contingencies, damages, costs and
expenses, including all judgments, amounts paid in settlements, court costs and
reasonable attorneys’ fees and costs of investigation that any such Purchaser
Party may suffer or incur as a result of or relating to (a) any breach of
any of the representations, warranties, covenants or agreements made by the
Company in this Agreement or in the other Transaction Documents or (b) any
action instituted against a Purchaser in any capacity, or any of them or their
respective Affiliates, by any stockholder of the Company who is not an
Affiliate of such Purchaser, with respect to any of the transactions
contemplated by the Transaction Documents (unless such action is based upon a
breach of such Purchaser’s representations, warranties or covenants under the
Transaction Documents or any agreements or understandings such Purchaser may
have with any such stockholder or any violations by such 

 

28

 

Purchaser of state or
federal securities laws or any conduct by such Purchaser which constitutes
fraud, gross negligence, willful misconduct or malfeasance).  If any action shall be brought against any
Purchaser Party in respect of which indemnity may be sought pursuant to this
Agreement, such Purchaser Party shall promptly notify the Company in writing,
and the Company shall have the right to assume the defense thereof with counsel
of its own choosing reasonably acceptable to the Purchaser Party.  Any Purchaser Party shall have the right to
employ separate counsel in any such action and participate in the defense
thereof, but the fees and expenses of such counsel shall be at the expense of
such Purchaser Party except to the extent that (i) the employment thereof
has been specifically authorized by the Company in writing, (ii) the
Company has failed after a reasonable period of time to assume such defense and
to employ counsel or (iii) in such action there is, in the reasonable
opinion of counsel, a material conflict on any material issue between the
position of the Company and the position of such Purchaser Party, in which case
the Company shall be responsible for the reasonable fees and expenses of no
more than one such separate counsel.  The
Company will not be liable to any Purchaser Party under this Agreement (y) for
any settlement by a Purchaser Party effected without the Company’s prior
written consent, which shall not be unreasonably withheld or delayed; or (z) to
the extent, but only to the extent that a loss, claim, damage or liability is
attributable to any Purchaser Party’s breach of any of the representations,
warranties, covenants or agreements made by such Purchaser Party in this
Agreement or in the other Transaction Documents.

 

4.11         Reservation and Listing of Securities.

 

(a)           The Company shall maintain a
reserve from its duly authorized shares of Common Stock for issuance pursuant
to the Transaction Documents in such amount as may then be required to fulfill
its obligations in full under the Transaction Documents.

 

(b)           If, on any date, the number
of authorized but unissued (and otherwise unreserved) shares of Common Stock is
less than the Required Minimum on such date, then the Board of Directors shall
use commercially reasonable efforts to amend the Company’s certificate or
articles of incorporation to increase the number of authorized but unissued
shares of Common Stock to at least the Required Minimum at such time, as soon
as possible and in any event not later than the 75th day after such date.

 

(c)           The Company shall, if
applicable: (i) in the time and manner required by the principal Trading
Market, prepare and file with such Trading Market an additional shares listing
application covering a number of shares of Common Stock at least equal to the
Required Minimum on the date of such application, (ii) take all steps
necessary to cause such shares of Common Stock to be approved for listing or
quotation on such Trading Market as soon as possible thereafter, (iii) provide
to the Purchasers evidence of such listing or quotation and (iv) maintain
the listing or quotation of such Common Stock on any date at least equal to the
Required Minimum on such date on such Trading Market or another Trading Market.

 

29

 

4.12         Participation in Future Financing.

 

(a)           So long as the Debentures
are outstanding, upon any issuance by the Company or any of its Subsidiaries of
Common Stock, Common Stock Equivalents for cash consideration, Indebtedness (or
a combination of units hereof) (a “Subsequent Financing”), each Purchaser
shall have the right to participate in up to an amount of the Subsequent
Financing equal to 30% of the Subsequent Financing (the “Participation
Maximum”) on the same terms, conditions and price provided for in the
Subsequent Financing.

