Document:

Exhibit 10.1

 

SECURITIES PURCHASE AGREEMENT

 

This Securities Purchase Agreement (this “Agreement”) is dated
as of March 28, 2005, by and among Intrusion Inc., a Delaware corporation (the “Company”),
and the purchasers 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 Designations (as
defined herein), and (b) the following terms have the meanings indicated in
this Section 1.1:

 

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

 

“Actual 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 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,
subject to the limitation on the number of shares of Common Stock issuable
hereunder set forth in Sections 6(c) and 6(d) of the Certificate of Designations.

 

“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.

 

“Certificate of Designations” means
the Certificate of Designations 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.

 

“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 have been 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 exchangeable for, or otherwise entitles the holder
thereof to receive, Common Stock.

 

“Company Counsel” means Patton Boggs
LLP.

 

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

 

“Current 10-KSB” means the Company’s
Annual Report on Form 10-KSB for the fiscal year ended December 31, 2004,
a current draft of which is attached as Annex 1 to the Disclosure Schedules,
which the Company intends to file on the second Trading Day following the
Closing Date.

 

“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.

 

“Escrow Agent” shall have the meaning
set forth in the Escrow Agreement.

 

“Escrow Agreement” shall mean the
Escrow Agreement in substantially the form of Exhibit E hereto executed
and delivered contemporaneously with this Agreement.

 

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

 

2

 

“Exempt Issuance” means the issuance
of (a) shares of Common Stock or options to employees, officers or directors
of, or consultants to, the Company pursuant to any stock or option plan duly
adopted 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 for such purpose, (b) securities upon the exercise of or
conversion of (i) any Securities issued hereunder or (ii), convertible
securities, options or warrants issued and outstanding on the date of this
Agreement, provided that in the case of this clause (ii) such securities have
not been amended since the date of this Agreement to increase the number of
such securities or to decrease the exercise or conversion price of any such
securities other than as a result of the operation of the anti-dilution
provisions thereof, (c) securities issued pursuant to acquisitions or strategic
transactions, 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, (d) shares of capital stock, convertible securities, options or
warrants issued in connection with any pro rata stock split or stock dividend
in respect of any series or class of capital stock of the Company or
recapitalization by the Company, (e) warrants issued pursuant to a commercial
borrowing, secured lending or lease financing transaction approved by the
Company’s Board of Directors, (f) shares of capital stock issued in a
firm-commitment underwritten public offering of securities pursuant to a
registration statement filed under the Securities Act with gross proceeds of at
least $30,000,000 and (g) securities issued upon the conversion or exercise of
any of the capital stock, convertible securities, options or warrants described
in clauses (a) through (f), provided that in the case of this clause (g) such
securities have not been amended since the date of this Agreement to increase
the number of such securities or to decrease the exercise or conversion price
of any such securities other than as a result of the operation of the
anti-dilution provisions thereof.

 

“Existing Preferred Stock” means the
Company’s 1,000,000 shares of 5% Convertible Preferred Stock, par value $0.01
per share, designated pursuant the Certificate of Designation filed with the
Delaware Secretary of State on March 25, 2004.

 

“FW” means Feldman Weinstein 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).

 

“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).

 

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“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.

 

“Permitted Lien” means (i) any Lien
for Taxes not yet due; (ii) any statutory Lien or contractual landlord’s Lien
or other Lien created by operation of law arising in the ordinary course of
business with respect to a Liability that is not yet due; (iii) retention of
title agreements with suppliers entered into in the ordinary course of
business; (iv) non-exclusive licenses of intellectual property granted by the
Company to third parties in the ordinary course of business; (v) licenses and
restrictions on use of third party intellectual property licensed to or used by
the Company in the ordinary course of business; (vi) source code escrow
arrangements; (vii) restrictions on transfer under federal or state securities
laws; and (viii) such imperfections of title and non-monetary Liens as do not
and will not materially detract from or interfere with the use of the
properties subject thereto or affected thereby or otherwise materially impair
business operations involving such properties.

 

 “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 the up to 1,200,000
shares of the Company’s Series 2 5% Convertible Preferred Stock issued
hereunder having the rights, preferences and privileges set forth in the
Certificate of Designations.

 

“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.

 

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“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 as provided for in the Registration Rights Agreement.

 

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

 

“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) and shall be deemed to include the
Current 10-KSB.

 

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

 

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

 

“Shareholder Approval” means such
approval as may be required by the applicable rules and regulations of the
Trading Market (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 and shares of Common
Stock issuable upon exercise of the Warrants in excess of 19.99% of the issued
and outstanding Common Stock on the Closing Date.

 

“Short Sales” shall include all “short
sales” as defined in Rule 200 of Regulation SHO under the Exchange Act. 

 

 “Stated
Value” means $2.50 per share of
Preferred Stock.

 

“Subscription Amount” shall mean, as to each Purchaser, the 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.

 

 

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

 

“Subsidiary” means any subsidiary of
the Company as set forth on Schedule 3.1(a) or identified in an
Exhibit included or incorporated in the SEC Reports pursuant to Item 601(b)(21)
of Regulation S-B.

 

“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 Nasdaq SmallCap Market, the American Stock Exchange,
the New York Stock Exchange, the Nasdaq National Market or the OTC Bulletin
Board.

 

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

 

“Underlying Shares” means the shares
of Common Stock 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.

 

 “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 Financial L.P. (based
on a Trading Day from 9:30 a.m. Eastern Time to 4:02 p.m. Eastern Time); (b) if
the Common Stock is not then listed or quoted on a Trading Market and if prices
for the Common Stock are then quoted on the OTC Bulletin Board, the volume
weighted average price of the Common Stock for such date (or the nearest
preceding date) on the OTC Bulletin Board; (c) if the Common Stock is not then
listed or quoted on the OTC Bulletin Board and if prices for the Common Stock
are then reported in the “Pink Sheets” published by the 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 (c) 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 Purchasers
and reasonably acceptable to the Company.

 

“Warrants” means collectively the
Common Stock purchase warrants, in the form of Exhibit C delivered
to the Purchasers at the Closing in accordance with Section 2.2(a) hereof,
which Warrants shall be exercisable beginning 6 months following the issuance
thereof and have a term of exercise equal to 5 years.

 

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“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, concurrent with the execution and delivery
of this Agreement by the parties hereto, the Company agrees to sell, and each
Purchaser agrees to purchase in the aggregate, severally and not jointly, up to
1,200,000 shares of Preferred Stock with an aggregated Stated Value equal to
such Purchaser’s Subscription Amount and Warrants as determined by pursuant to Section 2.2(a)(iii).  The aggregate number of shares of Preferred
Stock sold hereunder shall be up to 1,200,000. 
Each Purchaser shall deliver to the Company via wire transfer or a
certified check of immediately available funds equal to their Subscription
Amount and the Company shall deliver to each Purchaser their 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 via facsimile and electronic
transmission at the offices of the Escrow Agent, 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 the Escrow Agent
with respect to each Purchaser the following:

 

(i)                                     this Agreement
duly executed by the Company;

 

(ii)                                  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;

 

(iii)                               a Warrant registered in
the name of such Purchaser to purchase up to a number of shares of Common Stock
equal to 50% of such Purchaser’s Subscription Amount divided by $2.50, with an
exercise price equal to $2.77, subject to adjustment therein;

 

(iv)                              the Registration Rights
Agreement duly executed by the Company;

 

(v)                                 the Escrow Agreement
duly executed by the Company;

 

(vi)                              a legal opinion of
Company Counsel, in the form of Exhibit D attached hereto; and

 

(vii)                           the written voting
agreement, in the form of Exhibit F attached 

 

 

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hereto, of all of the officers, directors and
shareholders holding more than 10% of the issued and outstanding shares of
Common Stock on the date hereof to vote all Common Stock owned by each of such
officers, directors and shareholders as of the record date for the annual
meeting of shareholders of the Company in favor of Shareholder Approval.

