Document:

Exhibit 10.1

CONFIDENTIAL

REVISED
— Hand Delivered

November 8, 2006

Mr. James Brennan

c/o MedQuist Inc.

1000 Bishops Gate Blvd.

Mount Laurel, NJ 08054

Dear Jim:

I am pleased to
offer you the position of Principal Accounting Officer, Controller and Vice
President with MedQuist Inc. (the “Company”) reporting to Kathleen Donovan,
Chief Financial Officer.  We would like
your employment start date to be on November 14, 2006 under the following
general terms and conditions of our offer.

COMPENSATION

Your base salary will be $8,958.33 paid semi-monthly, which is
equivalent to an annual amount of $215,000.00, earned on an annualized basis
and will be subject to all applicable withholdings.  Payroll is processed on or about the 10th and
25th of each month, for time worked from the 1st through the 15th of the month,
and the 16th through the last day of the month.

In addition, you will be eligible to receive a hiring bonus in the
amount of $40,000.00, which will be paid within 30 days of your start date.
This payment is subject to all applicable withholdings. This hiring bonus shall
be reimbursed to MedQuist, within 30 calendar days, if you should voluntarily
leave the company within 12 months of your hire date.

In this position, you are eligible to participate in the Company’s 2007
Management Incentive Plan and your target incentive under this Plan is 30% of
your base salary.  You will be provided
with a copy of this Plan once it is developed and approved.

When the Company creates a new Long-term Incentive Plan, your
eligibility will be considered in accordance with your position.

 

If your employment is terminated by the Company without cause, you will
be eligible for continued payment of your base salary (at the rate in effect at
the time of termination) for a period of 12 months contingent upon the
execution and delivery of a General Release of claims against the Company.
However, if Philips employs you at any time as an employee or a contractor
during the 12-month severance period, the severance payments will end.

“Cause” means the
occurrence of any of the following: (1) Employee’s refusal, willful failure or
inability to perform (other than due to illness or disability) his/her
employment duties or to follow the lawful directives of his/her superiors; (2)
misconduct or gross negligence by Employee in the course of employment; (3)
conduct of Employee involving any type of disloyalty to the Company or its
subsidiaries, including, without limitation: fraud, embezzlement, theft or
dishonesty in the course of employment: (4) a conviction of or the entry of a
plea of guilty or nolo contendere to a crime involving moral turpitude or that
otherwise could reasonably be expected to have an adverse effect on the
operations, condition or reputation of the Company, (5) a material breach by
Employee of any agreement with or fiduciary duty owed to the Company; or (6)
alcohol abuse or use of controlled drugs other than in accordance with a
physician’s prescription.

BENEFITS

You
and your qualified dependents will be eligible on the first day of employment
for coverage under the Company’s group insurance benefits. The Human Resources
department will provide information and enrollment forms for these benefits
upon your eligibility.  These benefits
have been enhanced to include the following:

1)
Company-paid Life Insurance - 2x your base salary;

2)
Short-term Disability - 6 months/100% salary continuation; and

3)
Long-term Disability - 70% base salary replacement (maximum $15,000.00 per month).

After
one year of service, you will also be eligible to enroll in the Company’s
401(k) retirement plan and an enrollment package will be provided to you at
that time.

AT-WILL EMPLOYMENT

Your
employment with the Company is “at-will.” 
Accordingly, if you accept this offer, you may voluntarily leave the
Company at any time, or be terminated at any time, with or without reason.  This letter merely memorializes the terms of
your employment and does not create an employment agreement or contract.

RETURN OF MATERIALS

Upon
termination of your employment with the Company for any reason, you must
immediately return to the Company all documents, property, software, materials,
information and other records of the Company, and all copies thereof, within
your possession, custody or control, including but not limited to any materials
containing trade secrets or confidential information of MedQuist.