 

(b)           At least five (5) Trading
Days prior to the closing of the Subsequent Financing, the Company shall
deliver to each Purchaser a written notice of its intention to effect a
Subsequent Financing (“Pre-Notice”), which Pre-Notice shall ask such
Purchaser if it wants to review the details of such financing (such additional
notice, a “Subsequent Financing Notice”).  Upon the request of a Purchaser, and only
upon a request by such Purchaser, for a Subsequent Financing Notice, the
Company shall promptly, but no later than one (1) Trading Day after such
request, deliver a Subsequent Financing Notice to such Purchaser.  The Subsequent Financing Notice shall
describe in reasonable detail the proposed terms of such Subsequent Financing,
the amount of proceeds intended to be raised thereunder and the Person or
Persons through or with whom such Subsequent Financing is proposed to be
effected and shall include a term sheet or similar document relating thereto as
an attachment.

 

(c)           Any Purchaser desiring to
participate in such Subsequent Financing must provide written notice to the
Company by not later than 5:30 p.m. (New York City time) on the fifth (5th) Trading Day after all of
the Purchasers have received the Pre-Notice that the Purchaser is willing to
participate in the Subsequent Financing, the amount of the Purchaser’s
participation, and representing and warranting that the Purchaser has such
funds ready, willing, and available for investment on the terms set forth in
the Subsequent Financing Notice.  If the
Company receives no such notice from a Purchaser as of such fifth (5th) Trading Day, such
Purchaser shall be deemed to have notified the Company that it does not elect
to participate.

 

(d)           If by 5:30 p.m. (New
York City time) on the fifth (5th ) Trading Day
after all of the Purchasers have received the Pre-Notice, notifications by the
Purchasers of their willingness to participate in the Subsequent Financing (or
to cause their designees to participate) is, in the aggregate, less than the
total amount of the Subsequent Financing, then the Company may effect the
remaining portion of such Subsequent Financing on the terms and with the
Persons set forth in the Subsequent Financing Notice.

 

(e)   If by 5:30 p.m. (New
York City time) on the fifth (5th) Trading Day after all of the Purchasers have
received the Pre-Notice, the Company receives responses to a Subsequent
Financing Notice from Purchasers seeking to purchase more than the aggregate
amount of the Participation Maximum, each such Purchaser shall have the right
to purchase its Pro Rata Portion (as defined below) of the Participation
Maximum.  “Pro Rata Portion” means the ratio of (x) the
Subscription Amount of Securities purchased hereunder by a Purchaser
participating under this Section 4.12 and (y) the sum of the
aggregate Subscription Amounts of Securities purchased hereunder by all
Purchasers 

 

30

 

participating under this Section 4.12.

 

(f)            The Company must provide the
Purchasers with a second Subsequent Financing Notice, and the Purchasers will
again have the right of participation set forth above in this Section 4.12,
if the Subsequent Financing subject to the initial Subsequent Financing Notice
is not consummated for any reason on the terms set forth in such Subsequent
Financing Notice within thirty (30) Trading Days after the date of the initial
Subsequent Financing Notice.

 

(g)           Notwithstanding the
foregoing, this Section 4.12 shall not apply in respect of (i) an
Exempt Issuance, or (ii) an underwritten public offering of Common Stock
of at least $10,000,000.

 

4.13         Subsequent Equity Sales.

 

(a)           [RESERVED].

 

(b)           From the date hereof until
such time as no Purchaser holds any of the Securities, the Company shall be
prohibited from effecting or entering into an agreement to effect any issuance
by the Company or any of its Subsidiaries of Common Stock or Common Stock
Equivalents for cash consideration (or a combination of units thereof)
involving a Variable Rate Transaction. “Variable Rate Transaction” means
a transaction in which the Company (i) issues or sells any debt or equity
securities that are convertible into, exchangeable or exercisable for, or
include the right to receive, additional shares of Common Stock either (A) at
a conversion price, exercise price or exchange rate or other price that is
based upon, and/or varies with, the trading prices of or quotations for the
shares of Common Stock at any time after the initial issuance of such debt or
equity securities or (B) with a conversion, exercise or exchange price
that is subject to being reset at some future date after the initial issuance
of such debt or equity security or upon the occurrence of specified or
contingent events directly or indirectly related to the business of the Company
or the market for the Common Stock or (ii) enters into any agreement,
including, but not limited to, an equity line of credit, whereby the Company
may sell securities at a future determined price.   Any Purchaser shall be entitled to obtain
injunctive relief against the Company to preclude any such issuance, which
remedy shall be in addition to any right to collect damages.