 

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

 

(i)                                     this Agreement
duly executed by such Purchaser;

 

(ii)                                  such Purchaser’s Subscription
Amount by wire transfer to the account of the Escrow Agent;

 

(iii)                               the Escrow Agreement
duly executed by such Purchaser; and

 

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

 

2.3                                                         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;

 

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

 

(iv)                              the Company shall have
received the Required Approval contemplated by Section 3.1(e)(iii) from
Nasdaq for the listing of the Underlying Shares; and

 

(v)                                 the Company shall have
received the Required Approval of the holders of the Existing Preferred Stock
contemplated by Section 3.1(e)(vi).

 

b)                                     The respective
obligations of the Purchasers hereunder in connection with 

 

8

 

the Closing are subject to the following
conditions being met:

 

(i)                                     the accuracy in
all material respects 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 (except for any suspension of trading of limited duration
agreed to by the Company, which suspension shall be terminated prior to the
Closing), and, at any time prior to the Closing Date, trading in securities
generally as reported by Bloomberg Financial Markets shall not have been
suspended or limited, or minimum prices shall not have been established on
securities whose trades are reported by such service, or on any Trading Market,
nor shall a banking moratorium have been declared either by the United States
or New York State authorities nor shall there have occurred any material
outbreak or escalation of hostilities or other national or international
calamity of such magnitude in its effect on, or any material adverse change in,
any financial market which, in each case, in the reasonable judgment of each
Purchaser, makes it impracticable or inadvisable to purchase the 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, the
Company hereby makes the representations and warranties set forth below to each
Purchaser.  For all purposes herein, the
Current 10-KSB shall constitute a part of, and be incorporated in, the
Disclosure Schedules and shall qualify the representations and warranties of
the Company set forth herein.

 

(a)                                  Subsidiaries.  All of the direct and indirect subsidiaries
of the Company are set forth on Schedule 3.1(a) or identified in an
Exhibit included or incorporated in the 

 

9

 

SEC Reports pursuant to Item 601(b)(21) of
Regulation S-B.  The Company owns,
directly or indirectly, all of the capital stock or other equity interests of
each Subsidiary free and clear of any Liens other than Permitted Liens, and all
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, then
references in the Transaction Documents to the Subsidiaries will 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 financial condition of the Company and the Subsidiaries, taken as a whole
(other than any of the following, either alone or in combination: (A) any
effect or change occurring as a result of (1) general economic or financial
conditions or (2) other developments which are not unique to the Company but
also affect other persons or entities in the Company’s industry; (B) any change
or effect resulting from a delay in the Closing not caused directly or
indirectly by the Company; or (C) failure of the Company’s results of
operations to meet any internal or external projections, predictions, estimates
or expectations, or (iii) a material adverse effect on the Company’s ability to
perform in any material respect on a timely basis its obligations under any
Transaction Document (any of (i), (ii) or (iii), a “Material Adverse Effect”)
and no Proceeding has been instituted in any such jurisdiction revoking,
limiting or curtailing or seeking to revoke, limit or curtail such power and
authority or qualification.

 

(c)                                  Authorization;
Enforcement.  Subject to obtaining
the Required Approvals, 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
thereunder.  Subject to obtaining the
Required Approvals, the execution and delivery of each of the Transaction
Documents by the Company and the consummation by it of the transactions
contemplated thereby have been duly authorized by all necessary action on the
part of the Company and no further action is required by the Company in
connection therewith other than in connection with the Required Approvals.  Subject to obtaining the Required Approvals,
each Transaction Documents has been (or upon delivery will have been) duly
executed by the Company and, when delivered in accordance with the terms
hereof, will constitute the valid and 

 

10

 

binding obligation of the Company enforceable
against the Company in accordance with its terms except (i) as limited by
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) to the extent the
indemnification provisions of the Registration Rights Agreement or this
Agreement may be limited by federal or state securities laws.

 

(d)                                 No Conflicts.  Subject to obtaining the Required Approvals,
the execution, delivery and performance of the Transaction Documents by the
Company and the consummation by the Company of the other transactions
contemplated 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 and which is or is required to be filed or
incorporated as an exhibit to the SEC Reports or the Current 10-KSB, or (iii)
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 except to the extent such laws may
limit the indemnification provisions of the Registration Rights Agreement or
this Agreement), 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 Preferred Stock and Warrants 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, (v) the filing of the Certificate
of Designations with the Delaware Secretary of State, (vi) the consent of the holders
of at least a majority of the outstanding shares of Existing Preferred Stock and
(vii) Shareholder Approval (collectively, the “Required Approvals”).

 

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(f)                                    Issuance of the
Securities.  Subject to obtaining the
Required Approvals, 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 or under federal or state securities laws.  Subject to obtaining the Required Approvals,
the Underlying Shares, when issued in accordance with the terms of the Transaction
Documents, will be validly issued, fully paid and nonassessable, free and clear
of all Liens imposed by the Company other than restrictions on transfer
provided for in the Transaction Documents or under federal or state securities
laws.  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 Actual Minimum on the date
hereof.

 

(g)                                 Capitalization.  The capitalization of the Company as of March
28, 2005 is as set forth on Schedule 3.1(g).  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 outstanding Common Stock Equivalents.  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 other than the
Required Approvals which have not been exercised or waived as of the Closing
Date.  Except as a result of the purchase
and sale of the Securities or as otherwise provided in the Transaction
Documents or set forth on Schedule 3.1(g) or in the SEC Reports or
the Current 10-KSB, 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 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 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 shares of
Preferred Stock.  Except as set forth on Schedule 3.1(g),
in the SEC Reports or in the Current 10-KSB, 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.

 

12

 

(h)                                 SEC Reports;
Financial Statements.  The Company
has filed all reports, schedules, forms, statements and other documents
required to be filed by it 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 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 and the rules and regulations of the Commission
promulgated thereunder, 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 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.  Since the date of the
latest audited financial statements included within the SEC Reports, except as
specifically disclosed in the SEC Reports, (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, (B)
liabilities not required to be reflected in the Company’s financial statements
pursuant to GAAP or required to be disclosed in filings made with the
Commission and (C) liabilities incurred in connection with the negotiation,
preparation, execution and delivery of the Transaction Documents and the
consummation of the transactions contemplated thereby, (iii) the Company has
not altered its method of accounting, except as required by GAAP, the
Securities Act, the Exchange Act or the Commission or as otherwise disclosed in
the SEC Reports or the Current 10-KSB, (iv) the Company has not declared or made
any dividend or distribution of cash or other property to its stockholders (other
than dividends payable to holders of Existing Preferred Stock) or purchased,
redeemed or made any agreements to purchase or redeem any shares of its capital
stock (other than as a result of the conversion of outstanding shares of
Existing Preferred 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 or the Transaction Documents.  The Company does 

 

13

 

not have pending before the Commission any
request for confidential treatment of information.

 

(j)                                     Litigation.  Except as set forth in the SEC Reports or the
Current 10-KSB, 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.

 

(l)                                     Compliance.  Subject to obtaining the Required Approvals
and except as otherwise set forth in the SEC Reports or the Current 10-KSB, 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) and which is or is required to be filed or
incorporated as an exhibit to the SEC Reports or the Current 10-KSB, (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 except in each case as could
not have a Material Adverse Effect.

 

(m)                               Regulatory Permits.  The Company and the Subsidiaries possess all
certificates, authorizations and permits issued by the appropriate federal,
state, local or foreign regulatory authorities necessary to conduct their
respective businesses as described in the SEC Reports and the Current 10-KSB,
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 

 

14

 

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 valid title to all real property owned by them that is material to the
business of the Company and the Subsidiaries and good and valid 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 Permitted
Liens.  Any real property and facilities
held under lease by the Company and the Subsidiaries are held by them under
valid and subsisting and enforceable against the Company or the Subsidiary
party thereto, and the Company or such Subsidiary is in compliance with the
terms thereof, except for such noncompliance as could not have a Material
Adverse Effect.