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GENERAL

Enclosed
you will find a New Hire Kit with required payroll and employment process
forms; a Confidentiality and Non-Solicitation Agreement that you must sign and
date as a requirement for employment; and a copy of the MedQuist Employee
Handbook for your use while employed with MedQuist.  Please complete and sign the forms in the New
Hire Kit, sign and date the Confidentiality and Non-Solicitation Agreement,
sign the Employee Handbook Acknowledgement form and return all of these
completed forms to our Human Resources office on or before your first day of
employment.

On
your first day of work, you will also be required to present proof of
employment eligibility and a picture ID, as explained on the Employment
Eligibility Verification form provided in your New Hire Kit.

This offer is valid until
Friday, November 10, 2006. Please sign and return one copy of this offer letter
in the envelope provided no later than Friday, November 10, 2006.  Should you have any questions about this
letter, please feel free to contact me at 856-206-4905.

Jim, we sincerely look
forward to you officially joining the MedQuist team and the continued
contributions that you will make to our organization.

Sincerely,

Donna M. Jack

Vice President, Human Resources

The provisions of this
offer of employment have been read, are understood, and the offer is accepted
by the undersigned.

 

	
  Signature:

  	
   

  	
   

  
	
   

  	
  James Brennan

  	
   

  
	
   

  	
   

  	
   

  
	
  Date:

  	
   

  	
   

  

 

 

 3Exhibit 10.1

 

SECURITIES
PURCHASE AGREEMENT

This Securities Purchase Agreement (this “Agreement”)
is dated as of November 14, 2006, among ImageWare Systems, 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 Certificate of Designation (as
defined herein), and (b) the following terms have the meanings set forth in
this Section 1.1:

“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 144 under the Securities Act. 
With respect to a Purchaser, any investment fund or managed account that
is managed on a discretionary basis by the same investment manager as such
Purchaser will be deemed to be an Affiliate of such Purchaser.

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

“Certificate of Designation” means the
Certificate of Designation to be filed prior to the Closing by the Company with
the Secretary of State of Delaware, in the form of Exhibit A attached
hereto.

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

 

“Closing Date”
means the Trading Day when all of the Transaction Documents have been executed
and delivered by the applicable parties thereto, and all conditions precedent
to (i) the Purchasers’ obligations to pay the Subscription Amount and (ii) the
Company’s obligations to deliver the Securities have been satisfied or waived.

 

“Closing Price” means on any particular date
(a) the last reported closing bid price per share of Common Stock on such
date on the Trading Market (as reported by Bloomberg L.P. at 4:15 p.m. (New
York City time)), or (b) if there is no such price on such date, then the
closing bid price on the Trading Market on the date nearest preceding such date
(as reported by Bloomberg L.P. at 4:15 p.m. (New York City time)), or (c) 
if the Common Stock is not then listed or quoted on the Trading Market and if
prices for the Common Stock are then reported in the “pink sheets” published by
Pink Sheets LLC (or a similar organization or agency succeeding to its
functions of reporting prices), the most recent bid price per share of the
Common Stock so reported, or (d) if the shares of Common Stock are not
then publicly traded the fair market value of a share of Common Stock as
determined by an appraiser selected in good faith by the Purchasers of a
majority in interest of the Shares then outstanding.

“Commission” means the Securities and Exchange
Commission.

“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 into.

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

“Company Counsel” means Paul Hastings Janofsky
& Walker, LLP with offices located at 3579 Valley Centre Drive, San Diego,
California 92130.

“Conversion Price” shall have the meaning
ascribed to such term in the Certificate of Designation.

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

“Effective Date” means the date that the
initial Registration Statement filed by the Company pursuant to the
Registration Rights Agreement is first declared effective by the Commission.

“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.