 

(c)           Notwithstanding the
foregoing, this Section 4.13 shall not apply in respect of an Exempt
Issuance, except that no Variable Rate Transaction shall be an Exempt Issuance.

 

4.14         Equal Treatment of Purchasers.  No consideration (including any modification
of any Transaction Document) shall be offered or paid to any Person to amend or
consent to a waiver or modification of any provision of any of the Transaction
Documents unless the same consideration is also offered to all of the parties
to the Transaction Documents. Further, the Company shall not make any payment
of principal or interest on the Debentures in amounts which are
disproportionate to the respective principal amounts outstanding on the
Debentures at 

 

31

 

any applicable time.  For
clarification purposes, this provision constitutes a separate right granted to
each Purchaser by the Company and negotiated separately by each Purchaser, and
is intended for the Company to treat the Purchasers as a class and shall not in
any way be construed as the Purchasers acting in concert or as a group with
respect to the purchase, disposition or voting of Securities or otherwise.

 

4.15         Certain Transactions and
Confidentiality. Each Purchaser, severally and not jointly with the
other Purchasers, covenants that neither it, nor any Affiliate acting on its
behalf or pursuant to any understanding with it will execute any purchases or
sales, including Short Sales, of any of the Company’s securities during the
period commencing with the execution of this Agreement and ending at such time
that the transactions contemplated by this Agreement are first publicly
announced pursuant to the initial press release as described in Section 4.6.  Each Purchaser, severally and not
jointly with the other Purchasers, covenants that until such time as the
transactions contemplated by this Agreement are publicly disclosed by the
Company pursuant to the initial press release as described in Section 4.6,
such Purchaser will maintain the confidentiality of the existence and terms of
this transaction and the information included in the Transaction Documents and
the Disclosure Schedules.  Notwithstanding the foregoing, and notwithstanding
anything contained in this Agreement to the contrary, the Company expressly
acknowledges and agrees that (i) no Purchaser makes any representation,
warranty or covenant hereby that it will not engage in effecting transactions
in any securities of the Company after the time that the transactions
contemplated by this Agreement are first publicly announced pursuant to the
initial press release as described in Section 4.6, (ii) no
Purchaser shall be restricted or prohibited from effecting any transactions in
any securities of the Company in accordance with applicable securities laws
from and after the time that the transactions contemplated by this Agreement
are first publicly announced pursuant to the initial press release as described
in Section 4.6 and (iii) no Purchaser shall have any duty of
confidentiality to the Company or its Subsidiaries after the issuance of the
initial press release as described in Section 4.6.  Notwithstanding the foregoing, in the
case of a Purchaser that is a multi-managed investment vehicle whereby separate
portfolio managers manage separate portions of such Purchaser’s assets and the
portfolio managers have no direct knowledge of the investment decisions made by
the portfolio managers managing other portions of such Purchaser’s assets, the
covenant set forth above shall only apply with respect to the portion of assets
managed by the portfolio manager that made the investment decision to purchase
the Securities covered by this Agreement.

 

4.16         Form D; Blue Sky Filings.  The Company agrees to timely file a Form D
with respect to the Securities as required under Regulation D and to provide a
copy thereof, promptly upon request of any Purchaser. The Company shall take
such action as the Company shall reasonably determine is necessary in order to
obtain an exemption for, or to qualify the Securities for, sale to the
Purchasers at the Closings under applicable securities or “Blue Sky” laws of
the states of the United States, and shall provide evidence of such actions
promptly upon request of any Purchaser.