 

(o)                                 Patents and
Trademarks.  To the knowledge of the
Company (without any special investigation or patent search) the Company and
the Subsidiaries have, or have rights to use, all patents, patent applications,
trademarks, trademark applications, service marks, trade names, copyrights,
licenses and other similar rights that used 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 written notice 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 (without any
special investigation or patent search), all such Intellectual Property Rights
are enforceable and there is no existing infringement by another Person of any
of the Intellectual Property Rights of others.

 

(p)                                 Insurance.  The Company and the Subsidiaries are insured
by insurers of recognized financial responsibility against such losses and
risks and in such amounts as are prudent and customary in the businesses in
which the Company and the Subsidiaries are engaged to the extent conducted by
companies of similar size and financial condition, including, but not limited
to, directors and officers insurance coverage at least equal to the aggregate
Subscription Amount.  To the best of
Company’s knowledge, such insurance contracts and policies are accurate and
complete.  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.  Other than
the Transaction Documents and except as set forth in the SEC Reports or the
Current 10-KSB, 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 

 

15

 

Company, any entity in which any officer,
director, or any such employee has a substantial interest or is an officer,
director, trustee or partner, in each case in excess of $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 material
information relating to the Company, including its Subsidiaries, is made known
to the certifying officers by others within those entities, particularly during
the period in which the Company’s most recently filed periodic report under the
Exchange Act, as the case may be, is being prepared.  The Company’s certifying officers have
evaluated the effectiveness of the Company’s controls and procedures as of the
date prior to the filing date of the 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
significant changes in the Company’s internal controls (as such term is defined
in Item 307(b) of Regulation S-K under the Exchange Act) or, to the Company’s
knowledge, in other factors that could significantly affect the Company’s
internal controls.

 

(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 this Agreement.  The Purchasers shall have no obligation with
respect to any fees or with respect to any claims made by or on behalf of other
Persons for fees of a type contemplated in this Section that may be due in
connection with the transactions contemplated by this Agreement.

 

(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. Subject to obtaining the Required Approvals,
the issuance and 

 

16

 

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 shares of Preferred Stock, will not be or be an Affiliate
of, an “investment company” within the meaning of the Investment Company Act of
1940, as amended.  The Company shall
conduct its business in a manner so that it will not become subject to the
Investment Company Act.

 

(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(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.  Except as set forth in the
SEC Reports or the Current 10-KSB, 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. Subject to obtaining the Required Approvals, the Company is 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 the Company’s issuance of
the Securities and the Purchasers’ ownership of the Securities.

 

(y)                                 Disclosure.  Except for the information contained in the
Current 10-KSB and for the existence 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 constitutes or might constitute material,
nonpublic information, except to the extent such information was provided to a
Purchaser who has executed a confidentiality or non-disclosure agreement on or
prior to the date hereof.  The Company
understands and confirms that the Purchasers will rely on the foregoing
representations and covenants in effecting transactions in securities of the
Company.  All disclosure provided to the
Purchasers regarding the Company, its business and the transactions
contemplated hereby, including the Disclosure Schedules to this Agreement,
furnished by or on behalf of the Company 

 

17

 

with respect to the representations and
warranties made herein are true and correct with respect to such
representations and warranties and do 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 Company acknowledges and agrees that no Purchaser
makes or has made any representations or warranties with respect to the
transactions contemplated hereby other than those specifically set forth in Section 3.2
hereof.

 

(z)                                   No Integrated
Offering.  Assuming the accuracy of
the Purchasers’ representations and warranties set forth in Section 3.2,
neither the Company, nor any of its affiliates, nor any Person acting on its or
their behalf has, directly or indirectly, made any offers or sales of any
security or solicited any offers to buy any security, under circumstances that
would cause this offering of the Securities to be integrated with prior
offerings by the Company for purposes of the Securities Act or any applicable
shareholder approval provisions, including, without limitation, under the rules
and regulations of any Trading Market on which any of the securities of the
Company are listed or designated. 

 

(aa)                            Solvency.  Based on the financial condition of the
Company as of the Closing Date after giving effect to the receipt by the
Company of the proceeds from the sale of the Securities hereunder, (i) the Company
believes its available cash, cash equivalents and short term investments are
sufficient to fund the operation of its business for the next twelve months and
(ii) the Company will not be subject to a “going concern” opinion from its
accountants in the financial statements included in the Current 10-KSB.  The Company does not intend to incur debts
beyond its ability to pay such debts as they mature (taking into account the
timing and amounts of cash to be payable on or in respect of its debt).  The Company has no knowledge of any facts or
circumstances which lead it to believe that it will file for reorganization or
liquidation under the bankruptcy or reorganization laws of any jurisdiction
within one year from the Closing Date. 
The SEC Reports and the Current 10-KSB set forth as of the dates thereof
all outstanding secured and unsecured Indebtedness of the Company or any
Subsidiary, or for which the Company or any Subsidiary has commitments.  For the purposes of this Agreement, “Indebtedness”
shall mean (a) any liabilities for borrowed money or amounts owed in excess of
$50,000 (other than trade accounts payable incurred in the ordinary course of
business), (b) all guaranties, endorsements and other contingent obligations in
respect of Indebtedness of others, whether or not the same are or should be
reflected in the Company’s balance sheet (or the notes thereto), except
guaranties by endorsement of negotiable instruments for deposit or collection
or similar transactions in the ordinary course of business; and (c) the present
value of any lease payments in excess of $50,000 due under leases required to
be capitalized in accordance with GAAP. 
Neither the Company nor any Subsidiary is in default with respect to any
Indebtedness.

 

(bb)                          Form S-3 Eligibility.  The Company is eligible to register the
resale of the Underlying Shares for resale by the Purchaser on Form S-3
promulgated under the Securities Act pursuant to General Instruction I.B.3 of Form
S-3.

 

18

 

(cc)                            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.

 

(dd)                          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.

 

(ee)                            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

 

(ff)                                Accountants.  The Company’s accountants are set forth on Schedule 3.1(ff)
of the Disclosure Schedule.  To the
Company’s knowledge, such accountants, who the Company expects will express their
opinion with respect to the financial statements to be included in the Company’s
Annual Report on Form 10-K for the year ending December 31, 2004 are a
registered public accounting firm as required by the Securities Act.

 

(gg)                          Seniority.  As of the Closing Date, no other equity of
the Company is senior to the Preferred Stock in right of payment, whether with
respect to interest or upon liquidation or dissolution, or otherwise.

 

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

 

(ii)                                  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
hereby.  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 this Agreement and the
transactions contemplated hereby and any advice 

 

19

 

given by any Purchaser or any of their
respective representatives or agents in connection with this Agreement and the
transactions contemplated hereby 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 has been based solely on the independent evaluation of the
transactions contemplated hereby by the Company and its representatives.

 

 

(jj)                                  Acknowledgement
Regarding Purchasers’ Trading Activity. 
Anything in this Agreement or elsewhere herein to the contrary
notwithstanding (except for Section 4.16 hereof), it is understood and
agreed by the Company (i) that none of the Purchasers have been asked to agree,
nor has any Purchaser agreed, to desist from purchasing or selling, long and/or
short, securities of the Company, or “derivative” securities based on
securities issued by the Company or to hold the Securities for any specified
term; (ii) 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; (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, and (iv) that each Purchaser shall not be deemed
to have any affiliation with or control over any arm’s length counter-party in
any “derivative” transaction.

 

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
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 Documents 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 

 

20

 

account and not with a view to or for
distributing or reselling such Securities or any part thereof, has no present
intention of distributing any of such Securities and has no arrangement or
understanding with any other persons 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).  Such Purchaser is acquiring the
Securities hereunder in the ordinary course of its business. Such Purchaser
does not have any agreement or understanding, directly or indirectly, with any
Person to distribute any of the Securities.