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“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 of the Company
or a majority of the members of a committee of non-employee directors
established, (b) securities upon the exercise or exchange of or conversion of
any Securities issued hereunder and/or other securities exercisable or exchangeable
for or convertible into shares of Common Stock issued and outstanding on the
date of this Agreement, provided that such securities have not been amended
since the date of this Agreement to increase the number of such securities or
to decrease the exercise, exchange or conversion price of such securities, and
(c) securities issued pursuant to acquisitions or strategic transactions
approved by a majority of the disinterested directors of the Company, provided
any such issuance shall only be to a Person which is, itself or through its
subsidiaries, an operating company in a business synergistic with the business
of the Company and in which the Company receives benefits in addition to the
investment of funds, but shall not include a transaction in which the Company
is issuing securities primarily for the purpose of raising capital or to an
entity whose primary business is investing in securities.

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

“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(bb).

“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 4.13.

“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.

“Preferred Stock” means up to 3,500 shares of
the Company’s Series C 8% Convertible Preferred Stock issued hereunder, having
the rights, preferences and privileges set forth in the 

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Certificate of Designation, as amended, in the form of Exhibit A
hereto.

 

“Pre-Notice” shall have the meaning ascribed to
such term in Section 4.13.

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

“Purchaser Party” shall have the meaning
ascribed to such term in Section 4.11.

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

“Registration Statement” means a registration
statement meeting the requirements set forth in the Registration Rights
Agreement and covering the resale of the Underlying Shares by each Purchaser.

“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 or conversion in full of all Warrants
and all shares of Preferred Stock, ignoring any conversion or exercise limits
set forth therein, and assuming that any previously unconverted shares of
Preferred Stock are held until the third anniversary of the Closing Date and
all dividends are paid in shares of Common Stock until such third anniversary.

“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.

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

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

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

“Shareholder Approval” means such approval as
may be required by the applicable rules and regulations of the the American
Stock Exchange (or any successor entity) from the shareholders of the Company
with respect to the transactions contemplated by the Transaction Documents,
including the issuance of all of the Underlying Shares in excess of 19.99% of
the issued and outstanding Common Stock on the Closing Date.

“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

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borrowable shares of Common Stock).

 “Stated
Value” means $1,000 per share of Preferred Stock.

“Subscription Amount” means, as to each
Purchaser, the aggregate amount to be paid for the Preferred Stock purchased
hereunder 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 immediately available funds.

“Subsequent Financing” shall have the meaning
ascribed to such term in Section 4.13.

“Subsequent Financing Notice” shall have the
meaning ascribed to such term in Section 4.13.

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

“Trading Day” means a day on which the Common
Stock is traded on a Trading Market.

 “Trading
Market” means the following markets or exchanges on which the Common Stock
is listed or quoted for trading on the date in question: the American Stock
Exchange, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq
Global Select Market or the New York Stock Exchange.

“Transaction Documents” means this Agreement,
the Certificate of Designation, the Warrants, the Registration Rights Agreement
and any other documents or agreements executed in connection with the
transactions contemplated hereunder.

“Transfer Agent” means ComputerShare Trust
Company, N.A., with a mailing address of 250 Royall Street, Canton,
Massachusetts 02021 and a facsimile number of (617) 575-2549, and any successor
transfer agent of the Company.

“Underlying Shares” means the shares of Common
Stock issued and issuable upon conversion of the Preferred Stock, upon exercise
of the Warrants and issued and issuable in lieu of the cash payment of
dividends on the Preferred Stock in accordance with the terms of the Certificate
of Designation.

“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 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 Sheets, LLC (or a similar organization or agency succeeding
to its functions of reporting

 5
 

 

prices), the most recent bid price per share of the
Common Stock so reported; or (d) in all other cases, the fair market value
of a share of Common Stock as determined by an independent appraiser selected
in good faith by the Holder and reasonably acceptable to the Company.

 “Warrants”
means collectively the Common Stock purchase warrants delivered to the
Purchasers at the Closing in accordance with Section 2.2(a) hereof, which
Warrants shall be exercisable immediately and have a term of exercise equal to
5 years, in the form of Exhibit C attached hereto.

