1101 East Arapaho Road
Richardson, Texas 75081
(972) 234-6400

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held June 13, 2006

To the Stockholders of Intrusion Inc.:

NOTICE IS HEREBY GIVEN that the 2006 Annual Meeting of Stockholders (the “Meeting”) of Intrusion Inc. (the “Company”) will be held at the Radisson Hotel, Dallas North at Richardson, 1981 North Central Expressway, Richardson, Texas, at 10:00 A.M., Local Time, on Tuesday, June 13, 2006, for the following purposes:

(1)                                  To elect five (5) directors to serve until the next Annual Meeting of Stockholders or until their respective successors are duly elected and qualified;

(2)                                  To approve the issuance of greater than 1,381,900 shares of the Company’s common stock upon conversion or redemption of the Company’s Series 3 5% Convertible Preferred Stock and the exercise of warrants to purchase the Company’s common stock the Company sold in a private placement on December 2, 2005;

(3)                                  To approve the issuance of shares of the Company’s common stock upon the conversion or redemption of shares of the Company’s Series 3 5% Convertible Preferred Stock and warrants purchased by G. Ward Paxton, the Company’s Chairman, President and Chief Executive Officer, and James F. Gero, one of the Company’s directors, in the private placement;

(4)                                  To ratify the appointment of KBA Group LLP as independent auditors of the Company for the fiscal year ending December 31, 2006; and

(5)                                  To transact such other business as may properly come before the Meeting or any adjournments thereof.

The foregoing items of business are more fully described in the Proxy Statement accompanying this Notice. The record date for determining those stockholders who will be entitled to notice of, and to vote at, the Meeting and at any adjournment thereof is April 20, 2006. A list of stockholders entitled to vote at the Meeting will be available for inspection at the offices of the Company.

All stockholders are cordially invited to attend the Meeting in person. Stockholders are urged, whether or not they plan to attend the Meeting, to complete, date and sign the enclosed Proxy and return it promptly in the enclosed postage prepaid envelope. Your Proxy may be revoked at any time prior to the Meeting. If you decide to attend the Meeting and wish to change your Proxy vote, you may do so by voting in person at the Meeting.

By Order of the Board of Directors

G. WARD PAXTON
Chairman, President and Chief Executive Officer

Richardson, Texas

May 12, 2006

INTRUSION INC.
1101 East Arapaho Road
Richardson, Texas 75081

PROXY STATEMENT
for
ANNUAL MEETING OF STOCKHOLDERS
to be Held June 13, 2006

SOLICITATION AND REVOCABILITY OF PROXIES

The enclosed proxy (the “Proxy”) is being solicited on behalf of the Board of Directors (the “Board”) of Intrusion Inc. (the “Company”) for use at the Annual Meeting of Stockholders (the “Meeting”) to be held at the Radisson Hotel, Dallas North at Richardson, 1981 North Central Expressway, Richardson, Texas, at 10:00 A.M., Local Time, on Tuesday, June 13, 2006, or at such other time and place to which the Meeting may be adjourned. Proxies, together with copies of this Proxy Statement, are being mailed to stockholders of record entitled to vote at the Meeting on or about May 12, 2006.

Execution and return of the enclosed Proxy will not affect a stockholder’s right to attend the Meeting and to vote in person. Any stockholder executing a Proxy retains the right to revoke it at any time prior to exercise at the Meeting. A Proxy may be revoked by delivery of written notice of revocation to the Secretary of the Company, by execution and delivery of a later Proxy or by voting the shares in person at the Meeting. If you attend the Meeting and vote in person by ballot, your proxy will be revoked automatically and only your vote at the Meeting will be counted. A Proxy, when executed and not revoked, will be voted in accordance with the instructions thereon. In the absence of specific instructions, Proxies will be voted by those named in the Proxy “FOR” the election as directors of those nominees named in the Proxy Statement, “FOR” the approval of each of the other proposals described in this Proxy Statement, and in accordance with their best judgment on all other matters that may properly come before the Meeting.

The enclosed form of Proxy provides a method for stockholders to withhold authority to vote for any one or more of the nominees for director while granting authority to vote for the remaining nominees. The names of all nominees are listed on the Proxy. If you wish to grant authority to vote for all nominees, check the box marked “FOR.” If you wish to withhold authority to vote for all nominees, check the box marked “WITHHOLD.” If you wish your shares to be voted for some nominees and not for one or more of the others, check the box marked “FOR” and indicate the name(s) of the nominee(s) for whom you are withholding the authority to vote by writing the name(s) of such nominee(s) on the Proxy in the space provided.

RECORD DATE AND VOTING SECURITIES

Only stockholders of record at the close of business on April 20, 2006 are entitled to notice of and to vote at the Meeting. The stock transfer books of the Company will remain open between the record date and the date of the Meeting. A list of stockholders entitled to vote at the Meeting will be available for inspection at the executive offices of the Company. On the April 20, 2006 record date, the Company had 7,046,213 outstanding shares of Common Stock, $0.01 par value (the “Common Stock”); 259,696 outstanding shares of 5% Convertible Preferred Stock, par value $0.01 per share (the “5% Preferred Stock”); 460,000 shares of Series 2 5% Convertible Preferred Stock, par value $0.01 per share (the “Series 2 5% Preferred Stock”); and 468,736 shares of Series 3 5% Convertible Preferred Stock, par value $0.01 per share (the “Series 3 5% Preferred Stock”). The holders of Series 2 and Series 3 5% Preferred Stock do not have voting rights other than as required by the Delaware General Corporation Law and with respect to certain limited actions described in Proposal Two. Therefore, the holders of the Series 2 and Series 3 5% Preferred Stock are not entitled to vote with respect to the proposals set forth in this Proxy Statement. In addition, under the rules of the Nasdaq Stock Market, brokers who hold stock in street name have the authority to vote on certain routine matters when they have not received instructions from beneficial owners.

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QUORUM AND VOTING

The presence at the Meeting, in person or by Proxy, of the holders of a majority of the shares of Common Stock outstanding or issuable upon conversion of the 5% Preferred Stock is necessary to constitute a quorum. Holders of Common Stock are entitled to one vote for each share of Common Stock held on each matter to be voted on at the Meeting including the election of directors. Holders of 5% Preferred Stock are entitled to vote on an as-converted to Common Stock basis with any fractional votes being rounded to the nearest whole vote. As of the record date, each share of 5% Preferred Stock was convertible into 1.59 shares of Common Stock. As a result, each holder of Preferred Stock is entitled to 1.59 votes for each share of Preferred Stock held on each matter to be voted on at the Meeting, including the election of directors. However, the Company will exclude the vote of any holder of Common Stock or 5% Preferred Stock who participated in the private placement described in Proposal Two from the tabulation of votes cast in connection with Proposal Two because of these stockholders’ interest therein. As a result, the shares of Common Stock held by these stockholders or issuable upon the conversion of the 5% Preferred Stock held by these stockholders will not be counted for the purpose of determining whether approval of Proposal Two has been obtained, but will be counted for the purpose of determining the presence or absence of a quorum. In addition, the Company will exclude the vote of Mr. Paxton and Mr. Gero from the tabulation of votes cast in connection with Proposal Three because they are interested therein. Therefore, the shares of Common Stock held by Mr. Paxton and Mr. Gero or issuable upon the conversion of the shares of 5% Preferred Stock held by them will not be counted for the purposes of determining whether approval of Proposal Three has been obtained, but will be counted for the purpose of determining the presence or absence of a quorum.

All votes will be tabulated by the inspector of election appointed for the Meeting, who will separately tabulate affirmative and negative votes, abstentions and broker non-votes. Abstentions and broker non-votes are counted as present for purposes of determining the presence or absence of a quorum for the transaction of business. Abstentions will be counted towards the tabulations of votes cast on matters presented at the Meeting and will have the same effect as negative votes (other than the election of directors) whereas broker non-votes will not be counted for purposes of determining whether a matter has been approved.

Assuming the presence of a quorum, the following paragraphs describe the vote required by the stockholders of record to approve each of the proposals set forth in this Proxy Statement.

•                                          Proposal One. The five nominees receiving the greatest number of votes of the shares of Common Stock outstanding or issuable upon conversion of the 5% Preferred Stock present in person or represented by Proxy at the Meeting and entitled to vote shall be deemed elected even if they receive the affirmative vote of less than a majority of the shares of Common Stock outstanding or issuable upon conversion of the 5% Preferred Stock entitled to be voted at the Meeting. Cumulative voting is prohibited in the election of directors, and Proxies cannot be voted for more than five nominees.

•                                          Proposal Two. The affirmative vote of the holders of a majority of the shares of Common Stock outstanding or issuable upon conversion of the 5% Preferred Stock entitled to vote at the Meeting, present in person or by Proxy and not excluded from such vote, is required for the approval of the issuance of more than 1,381,900 shares of Common Stock upon conversion or redemption of the Company’s Series 3 5% Preferred Stock and the exercise of the warrants (the “Private Placement Warrants”) issued in the Company’s recent private placement.

•                                          Proposal Three. The affirmative vote of the holders of a majority of the shares of Common Stock outstanding or issuable upon conversion of the 5% Preferred Stock entitled to vote at the Meeting, present in person or by Proxy and not excluded from such vote, is required for the approval of the issuance of shares of Common Stock upon conversion or redemption of the shares of Series 3 5% Preferred Stock and the exercise of the Private Placement Warrants purchased by Mr. Paxton and Mr. Gero in the Company’s recent private placement.

•                                          Proposal Four. The affirmative vote of the holders of a majority of the shares of Common Stock outstanding or issuable upon conversion of the 5% Preferred Stock entitled to vote at the Meeting, present in person or by Proxy, is required for the ratification of the appointment of KBA Group LLP as independent auditors.

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The Board unanimously recommends a vote “FOR” each of the proposals set forth in this Proxy Statement. In addition, as a condition to the private placement, each of the Company’s officers and directors have agreed to vote any shares of Common Stock owned by them or issuable upon conversion of the 5% Preferred Stock owned by them in favor of Proposal Two to the extent their votes are not being excluded by the Company.