 

(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
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.

 

(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.  Other than the
transaction contemplated hereunder, such Purchaser has not directly or
indirectly, nor has any Person acting on behalf of or pursuant to any
understanding with such Purchaser, executed any disposition, including Short
Sales (but not including the location and/or reservation of borrowable shares
of Common Stock), in the securities of the Company during the period
commencing from the time that such Purchaser first received a term sheet 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 

 

21

 

has maintained the confidentiality of all
disclosures made to it in connection with this transaction (including the
existence and terms of this transaction).

 

(g)                                 Opportunities for
Additional Information. Each Purchaser acknowledges that such Purchaser has
had the opportunity to ask questions of and receive answers from, or obtain
additional information from, the executive officers of the Company concerning
the financial and other affairs of the Company, and to the extent deemed
necessary by such Purchaser in light of such Purchaser’s personal knowledge of
the Company’s affairs, such Purchaser has asked such questions and received
answers to the full satisfaction of such Purchaser, and such Purchaser desires
to invest in the Company.

 

The Company acknowledges and
agrees that each Purchaser does not make or has not made any representations or
warranties with respect to the transactions contemplated hereby other than
those specifically set forth in this Section 3.2.

 

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 who agrees to be bound by the
provisions of this Agreement and the Registration Rights Agreement 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(b), of a
legend on any of the Securities in the following form:

 

[NEITHER]
THESE SECURITIES [NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
[EXERCISABLE] [CONVERTIBLE]] HAVE BEEN REGISTERED WITH THE SECURITIES AND
EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON
AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR
PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO,
THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN 

 

22

 

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. THESE SECURITIES AND THE SECURITIES
ISSUABLE UPON EXERCISE OF THESE SECURITIES 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 Company’s
transfer agent promptly after the Effective Date if required by the Company’s
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 thereof) then such Underlying Shares shall be issued free of
all legends.  The Company agrees that
following the Effective Date or at such time as such legend is no longer
required under this Section 4.1(c), it will, no later than three Trading
Days following the delivery by a Purchaser to the Company or the Company’s
transfer agent of a certificate representing Underlying Shares, as applicable,
issued with a restrictive legend (such third Trading Day, the “Legend
Removal Date”),

 

23

 

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.  If requested by
the applicable Purchaser, certificates for Securities subject to legend removal
hereunder shall be transmitted by the transfer agent of the Company to the
Purchasers by crediting the account of the Purchaser’s prime broker with the
Depository Trust Company System.

 

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

 

(e)                                  Each Purchaser,
severally and not jointly with the other Purchasers, agrees 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 and the Company’s
counsel’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.  The Company’s counsel, from time to time, is
expressly authorized to rely upon this covenant of Section 4.1(e).

 

(f)                                    Until the one year
anniversary of the Effective Date, the Company shall not undertake a reverse or
forward stock split or reclassification of the Common Stock without the prior
written consent of the Purchasers holding a majority in interest of the shares
of Preferred Stock.

 

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 

 

24

 

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, all to the extent required from time to time to enable such Person to
sell such Securities without registration under the Securities Act within the
limitation of the exemptions provided by Rule 144; provided, however,
that the Company shall not be required to disclose to such Person any material
non-public information regarding the Company.

 

4.4                                 Integration.  The Company shall not sell, offer for sale or
solicit offers to buy or otherwise negotiate in respect of any security (as
defined in Section 2 of the Securities Act) that would be integrated with
the offer or sale of the Securities in a manner that would require the
registration under the Securities Act of the sale of the Securities 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.  Except for
delivery of the Preferred Stock certificate and/or the Warrant certificate to
the Company upon the final conversion of the Preferred Stock or exercise of the
Warrants, as applicable, the form of Notice of Exercise included in the
Warrants and the Notice of Conversion included in the Certificate of
Designations 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, (a) by 8:30 a.m. Eastern time on the Trading Day
following the Closing Date, issue a press release, reasonably acceptable to the
Purchasers acquiring a majority of the shares of Preferred Stock at the Closing
disclosing the material terms of the transactions contemplated hereby and (b)
by 8:30 a.m. Eastern time on the second Trading Day following the Closing Date,
issue a Current Report on Form 8-K, reasonably acceptable to each Purchaser
disclosing the material terms of the transactions contemplated hereby and shall
attach the Transaction Documents thereto as exhibits.  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 the Purchasers acquiring a
majority of the shares of Preferred Stock at the Closing, with respect to any
press release of the Company, which consent shall not unreasonably be withheld,
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 

 

25

 

regulatory
agency or Trading Market, without the prior written consent of such Purchaser,
except (i) as required by federal securities law in connection with the
registration statement contemplated by the Registration Rights Agreement 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 subclause (i) or (ii).

 

4.7                                 Shareholder
Rights Plan.  No claim will be made
or enforced by the Company or, to the knowledge of the Company, any other
Person that any Purchaser is an “Acquiring Person” under any shareholder rights
plan or similar plan or arrangement in effect or hereafter adopted by the
Company, or that any Purchaser could be deemed to trigger the provisions of any
such plan or arrangement, by virtue of receiving Securities under the
Transaction Documents or under any other agreement between the Company and the
Purchasers. The Company shall conduct its business in a manner so that it will
not become subject to the Investment Company Act.

 

4.8                                 Non-Public
Information.  Except to the extent
providing such information is required pursuant to the terms of this Agreement
(including, without limitation, information regarding a Subsequent Financing
provided pursuant to Section 4.13), the Company covenants and agrees that
neither it nor any other Person acting on its behalf will provide any Purchaser
or its agents or counsel with any information that the Company believes
constitutes material non-public information, unless prior thereto such
Purchaser shall have executed a written agreement 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.  Notwithstanding the foregoing, each Purchaser
(i) acknowledges that (A) until the Company’s compliance with Section 4.6,
the terms of the Transaction Documents and the consummation of the transactions
contemplated hereby, (B) until its filing with the Commission, the information
contained or incorporated in the Current 10-KSB, except to the extent otherwise
disclosed in an another SEC Report or by the Company pursuant to Section 4.6,
and (C) any information provided to such Purchaser pursuant to Section 4.13
(other than a Pre-Notice), may constitute material non-public information as
defined by U.S. securities law Regulation FD; and (ii) agrees (A) to keep such
information confidential (B) not to disclose such information to any
third-party unless and until such information is made publicly available by the
Company, (C) to otherwise comply with Regulation FD and (D) to refrain from
trading in the Company’s Common Stock until such information is made publicly
available (other than as a result of a breach of this Section 4.8).

 

4.9                                 Use
of Proceeds.  Except as set forth on Schedule 4.9
attached hereto, the Company shall use the net proceeds from the sale of the
Securities hereunder for working capital purposes and not for the satisfaction
of any portion of the Company’s debt (other than payment of trade payables in
the ordinary course of the Company’s business and prior practices), to redeem Common
Stock or Common Stock Equivalents or to settle any outstanding litigation.  Prior to the receipt of Shareholder Approval,
the Company shall not declare or pay any cash dividend on its shares of Common
Stock while any shares of Preferred Stock remain outstanding.