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

ARTICLE II

PURCHASE AND SALE

2.1           Closing.  On the 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 each Purchaser, severally and not jointly, agrees to
purchase an aggregate of, up to $3,500,000 of shares of Preferred Stock with an
aggregate Stated Value equal to such Purchaser’s Subscription Amount and
Warrants as determined pursuant to Section 2.2(a).  The aggregate number of shares of Preferred
Stock sold hereunder shall be up to 3,500. 
Each Purchaser shall deliver to the Company via wire transfer or a
certified check immediately available funds equal to its Subscription Amount
and the Company shall deliver to each Purchaser its respective shares of
Preferred Stock and Warrants as determined pursuant to Section 2.2(a) and the
other items set forth in Section 2.2 issuable at the Closing.  Upon satisfaction of the conditions set forth
in Sections 2.2 and 2.3, the Closing shall occur at the offices of FWS or such
other location as the parties shall mutually agree.

2.2           Deliveries.

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

(i)            this Agreement duly executed by the Company;

(ii)           certified resolutions of the Board of Directors of the
Company authorizing the transactions contemplated by the Transaction Documents;

(iii)          a certificate evidencing a number of shares of Preferred
Stock equal to such Purchaser’s Subscription Amount divided by the Stated
Value, registered in the name of such Purchaser;

(iv)          a Warrant registered in the name of each Purchaser to
purchase the Purchaser’s pro-rata share of up to 175,000 shares of Common
Stock, with an exercise price equal to $1.575, subject to adjustment therein;
and

(v)           a
Forbearance Agreement, addressing the transactions contemplated under this
Agreement, from Little Bear Investments, LLC, as representative of certain
holders of Company indebtedness; and

 6
 

 

(vi)          the Registration Rights Agreement duly executed by the
Company.

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

(i)            this Agreement duly executed by such Purchaser;

(ii)           such Purchaser’s Subscription Amount by wire transfer to the
account as specified in writing by the Company; and

(iii)          the Registration Rights Agreement duly executed by such
Purchaser.

2.3           Subsequent
Closings.  At any time on or before
the 3rd day following the Closing, the Company may sell up to the balance of
the authorized shares of Preferred Stock and Warrants not sold at the Closing
to such persons as may be approved by the Company (the “Additional
Purchasers”).  All such sales made at any
additional closings (each an “Additional Closing”), (i) shall be made on the
terms and conditions set forth in this Agreement, (ii) the representations and warranties
of the Company set forth in Section 3.1, and the Disclosure Schedules, shall
peak as of the Closing and the Company shall have no obligation to update any
such disclosure, and (iii) the representations and warranties of the Additional
Purchasers in Section 3.2 shall speak as of such Additional Closing.  This Agreement, including without limitation,
the Disclosure Schedules, may be amended without the consent of the Purchasers
to include any Additional Purchasers. 
Any shares of Preferred Stock or Warrants sold pursuant to this Section 2.3
shall be deemed to be “Securities” for all purposes under this Agreement and
any Additional Purchasers shall be deemed to be “Purchasers” for all purposes
under this Agreement.

2.4           Closing Conditions.

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

(i)            the accuracy in all material respects when made and on the
Closing Date of the representations and warranties of the Purchasers contained
herein;

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

(iii)          the delivery by the Purchasers of the items set forth in
Section 2.2(b) of this Agreement.

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

(i)            the accuracy in all material respects when made and on the
Closing Date of the representations and warranties of the Company contained
herein;

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

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

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

(v)           from the date hereof to the Closing Date, 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 Closing), and, at any time prior to the Closing Date, trading in
securities generally as reported by Bloomberg L.P. shall not have been

 7
 

 

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 Preferred Stock at the Closing.