PROPOSAL ONE
ELECTION OF DIRECTORS

The Board for the ensuing year will consist of five directors who are each to be elected at the Meeting for a term of office expiring at the next Annual Meeting of Stockholders or until their respective successors have been elected and qualified. It is intended that the persons named in the following table will be nominated as directors of the Company and that the persons named in the accompanying Proxy, unless otherwise directed, will vote for the election of such nominees at the Meeting. Each of the nominees has indicated his willingness to serve as a member of the Board of Directors, if elected. However, in the event any nominee shall become unavailable for election to the Board for any reason not presently known or contemplated, the Proxy holders will be vested with discretionary authority in such instance to vote the enclosed Proxy for such substitute as the Board of Directors shall designate.

The following slate of five nominees has been nominated by the Board of Directors:

(1)                                  Member of the Compensation Committee.

(2)                                  Member of the Audit Committee.

G. Ward Paxton was named President and Chief Executive Officer of the Company on November 28, 2001. He is also co-founder of the Company and has served as Chairman of the Board since the Company’s inception in September 1983. Mr. Paxton also served as President and Chief Executive Officer of the Company from 1983 until June 2000 and served as Chief Financial Officer from 1983 until 1994. Prior to founding the Company, Mr. Paxton was Vice President of Honeywell Optoelectronics, a division of Honeywell, Inc., from 1978 to 1983. From 1969 to 1978, Mr. Paxton was Chairman of the Board, President, Chief Executive Officer and founder of Spectronics, Inc., which was acquired by Honeywell, Inc. in 1978. Prior to founding Spectronics, Inc., Mr. Paxton held various managerial and technical positions at Texas Instruments Incorporated from 1959 to 1969. Mr. Paxton holds Ph.D., M.S. and B.S. degrees in Physics from the University of Oklahoma.

T. Joe Head is co-founder of the Company and has served as a director since the Company’s inception in September 1983. Mr. Head was named Vice Chairman of the Board of Directors in June 2000 and was named Vice Chairman and Vice President on February 14, 2003. He also served as Senior Vice President from 1983 until 1998 and Executive Vice President from 1998 until June 2000. Prior to co-founding the Company, Mr. Head held the positions of Product Marketing Manager and Marketing Engineer of Honeywell Optoelectronics from 1980 to 1983. Mr. Head holds a B.S. degree in Electrical Engineering from Texas A & M University.

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J. Fred Bucy, Jr. has served as a director of the Company since 1993. Mr. Bucy was employed in various technical and managerial capacities by Texas Instruments Incorporated from 1953 through his retirement in 1985. At the time of his retirement, Mr. Bucy was President, Chief Executive Officer and a director of Texas Instruments. Mr. Bucy was a Trustee of Southwest Research Institute. He was Chairman of the Texas National Research Laboratory Commission (re-appointed by George W. Bush in 1995) until 2001. Mr. Bucy was also a member of the Coordinating Board Advisory Committee on Research of the Texas College and University System and a former member of the Board of Regents of Texas Tech University and Texas Tech University Health Sciences Center from 1973 to 1991, including four years as its Chairman. Mr. Bucy has been accorded Distinguished Alumnus and Distinguished Engineer Awards by Texas Tech University, is a fellow of the Institute of Electrical and Electronics Engineers, a member of National Academy of Engineers, and is a life member of the Navy League. Mr. Bucy was awarded an honorary Doctor of Science degree from Texas Tech University in 1994. Mr. Bucy was recognized as an Eminent Member of Eta Kappa Nu in 2002.

James F. Gero was named a director of the Company on October 27, 2003. Mr. Gero is former Chairman of the Board and a principal stockholder of Sierra Technologies, Inc., which was formed in September 1991, and is a private investor. Mr. Gero serves on the Boards of Drew Industries, a public company which supplies a broad array of components for recreational vehicles and manufactured homes, and is Chairman of Orthofix, N.V., a publicly traded medical device manufacturer. Mr. Gero is a former Chairman and Chief Executive Officer of Varo Inc., a manufacturer of high technology systems. Prior to becoming Chairman and CEO of Varo Inc., Mr. Gero served as Vice President and General Manager at Allied Signal Corporation. Mr. Gero holds a B.S. degree from State University of New York, an M.B.A. degree from University of New Haven and an M.A. degree from Fairleigh Dickinson.

Donald M. Johnston has served as a director of the Company since November 1983. Mr. Johnston is President of Massey Burch Capital Corp., a venture capital firm. He served as President of Massey Burch Investment Group, Inc., a venture capital firm, from 1990 until December 1993 where he had been a principal since 1982. Prior to that time, Mr. Johnston was the President of InterFirst Venture Corporation, a venture capital subsidiary of Interfirst Bancshares, Inc., and the Executive Director of First Dallas, Ltd., a corporate finance group in London, England. Mr. Johnston holds a B.A. degree from Vanderbilt University and an M.B.A. degree from Southern Methodist University.

All directors of the Company hold office until the next ensuing annual meeting of stockholders or until their respective successors are duly elected and qualified. All officers of the Company are elected annually by the Board of Directors and serve at the discretion of the Board. There are no family relationships between any director or officer of the Company and any other such person except that Michael L. Paxton, Vice President, Chief Financial Officer, Secretary and Treasurer, is the son of G. Ward Paxton, Chairman, President and Chief Executive Officer.

Stockholder Approval

The affirmative vote of a plurality of the shares of Common Stock outstanding or issuable upon conversion of outstanding 5% Preferred Stock present in person or by proxy at the Annual Meeting is required for the election of each of the nominees for director.

The Board recommends a vote “FOR” the election of such nominees.

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CORPORATE GOVERNANCE

Board of Directors and Committees

The business affairs of the Company are managed under the direction of the Board. The Board meets on a regularly scheduled basis during the fiscal year of the Company to review significant developments affecting the Company and to act on matters requiring Board approval. It also holds special meetings as required from time to time when important matters arise requiring Board action between scheduled meetings. The Board of Directors or its authorized committees met twenty-seven times during the 2005 fiscal year. During fiscal year 2005, each director participated in at least 75% or more of the aggregate of (i) the total number of meetings of the Board of Directors (held during the period for which he was a director) and (ii) the total number of meetings of all committees of the Board on which he served (during the period that he served).

The Board has established Audit and Compensation Committees to devote attention to specific subjects and to assist it in the discharge of its responsibilities. The functions of the Audit Committee and the Compensation Committee are described below.

Audit Committee. The Audit Committee is composed of:  Donald M. Johnston (Chairman), James F. Gero, and J. Fred Bucy, Jr. Each member of the Audit Committee is independent (as defined in Nasdaq Marketplace Rule 4200). The Audit Committee has at least one financial expert (as defined by Item 401(e) of Regulation S-B). Mr. Bucy is currently the Audit Committee financial expert. The functions performed by the Committee, its membership and the number of meetings held during the fiscal year, is set forth in the “Report of the Audit Committee,” included in this Proxy Statement. The Audit Committee is governed by a written charter, which was approved by the Audit Committee on March 18, 2004, and attached as Exhibit A to the Company’s proxy statement for its 2004 annual meeting of stockholders.

Compensation Committee. The Compensation Committee is empowered to advise management and make recommendations to the Board with respect to the compensation and other employment benefits of executive officers and key employees of the Company. The Compensation Committee also administers the Company’s incentive stock option plans (the “Stock Option Plans”) for officers and key employees and the Company’s incentive bonus programs for executive officers and employees. The Compensation Committee is authorized, among other powers, to determine from time to time the individuals to whom options shall be granted, the number of shares to be covered by each option and the time or times at which options shall be granted pursuant to the Stock Option Plans. The Compensation Committee is comprised of Mr. Bucy (Chairman), Mr. Gero and Mr. Johnston, each of whom is an independent director. The Compensation Committee met six times during the 2005 fiscal year.

Notwithstanding anything to the contrary set forth in any of the Company’s previous or future filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, that might incorporate this Proxy or future filings made by the Company under those statutes, the Compensation Committee Report, the Audit Committee Report, the Audit Committee Charter, references to the independence of Audit Committee members and the Stock Performance Graph are not deemed filed with the Securities and Exchange Commission. They also shall not be deemed incorporated by reference into any of those prior filings or into any future filings made by the Company under those statutes, except the extent the Company specifically incorporates such information by reference in such filings.

Report of the Audit Committee

The Audit Committee oversees the Company’s financial reporting process on behalf of the Board. Management has the primary responsibility for the financial statements and the reporting process including the systems of internal controls. In fulfilling its oversight responsibilities, the Audit Committee reviewed the audited financial statements in the Annual Report with management including a discussion of the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments, and the clarity of disclosures in the financial statements.

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The Audit Committee reviewed with the Independent Registered Public Accounting Firm, who are responsible for expressing an opinion on the conformity of those audited financial statements with generally accepted accounting principles, their judgments as to the quality, not just the acceptability, of the Company’s accounting principles, the matters required to be discussed by SAS 61 (Certification of Accounting Standards AU Section 280) and such other matters as are required to be discussed with the Audit Committee under generally accepted auditing standards. In addition, the Audit Committee has discussed with the Independent Registered Public Accounting Firm the auditors’ independence from management and the Company including the matters in the written disclosures and the letter from the Independent Registered Public Accounting Firm required by the Independence Standards Board Standard No. 1 (Independence Standards Board Standard No. 1, Independence Discussions with Audit Committees) and considered the compatibility of non-audit services with the auditors’ independence.

The Audit Committee discussed with the Company’s Independent Registered Public Accounting Firm the overall scope and plans for their audit. The Audit Committee meets with Independent Registered Public Accounting Firm, with and without management present, to discuss the results of their examinations, their evaluations of the Company’s internal controls, and the overall quality of the Company’s financial reporting. The Audit Committee held eleven meetings during fiscal year 2005.

In reliance on the reviews and discussions referred to above, the Audit Committee recommended to the Board of Directors (and the Board has approved) that the audited financial statements be included in the Annual Report on Form 10-KSB for the year ended December 31, 2005 for filing with the Securities and Exchange Commission. The Audit Committee and the Board have also recommended, subject to stockholder ratification, the selection of the Company’s Independent Registered Public Accounting Firm.