 

4.17         Capital Changes.  Until the one year anniversary of the First
Closing Date, the Company shall not undertake a reverse or forward stock split
or reclassification of the Common Stock without the prior written consent of
the Purchasers holding a majority in principal amount outstanding of the
Debentures.

 

32

 

 

ARTICLE V.

MISCELLANEOUS

 

5.1           Termination.  This Agreement may be terminated
by any Purchaser, as to such Purchaser’s obligations hereunder only and without
any effect whatsoever on the obligations between the Company and the other
Purchasers, by written notice to the other parties, if the First Closing has
not been consummated on or before October 2, 2009; provided, however,
that such termination will not affect the right of any party to sue for any
breach by the other party (or parties).

 

5.2           Fees
and Expenses.  At the First Closing,
the Company has agreed to reimburse Enable Capital Management, LLC (“Enable”)
the non-accountable sum of $25,000 for its legal fees and expenses, none of
which has been paid prior to the First Closing. 
The Company shall deliver to each Purchaser, prior to each Closing, a
completed and executed copy of the Closing Statement, attached hereto as Annex
A.  Except as expressly set forth in
the Transaction Documents to the contrary, each party shall pay the fees and
expenses of its advisers, counsel, accountants and other experts, if any, and
all other expenses incurred by such party incident to the negotiation,
preparation, execution, delivery and performance of this Agreement.  The Company shall pay all Transfer Agent
fees, stamp taxes and other taxes and duties levied in connection with the
delivery of any Securities to the Purchasers.

 

5.3           Entire
Agreement.  The Transaction
Documents, together with the exhibits and schedules thereto, contain the entire
understanding of the parties with respect to the subject matter hereof and
supersede all prior agreements and understandings, oral or written, with
respect to such matters, which the parties acknowledge have been merged into
such documents, exhibits and schedules.

 

5.4           Notices.  Any and all notices or other communications
or deliveries required or permitted to be provided hereunder shall be in
writing and shall be deemed given and effective on the earliest of: (a) the
date of transmission, if such notice or communication is delivered via
facsimile at the facsimile number set forth on the signature pages attached
hereto prior to 5:30 p.m. (New York City time) on a Trading Day, (b) the
next Trading Day after the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile number set forth on
the signature pages attached hereto on a day that is not a Trading Day or
later than 5:30 p.m. (New York City time) on any Trading Day, (c) the
second (2nd) Trading Day
following the date of mailing, if sent by U.S. nationally recognized overnight
courier service or (d) upon actual receipt by the party to whom such
notice is required to be given.  The
address for such notices and communications shall be as set forth on the
signature pages attached hereto.

 

5.5           Amendments;
Waivers.  No provision of this
Agreement may be waived, modified, supplemented or amended except in a written
instrument signed, in the case of an amendment, by the Company and the
Purchasers holding at least [75%] in interest of the Securities then
outstanding or, in the case of a waiver, by the party against whom enforcement
of any such waived provision is sought. 
No waiver of any default with respect to any provision, condition or
requirement of this Agreement shall be deemed to be a continuing waiver in the
future or a waiver of any subsequent default or a waiver of any other
provision, condition or 

 

33

 

requirement hereof, nor shall any delay or omission of any party to
exercise any right hereunder in any manner impair the exercise of any such
right.

 

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

 

5.7           Successors
and Assigns.  This Agreement shall be
binding upon and inure to the benefit of the parties and their successors and
permitted assigns.  The Company may not
assign this Agreement or any rights or obligations hereunder without the prior
written consent of each Purchaser (other than by merger).  Any Purchaser may assign any or all of its
rights under this Agreement to any Person to whom such Purchaser assigns or
transfers any Securities, provided that such transferee agrees in writing to be
bound, with respect to the transferred Securities, by the provisions of the
Transaction Documents that apply to the “Purchasers.”

 

5.8           No
Third-Party Beneficiaries.  This
Agreement is intended for the benefit of the parties hereto and their
respective successors and permitted assigns and is not for the benefit of, nor
may any provision hereof be enforced by, any other Person, except as otherwise
set forth in Section 4.10.