ARTICLE III

REPRESENTATIONS AND WARRANTIES

3.1           Representations and Warranties of the Company.  Except as set forth
under the corresponding section of the disclosure schedules delivered to the
Purchasers concurrently herewith (the “Disclosure Schedules”), which
Disclosure Schedules shall be deemed a part hereof and to qualify any
representation or warranty otherwise made herein to the extent of such
disclosure, and except as disclosed in the Company’s SEC Reports, the Company
hereby makes the following representations and warranties to each Purchaser:

(a)           Subsidiaries.  The Company owns, directly or indirectly, all
of the capital stock or other equity interests of each subsidiary listed in the
Company’s SEC Reports (each, a “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 (as applicable), 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 or 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
legality, validity or enforceability of any Transaction Document, (ii) a
material adverse effect on the results of operations, assets, business,
prospects 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.

 8
 

 

(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, its board of directors or its
stockholders in connection therewith other than in connection with the Required
Approvals.  Each Transaction Document 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 of
the Transaction Documents by the Company and the consummation by the Company of
the other transactions contemplated hereby and thereby 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, or (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.

(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) filings required pursuant to Section 4.6, (ii) the filing
with the Commission of the Registration Statement, (iii) 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, (iv) the filing of Form D with the
Commission and such filings as are required to be made under applicable state
securities laws and (v) Shareholder Approval (collectively, the “Required
Approvals”).

 9
 

 

(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.  The Company has reserved from its duly
authorized capital stock a number of shares of Common Stock for issuance of the
Underlying Shares at least equal to the Required Minimum on the date hereof.

(g)           Capitalization.  As of the date hereof (and prior to the
Closing), the Company has authorized for issuance 50,000,000 shares of Common
Stock, par value $ 0.01 per share (the “Common Stock”), and 4,000,000
shares of Series B Preferred Stock, par value $0.01 per share (the “Series B
Preferred Stock”).  As of the date hereof (and prior to the Closing),
there are 13,621,941 shares of Common Stock issued and outstanding and 239,400
shares of Series B Preferred Stock issued and outstanding.   As of
the date hereof (and prior to the Closing), there are issued and outstanding
warrants to purchase 4,680,806 shares of Common Stock, stock options to
purchase 1,652,234 shares of Common Stock and restricted stock grants totaling
216,588 shares of Common Stock.  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 plan and pursuant to the
conversion 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, script 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 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 of the Company 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.

 10
 

 

(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 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,
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 or development has occurred or exists with
respect to the Company or its Subsidiaries or their respective business,
properties, operations or financial condition, that would be required to be
disclosed by the Company under applicable securities laws at the time this
representation is made that has not been publicly disclosed at least 1 Trading
Day prior to the date that this representation is made.

 11
 

 

(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, and neither the Company or 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, and to the knowledge of the
Company, 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 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 order of any court, arbitrator or governmental body, or (iii)
is or has been in violation of any statute, rule 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.

 12
 

 

(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 have or 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 that is
material to the business of the Company and the Subsidiaries 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
necessary or material for use in connection with their respective businesses as
described in the SEC Reports 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 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 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 have in
place the insurance coverage set forth on Schedule 3.1(p).  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.  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

 13
 

 

any such employee has a substantial interest or is an
officer, director, trustee or partner, in each case in excess of $60,000 other
than (i) for payment of salary or consulting fees for services rendered, (ii)
reimbursement for expenses incurred on behalf of the Company and (iii) for
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 the Closing Date. 
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 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 against
the Company 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

 14
 

 

“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 subject to 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 Company’s
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 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 its
Board of Directors have taken all necessary action, if any, in order to render
inapplicable any control share acquisition, business combination, poison pill
(including any distribution under a rights agreement) or other similar anti-takeover
provision under the 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, nonpublic
information.  The Company understands and
confirms that the Purchasers will rely on the foregoing representation in
effecting transactions in securities of the Company.  All 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, 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.

 15
 

 

(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 the Securities
Act or any applicable shareholder approval provision of any Trading Market on
which any of the securities of the Company are listed or designated. 

(aa)         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.

(bb)         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.

(cc)         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 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.

(dd)         Accountants.  The Company’s accounting firm is Stonefield
Josephson, LLP.  To the knowledge 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 on Form
10-KSB for the year ending December 31, 2006.