Respectfully submitted,


AUDIT COMMITTEE
of the Board of Directors
Donald M. Johnston, Audit Committee Chair
James F. Gero, Audit Committee Member
J. Fred Bucy, Jr., Audit Committee Member

Compensation Committee Report on Executive Compensation

General. The Compensation Committee of the Board sets the compensation for the Chief Executive Officer, reviews the design, administration and effectiveness of the compensation programs for other key executives, and approves stock option grants for all executive officers and key employees. The Compensation Committee is currently composed of three non-employee directors who have no interlocking relationships. The data and information included in the various compensation tables appearing elsewhere in this Proxy Statement should be read in conjunction with and deemed to be a part of this report.

Named Executive Officers. This report includes disclosure of the required compensation information for any one acting as the Company’s Chief Executive Officer at any time during the year and its four most highly compensated executive officers.

Compensation Objectives. The Company operates in the highly competitive and rapidly changing high technology industry. The Compensation Committee believes that the compensation programs for executive officers of the Company should be designed to attract, motivate and retain talented executives who contribute to the success of the Company and should be determined within a competitive framework based on the achievement of overall business objectives and financial performance and individual contributions. Within this framework, the Compensation Committee’s objectives are to:  (1) provide a total compensation program competitive with the compensation practices of organizations in the high technology industry of comparable size to the Company; (2) provide annual variable incentive awards based on the Company’s overall financial performance relative to corporate objectives; and (3) align the financial interests of executive officers with those of stockholders by providing equity-based incentives.

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Base Salary. The salaries of the executive officers, including the Chief Executive Officer, are determined annually by the Compensation Committee with reference to (1) salaries paid to executives with similar responsibilities at companies of a comparable size and sales volume, primarily in the high technology industry, (2) each officer’s performance and (3) the Company’s overall financial results, without specific weighting being attributed to any of these factors. In setting base salaries, the Company reviews available published executive compensation data for the high technology industry generally as well as the network security industry. This group of companies is a larger and more diverse group of companies than just the companies comprising the peer group identified in the Stock Performance Graph, buy may include such companies if they participated in one or more of the compensation surveys. The Compensation Committee believes that these companies likely compete with the Company for executive talent and that the Company must offer salaries within a competitive market range to attract and retain talented executives. However, the Compensation Committee manages salaries for the executive group as a whole in a conservative fashion in order to place more emphasis on incentive compensation. As a result, the Company believes the base salary of its executive officers is lower than the median compensation in effect for comparable positions in the surveyed data. The Company does not consider the performance of the comparison group in determining compensation of its executive officers.

Incentive Bonus Plan. To reinforce the attainment of corporate objectives, the Compensation Committee believes that a substantial portion of the potential annual compensation of each executive officer should be in the form of variable incentive pay. The incentive cash bonus program for executives is established annually by the Compensation Committee based upon the Company’s achievement of sales and/or net income targets established at the beginning of the fiscal year. The incentive plan for executives, other than certain executives in the Company’s sales organization, requires a threshold level of Company financial performance before any incentives are awarded. Once the threshold objective for sales and/or net income of a fiscal year is reached, specific formulas are in place to calculate the actual incentive payment for each executive for such year. In fiscal 2005, the Company did not achieve its threshold level of profitability; thus, non-sales executives, including the Chief Executive Officer and the Named Executive Officers other than the Company’s Vice President of Worldwide Sales, did not receive any incentive bonus awards. Certain employees in the sales organization, including Eric Gore, the Company’s Vice President of Worldwide Sales, received incentive sales commission in fiscal 2005 based upon the Company’s sales.

Equity-based Incentives. The goal of the Company’s equity-based incentive awards is to align the interests of executive officers with its stockholders. The Compensation Committee determines the value allocated to equity-based incentives according to each executive’s position within the Company, individual performance, contributions to achievement of corporate objectives and related factors, and grants stock options to create a meaningful opportunity for stock ownership.

Prior to 2005, the Company had previously adopted three Stock Option Plans (collectively, the “Plans”), including the 1983 Incentive Stock Option Plan, the 1987 Incentive Stock Option Plan and the 1995 Stock Option Plan (as amended, the “1995 Option Plan”), to provide long-term incentive compensation for eligible participants. Generally, executive officers and other key employees of the Company and its subsidiaries are eligible to participate in the Plans; however, non-employee directors of the Company are not eligible to participate in these Plans. These directors participated in the 1995 Director Stock Option Plan (as amended, the “1995 Director Plan,” and together with the 1995 Option Plan, the “1995 Plans”).

On March 21, 2005, the 1995 Plans expired. The Board approved the 2005 Stock Incentive Plan (the “2005 Plan) on March 17, 2005, as a replacement for these plans. The 2005 Plan was approved by the stockholders on June 14, 2005. Stock option grants under the 1995 Plans and the 2005 Plan provide the right to purchase shares of Common Stock at fair market value on the date of grant, or in the case of an optionee who at the time of the grant holds more than 10% of the total combined voting securities of the Company, 110% of the fair market value on the date of grant. Stock options generally vest in a one, three or five-year period and provide terms of five or ten years, as applicable. In 2005, the Compensation Committee approved the grant of stock options pursuant to the Plans to the Named Executive Officers indicated in the tables accompanying this report.

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CEO Compensation. G. Ward Paxton was named President and Chief Executive Officer of the Company on November 28, 2001. He also served as President and Chief Executive Officer of the Company from 1983 until June 2000. Mr. Paxton’s base salary was set at $175,000 for fiscal year 2002, but was decreased to $122,500 in April 2002 by the Compensation Committee. The salary of Mr. Paxton was decreased in an effort to reduce cost. The base salary for Mr. Paxton was based on personal performance of CEO duties and on salary levels paid to chief executive officers of comparable companies. Mr. Paxton did not receive an incentive bonus award for 2005 because the Company did not achieve its threshold level of profitability established at the beginning of the year.

Compliance with Internal Revenue Code Section 162(m). Section 162(m) of the Internal Revenue Code disallows a tax deduction to publicly held companies for compensation paid to certain of their executive officers, to the extent that compensation exceeds $1 million per covered officer in any fiscal year. The limitation applies only to compensation which is not considered to be performance-based. Non-performance based compensation paid to the Company’s executive officers for the 2005 fiscal year did not exceed the $1 million limit per officer, and the Compensation Committee does not anticipate that the non-performance based compensation to be paid to the Company’s executive officers for fiscal 2006 will exceed that limit. The Company’s 1995 Option Plan and the new 2005 Plan have been structured so that any compensation deemed paid in connection with the exercise of option grants made under that plan with an exercise price equal to the fair market value of the option shares on the grant date will qualify as performance-based compensation which will not be subject to the $1 million limitation. Because it is unlikely that the cash compensation payable to any of the Company’s executive officers in the foreseeable future will approach the $1 million limit, the Compensation Committee has decided at this time not to take any action to limit or restructure the elements of cash compensation payable to the Company’s executive officers. The Compensation Committee will reconsider this decision should the individual cash compensation of any executive officer ever approach the $1 million level.

It is the opinion of the Compensation Committee that the executive compensation policies and plans provide the necessary total remuneration program to properly align the Company’s performance and the interests of the Company’s stockholders through the use of competitive and equitable executive compensation in a balanced and reasonable manner, for both the short and long-term.

Respectfully submitted,

COMPENSATION COMMITTEE
of the Board of Directors


J. Fred Bucy, Jr., Compensation Committee Chair
James F. Gero, Compensation Committee Member
Donald M. Johnston, Compensation Committee Member

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Compensation Committee Interlocks and Insider Participation

No member or nominee for election as a member of the Board or any committees of the Board has an interlocking relationship with the board (or member of such board) or any committee (or member of such committee) of a board of any other company.

Nomination of Directors

The Company does not have a formal nominating committee. Instead, the independent members of the Board, Mr. Bucy, Mr. Gero and Mr. Johnston, consider nominees and appointees to the Board in accordance with Nasdaq Marketplace Rule 4350. In evaluating candidates to determine if they are qualified to become Board members, these directors consider a number of attributes, including:

•                                          personal and professional character, integrity, ethics and values;

•                                          general business experience and leadership profile, including experience in corporate management, such as serving as an officer or former officer of a publicly held company, or experience as a board member of another publicly held company;

•                                          strategic planning abilities and experience;

•                                          aptitude in accounting and finance;

•                                          expertise in domestic and international markets;

•                                          experience in the network security or telecommunications industry;

•                                          understanding of relevant technologies;

•                                          academic expertise in an area of the Company’s operations;

•                                          communications and interpersonal skills;

•                                          and practical and mature business judgment.

These directors also evaluate board members’ and nominees’ service on the board of other public companies. Although these directors use these and other criteria to evaluate potential nominees, there are no stated minimum criteria for nominees. These directors also evaluate candidates identified by their personal contacts and other Board members.

These directors will also consider nominees proposed by stockholders. Although the Company has no formal policy regarding stockholder nominees, stockholder nominees are viewed in substantially the same manner as other nominees. The consideration of any candidate for director will be based on the assessment of the individual’s background, skills and abilities, and if such characteristics qualify the individual to fulfill the needs of the Board at that time. To recommend a prospective nominee for consideration, stockholders should submit the candidate’s name and qualifications to the Company’s Secretary in writing at the address listed above. There have been no changes to the procedures by which stockholders may recommend nominees to the Board since the date of the Company’s proxy statement for its 2005 annual meeting of stockholders. The Company did not receive any recommendations for Board nominees for election at the Meeting from its stockholders.

Communication with the Board

The Company does not have formal procedures for stockholder communication with the Board. Any matter intended for the Board, or for any individual member or members of the Board, should be directed to the Company’s Secretary at the address of the Company indicated above, with a request to forward the same to the intended recipient. In general, all stockholder communication delivered to the Company’s Secretary for forwarding to the Board or specified Board members will be forwarded in accordance with the stockholders instructions, unless the Secretary believes the question or issue may be addressed adequately by the Company’s investor relations department. However, the Secretary reserves the right to not forward to Board members any abusive, threatening or otherwise inappropriate materials.