 

4.10                           Reimbursement.  If any Purchaser becomes involved in any
capacity in any Proceeding by or against any Person who is a stockholder of the
Company (except as a result of sales, pledges, margin sales and similar
transactions by such Purchaser to or with any current 

 

26

 

stockholder),
solely as a result of such Purchaser’s acquisition of the Securities under this
Agreement, the Company will reimburse such Purchaser for its reasonable legal
and other expenses (including the cost of any investigation preparation and
travel in connection therewith) incurred in connection therewith, as such
expenses are incurred.  The reimbursement
obligations of the Company under this paragraph shall be in addition to any
liability which the Company may otherwise have, shall extend upon the same
terms and conditions to any Affiliates of the Purchasers who are actually named
in such action, proceeding or investigation, and partners, directors, agents,
employees and controlling persons (if any), as the case may be, of the
Purchasers and any such Affiliate, and shall be binding upon and inure to the
benefit of any successors, assigns, heirs and personal representatives of the Company,
the Purchasers and any such Affiliate and any such Person.  The Company also agrees that neither the
Purchasers nor any such Affiliates, partners, directors, agents, employees or
controlling persons shall have any liability to the Company or any Person
asserting claims on behalf of or in right of the Company solely as a result of
acquiring the Securities under this Agreement, unless such action is based upon
a breach of such Purchaser’s representations, warranties or covenants under the
Transaction Documents.

 

4.11                           Indemnification
of Purchasers.   Subject to the
provisions of this Section 4.11, the Company will indemnify and hold the
Purchasers and their directors, officers, shareholders, partners, employees and
agents (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
representation, 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.  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 issue between the
position of the Company and the position of such Purchaser Party.  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, 

 

27

 

warranties,
covenants or agreements made by the Purchasers 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)                                 RESERVED.

 

(c)                                  The Company shall, if
applicable: (i) in the time and manner required by the 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 Actual
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 the 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 Actual Minimum on such date on such Trading Market or another
Trading Market. In addition, the Company shall hold a special meeting of
shareholders (which may also be at the annual meeting of shareholders) within
120 days after the date hereof for the purpose of obtaining Shareholder
Approval, with the recommendation of the Company’s Board of Directors that such
proposal be approved, and the Company shall solicit proxies from its
shareholders in connection therewith in the same manner as all other management
proposals in such proxy statement and all management-appointed proxyholders
shall vote their proxies in favor of such proposal. If the Company does not
obtain Shareholder Approval at the first meeting, the Company shall call a
meeting every four months thereafter to seek Shareholder Approval until the
earlier of the date Shareholder Approval is obtained or the Preferred Stock is
no longer outstanding.

 

4.13                           Participation
in Future Financing.

 

(a)                                  From
the date hereof until the date that is the 180 days after the Effective Date,
upon any financing by the Company or any of its Subsidiaries of Common Stock or
Common Stock Equivalents (a “Subsequent Financing”), each Purchaser that
(A) still owns shares of Preferred immediately prior to date of the Pre-Notice,
(B) purchased shares of Preferred stock on the Closing Date, and (C) was not an
officer or director of the Company as of the Closing Date (any such Purchaser,
for such purpose, an “Eligible Purchaser”) shall have the right to
participate in up to an amount of the Subsequent Financing equal to 100% of the
Subsequent Financing (the “Participation Maximum”).

 

(b)                                 At
least 5 Trading Days prior to the closing of the Subsequent Financing, the
Company shall deliver to each Eligible Purchaser a written notice of its
intention to effect a Subsequent Financing (“Pre-Notice”), which
Pre-Notice shall ask such Purchaser if it wants to review the details of such
financing (such additional notice, a “Subsequent Financing Notice”).  Upon the request of an Eligible Purchaser,
and only upon a request 

 

28

 

by such Eligible Purchaser, for a Subsequent
Financing Notice, the Company shall promptly, but no later than 1 Trading Day
after such request, deliver a Subsequent Financing Notice to such Eligible
Purchaser.  The Subsequent Financing
Notice shall describe in reasonable detail the proposed terms of such
Subsequent Financing, the amount of proceeds intended to be raised thereunder,
the Person with whom such Subsequent Financing is proposed to be effected, and
attached to which shall be a term sheet or similar document relating thereto.

 

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

 

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

 

(e)                                  If
by 5:30 p.m. (New York City time) on the fifth Trading Day after all of the Eligible
Purchasers have received the Pre-Notice, the Company receives responses to a
Subsequent Financing Notice from Eligible Purchasers seeking to purchase more
than the aggregate amount of the Participation Maximum, each such Eligible
Purchaser shall have the right to purchase the greater of (a) their Pro Rata
Portion (as defined below) of the Participation Maximum and (b) the difference
between the Participation Maximum and the aggregate amount of participation by
all other Eligible Purchasers.  “Pro Rata Portion” is the ratio of
(x) the Subscription Amount of Securities purchased on the Closing Date by an Eligible
Purchaser participating under this Section 4.13 and (y) the sum of the
aggregate Subscription Amounts of Securities purchased on the Closing Date by
all Eligible Purchasers participating under this Section 4.13.

 

(f)                                    The
Company must provide the Eligible Purchasers with a second Subsequent Financing
Notice, and the Eligible Purchasers will again have the right of participation
set forth above in this Section 4.13, if the Subsequent Financing subject
to the initial Subsequent Financing Notice is not consummated for any reason on
the terms set forth in such Subsequent Financing Notice within 60 Trading Days
after the date of the initial Subsequent Financing Notice.

 

(g)                                 Notwithstanding
the foregoing, this Section 4.13 shall not apply in respect of an Exempt
Issuance.

 

29

 

4.14                           Subsequent
Equity Sales.

 

(a)                                  From
the date hereof until 180 days after the Effective Date, neither the Company
nor any Subsidiary shall issue shares of Common Stock or Common Stock
Equivalents; provided, however, the 180 day period set forth in this Section 4.14
shall be extended for the number of Trading Days during such period in which (i)
trading in the Common Stock is suspended by any Trading Market, or (ii)
following the Effective Date, the Registration Statement is not effective or
the prospectus included in the Registration Statement may not be used by the
Purchasers for the resale of the Underlying Shares.

 

(b)                                 From the date hereof
until such time as no Purchaser holds any of the Preferred Stock and Warrants,
the Company shall be prohibited from effecting or entering into an agreement to
effect any Subsequent Financing involving a “Variable Rate Transaction”.  The term “Variable Rate Transaction”
shall mean a transaction in which the Company issues or sells (i) any debt or
equity securities that are convertible into, exchangeable or exercisable for,
or include the right to receive additional shares of Common Stock either (A) at
a conversion, exercise or exchange rate or other price that is based upon and/or
varies with the trading prices of or quotations for the shares of Common Stock
at any time after the initial issuance of such debt or equity securities, or
(B) with a conversion, exercise or exchange price that is subject to being
reset at some future date after the initial issuance of such debt or equity
security or upon the occurrence of specified or contingent events directly or
indirectly related to the business of the Company or the market for the Common Stock
or (ii) enters into any agreement, including, but not limited to, an equity
line of credit, whereby the Company may sell securities at a future determined
price.

 

(c)                                  Notwithstanding the
foregoing, this Section 4.14 shall not apply in respect of an Exempt
Issuance, except that no Variable Rate Transaction shall be an Exempt Issuance.

 

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 to
treat for the Company 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.  Further, the rights of Eligible Purchasers
under Section 4.13 or a waiver of the terms thereof shall not be deemed to
be unequal treatment of any non-Eligible Purchasers

 

4.16                           Short
Sales and Confidentiality.  Each Purchaser
covenants that neither it nor any affiliates acting on its behalf or pursuant
to any understanding with it will execute any Short Sales during the period
after the Discussion Time until prior to the time that the transactions
contemplated by this Agreement are first publicly announced as described in Section 4.6.  Each 

 

30

 

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).  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 5 under 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.

 

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 March 31, 2005; provided,
however, that no such termination will affect the right of any party to
sue for any breach by the other party (or parties).

 

5.2                                 Fees
and Expenses.  Except as expressly
set forth in the Transaction Documents to the contrary, each party shall pay
the fees and expenses of its advisers, counsel, accountants and other experts,
if any, and all other expenses incurred by such party incident to the
negotiation, preparation, execution, delivery and performance of this
Agreement.  The Company shall pay all
transfer agent fees, stamp taxes and other taxes and duties levied in
connection with the delivery of any Securities.