(ee)         Seniority.  As of the Closing Date, no Indebtedness or
other claim against the Company is senior to the Preferred Stock 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),
capital lease obligations (which is senior only as to the property covered
thereby), the Series B Preferred Stock (which is senior only as to dividend and
liquidation preference) and those certain Secured Promissory Notes dated as of
March 17, 2006 with an aggregate outstanding principal balance as of November
10, 2006 of $1,335,000.00.

(ff)           No Disagreements with Accountants and Lawyers.  There are no
disagreements of any kind presently existing, or reasonably anticipated by the
Company to arise,

 16

 

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.

(gg)         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.

(hh)         Acknowledgement Regarding Purchasers’ 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 (i) that past or future open market or other transactions by any
Purchaser, including Short Sales, and 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; and (iii) that
any Purchaser, and counter-parties in “derivative” transactions to which any
such Purchaser is a party, directly or indirectly, presently may have a “short”
position in the Common Stock.  The
Company further understands and acknowledges that (a) 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 (b) such hedging activities (if any) could reduce the
value of the existing stockholders’ equity interests in the Company at and
after the time that the hedging activities are being conducted.

(ii)           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 of the Company, 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.

(jj)           Form SB-2 Eligibility.           The Company is eligible to register
the resale of the Underlying Shares for resale by the Purchaser on Form SB-2
promulgated under the Securities Act.

 17
 

 

3.2           Representations
and Warranties of the Purchasers. 
Each Purchaser hereby, for itself and for no other Purchaser, represents
and warrants as of the date hereof and as of the Closing Date to the Company as
follows:

(a)           Organization; Authority.  Such Purchaser is 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 thereunder.
The execution, delivery and performance by such Purchaser of the transactions
contemplated by this Agreement have been duly authorized by all necessary
corporate or similar action 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 (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) in violation of the Securities Act or any applicable
state securities law.  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 at the date hereof it is, and on each date on which it converts any
shares of Preferred Stock or exercises any Warrants, 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.

 18
 

 

(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.

(f)            Short Sales and Confidentiality Prior To The Date Hereof.  Other than the
transaction contemplated hereunder, such Purchaser has not, nor has any Person
acting on behalf of or pursuant to any understanding with such Purchaser,
directly or indirectly executed any transaction, including Short Sales, in
the securities of the Company during the period commencing from the time that
such Purchaser first received a term sheet (written or oral) from the Company
or any other Person setting forth the material terms of the transactions
contemplated hereunder until the date hereof (“Discussion Time”).  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).

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 of a Purchaser under this Agreement and the
Registration Rights Agreement.

(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 (as
applicable) in the following form:

[NEITHER] THIS SECURITY
[NOR THE SECURITIES INTO WHICH THIS SECURITY IS [EXERCISABLE] [CONVERTIBLE]]
HAS BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE
SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON

 19
 

 

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
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 the Registration Rights 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,
including, if the Securities are subject to registration pursuant to the
Registration Rights Agreement, the preparation and filing of any required
prospectus supplement under Rule 424(b)(3) under the Securities Act or other
applicable provision of the Securities Act to appropriately amend the list of
Selling Stockholders thereunder.

(c)           Certificates evidencing 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, or
(ii) following any sale of such Underlying Shares pursuant to Rule 144, or
(iii) if such Underlying Shares are eligible for sale under Rule 144(k), 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 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 shares of Preferred Stock or any portion of a Warrant is converted
or exercised (as applicable) 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(k) 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

 20
 

 

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 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 any transfer agent of the Company that enlarge the restrictions
on transfer set forth in this Section. 
Certificates for Underlying Shares subject to legend removal hereunder
shall be transmitted by the Transfer Agent to the Purchasers by crediting the
account of the Purchaser’s prime broker with the Depository Trust Company
System.

(d)           [RESERVED].

(e)           Each Purchaser, severally and not jointly with the other
Purchasers, agrees 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 that the 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.