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Policy Regarding Board Attendance at Stockholders Meetings

Although it has no formal policy requiring attendance, the Company encourages all directors to attend all meetings of stockholders. Four out of five of the Company’s directors attended its 2005 annual stockholders meeting.

Code of Ethics

All of the Company’s directors and employees are required to abide by the Company’s Code of Business Conduct and Ethics, and the Company’s Chief Executive Officer, Chief Financial Officer, and other senior financial employees are also required to abide by the Company’s Code of Ethics for Senior Financial Employees, which the Company adopted on March 18, 2004 to comply with Nasdaq and SEC requirements to insure that the Company’s business is conducted in a consistently legal and ethical manner. Both Codes cover all areas of professional conduct, including conflicts of interest, fair dealing and the strict adherence to all laws and regulations applicable to the conduct of the Company’s business. The full text of the Codes is published on the Company’s website at www.intrusion.com; click on the investor relations tab, and then “Code of Ethics.”  The Company intends to disclose future amendments to, or waivers from, certain provisions of the Codes of Ethics on the Company’s website within four business days following the date of such amendment or waiver. Upon the written request of any stockholder, the Company will furnish, without charge, a copy of each of the Codes. This request should be directed to the Company’s Secretary at the address indicated above.

PROPOSAL TWO
AUTHORIZATION AND APPROVAL OF THE ISSUANCE OF COMMON STOCK
REPRESENTING 20% OR MORE OF THE OUTSTANDING SHARES OF COMMON STOCK
OF THE COMPANY UPON CONVERSION OR REDEMPTION OF THE
SERIES 3 5% PREFERRED STOCK AND THE EXERCISE
OF THE PRIVATE PLACEMENT WARRANTS

Background

On December 2, 2005, the Company executed a Securities Purchase Agreement and Registration Rights Agreement with various investors, including G. Ward Paxton, the Company’s Chairman, President and Chief Executive Officer, and James F. Gero, a member of the Board, in connection with a private placement. Pursuant to the Securities Purchase Agreement, the purchasers paid the Company an aggregate of $1,230,843 in consideration for the issuance to them of an aggregate of (1) 564,607 shares of Series 3 5% Preferred Stock convertible into shares of Common Stock at an initial conversion price of $2.18 per share and (2) Private Placement Warrants to purchase up to 282,306 shares of Common Stock at an initial exercise price of $2.58 per share. The conversion price of the Series 3 5% Preferred Stock was calculated as 85% of the average closing bid price per share of the Common Stock on The Nasdaq SmallCap Market for the five business days ended November 30, 2005, and the exercise price of the Private Placement Warrants was equal to the closing bid price per share of Common Stock on that date. The closing price of the Company’s Common Stock on November 30, 2005, was $2.58.

As described below, the conversion or redemption of the Series 3 5% Preferred Stock and exercise of the Private Placement Warrants issued in the private placement may result in the Company issuing shares of Common Stock in excess of 1,381,900, or 19.99% of its total number of shares outstanding on December 2, 2005, for a price per share less than the greater of the book value or the market value of the Common Stock on that date. The Board unanimously approved the private placement on November 29, 2005, and believes it is in the best interests of the Company and its stockholders. Therefore, under the terms of the Securities Purchase Agreement, the Company has agreed to include in this Proxy Statement this proposal to approve the issuance of additional shares of its Common Stock for purposes of complying with the rules of Nasdaq. Unless and until the Company obtains the stockholder approval contemplated by this proposal, the purchasers in the private placement cannot convert or redeem their shares of Series 3 5% Preferred Stock or exercise their Private Placement Warrants for more than an aggregate of 1,381,900 shares of Common Stock.

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The following summary of the terms of the private placement, the Series 3 5% Preferred Stock and the Private Placement Warrants is qualified by reference to the complete text of (1) the Securities Purchase Agreement executed in connection with the private placement, (2) the Certificate of Designations for the Series 3 5% Preferred Stock filed by the Company with the Delaware Secretary of State on December 2, 2005, (3) the form of Private Placement Warrant and (4) the Registration Rights Agreement executed in connection with the private placement. Each of these documents is attached as Appendices A through D, respectively, to this Proxy Statement.

Terms of the Series 3 5% Preferred Stock

Dividends

Holders of Series 3 5% Preferred Stock are entitled to a 5% per annum dividend per share. The dividend accrues and is payable in cash quarterly on the first business day of March, June, September and December of each year, beginning on March 1, 2006. Dividends may increase to 18% per annum upon the occurrence of certain redemption events described below under “Terms of the Series 3 5% Convertible Preferred Stock—Redemption” below.

Accrued but unpaid dividends are payable upon the conversion or redemption of the shares of Series 3 5% Preferred Stock and upon a liquidation event. Dividends not paid within five business days of the day they are due accrue daily interest at the lesser of 18% per annum or the maximum rate permitted by law, until the dividends and the accrued interest are paid in cash.

As long as any shares of Series 3 5% Preferred Stock are outstanding, the Company cannot pay dividends or make other distribution on, redeem shares of, or set money aside or create a sinking fund for that purpose for, any shares of capital stock ranking junior to the Series 3 5% Preferred Stock with respect to dividends, including Common Stock. However, this restriction does not apply to the payment of accrued dividends on the 5% Preferred Stock Series 2 5% Preferred Stock or the conversion of any convertible capital stock in accordance with its terms.

Voting Rights

Holders of Series 3 5% Preferred Stock have no voting rights, except as required by law. However, as long as any shares of Series 3 5% Preferred Stock remain outstanding, the Company cannot take any of the following actions without the separate class vote or written consent of at least 75% of the then outstanding shares of Series 3 5% Preferred Stock:

•                                          alter or change adversely the powers, preferences or privileges of the Series 3 5% Preferred Stock;

•                                          alter or amend the Certificate of Designation creating the Series 3 5% Preferred Stock;

•                                          authorize or create any class stock ranking senior to, or on an equal basis with, the Series 3 5% Preferred Stock with respect to dividends, redemption or liquidation;

•                                          amend its certificate of incorporation, bylaws or other organizational documents in a manner which adversely affects the rights of any of the holders of the Series 3 5% Preferred Stock;

•                                          increase the authorized number of shares of Series 3 5% Preferred Stock; or

•                                          enter into any agreement to do any of the above.

Conversion

The holders of the Series 3 5% Preferred Stock have the option to convert their shares of Series 3 5% Preferred Stock into shares of Common Stock at an initial conversion price of $2.18 per share. The Company also has the right to force conversion of outstanding shares of Series 3 5% Preferred Stock after December 2, 2006, if the following conditions are met:

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•                                          the volume weighted average price of the Common Stock for twenty consecutive trading days must be at least 200% of the conversion price of the Series 3 5% Preferred Stock then in effect, for a period of 20 consecutive trading days immediately preceding the redemption;

•                                          it notifies the holders of the conversion within one trading day after the Common Stock meets the above trading price requirement;

•                                          it has honored all requested conversions of Series 3 5% Preferred Stock, if any;

•                                          it has paid any liquidated damages or other amounts owing on the Series 3 5% Preferred Stock;

•                                          the registration statement related covering the resale of the shares of Common Stock underlying the Series 3 5% Preferred Stock and Private Placement Warrants is effective and is expected to remain effective;

•                                          the Common Stock is traded on The Nasdaq Capital Market, The Nasdaq National Market, the New York Stock Exchange, the American Stock Exchange or the OTC Bulletin Board;

•                                          it has a sufficient number of authorized but unissued shares of Common Stock to permit the conversion;

•                                          no event which would give the holders the right to redeem there shares of Series 3 5% Preferred Stock exists;

•                                          the issuance of the shares of Common Stock would not cause a relevant holder to exceed the 4.99% beneficial ownership limitation described below; and

•                                          it has not publicly announced any merger or consolidation, sale of all or substantially all of its assets, tender or exchange offer, reclassification of the Common Stock or any share exchange or any transaction which would constitute a change of control for purposes of the liquidation preference of the Series 3 5% Preferred Stock.

Because the original purchase price and the initial conversion price are the same, each share of Series 3 5% Preferred Stock is initially convertible into one share of Common Stock. The Series 3 5% Preferred Stock contains adjustment provisions upon the occurrence of stock splits, stock dividends, combinations, reclassifications or similar events of the Company’s capital stock as well as any rights offering or pro rata distribution of cash, property, assets or securities to holders of Common Stock.

A holder of Series 3 5% Preferred Stock cannot convert shares of Series 3 5% Preferred Stock into shares of the Company’s Common Stock if that holder would beneficially own greater than 4.99% of the Company’s issued and outstanding shares of Common Stock, as determined in accordance with Section 13(d) of the Exchange Act, upon conversion of the Series 3 5% Preferred Stock and exercise of the Private Placement Warrants. However, this restriction does not apply to any holder of Series 3 5% Preferred Stock who is one of the Company’s directors or officers. Although this restriction does not limit the conversion of the shares of Series 3 5% Preferred Stock purchased by Mr. Paxton or Mr. Gero, neither Mr. Paxton nor Mr. Gero may convert their shares into Common Stock unless stockholders approve Proposal Three.

Rank; Liquidation Preference

The shares of Series 3 5% Preferred Stock rank prior to the shares of the Company’s Common Stock, 5% Preferred Stock and Series 2 5% Preferred Stock with respect to the distribution of the Company’s assets upon a dissolution, liquidation or other similar event. The liquidation preference for the Series 3 5% Preferred Stock is an amount equal to $2.18 per share plus any accrued but unpaid dividends.

In addition to a dissolution, liquidation or similar event, the following “change of control” transactions constitute a liquidation:

•                                          an acquisition by an individual, legal entity or group, as defined in Rule 13d-5(b)(1) of the Exchange Act of 1934, as amended, of more than 33% of the Company’s voting securities;

•                                          a merger or consolidation with or into another entity, after which the Company’s stockholders own less than 66% of the aggregate voting power of the surviving corporation;

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•                                          a sale of all or substantially all of the Company’s assets to an entity in which the Company’s stockholders own less than 66% of aggregate voting power of the acquiring entity;

•                                          a replacement at one time or within one year of more than half the members of the Board which is not approved by the members of Board or their nominees;

•                                          the execution of a binding agreement to effect any of the above transactions.