 

5.9           Governing
Law.  All questions concerning the
construction, validity, enforcement and interpretation of the Transaction
Documents shall be governed by and construed and enforced in accordance with
the internal laws of the State of New York, without regard to the principles of
conflicts of law thereof.  Each party
agrees that all legal proceedings concerning the interpretations, enforcement
and defense of the transactions contemplated by this Agreement and any other
Transaction Documents (whether brought against a party hereto or its respective
affiliates, directors, officers, shareholders, employees or agents) shall be
commenced exclusively in the state and federal courts sitting in the City of
New York.  Each party hereby irrevocably
submits to the exclusive jurisdiction of the state and federal courts sitting
in the City of New York, borough of Manhattan for the adjudication of any
dispute hereunder or in connection herewith or with any transaction
contemplated hereby or discussed herein (including with respect to the
enforcement of any of the Transaction Documents), and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is improper or is an inconvenient venue for
such proceeding.  Each party hereby
irrevocably waives personal service of process and consents to process being
served in any such suit, action or proceeding by mailing a copy thereof via
registered or certified mail or overnight delivery (with evidence of delivery)
to such party at the address in effect for notices to it under this Agreement
and agrees that such service shall constitute good and sufficient service of
process and notice thereof.  Nothing
contained herein shall be deemed to limit in any way any right to serve process
in any other manner permitted by law.  If
either party shall commence an action or proceeding to enforce any provisions
of the Transaction Documents, then, in addition to the obligations of the
Company under Section 4.10, the prevailing party in such action or
proceeding shall be reimbursed by the other party for its reasonable attorneys’
fees and other costs and expenses incurred with the investigation, preparation
and prosecution of such action or proceeding.

 

34

 

5.10         Survival.  The representations and warranties contained
herein shall survive each Closing and the delivery of the Securities for the
applicable statute of limitations.

 

5.11         Execution.  This Agreement may be executed in two or more
counterparts, all of which when taken together shall be considered one and the
same agreement and shall become effective when counterparts have been signed by
each party and delivered to the other party, it being understood that both
parties need not sign the same counterpart. 
In the event that any signature is delivered by facsimile transmission
or by e-mail delivery of a “.pdf” format data file, such signature shall create
a valid and binding obligation of the party executing (or on whose behalf such
signature is executed) with the same force and effect as if such facsimile or “.pdf”
signature page were an original thereof.

 

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

 

5.13         Rescission
and Withdrawal Right. 
Notwithstanding anything to the contrary contained in (and without
limiting any similar provisions of) any of the other Transaction Documents,
whenever any Purchaser exercises a right, election, demand or option under a
Transaction Document and the Company does not timely perform its related
obligations within the periods therein provided, then such Purchaser may
rescind or withdraw, in its sole discretion from time to time upon written
notice to the Company, any relevant notice, demand or election in whole or in
part without prejudice to its future actions and rights; provided, however,
that in the case of a rescission of a conversion of a Debenture or exercise of
a Warrant, the applicable Purchaser shall be required to return any shares of
Common Stock subject to any such rescinded conversion or exercise notice
concurrently with the return to such Purchaser of the aggregate exercise price
paid to the Company for such shares and the restoration of such Purchaser’s
right to acquire such shares pursuant to such Purchaser’s Warrant (including,
issuance of a replacement warrant certificate evidencing such restored right).

 

5.14         Replacement
of Securities.  If any certificate or
instrument evidencing any Securities is mutilated, lost, stolen or destroyed,
the Company shall issue or cause to be issued in exchange and substitution for
and upon cancellation thereof (in the case of mutilation), or in lieu of and
substitution therefor, a new certificate or instrument, but only upon receipt
of evidence reasonably satisfactory to the Company of such loss, theft or
destruction.  The applicant for a new
certificate or instrument under such circumstances shall also pay any
reasonable third-party costs (including customary indemnity) associated with
the issuance of such replacement Securities.