 

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 

 

31

 

on the
earliest of (a) the date of transmission, if such notice or communication is
delivered via facsimile at the facsimile number set forth on the signature
pages attached hereto prior to 5:30 p.m. (New York City time) on a Trading Day,
(b) the next Trading Day after the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile number set forth on
the signature pages attached hereto on a day that is not a Trading Day or later
than 5:30 p.m. (New York City time) on any Trading Day, (c) the second 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 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 waiver 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 either 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.  The language used in this
Agreement will be deemed to be the language chosen by the parties to express
their mutual intent, and no rules of strict construction will be applied against
any party.

 

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.  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 hereof 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 4.1(e), Section 4.10 and Section 4.11.

 

5.9                                 Governing
Law.  All questions concerning the
construction, validity, enforcement and interpretation of the Transaction
Documents shall be governed by and construed and enforced in accordance with
the internal laws of the State of New York, without regard to the principles of
conflicts of law thereof.  Each party
agrees that all legal proceedings concerning the interpretations, enforcement
and defense of the transactions contemplated by this Agreement and any other
Transaction Documents (whether brought against a party hereto or its respective
affiliates, directors, officers, shareholders, employees or agents) shall be
commenced exclusively in the state and federal courts sitting in the City of
New 

 

32

 

York.  Each party hereby irrevocably submits to the
exclusive jurisdiction of the state and federal courts sitting in the City of
New York, borough of Manhattan for the adjudication of any dispute hereunder or
in connection herewith or with any transaction contemplated hereby or discussed
herein (including with respect to the enforcement of any of the Transaction
Documents), and hereby irrevocably waives, and agrees not to assert in any
suit, action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is
improper or 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 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 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, exercise and/or conversion of the
Securities, as applicable 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,
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 signature page were an original thereof.

 

5.12                           Severability.  If any provision of this Agreement is held to
be invalid or unenforceable in any respect, the validity and enforceability of
the remaining terms and provisions of this Agreement shall not in any way be
affected or impaired thereby and the parties will attempt to agree upon a valid
and enforceable provision that is a reasonable substitute therefor, and upon so
agreeing, shall incorporate such substitute provision in this Agreement.

 

5.13                           Rescission
and Withdrawal Right. 
Notwithstanding anything to the contrary contained in (and without
limiting any similar provisions of) the Transaction Documents, whenever any
Purchaser exercises a right, election, demand or option under a Transaction Documents
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.

 

33

 

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, 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 and customary
and reasonable indemnity, if requested. 
The applicants for a new certificate or instrument under such
circumstances shall also pay any reasonable third-party costs 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 described in the foregoing
sentence and hereby agrees to waive in any action for specific performance of
any such obligation the defense that a remedy at law would be adequate.

 

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

 

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

 

34

 

Transaction
Documents, such excess shall be applied by such Purchaser to the unpaid
principal balance of any such indebtedness or be refunded to the Company, the
manner of handling such excess to be at such Purchaser’s election.

 

5.18                           Independent
Nature of Purchasers’ Obligations and Rights.  The obligations of each Purchaser under any
Transaction Document are several and not joint with the obligations of any
other Purchaser, and no Purchaser shall be responsible in any way for the
performance of the obligations of any other Purchaser under any Transaction Document.  Nothing contained herein or in any
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 FW. 
FW does not represent any of the Purchasers but only Stonegate
Securities, Inc., who has acted as placement agent to the transaction.  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.

 

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

 

5.20                           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 PAGE FOLLOWS]

 

35

 

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.

 

 

	
  INTRUSION INC.

  	
  Address for Notice:

  
	
   

  	
   

  
	
  By:

  	
  /s/ G. Ward Paxton

  	
   

  	
  1101
  E. Arapaho Road 

  
	
   

  	
  Name: G. Ward Paxton

  	
  Richardson,
  TX 75081 

  
	
   

  	
  Title: Chairman, President
  & CEO

  	
  Fax:
  972.301.3892 

  
	
   

  	
  ATTN:
  Chief Financial Officer

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

  	
   

  
				

 

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK

SIGNATURE PAGE FOR PURCHASER FOLLOWS]

 

36

 

[PURCHASER SIGNATURE PAGES TO INTZ 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 Purchaser:

  	
   

  	
   

  
									

 

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:  [PROVIDE
THIS UNDER SEPARATE COVER]

 

[SIGNATURE PAGES CONTINUE]

 

37Exhibit 10.2

 

PLACEMENT AGENCY AGREEMENT

 

This Placement Agency Agreement (this “Agreement”) is
made and entered into as of February 7, 2005 (the “Effective Date”), by
and between Intrusion Inc., a Delaware corporation (the “Company”), and
Stonegate Securities, Inc., a Texas corporation (“Stonegate”).

 

WHEREAS, the Company desires to retain Stonegate as
its non-exclusive placement agent, and Stonegate is willing to act in such
capacity, in each case subject to the terms and conditions of this Agreement.

 

NOW, THEREFORE, in consideration of the premises and
the mutual covenants herein contained, the Company and Stonegate (each a “Party”
and collectively, the “Parties”) hereby agree as follows:

 

1.                                      RETENTION OF STONEGATE;
SCOPE OF SERVICES.

 

(a)                                  Subject
to the terms and conditions set forth herein, the Company hereby retains
Stonegate to act as the non-exclusive placement agent to the Company during the
Contract Period (as defined in Section 2 below), and Stonegate hereby
agrees to be so retained.

 

(b)                                 As
the non-exclusive placement agent to the Company, Stonegate will have the
non-exclusive right during the Contract Period to identify for the Company
prospective accredited investors, as such term is defined in Rule 501 of the
Securities Act of 1933, as amended (the “Securities Act”) (such accredited
investors being collectively, the “Purchasers” and each, individually, a “Purchaser”),
in one or more placement (each, a “Placement” and collectively, the “Placements”)
of equity securities to be issued by the Company, the type and dollar amount
being as mutually agreed to by the Parties (the “Securities”).

 

(c)                                  Terms
of the Placements shall be as set forth in subscription documents, including
any stock purchase or subscription agreement, escrow agreement, registration
rights agreement, warrant agreement and/or other documents to be executed and
delivered in connection with each Placement (collectively, the “Subscription
Documents”).  The Placements are intended
to be exempt from the registration requirements of the Securities Act of 1933,
as amended (the “Securities Act”), pursuant to Regulation D (“Regulation D”) of
the rules and regulations of the Securities and Exchange Commission (the “SEC”)
promulgated under the Securities Act.

 

(d)                                 Stonegate
will act on a best efforts basis and will have no obligation to purchase any of
the Securities offered in any Placement. During the Contract Period, Stonegate
shall have the non-exclusive right to arrange for all sales of Securities in
the Placements, including without limitation the exclusive right to identify
potential buyers for the Securities.  All
Purchasers and sales of Securities in the Placements

 

1

 

shall be subject to the approval of the Company, which
approval may be withheld, in whole or in part, in the Company’s sole
discretion.

 

2.                                      CONTRACT PERIOD AND
TERMINATION.

 

(a)                                  Stonegate
shall act as the Company’s non-exclusive placement agent under this Agreement
for a period commencing on the Effective Date, and continuing until terminated
by either Party upon 10 days notice to the other Party (the “Contract Period”).

 

(b)                                 Upon
termination, neither party will have any further obligation under this
Agreement, except as provided in Sections 5, 6, 7, 8, 9 and 10 hereof.

 

3.                                      REPRESENTATIONS AND
WARRANTIES OF THE COMPANY.

 

The company represents and warrants that it has full
power and authority to enter into this Agreement and to perform its obligations
hereunder.  This Agreement is enforceable
against the Company in accordance with its terms, subject to applicable laws
governing bankruptcy, insolvency and creditors’ rights generally.  The Agreement does not conflict with,
violate, cause a default, right of termination, or acceleration (whether
through the passage of time or otherwise) under any contract, agreement, or
understanding binding upon the Company or any subsidiary of the Company.