Redemption

Holders of Series 3 5% Preferred Stock can require the Company to redeem all of their shares of Series 3 5% Preferred Stock upon the occurrence of any of the following events:

•                                          the registration statement covering the resale of the shares of Common Stock underlying Series 3 5% Preferred Stock and Private Placement Warrants ceases to be effective or a holder is not permitted to resell its shares of Common Stock registered for resale for more than 90 calendar days in any twelve month period;

•                                          its failure to deliver certificates for Common Stock within ten trading days of a request to convert, or it publicly announces that it will not comply with requests to convert;

•                                          its failure to pay within ten days after receipt of notice to a holder for any damages it incurs as a result of open market purchases to cover sales of Common Stock which it did not timely issue Common Stock certificates on conversion;

•                                          its failure to have a sufficient number of authorized but unissued shares to permit conversion;

•                                          its breach of any representation, warranty, covenant or agreement in the Securities Purchase Agreement, Registration Rights Agreement, Private Placement Warrants or other transaction documents executed in connection with the private placement which it has not cured within 45 days after notice of such breach;

•                                          its redemption of any shares of Common Stock, or 5% Preferred Stock or Series 2 5% Preferred Stock, other than conversions of the  5% Preferred Stock or Series 2 5% Preferred Stock and the repurchase of up $100,000 per calendar year of Common Stock from employees, officers, directors, consultants and other service providers upon their termination;

•                                          it becomes a party to a change of control transaction that results in a liquidation of the Series 3 5% Preferred Stock; or

•                                          it has filed for bankruptcy, whether voluntarily or involuntarily, or made a general assignment for the benefit of creditors.

The redemption price is the sum of (1) the greater of $2.834 and the product of the volume weighted average price of the Common Stock on the trading day immediately preceding the event multiplied by $2.18 divided by the conversion price then in effect plus (2) any accrued but unpaid dividends on the Series 3 5% Preferred Stock plus (3) all liquidated damages or other amounts payable to the holders of Series 3 5% Preferred Stock. The redemption price is payable in cash if a redemption event occurs as a result of the Company’s failure to deliver stock certificates upon conversion, its public announcement of its refusal to comply with conversion requests, its failure to pay damages to a holder who is forced to cover a sale for which it did not timely issue certificates, its breach of the provisions of any of the agreements executed in connection with the private placement, its becoming party to a change of control transaction or its voluntary bankruptcy. In the case of any other redemption event, a holder has the option to receive a number of shares of Common Stock equal to the redemption price divided by 75% of the ten-day average of the volume weighted average of the Common Stock ending on the day immediately preceding the holder’s election, subject to a floor of $0.87 per share, or an increase in the dividends payable per share to 18% per annum. Mr. Paxton and Mr. Gero will not be able to receive stock upon redemption of their shares of Series 3 5% Preferred Stock unless stockholders approve Proposal Three. Payment of the redemption price is due within five trading days after the holder provides the Company with a notice of payment, after which the unpaid amount accrues interest daily at a rate equal to the lower of 18% per annum and the highest rate permitted by law.

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If stockholders approve this proposal and Proposal Three, the Company would issue up to                       shares of Common Stock if a specified redemption event occurs and all holders of Series 3 5% Preferred Stock elected to redeem their shares for Common Stock, assuming the Company had paid all liquiditated damages and other amounts to the holders, a volume weighted average price of $                  , which was the closing price of the Common Stock on April 20, 2006, and the 7,046,213 shares outstanding on April 20, 2006. This would represent an increase of approximately      % in the number of shares of Common Stock as of April 20, 2006.

Terms of the Private Placement Warrants

The Private Placement Warrants the Company issued in the private placement have an initial exercise price of $2.58 per share and are exercisable for Common Stock at any time during the period commencing on June 6, 2006 and ending on or before June 6, 2011. The Private Placement Warrants contain a cashless exercise provision, permitting the holder at any time on or after December 2, 2007, in lieu of paying the exercise price, to surrender the Private Placement Warrant for a number of shares of Common Stock determined by multiplying the number of shares of Common Stock underlying the Private Placement Warrant by a fraction based on the exercise price of the Private Placement Warrant and the volume weighted average price of the Company’s Common Stock on trading day immediately preceding the exercise date. A holder may only use the cashless exercise if there is no effective registration statement covering the resale of the shares of Common Stock underlying the Private Placement Warrant at the time the holder wishes to exercise.

All of the Private Placement Warrants contain adjustment provisions upon the occurrence of stock splits, stock dividends, combinations, reclassification or similar events of the Company’s capital stock as well as pro rata distributions of cash, property, assets or securities to holders of Common Stock. In addition, if the Company issues shares of Common Stock or securities convertible into or exercisable for shares of Common Stock at a price less than the exercise price of the Private Placement Warrants, other than in an issuance exempt from the investors’ pre-emptive rights described below under “Pre-emptive Rights and Restrictions on Future Sales of Equity – Pre-emptive Rights”, the exercise price of the Private Placement Warrants will reset to the lower price.

A holder of a Private Placement Warrant cannot exercise Private Placement Warrants for shares of Common Stock if that holder would beneficially own greater than 4.99% of the issued and outstanding shares of Common Stock, as determined in accordance with Section 13(d) of the Exchange Act, upon exercise of the Private Placement Warrants and conversion of the Series 3 5% Preferred Stock. However, this restriction does not apply to any holder of a Private Placement Warrant who is one of the Company’s directors or officers. Although this restriction does not currently limit the exercise of the Private Placement Warrants acquired by Mr. Paxton or Mr. Gero, neither Mr. Paxton or Mr. Gero may exercise their Private Placement Warrants for Common Stock unless stockholders approve Proposal Three.

If all Private Placement Warrants could be exercised as of April 20, 2006, the Company would issue an additional 282,306 shares of Common Stock upon the exercise thereof.

Pre-emptive Rights and Restrictions on Future Sales of Equity

Pre-emptive Rights

Pursuant to the terms of the Securities Purchase Agreement entered into in connection with the private placement, the Company granted the investors, other than Mr. Paxton and Mr. Gero, who continue to own shares of Series 3 5% Preferred Stock prior to the sale, the right to purchase up to 100% of the securities the Company may offer in certain future sales of securities within 180 days of the effective date of the registration statement covering resale the shares of Common Stock underlying the Series 3 5% Preferred Stock and the Private Placement Warrants. This right expires on July 16, 2006.

The investors’ right of purchase will not apply to the following issuances by the Company:

•                                          shares issuable upon the conversion of the Series 3 5% Preferred Stock or the exercise of the Private Placement Warrants;

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•                                          securities it issues to directors, officers, employees and consultants as compensation;

•                                          securities issuable upon the exercise of options, warrants or other convertible securities currently outstanding, as long as it has not amended these securities to increase the number of shares issuable upon conversion or to decrease the exercise price other than as a result of their respective anti-dilution provisions;

•                                          shares of stock issued in connection with a stock split, stock dividend or recapitalization;

•                                          securities it issues in connection with commercial lending and lease transactions;

•                                          securities it issues as compensation to registered broker-dealers engaged by it to obtain financing on its behalf;

•                                          securities it issues in connection with acquisitions or strategic transactions; and

•                                          shares of stock it issues in a firm commitment, underwritten public offering with gross proceeds of at least $30,000,000.

Restrictions of Future Sales

The Securities Purchase Agreement also restricts the Company from issuing any shares of Common Stock or other securities convertible or exercisable for Common Stock until July 16, 2006. In addition, as long as any investor holds Series 3 5% Preferred Stock or Private Placement Warrants, the Company cannot issue debt or equity securities that are convertible or exercisable for shares of Common Stock at a price that varies with the trading price of the Common Stock or is subject to reset for events contingent on the Company’s business or the price of the Common Stock or enter into any other agreement, including an equity line of credit, pursuant to which the Company sells securities at a future determined price. However, these restrictions to do apply to transactions which are exempt from the pre-emptive rights described above.

These provisions may hinder or delay the Company’s ability to raise additional debt or equity financing if and when the Company require additional capital to operate or grow the Company’s business.

Registration Rights

In connection with the Securities Purchase Agreement, the Company entered into a Registration Rights Agreement, pursuant to which the Company it filed a registration statement registering the resale of the 849,913 shares of Common Stock issuable upon the conversion of the Series 3 5% Preferred Stock and upon the exercise of the Private Placement Warrants issued to the investors in the private placement. This registration statement also included the 27,531 shares of Common Stock issuable upon the exercise of warrants the Company issued to two affiliates of Stonegate Securities, Inc., its placement agent for the private placement. The SEC declared the Registration Statement effective on January 17. 2006. As a result, subject to the approval of Proposals Two and Three and the limitations on beneficial ownership described in “Terms of the Series 3 5% Preferred Stock — Conversion” and “—Terms of the Private Placement Warrants”, the investors will be able to freely convert their shares of Series 3 % Preferred Stock and exercise their Private Placement Warrants and sell the underlying shares of Common Stock.

Under the terms of the Registration Rights Agreement, the Company may be subject to the payment of partial liquidated damages if the registration statement ceases to be effective or a holder is not permitted to resell its shares of Common Stock registered for resale for more than 30 calendar days in any twelve month period. The amount of liquidated damages will equal 1% of the aggregate purchase price paid to the Company by the investors in the private placement for the first thirty-day period, and 2% of the aggregate purchase price for each subsequent thirty-day period, each pro rated for any shorter period, following any of the above events. The damages are payable on the monthly anniversary of the date of the event giving rise to the damages. Any damages not paid within seven days of the date due will accrue daily interest at the lesser of 18% per annum and the maximum amount permitted by law until paid in full. No damages are payable to the affiliates of Stonegate with respect to the shares of Common Stock underlying their warrants or to any person who is one of the Company’s officers or directors at the time the payment is due. Therefore, Mr. Paxton and Mr. Gero are not currently entitled to receive any of these damages.

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The Company must keep the registration statement effective until the earlier to occur of the date when all the securities covered by the Registration Statement may be sold without restriction pursuant to Rule 144(k) and the date on which all securities covered by the registration statement have been sold.