 

35

 

5.15         Remedies.  In addition to being entitled to exercise all
rights provided herein or granted by law, including recovery of damages, each
of the Purchasers and the Company will be entitled to specific performance under
the Transaction Documents.  The parties
agree that monetary damages may not be adequate compensation for any loss
incurred by reason of any breach of obligations contained in the Transaction
Documents and hereby agree to waive and not to assert in any action for
specific performance of any such obligation the defense that a remedy at law
would be adequate.

 

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

 

5.17         Usury.  To the extent it may lawfully do so, the
Company hereby agrees not to insist upon or plead or in any manner whatsoever
claim, and will resist any and all efforts to be compelled to take the benefit
or advantage of, usury laws wherever enacted, now or at any time hereafter in
force, in connection with any claim, action or proceeding that may be brought
by any Purchaser in order to enforce any right or remedy under any Transaction
Document.  Notwithstanding any provision
to the contrary contained in any Transaction Document, it is expressly agreed
and provided that the total liability of the Company under the Transaction
Documents for payments in the nature of interest shall not exceed the maximum
lawful rate authorized under applicable law (the “Maximum Rate”), and,
without limiting the foregoing, in no event shall any rate of interest or
default interest, or both of them, when aggregated with any other sums in the
nature of interest that the Company may be obligated to pay under the
Transaction Documents exceed such Maximum Rate. 
It is agreed that if the maximum contract rate of interest allowed by
law and applicable to the Transaction Documents is increased or decreased by
statute or any official governmental action subsequent to the date hereof, the
new maximum contract rate of interest allowed by law will be the Maximum Rate
applicable to the Transaction Documents from the effective date thereof
forward, unless such application is precluded by applicable law.  If under any circumstances whatsoever, interest
in excess of the Maximum Rate is paid by the Company to any Purchaser with
respect to indebtedness evidenced by the Transaction Documents, such excess
shall be applied by such Purchaser to the unpaid principal balance of any such
indebtedness or be refunded to the Company, the manner of handling such excess
to be at such Purchaser’s election.

 

5.18         Independent
Nature of Purchasers’ Obligations and Rights.  The obligations of each Purchaser under any
Transaction Document are several and not joint with the obligations of any
other Purchaser, and no Purchaser shall be responsible in any way for the
performance or non-performance of the obligations of any other Purchaser under
any Transaction Document.  Nothing contained
herein or in any other Transaction Document, and no action taken by any 

 

36

 

Purchaser pursuant thereto, shall be deemed to constitute the
Purchasers as a partnership, an association, a joint venture or any other kind
of entity, or create a presumption that the Purchasers are in any way acting in
concert or as a group with respect to such obligations or the transactions
contemplated by the Transaction Documents. 
Each Purchaser shall be entitled to independently protect and enforce
its rights, including, without limitation, the rights arising out of this
Agreement or out of the other Transaction Documents, and it shall not be
necessary for any other Purchaser to be joined as an additional party in any
proceeding for such purpose.  Each
Purchaser has been represented by its own separate legal counsel in their
review and negotiation of the Transaction Documents.  For reasons of administrative convenience
only, each Purchaser and its respective counsel have chosen to communicate with
the Company through WS.  WS does not
represent any of the Purchasers and only represents Enable.  The Company has elected to provide all
Purchasers with the same terms and Transaction Documents for the convenience of
the Company and not because it was required or requested to do so by any of the
Purchasers.

 

5.19         Liquidated
Damages.  The Company’s obligations
to pay any partial liquidated damages or other amounts owing under the
Transaction Documents is a continuing obligation of the Company and shall not
terminate until all unpaid partial liquidated damages and other amounts have
been paid notwithstanding the fact that the instrument or security pursuant to
which such partial liquidated damages or other amounts are due and payable
shall have been canceled.

 

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

 

5.21         Construction.
The parties agree that each of them and/or their respective counsel has
reviewed and had an opportunity to revise the Transaction Documents and,
therefore, the normal rule of construction to the effect that any
ambiguities are to be resolved against the drafting party shall not be employed
in the interpretation of the Transaction Documents or any amendments hereto. In
addition, each and every reference to share prices and shares of Common Stock
in any Transaction Document shall be subject to adjustment for reverse and
forward stock splits, stock dividends, stock combinations and other similar
transactions of the Common Stock that occur after the date of this Agreement.