 

4.                                      COVENANTS OF THE
COMPANY.

 

The Company covenants and agrees as follows:

 

(a)                                  Neither
the Company nor any affiliate of the Company (as defined in Rule 501(b) of the
Securities Act) will sell, offer for sale or solicit offers to buy or otherwise
negotiate in respect of any security (as defined in the Securities Act) of the
Company which will be integrated with the sale of the Securities in a manner
which would require the registration under the Securities Act of the
Securities.

 

(b)                                 Any
and all filings and documents required to be filed in connection with or as a
result of the Placements pursuant to federal and state securities laws are the
responsibility of the Company and will be filed by the Company, other than NASD
or other regulatory filings required to be made by Stonegate or a particular
Purchaser, which shall be the sole obligation of Stonegate or such Purchaser,
as applicable.

 

(c)                                  Any
press release to be issued by the Company announcing or referring to any
Placement shall, at the request of Stonegate, identify Stonegate as the
placement agent.  Subject to prior review
of the Company, Stonegate shall be permitted to publish a tombstone or similar
advertisement upon completion of each Placement identifying itself as the
Company’s placement agent with respect thereto; provided, that each such
advertisement does not constitute a general solicitation under federal
securities laws and otherwise complies with the requirements of the Securities
Act.  This Agreement shall not be filed
publicly by the Company without the prior written consent of Stonegate, unless
required by applicable law or regulation.

 

2

 

5.                                      FURNISHING OF COMPANY
INFORMATION; CONFIDENTIALITY.

 

(a)                                  In
connection with Stonegate’s activities hereunder on the Company’s behalf, the
Company shall furnish Stonegate with all reasonable information concerning the
Company and its operations that Stonegate deems necessary or appropriate (the “Company
Information”) and shall provide Stonegate with reasonable access to the Company’s
books, records, officers, directors, employees, accountants and counsel.  The Company acknowledges and agrees that, in
rendering its services hereunder, Stonegate will be using and relying upon the
Company Information without independent verification thereof or independent
appraisal of any of the Company’s assets and may, in its sole discretion, use
additional information contained in public reports or other information
furnished by the Company or third parties.

 

(b)                                 Stonegate
agrees that the Company Information will be used solely for the purpose of
performing its services hereunder. 
Subject to the limitations set forth in subsection (c) below,
Stonegate will keep the Company Information provided hereunder confidential and
will not disclose such Company Information or any portion thereof, except (i)
to a third party contacted by Stonegate on behalf of, and with the prior
approval of, the Company pursuant hereto who has agreed to be bound by a
confidentiality agreement satisfactory in form and substance to the Company, or
(ii) to any other person for which the Company’s consent to disclose such
Company Information has been obtained. 
Further, Stonegate acknowledges that certain Confidential Information
may constitute material non-public information (as defined in Regulation FD)
and agrees to, and to cause its officer, directors, employees and affiliates
to, refrain from trading in the Company’s common stock until such information
is made publicly available by the Company.

 

(c)                                  Stonegate’s
confidentiality obligations under this Agreement shall not apply to any portion
of the Company Information which (i) at the time of disclosure to Stonegate or
thereafter is generally available to and known by the public (other than as a
result of a disclosure directly or indirectly by Stonegate in violation of this
Agreement); (ii) was available to Stonegate on a non-confidential basis from a
source other than the Company, provided that such source is not and was not
bound by a confidentiality agreement with the Company; (iii) has been
independently acquired or developed by Stonegate without violating any of its
obligations under this Agreement; or (iv) the disclosure of which is legally
compelled (whether by deposition, interrogatory, request for documents,
subpoena, civil or administrative investigative demand or other similar
process).  In the event that Stonegate
becomes legally compelled to disclose any of the Company Information, Stonegate
shall provide the Company with prompt prior written notice of such requirement
so that the Company may seek a protective order or other appropriate remedy
and/or waive compliance with the terms of this Agreement.

 

(d)                                 The
obligations of the Parties under this Section 5 shall survive the
termination of this Agreement for 12 months.

 

3

 

6.                                      FEES AND EXPENSES.

 

(a)                                  As
compensation for services rendered by Stonegate in connection with the
Placements, the Company agrees to pay Stonegate a fee (the “Agency Fee”) of:
(i) six percent (6%) of the gross proceeds from the sale of Securities in the
Placements (on a cumulative basis) to Purchasers other than officers, directors,
employees or affiliates of the Company or their respective affiliates or any
individuals who participate in the Placement as a result of an introduction
from any such person (such Purchasers, being “Qualified Purchasers”).  The Agency Fee shall be paid immediately upon
the closing of each sale of Securities by the Company.

 

(b)                                 Upon
execution of this Agreement by the Parties, the Company shall deliver to
Stonegate $5,000 as a non-accountable and non-refundable expense allowance to
compensate Stonegate for its initial diligence efforts, which such amount shall
be credited against any amounts payable to Stonegate pursuant to Section 6(a).

 

(c)                                  The
Company shall also promptly reimburse Stonegate for all reasonable
out-of-pocket expenses incurred by Stonegate and its directors, officers and
employees in connection with the performance of Stonegate’s services under this
Agreement.  For these purposes, “out-of-pocket
expenses” shall include, but not be limited to long distance telephone,
facsimile, courier, mail, supplies, travel and similar expenses.

 

(d)                                 Upon
closing of the Placement and execution and delivery of evidence of its status
as an accredited investor in form and substance reasonably acceptable to the
Company and its counsel, the Company agrees to issue to Stonegate a Securities
Purchase Warrant (the “Representative’s Warrant”) entitling the holder(s)
thereof to purchase an amount of Securities equal to six percent (6%) of the
total number of Securities sold in the Placement to Qualified Purchasers.  The Representative’s Warrant shall be
exercisable for a period of five (5) years at an exercise price per share equal
to 100% of the closing price per share on the date immediately preceding the
execution of definitive documents of the private placement.  The warrants shall not be exercisable until 6
months from the date of closing of the placement.  The Representative’s Warrant shall otherwise
be substantially in the form of Exhibit A attached hereto.

 

(e)                                  The
obligations of the Parties under this Section 6 shall survive the
termination of this Agreement for any reason.

 

7.                                      INDEMNIFICATION.

 

(a)                                  The
Company agrees to indemnify and hold Stonegate harmless from and against any
and all losses, claims, damages or liabilities (or actions, including securityholder
actions, in respect thereof) related to or arising out of Stonegate’s
engagement hereunder or its role in connection herewith, and will reimburse
Stonegate for all reasonable expenses (including reasonable costs, expenses,
awards and counsel fees and/or judgments) as they are incurred by Stonegate in
connection with investigating, preparing for or defending any such action or
claim, whether or not in connection

 

4

 

with pending or threatened litigation in which Stonegate is a
party.  The Company will not, however, be
responsible for any claims, liabilities, losses, damages or expenses which are
finally judicially determined to have resulted primarily from the bad faith,
gross negligence or willful misconduct, or reckless disregard of its
obligations or duties of or by Stonegate or any of its officers, directors or
employees (collectively, “Excluded Claims”). 
The Company also agrees that Stonegate shall not have any liability to
the Company for or in connection with such engagement, except for any such
liability for losses, claims, damages, liabilities or expenses incurred by the
Company that result primarily from an Excluded Claim.  In the event that the foregoing indemnity is
unavailable (except by reason of an Excluded Claim), then the Company shall
contribute to amounts paid or payable by Stonegate in respect of its losses,
claims, damages and liabilities in such proportion as appropriately reflects
the relative benefits received by, and fault of, the Company and Stonegate in
connection with the matters as to which such losses, claims, damages or
liabilities relate, and other equitable considerations.  The foregoing shall be in addition to any
rights that Stonegate may have at common law or otherwise and shall extend upon
the same terms to and inure to the benefit of any director, officer, employee,
agent or controlling person of Stonegate. 
The Company hereby consents to personal jurisdiction, service and venue
in any court in which any claim which is subject to this agreement is brought
against Stonegate or any other person entitled to indemnification or
contribution under this subsection (a).