Use of Proceeds

The Company intends to use the proceeds from the private placement for general working capital purposes, including ongoing operating expenses, trade payables, the payment of dividends on the Series 3 5% Preferred Stock, the Series 2 5% Preferred Stock or the 5% Preferred Stock and expenses in connection with the private placement. However, the Securities Purchase Agreement the Company executed in connection with the private placement restricts it from using the proceeds to pay other debt, to redeem securities or settle litigation. Other than these restrictions, the Company’s management will have broad discretion over how it uses the net proceeds of private placement and could spend proceeds in ways with which stockholders do not agree. Pending deployment of the funds, the Company may invest the proceeds in ways that do not yield favorable returns.

None of the shares of Series 3 5% Preferred Stock, the Private Placement Warrants or the warrants the Company issued to the affiliates of Stonegate, have been registered under the Securities Act of 1933, as amended, and none of these securities may be offered or sold in the United States absent registration or an applicable exemption from registration requirements. This Proxy Statement is neither an offer to sell or solicitation of an offer to buy, nor shall there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such state.

Factors Affecting Current Stockholders

While the Board unanimously recommends the approval of the issuance of the Common Stock upon the conversion or redemption of the Series 3 5% Preferred Stock and exercise of the Private Placement Warrants and is of the opinion that the issuance would be fair to, and otherwise in the best interest of, the Company and its stockholders, stockholders should consider the following possible factors as well as other information contained in this Proxy Statement in evaluating this proposal.

Effect of Actual or Potential Future Redemption or Sales Below Market Price

The redemption provisions of the Series 3 5% Preferred Stock substantially increases the number of shares of Common Stock the Company may issue below the current market price of the Common Stock. Further, certain future issuances of stock by the Company below $2.58 will cause the exercise price of the Private Placement Warrants to reset to the lower price. Issuances of Common Stock at a discount upon redemption or at the lower exercise price for the Private Placement Warrants, or the threat thereof, could have a depressive effect on the market price of, and reduce trading activity in, the Common Stock by increasing the amount of shares of Common Stock outstanding and could encourage short sales by the holders of the Series 3 5% Preferred Stock or Private Placement Warrants or others which could place further downward pressure on the price of the Common Stock.

Dilution

If all of the shares of Series 3 5% Preferred Stock are converted and all of the Private Placement Warrants are fully exercised for cash, and assuming no adjustments to the conversion price or the exercise price, and no other issuances of, or conversions or exchanges into, Common Stock, the number of shares of outstanding Common Stock would increase by approximately 11.05% and significantly dilute the ownership interests and proportionate voting power of the existing holders of Common Stock, Series 2 5% Preferred Stock and 5% Preferred Stock. This dilutive effect increases to approximately          % if a specified redemption event occurs and all holders of Series 3 5% Preferred Stock elected to redeem their shares for Common Stock, assuming the Company has paid all liquidated damages and other amounts to the holders, no accrued but unpaid dividends and the volume weighted average price of the Common Stock is $          , which was the closing price of the Common Stock on April 20, 2006.

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Certain Purchasers will become Significant Stockholders

Certain of the investors will, upon conversion of their shares of Series 3 5% Preferred Stock and the exercise of their Private Placement Warrants, become significant holders of the Company’s voting power or increase their current control over the Company’s voting securities. As a result, these purchasers may be able to effect the outcome of all matters brought before the stockholders, including a vote for the election of directors, the approval of mergers and other business combination transactions. Moreover, these holders have various protective voting rights and pre-emptive rights which could hinder or delay the Company’s ability to raise additional equity financing if and when required.

Nasdaq Stockholder Approval Requirement

The Common Stock is listed on The Nasdaq Capital Market. Nasdaq Marketplace Rule 4350 requires that the issuer of stock in a non-public offering secure stockholder approval prior to an issuance where (1) the securities issued are common stock or securities convertible into common stock, (2) the price per share of the securities in the offering is less than the greater of book value or market value of the issuer’s common stock and (3) the proposed issuance would result in the issuance of 20% or more of the common stock or voting power of the issuer before the issuance.

Although the $2.58 exercise price of the Private Placement Warrants is equal to the $2.58 market price of the Common Stock on December 2, 2005, the date of sale, and the number of shares of Series 3 5% Preferred Stock issuable upon conversion at the price of $2.18, is only 564,607, or approximately 8.17% of the Company’s outstanding shares on that date, the redemption provisions of the Series 3 5% Preferred Stock permit the holders to redeem their shares for shares of Common Stock at 75% of the ten-day average of the volume weighted average of the Common Stock ending on the day immediately preceding the holder’s election to redeem upon the occurrence of certain events described above under “Terms of the Series 3 5% Preferred Stock – Redemption.”  Further, Nasdaq treats the reset provisions of the Private Placement Warrants described under “Terms of the Private Placement Warrants” as a below market issuance.

Based on the $          price of the Common Stock and 7,046,213 shares of Common Stock outstanding on April 20, 2006, if a specified redemption event occurred, holders of the Series 3 5% Preferred Stock could redeem their 468,735 shares at a price of $         per share for an aggregate of $                  , and holders would be entitled to redeem their shares of Series 3 5% Preferred Stock for shares of Common Stock at a price of $         .

Using the $                    aggregate redemption price, this would result in an additional                     shares of Common Stock being issued. Added to the 282,306 shares of Common Stock underlying the Warrants, the total increase is                     shares, or approximately            % of the Company’s 7,046,213 shares outstanding on April 20, 2006. Under the Nasdaq rule described above, the Company is prohibited from issuing more than 1,381,900 shares of Common Stock, or 19.99% of its total number of shares outstanding on December 2, 2005, upon conversion or redemption of the Series 3 5% Preferred Stock or the exercise of the Private Placement Warrants, unless stockholder approval is obtained. Thus, stockholders must vote in favor of this proposal in order for the purchasers in the private placement to be able to convert or redeem their shares of Series 3 5% Preferred Stock or exercise their Private Placement Warrants without restriction.

Reasons for the Private Placement

The Company intends to use the proceeds from the private placement for general working capital and corporate purposes as described above under “Use of Proceeds.”

The Board and members of management of the Company reviewed and considered numerous financing alternatives prior to completing the private placement. The Board unanimously approved the private placement, the issuance of the Series 3 5% Preferred Stock and Private Placement Warrants and related matters. In so doing, the Board considered a number of factors including:

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•                                          the Company’s continuing liquidity needs to operate and grow its business;

•                                          the unavailability of alternative financing on acceptable terms; and

•                                          the Company’s need to maintain its stockholders’ equity in accordance with Nasdaq continued listing requirements.

Principal Effects of Approval or Nonapproval

In the event that stockholders approve this proposal, the Company may initially issue more than 1,381,900 shares of Common Stock upon the conversion or redemption of the Series 3 5% Preferred Stock and the exercise of the Private Placement Warrants.

If stockholders do not approve this proposal, the Company has agreed to continue to call a meeting of stockholders every four months after the date of the Meeting in order to seek approval of the issuance of these shares until the earlier to occur of the date the Company finally receives approval and the date no shares of Series 3 5% Preferred Stock remain outstanding. The cost of additional meetings, the preparation, filing and mailing of the related proxy statements and the solicitation of proxies can be substantial and could strain the Company’s cash resources and distract management’s time and attention away from the Company’s day-to-day business operations. Further, unless approval is obtained, in the event of the specified redemption events, holders of Series 3 5% Preferred Stock will only be able to elect to increase the dividends on their shares to 18% per annum, which also could deplete the Company’s available cash.

In the opinion of the Board, a failure of the stockholders to approve this proposal could have a serious detrimental effect on the Company’s operations and cash resources as well as the ability of the Company to raise future equity financing if and when required.

The Board recommends a vote FOR this proposal.

PROPOSAL THREE
APPROVAL OF THE ISSUANCE OF AT LEAST 123,854 SHARES OF COMMON
STOCK UPON THE CONVERSION OR REDEMPTION OF SHARES OF SERIES 3 5%
PREFERRED STOCK AND EXERCISE OF PRIVATE PLACEMENT WARRANTS
ACQUIRED BY G. WARD PAXTON AND JAMES F. GERO

Background

As indicated in Proposal Two, G. Ward Paxton, the Company’s Chairman, President and Chief Executive Officer, and James F. Gero, one of the Company’s directors, invested a total of $180,000 in the December 2, 2005 private placement as follows:

Mr. Paxton and Mr. Gero participated in the private placement on the same terms and conditions as the other investors as described in Proposal Two, except that they are not entitled to a pre-emptive right to purchase a pro rata portion of certain future sales of securities by the Company or to receive liquidated damages under the provisions of the Registration Rights Agreement executed in connection with the private placement. In addition, even if stockholders approve Proposal Two, neither Mr. Paxton nor Mr. Gero will be able to convert or redeem his shares of Series 3 5% Preferred Stock or exercise his Private Placement Warrants for shares of Common Stock unless stockholders separately also approve this proposal.

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The Board, including all of the other members of the Board who did not participate in the private placement, in good faith after due consideration of all facts relevant to its decision, unanimously approved the participation of Mr. Paxton and Mr. Gero in the private placement and the issuance of shares of Common Stock to them in accordance with the terms of the Series 3 5% Preferred Stock and Private Placement Warrants as entirely fair to the Company and its stockholders.

Interest of Mr. Paxton and Mr. Gero

If stockholders do not approve this proposal, Mr. Paxton and Mr. Gero will be left with relatively illiquid securities in the form of Series 3 5% Preferred Stock and Private Placement Warrants which cannot be converted, redeemed or exercised for Common Stock. Further, upon approval, Mr. Paxton and Mr. Gero will have the right to purchase or otherwise receive shares of Common Stock below the current market value of the Common Stock. This right is limited to Mr. Paxton and Mr. Gero as participants, along with other investors in the private placement, and will not be issued generally to other holders of Common Stock.