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.  As long as any Purchaser owns Securities, the
Company covenants to timely file (or obtain extensions in respect thereof and
file within the applicable grace period) all reports required to be filed by
the Company after the date hereof pursuant to 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 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 within the requirements of the exemption provided by
Rule 144.

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

 21
 

 

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 to the Purchasers or that would be integrated
with the offer or sale of the Securities for purposes of the rules and
regulations of any Trading Market.

4.5           Conversion and Exercise Procedures.  The form of Notice
of Exercise included in the Warrants and the form of Notice of Conversion
included in the Certificate of Designation set forth the totality of the
procedures required of the Purchasers in order to exercise the Warrants or
convert the Preferred Stock.  No
additional legal opinion or other information or instructions shall be required
of the Purchasers to exercise their Warrants or convert their Preferred
Stock.  The Company shall honor exercises
of the Warrants and conversions of the Preferred Stock 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
within the time period required by the Exchange Act, issue a Current Report on
Form 8-K, disclosing the material terms of the transactions contemplated hereby
and filing the Transaction Documents as exhibits thereto.  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 or 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 (i) as
required by federal securities law in connection with (A) any registration
statement contemplated by the Registration Rights Agreement and (B) the filing
of final Transaction Documents (including signature pages thereto) with the
Commission and (ii) to the extent such disclosure is required by law or Trading
Market regulations, in which case the Company shall provide the Purchasers with
prior notice of such disclosure permitted under this subclause (ii).

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, solely by virtue of receiving Securities
under the Transaction Documents.

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

 22
 

 

information, unless prior thereto such Purchaser shall
have executed a written agreement regarding the confidentiality and use of such
information.  The Company understands and
confirms that each Purchaser shall be relying on the foregoing representations
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 (i) repayment of up to $1,335,000 of indebtedness of
the Company and (ii) working capital purposes, and shall not use such proceeds
for the satisfaction of any other portion of the Company’s debt (other than
payment of trade payables in the ordinary course of the Company’s business and
prior practices), or to redeem any Common Stock, or Common Stock Equivalents or
to settle any outstanding litigation.

4.10         [RESERVED].

4.11         Indemnification of Purchasers.   Subject to the provisions of this Section
4.11, 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, 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 the 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 such
separate counsel, a material conflict on any material

 23
 

 

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 (i) for any settlement by
a Purchaser Party effected without the Company’s prior written consent, which
shall not be unreasonably withheld or delayed; or (ii) 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.

4.12         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 be required to fulfill its obligations in full
under the Transaction Documents.

(b)           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 on such Trading Market as soon as possible
thereafter, (iii) provide to the Purchasers evidence of such listing, and (iv)
maintain the listing 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.

4.13         [RESERVED].

4.14         [RESERVED].

4.15         Equal Treatment of Purchasers.  No consideration shall be offered or paid to
any Person to amend or consent to a waiver or modification of any provision of
any of the Transaction Documents unless the same consideration is also offered
to all of the parties to the Transaction Documents.  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.

4.16         Short Sales and Confidentiality After The Date Hereof. 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 Short Sales during the
period commencing at the Discussion Time and ending at the time that the
transactions contemplated by this Agreement are first publicly announced 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 as described in Section 4.6, such Purchaser will
maintain the confidentiality of all disclosures made to it in connection with
this transaction (including the existence and terms of this transaction).

 24
 

 

Each Purchaser understands and acknowledges, severally
and not jointly with any other Purchaser, that the Commission currently takes
the position that coverage of short sales of shares of the Common Stock “against
the box” prior to the Effective Date of the Registration Statement with the Securities
is a violation of Section 5 of the Securities Act, as set forth in Item 65,
Section A, of the Manual of Publicly Available Telephone Interpretations, dated
July 1997, compiled by the Office of Chief Counsel, Division of Corporation
Finance.  Notwithstanding the foregoing,
no Purchaser makes any representation, warranty or covenant hereby that it will
not engage in Short Sales in the securities of the Company after the time that
the transactions contemplated by this Agreement are first publicly announced 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.