 

(b)                                 Stonegate
agrees to indemnify and hold the Company harmless from and against any and all
losses, claims, damages or liabilities (or actions, including securityholder
actions, in respect thereof) which are finally judicially determined to have
resulted primarily from the bad faith, gross negligence or willful misconduct
of Stonegate, and will reimburse the Company for all reasonable expenses
(including reasonable costs, expenses, awards and counsel fees and/or
judgments) as they are incurred by the Company in connection with
investigating, preparing for or defending any such action or claim, whether or
not in connection with pending or threatened litigation in which the Company is
a party.  In the event that the foregoing
indemnity is unavailable, then Stonegate shall contribute to amounts paid or
payable by the Company in respect of its losses, claims, damages and
liabilities in such proportion as appropriately reflects the relative benefits
received by, and fault of, the Company and Stonegate in connection with the
matters as to which such losses, claims, damages or liabilities relate, and
other equitable considerations.  The
foregoing shall be in addition to any rights that the Company may have at
common law or otherwise and shall extend upon the same terms to and inure to
the benefit of any director, officer, employee, agent or controlling person of
the Company.  Stonegate hereby consents
to personal jurisdiction, service and venue in any court in which any claim,
which is subject to this agreement, is brought against the Company or any other
person entitled to indemnification or contribution under this subsection (b).

 

(c)                                  The
obligations of the Parties under this Section 7 shall survive the
termination of this Agreement.

 

5

 

8.                                      NON-CIRCUMVENTION.

 

The Company hereby agrees that, for a period of one
year from the end of the Contract Period or other termination of this
Agreement, the Company will not enter into any agreement, transaction or
arrangement with any of Qualified Purchasers (including their agents,
principals and affiliates and the accounts and funds which they manage or
advise) which Stonegate has introduced, directly or indirectly, to the Company
pursuant to a meeting, telephone call, any written communication, or by e mail,
as Qualified Purchasers of the Securities in the Placements (collectively, the “Stonegate
Contacts”), regardless of whether a transaction is consummated with such
prospective purchasers, unless the Company notifies Stonegate in writing of the
agreement, transaction or arrangement, and pays Stonegate a fee equal to the
Agency Fee for securities of the Company sold to Stonegate Contacts.

 

9.                                      GOVERNING LAW.

 

THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH
AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS, WITHOUT GIVING EFFECT TO ANY
CONFLICT OF LAWS PROVISIONS THEREOF.

 

10.                               ARBITRATION.

 

Stonegate and the Company will attempt to settle any
claim or controversy arising out of this Agreement through consultation and
negotiation in good faith and a spirit of mutual cooperation.  Any dispute which the parties cannot resolve
may then be submitted by either party to binding arbitration in Dallas, Texas
under the rules of the American Arbitration Association for resolution.  Nothing in this paragraph will prevent either
party from resorting to judicial proceedings if (a) good faith efforts to resolve
the dispute under these procedures have been unsuccessful or (b) interim relief
from a court is necessary to prevent serious and irreparable injury.

 

11.                               NO WAIVER.

 

The failure or neglect of any party hereto to insist,
in any one or more instances, upon the strict performance of any of the terms
or conditions of this Agreement, or waiver by any party of strict performance
of any of the terms or conditions of this Agreement, shall not be construed as
a waiver or relinquishment in the future of such term or condition, but the
same shall continue in full force and effect.

 

12.                               SUCCESSORS AND ASSIGNS.

 

The benefits of this Agreement shall inure to the
benefit of the Parties, their respective successors, assigns and
representatives, and the obligations and liabilities assumed in this Agreement
by the Parties shall be binding upon their respective successors and
assigns.  This Agreement may not be
assigned by either Party without the express written consent of the other
Party, which consent shall not be unreasonably withheld.

 

6

 

13.                               NOTICES.

 

All notices and other communications required or
permitted to be given under this Agreement shall be in writing and shall be
delivered personally or sent by certified mail, return receipt requested,
recognized overnight delivery service, or facsimile as follows:

 

 

If to the Company:

 

Intrusion Inc.

1101 East Arapaho Road

Richardson, TX 75081

Facsimile: (972) – 234-1467

Attention: G. Ward Paxton, Chairman, CEO

 

 

If to Stonegate:

 

Stonegate Securities, Inc.

5940 Sherry Lane, Suite 410

Dallas, Texas 75225

Facsimile: (214) 987-1981

Attention: Scott Griffith, President

 

Either Party may change its address or facsimile
number set forth above by giving the other Party notice of such change in
accordance with the provisions of this Section 13. A notice shall be
deemed given (a) if by personal delivery, on the date of such delivery, (b) if
by certified mail, on the date shown on the applicable return receipt, (c) if
by overnight delivery service, on the day after the date delivered to the
service, or (d) if by facsimile, on the date of transmission.

 

14.                               NATURE OF RELATIONSHIP.

 

The Parties intend that Stonegate’s relationship to
the Company and the relationship of each director, officer, employee or agent
of Stonegate to the Company shall be that of an independent contractor and not
as an employee of the Company or an affiliate thereof.  Nothing contained in this Agreement shall
constitute or be construed to be or create a partnership or joint venture
between Stonegate and the Company or their respective successors or
assigns.  Neither Stonegate nor any
director, officer, employee or agent of Stonegate shall be considered to be an
employee of the Company by virtue of the services provided hereunder.

 

15.                               MISCELLANEOUS

 

(a)                                  Stonegate
reserves the right to solicit the assistance of outside dealers (“Dealers”) to
assist in the offer and sale of the Placements; provided, however, (i) that any
such

 

7

 

Dealers agree in writing to be bound by the terms of the applicable
Placement and (ii) no such assistance shall constitute a general solicitation
to purchase the Company’s securities. It is understood that Stonegate, in its
sole discretion, shall be entitled to pay over to any such Dealers any portion
of the compensation received by Stonegate hereunder.  The Company shall have no financial liability
for any fees or expenses of any such Dealers.

 

16.                               CAPTIONS.

 

The Section titles herein are for reference
purposes only and do not control or affect the meaning or interpretation of any
term or provision hereof.

 

17.                               AMENDMENTS.

 

No alteration, amendment, change or addition hereto
shall be binding or effective unless the same is set forth in a writing signed
by a duly authorized representative of each Party.

 

18.                               PARTIAL INVALIDITY.

 

If it is finally determined that any term or provision
hereof is invalid or unenforceable, (a) the remaining terms and provisions
hereof shall be unimpaired, and (b) the invalid or unenforceable term or
provision shall be replaced by a term or provision that is valid and
enforceable and that comes as close as possible to expressing the intention of
the invalid or unenforceable term or provision.

 

19.                               ENTIRE AGREEMENT.

 

This Agreement embodies the entire agreement and
understanding of the Parties and supersedes any and all prior agreements,
arrangements and understandings relating to the matters provided for herein.

 

20.                               COUNTERPARTS.

 

This Agreement may be executed in one or more
counterparts, each of which shall be an original, but all of which together
shall be considered one and the same agreement.

 

[Remainder of Page Intentionally Left Blank]

 

8

 

IN WITNESS WHEREOF, this Agreement has been executed
as of the date first written above by duly authorized representatives of the
Company and Stonegate.

 

	
   

  	
  INTRUSION INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ G. Ward Paxton

  	
   

  
	
   

  	
  Title: 

  	
  President & CEO

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  STONEGATE SECURITIES, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By: 

  	
  /s/ Jesse Shelmire

  	
   

  
	
   

  	
  Title: 

  	
  Partner

  	
   

  
							

 

9

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