Nasdaq Stockholder Approval Requirement

Nasdaq Marketplace Rule 4350 generally requires approval of any arrangement pursuant to which officers or directors of a corporation will or may acquire shares of the corporation’s common stock at a discount to current market price, unless all holders of common stock are given a similar right. Because the $2.18 conversion price Series 3 5% Preferred Stock purchased by Mr. Paxton and Mr. Gero permits them to acquire shares of Common Stock at a price lower than the $2.59 market price of the Common Stock on December 2, 2005, the shares of Series 3 Preferred Stock include the right to redeem the shares for shares of Common Stock at a discount as described in “Proposal Two – Terms of the Series 3 5% Preferred Stock – Redemption,” “—Factors Affecting Current Stockholders – Dilution” and “—Nasdaq Stockholder Approval Requirement,” and the reset provisions of the the Private Placement Warrants may lower the exercise price below the market price on December 2, 2005 as described in “Proposal Two — Terms of the Private Placment Warrants,” “—Factors Affecting Current Stockholders – Dilution” and “—Nasdaq Stockholder Approval Requirement,”, the Company must secure stockholder approval of this proposal before Mr. Paxton or Mr. Gero may convert or redeem their shares of Series 3 5% Preferred Stock or exercise their Private Placement Warrants.

The Board recommends a vote FOR this proposal.

PROPOSAL FOUR
RATIFICATION OF THE APPOINTMENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board has appointed KBA Group LLP to serve as independent auditors of the Company and to audit its consolidated financial statements for fiscal year 2006, subject to ratification by the Company’s stockholders at the Meeting. KBA Group LLP has served as the Company’s Independent Registered Public Accounting Firm since March 2003. To the knowledge of management of the Company, neither such firm nor any of its members has any direct or material indirect financial interest in the Company, nor any connection with the Company in any capacity other than as independent auditors.

Although stockholder ratification and approval of this appointment is not required by the Company’s bylaws or otherwise, in keeping with the Company’s policy that its stockholders should be entitled to a voice in this regard and as a matter of good corporate practice, the Board is seeking ratification of this appointment. If the appointment is not ratified, the Board must then determine whether to appoint other auditors prior to the end of the current fiscal year. In such case, the opinions of stockholders will be taken into consideration.

Fees Paid to Independent Registered Public Accounting Firm

The Audit Committee has reviewed the following audit and non-audit fees the Company has paid to the Independent Registered Public Accounting Firm for purposes of considering whether such fees are compatible with maintaining the auditor’s independence. The policy of the Audit Committee is to pre-approve all audit and non-audit services performed by its Independent Registered Public Accounting Firm before the services are performed, including all of the services described below under Audit-Related Fees, Tax Fees and All Other Fees below.

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Audited Fees. Estimated fees billed for service rendered by KBA Group LLP for the reviews of Forms 10-Q and for the audit of the consolidated financial statements of the Company were $107,725 for 2005 and $59,550 for 2004.

Audited-Related Fees. Aggregate fees billed for all audit-related services rendered by KBA Group LLP consisted of $7,000 for 2005 and $7,875 for 2004. These amounts include employee benefit plan audits in 2004 and 2005.

Tax Fees. Aggregate fees billed for permissible tax services rendered by KBA Group LLP consisted of $46,145 for 2005 and $36,707 for 2004. These amounts include tax strategy services, preparation of sales tax returns, preparation of federal and state income tax returns, preparation of property tax and franchise tax returns and international tax issues.

All Other Fees. Aggregate fees billed for all other services rendered by KBA Group LLP consisted of $16,850 for 2005 and $35,725 for 2004. The services billed for 2005 were related to the Form S-3 filed in 2005. The services billed for 2004 were for fees related to the Form S-3 filed in 2004 and the subsequent amendment of 2003 Form 10-K and first quarter 2004 10-Q.

Representatives of KBA Group LLP are expected to be in attendance at the Meeting and will be afforded the opportunity to make a statement. The representatives will also be available to respond to appropriate questions.

The enclosed Proxy will be voted as specified, but if no specification is made, it will be voted in favor of the adoption of the resolution of ratification.

The Board recommends a vote “FOR” this proposal.

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT

The following table sets forth information regarding the beneficial ownership of the Common Stock as of April 20, 2006, unless otherwise indicated, by (i) each person known by the Company to be the beneficial owner of more than 5% of the outstanding shares of Common and Preferred Stock, (ii) each director of the Company, (iii) the Company’s current executive officers and (iv) all current directors and executive officers of the Company as a group. The persons and entities named in the table have sole voting and investment power with respect to all such shares owned by them, unless otherwise indicated.

*                 Represents beneficial ownership of less than 1% of the outstanding shares of Common Stock.

(1)                                  The addresses of the persons or entities shown in the foregoing table who are beneficial owners of more than 5% of the Common Stock or Preferred Stock are as follows:  G. Ward Paxton, T. Joe Head and James F. Gero, 1101 East Arapaho Road, Richardson, Texas 75081; Gryphon Master Fund, L.P., 100 Crescent Court, Suite 490, Dallas, Texas 75201; Enable Growth Partners L.P., One Sansome Street, Suite 2900, San Francisco, CA 94104; Marshall B. Payne, 500 Crescent Court, Suite 250, Dallas, TX  75201; and Kern Capital Management, LLC, 114 West 47^th Street, Suite 1926, New York, NY 10036.

(2)                                  Beneficial ownership is calculated in accordance with the rules of the Securities and Exchange Commission in accordance with Rule 13d-3(d)(1). Percentage of beneficial ownership is based on 7,046,213 shares of Common Stock outstanding as of April 20, 2006 and 259,696 shares of 5% Preferred Stock. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of Common Stock subject to options or warrants held by that person that are currently exercisable or will become exercisable within 60 days following April 20, 2006 are deemed outstanding. However, these shares are not deemed outstanding for the purpose of computing the percentage ownership of any other person. Unless otherwise indicated in the footnotes to this table, the persons and entities named in the table have sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable.

Certain shares of Common Stock shown as beneficially owned are issuable upon conversion of the 5% Preferred Stock or exercise of warrants the Company issued in a private placement on March 25, 2004. Under the terms of these shares preferred stock and warrants, the shares of 5% Preferred Stock are convertible and the warrants are exercisable only to the extent that the number of shares of common stock issuable pursuant to those securities, together with the number of shares of Common Stock owned by the relevant person and its affiliates (but not including shares of Common Stock underlying unconverted portions of the 5% Preferred Stock or unexercised portions of the warrants) would not exceed 9.9% of the then outstanding Common Stock as determined in accordance with Section 13(d) of the Exchange Act. In addition, certain shares of Common Stock shown as beneficially owned are issuable upon the conversion of Series 2 5% Preferred Stock issued in a private placements on March 28, 2005. Under the terms of the Series 2 5% Preferred Stock, the shares are convertible only to the extent that the number of shares of Common Stock issuable upon conversion thereof and upon the exercise of the warrants issued in such private placement, together with the number of shares of Common Stock owned the relevant person and its affiliates (but not including shares of Common Stock underlying unconverted portions of the Series 2 preferred stock or unexercised portions of the warrants) would not exceed 4.99% of the then outstanding common stock as determined in accordance with Section 13(d) of the Exchange Act. However, this restriction does not apply to any holder of the Series 2 Preferred Stock who is one of the Company’s directors or officers. Similar restrictions apply to the conversion of the Series 3 5% Preferred Stock and Private Placement Warrants as described in “Proposal Two — Terms of the Series 3 5% Preferred Stock – Conversion” and “— Terms

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of the Private Placement Warrants.” Although these restrictions do not currently limit the conversion of shares of Series 3 5% Preferred Stock or exercise of the Private Placement Warrants by Mr. Paxton or Mr. Gero, neither Mr. Paxton nor Mr. Gero may convert their shares of Series 3 5% Preferred Stock, into or exercise their Private Placement Warrants for, Common Stock unless stockholders approve Proposal Three. Further, the Company cannot issue shares of Common Stock to any investor who participated in the December 2, 2005 private placement upon the conversion of their shares of Series 3 5% Preferred Stock or the exercise of their Private Placement Warrants, if the number of shares to be issued upon the conversion of all of the shares of Series 3 5% preferred stock and exercise all of the Private Placement Warrants exceeds 1,381,900, or 19.99% of the Company’s outstanding shares of Common Stock on December 2, 2005, unless stockholders approve Proposal Two. Accordingly, the number of shares of Common Stock set forth in the column under “Common Stock” entitled “Amount and Nature of Beneficial Ownership” in the table above exceeds the number of shares of Common Stock that they could beneficially own at any given time through the ownership of these securities.

(3)                                  Includes the equivalent of 5,040 shares held by Mr. Paxton in the Intrusion Stock Fund in the Intrusion 401(k) Savings Plan. Includes the equivalent of 55,046 shares that may be issued upon conversion of Series 3 5% Preferred Stock, 160,000 shares that may be issued upon conversion of Series 2 5% Preferred Stock, 222,646 shares that may be issued upon conversion of 5% Preferred Stock and 185,449 shares that Mr. Paxton may acquire upon the exercise of warrants that are currently exercisable or exercisable within 60 days of April 20, 2006. Also includes 25,000 shares that Mr. Paxton may acquire upon exercise of options that are currently exercisable or will become exercisable within 60 days of April 20, 2006.

(4)                                  Includes 13,334 shares that Mr. Bucy may acquire upon exercise of options that are currently exercisable or will become exercisable within 60 days of April 20, 2006.

(5)                                  Includes the equivalent of 27,523 shares that may be issued upon conversion of Series 3 5% Preferred Stock, the equivalent of 60,000 shares that may be issued upon conversion of Series 2 5% Preferred Stock, 95,419 shares that may issued upon conversion of 5% Preferred Stock and 77,159 shares that Mr. Gero may acquire upon exercise of warrants that are currently exercisable or exercisable within 60 days of April 20, 2006. Also includes 4,168 shares that Mr. Gero may acquire upon exercise of options that are currently exercisable or will become exercisable within 60 days of April 20, 2006.

(6)                                  Includes 13,334 shares that Mr. Johnston may acquire upon exercise of options that are currently exercisable or will become exercisable within 60 days of April 20, 2006.