4.17         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 Closing 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.

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 Closing has not been consummated on or before November 30,
2006; provided, however, that no such termination will affect the
right of any party to sue for any breach by the other party (or parties).  The Agreement may be terminated by the
Company at any time and with respect to one or more Purchasers at any time and
without any obligation to any Purchaser at any time prior to the Closing Date.

5.2           Fees and Expenses.  At the Closing, the Company has agreed to
reimburse Empire Financial Group (“Empire”) for its legal fees and
expenses incurred in connection with the transactions contemplated by this
Agreement, up to a maximum of $25,000. 
The Company shall deliver to each Purchaser, prior to the 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

 25
 

 

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 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 each Purchaser 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 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 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 4.11.

 26
 

 

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 California, 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 San
Diego.  Each party hereby irrevocably
submits to the exclusive jurisdiction of the state and federal courts sitting
in the City of San Diego 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. 
The parties hereby waive all rights to a trial by jury.  If either party shall commence an action or
proceeding to enforce any provisions of the Transaction Documents, then 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.

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

 27
 

 

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, in the case of a
rescission of a conversion of the Preferred Stock or exercise of a Warrant, the
Purchaser shall be required to return any shares of Common Stock subject to any
such rescinded conversion or exercise notice.

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.

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 agrees 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         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

 28
 

 

Transaction Documents from the effective date forward,
unless such application is precluded by applicable law.

5.17         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 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, Purchasers and their respective counsel have chosen to
communicate with the Company through FWS. 
FWS does not represent any of the Purchasers but only Empire as
placement agent.  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 the Purchasers.

5.18         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.

5.19         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.

[SIGNATURE PAGES FOLLOWS]

 29
 

 

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.

 

 

	
  IMAGEWARE SYSTEMS, INC.

  	
  Address for Notice:

  
	
   

  	
   

  
	
  By:

  	
     /s/
  S. James Miller

  	
   

  	
  10883 Thornmint Road

  
	
   

  	
  Name:  S. James Miller

  	
  San Diego, CA 92127

  
	
   

  	
  Title:  Chairman & CEO

  	
  Facsimile:

  	
  (858) 673-0291

  	
   

  
	
   

  	
  Attention:

  	
   

  	
   

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

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  Carl R. Sanchez,
  Esq.

  Paul, Hastings, Janofsky & Walker LLP

  3579 Valley Centre Drive

  San Diego, CA 92130

  Telephone: (858) 720-2500

  	
   

  
						

 

 

[REMAINDER OF PAGE
INTENTIONALLY LEFT BLANK

SIGNATURE PAGE FOR PURCHASER FOLLOWS]

 30
 

 

 

[PURCHASER
SIGNATURE PAGES TO IW 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:

  	
   

  	
   

  
	
   

  
	
  Fax Number of
  Authorized Signatory:

  	
   

  	
   

  
								

 

 

Address for Notice of Purchaser:

 

 

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

 

 

Subscription Amount: $

Shares of Preferred
Stock: 

Warrant Shares: 

EIN Number:

 31
 

 

Annex A

CLOSING
STATEMENT

Pursuant to the
attached Securities Purchase Agreement, dated as of the date hereto, the
purchasers shall purchase up to $3,500,000 of Preferred Stock and Warrants from
ImageWare Systems, Inc., a Delaware corporation (the “Company”).  All funds will be wired directly to the
Company.  All funds will be disbursed in accordance
with this Closing Statement.

Disbursement
Date:           November     ,
2006

	
  I.  PURCHASE PRICE

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Gross Proceeds to be Received in Trust

  	
   

  	
  $

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  II.  DISBURSEMENTS

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Total
  Amount Disbursed:

  	
   

  	
  $

  	
   

  	
   

  

 

 

WIRE INSTRUCTIONS:

 

	
  To:

  	
   

  	
   

  
	
   

  
	
   

  
	
  To:

  	
   

  	
   

  

 

 32

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