 

5.22         WAIVER OF JURY TRIAL.  IN ANY ACTION, SUIT, OR PROCEEDING IN ANY
JURISDICTION BROUGHT BY ANY PARTY AGAINST ANY OTHER PARTY, THE PARTIES EACH
KNOWINGLY AND INTENTIONALLY, TO THE GREATEST EXTENT PERMITTED BY APPLICABLE
LAW, HEREBY ABSOLUTELY, UNCONDITIONALLY, IRREVOCABLY AND EXPRESSLY WAIVES
FOREVER TRIAL BY JURY.

 

(Signature Pages Follow)

 

37

 

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

 

	
  ETELOS, INC.

  	
   

  	
  Address for Notice:

  
	
   

  	
   

  	
  26828 Maple Valley Highway
  #297 

  Maple Valley WA 98038-8309

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
  Fax:  425.458.4511

  
	
   

  	
  Name:  Daniel J. A. Kolke 

  	
   

  	
   

  
	
   

  	
  Title:  Chief Executive Officer 

  	
   

  	
   

  
	
  With a copy to (which
  shall not constitute notice):

  	
   

  	
   

  
	
  Sheppard, Mullin,
  Richter & Hampton, LLP

  Attn: James A. Mercer, III, Esq.

  12275 El Camino Real, Suite 200

  San Diego, California 92130

  	
   

  	
   

  

 

[REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK

SIGNATURE
PAGE FOR PURCHASER FOLLOWS]

 

38

 

[PURCHASER
SIGNATURE PAGES TO ETLO SECURITIES PURCHASE AGREEMENT]

 

IN WITNESS WHEREOF, the
undersigned have caused this Securities Purchase Agreement to be duly executed
by their respective authorized signatories as of the date first indicated
above.

 

	
  Name of Purchaser:

  	
   

  
	
   

  
	
  Signature of Authorized
  Signatory of Purchaser:

  	
   

  
	
   

  
	
  Name of Authorized
  Signatory:

  	
   

  
	
   

  
	
  Title of Authorized
  Signatory:

  	
   

  
	
   

  
	
  Email Address of
  Authorized Signatory:

  	
   

  
	
   

  
	
  Facsimile Number of
  Authorized Signatory:

  	
   

  
	
   

  
	
  Address for Notice of
  Purchaser:

  	
   

  
								

 

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

 

First Closing Subscription Amount:                          

Second Closing Subscription Amount:
                            (1)

Commitment Shares:           

Series I Warrant Shares:              

Series II Warrant Shares (for Purchasers
not eligible to receive Commitment Shares):           

 

EIN Number: 
[PROVIDE THIS UNDER SEPARATE COVER]

 

[SIGNATURE PAGES CONTINUE]

 

39

 

Annex A

 

CLOSING
STATEMENT

 

Pursuant to the attached Securities Purchase
Agreement, dated as of the date hereto, the purchasers shall purchase up to
$3,000,000 of Debentures and Warrants from Etelos, Inc., a Delaware
corporation (the “Company”).  All
funds will be wired into an account maintained by the Company.  All funds will be disbursed in accordance
with this Closing Statement.

 

Disbursement
Date:  September       ,
2009

 

	
  I.

  	
  PURCHASE PRICE

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Gross Proceeds to be Received

  	
   

  	
  $

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  II.

  	
  DISBURSEMENTS

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
   

  
	
   

  	
   

  	
  $

  	
   

  
	
   

  	
   

  	
  $

  	
   

  
	
   

  	
   

  	
  $

  	
   

  
	
   

  	
   

  	
  $

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Total Amount Disbursed:

  	
   

  	
  $

  	
   

  

 

	
  WIRE INSTRUCTIONS:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  To:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  To:

  	
   

  	
   

  	
   

  
						

 

40

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