(7)                                  Includes 111,201 shares that Mr. Bawcom may acquire upon exercise of options that are currently exercisable or will become exercisable within 60 days of April 20, 2006.

(8)                                  Includes 125,128 shares that Mr. Gore may acquire upon exercise of options that are currently exercisable or will become exercisable within 60 days of April 20, 2006. Also includes the equivalent of 4,714 shares held by Mr. Gore in the Intrusion Stock Fund in the Intrusion 401(k) Savings Plan.

(9)                                  Includes 76,875 shares that Mr. Hemphill may acquire upon exercise of options that are currently exercisable or will become exercisable within 60 days of April 20, 2006.

(10)                            Includes 185,625 shares held directly by Mr. Michael Paxton, 8,029 shares held by Mr. Paxton’s wife, and 68,221 held by trusts of Mr. Paxton’s children. Also includes 90,000 shares that Mr. Paxton may acquire upon exercise of options that are currently exercisable or will become exercisable within 60 days of April 20, 2006.

(11)                            Includes 128,022 shares that Gryphon Master Fund may acquire upon exercise of warrants that are currently exercisable or exercisable within 60 days of April 20, 2006. Gryphon Master Fund, L.P. has shared voting power and shared dispositive power over all of these shares with Gryphon Management Partners, L.P., Gryphon Partners, L.P., Gryphon Partners (QP), L.P., Gryphon Advisors, LLC and E.B. Lyon IV. Gryphon Partners, L.P. is the general partner of Gryphon Master Fund, L.P. Gryphon Management Partners, L.P. is the general partner of Gryphon Partners, L.P. Gryphon Advisors, LLC is the general partner of Gryphon Management Partners, L.P. Mr. Lyon controls Gryphon Advisors, LLC and has voting and/or investment control over the shares held by Gryphon Master Fund, L.P. Mr. Lyon disclaims beneficial ownership of these shares.

(12)                            Includes the equivalent of 137,615 shares that may be issued upon the conversion of Series 3 5% Preferred Stock, the equivalent of 200,000 shares that may be issued upon conversion of Series 2 5% Preferred Stock, 63,129 shares that may be issued upon conversion of 5% Preferred Stock and 207,436 shares that Enable Growth Partners L.P. may acquire upon exercise of warrants that are currently exercisable or exercisable within 60 days of April 20, 2006. Mitch Levine has voting and/or investment control over the shares held by Enable Growth Partners LP. Mr. Levine disclaims beneficial ownership of these shares.

(13)                            Includes the equivalent of 23,194 shares that may be issued upon the conversion of Series 3 5% Preferred Stock, the equivalent of 40,000 shares that may be issued upon conversion of Series 2 5% Preferred Stock, 31,806 shares that may be issued upon conversion of 5% Preferred Stock and 42,730 shares that Mr. Payne may acquire upon exercise of warrants that are currently exercisable or exercisable within 60 days of April 20, 2006.

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(14)                            According to a Schedule 13G/A filed with the SEC on February 14, 2006, Kern Capital Management, LLC, on its behalf and on behalf of Robert E. Kern, Jr., David G. Kern and Redpoint Partners LP has reported that it has shared voting and shared dispositive  power over 535,800 shares of Common Stock.

(15)                            Includes an aggregate of 319,040 shares that may be acquired upon exercise of options of officers and directors that are currently exercisable or will become exercisable within 60 days of April 20, 2006. Includes the equivalent of 82,569 shares that may be issued upon conversion of Series 3 5% Preferred Stock, the equivalent of 220,000 shares that may be issued upon conversion of Series 2 5% Preferred Stock, 318,065 shares that may be issued upon conversion of 5% Preferred Stock and 262,608 shares that may be acquired upon exercise of warrants that are currently exercisable or exercisable within 60 days of April 20, 2006.

Executive Officers

The following table sets forth the names and ages of all executive officers of the Company, their respective positions with the Company, and the period during which each has served as an officer.

Jay W. Barbour joined the Company on January 11, 2006 as Vice President of Marketing. As Vice President of Marketing, he is responsible for the strategies to bring the Company’s services to market. Prior to joining the Company, Mr. Barbour held various positions in the hi-tech industry including the Vice President of Product Management at ScanSafe in 2005 as well as a consultant to security and wireless start-ups in the United Kingdom and United States from 2003 until 2005. From 2002 to 2003, Mr. Barbour was a Senior Product Manager at Hewlett Packard. Mr. Barbour was Product Manager of Security at 3Com from 2000 to 2002 and was also the Product Marketing Manager at Teradyne from 1999 to 2000. Mr. Barbour holds a B.S. degree in Engineering Physics with honors from Queen’s University, Canada. Mr. Barbour also holds an M.B.A from INSEAD, France, and is a Certified Information Systems Security Professional (CISSP).

Aaron N. Bawcom was named Vice President of Engineering on January 29, 2003. He joined the Company on April 10, 2000 as Director of Product Development of Security Software. As Vice President of Engineering, he is responsible for the technical direction and development of all products. From 1998 to 2000, Mr. Bawcom served as engineer, manager, and chief architect for Network Associates security products where he produced Enterprise Management, Intrusion Detection, and Firewall software. Prior to that time, Mr. Bawcom worked as an engineer producing a network based content scanning product for McAfee. Mr. Bawcom holds a B.S. degree in Computer Science from Texas A&M University.

Eric H. Gore has served the Company as Vice President—Worldwide Sales since June 2001. He also served as Vice President—International Sales from December 2000 to June 2001 and Vice President—Strategic Business Development from 1994 to 2000. Mr. Gore previously held positions with the Company as Director of Strategic Business Development from 1992 to 1994, Area Sales Manager from 1989 to 1992 and Regional Sales Manager from 1984 to 1989. Prior to joining the Company, Mr. Gore served Texas Instruments Incorporated in various marketing positions from 1979 to 1982. Mr. Gore holds a M.B.A. degree from Hardin-Simmons University and a Bachelor of Business Administration degree from the University of North Texas.

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Garry L. Hemphill joined the Company on February 14, 2003 as Vice President of Operations. Mr. Hemphill was previously employed with the Company from 1987 to 2000 as Vice President of Operations and 1984 to 1987 as Director of Operations. From 2002 to 2003, Mr. Hemphill acted as an independent consultant to contract manufacturers in the area of business development. From 2000 to 2001, Mr. Hemphill was President and Chief Executive Officer of VHB Technologies, Inc., a Richardson, Texas based start-up. Mr. Hemphill’s background covers over 20 years in data networking, engineering and operation management. Mr. Hemphill holds an Associate Degree in Business Administration from the University of Texas at Dallas.

Michael L. Paxton joined the Company on August 13, 2002 as Vice President, Chief Financial Officer, Secretary and Treasurer. He was also employed by the Company from 1986 until May 1998. Mr. Paxton previously held positions with the Company as Vice President and Secretary from 1995 to 1998, Controller of Finance and Accounting from 1987 to 1995 and Accounting Manager from 1986 to 1987. From 1998 to August 2002, Mr. Paxton served as General Partner for Paxton Ventures, L.P. Mr. Paxton holds a B.B.A. degree from the University of Oklahoma.

The biographies of G. Ward Paxton and T. Joe Head are provided in “Proposal One – Election of Directors.”

All executive officers of the Company are elected annually by the Board and serve at the discretion of the Board. There are no family relationships between any director or executive officer and any other such person except for Michael L. Paxton, Vice President, Chief Financial Officer, Secretary and Treasurer, who is the son of G. Ward Paxton, Chairman, President and Chief Executive Officer.

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EXECUTIVE COMPENSATION

Summary Compensation Information

The following table sets forth certain summary information regarding all cash compensation earned by the Company’s Chief Executive Officers and each of the Company’s four other most highly compensated executive officers (the “Named Executive Officers”) for the last three fiscal years in all capacities in which they served the Company and its subsidiaries for such period. No executive officers who would have otherwise been includible in such table on the basis of salary and bonus earned for the 2005 fiscal year has been excluded by reason of his or her termination of employment or change in executive status during that year. The individuals listed below shall be referred to as the (“Named Executive Officers”).

Summary Compensation Table

(1)                                  Represents bonus compensation and/or commission earned during the fiscal year indicated, a portion of which may have been or will be paid during the subsequent fiscal year.

(2)                                  T. Joe Head was named Vice Chairman and Vice President on February 14, 2003.

(3)                                  Aaron Bawcom joined the Company on April 10, 2000 and was named Vice President of Engineering on January 29, 2003. The bonus paid to Mr. Bawcom in 2003 was pursuant to the employment agreement dated February 4, 2003. Such employment agreement is described in the Certain Transactions with Management section of this proxy statement.

(4)                                  Car allowance income.

(5)                                  No restricted stock awards or long-term incentive plan payouts were paid to the Company’s Chief Executive Officer and the “Named Executive Officers for the last three fiscal years. These columns have been omitted from the table.

(6)                                  This amount includes the annual employer matching contributions under the Company’s tax qualified Section 401(k) Savings Plan.

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Option Grants During Fiscal Year 2005

The following table provides information related to options to acquire shares of Common Stock granted to the Named Executive Officers during fiscal year 2005. The Company did not grant any stock appreciation rights during fiscal year 2005.

Option Grants in Last Fiscal Year

(1)                                  The potential realizable value illustrates the value that may be realized upon exercise of the options immediately prior to the expiration of their respective terms, assuming the specified compounded rates of appreciation of the Company’s Common Stock over the term of each option. There can be no assurance that the actual stock price appreciation over the option term will be at the assumed 5% and 10% levels or at any other defined level. These potentially realizable values do not take into account provisions of each option providing for termination of the option following cessation of employment, nontransferability or effective vesting over one year. All options granted in 2005 in the table above fully vest after 1 year.

(2)                                  Options granted to Mr. Head, Mr. Bawcom and Mr. Gore on January 31, 2005 were incentive stock options. All other options granted on January 31, 2005 and all options granted on June 14, 2005 were nonqualified stock options. Each option has a term of ten years from date of grant, subject to earlier termination under certain conditions upon cessation of employment of the optionee and become exercisable one year from the date of grant. Such options are not transferable.

(3)                                  The exercise price per share of each option was equal to 100% of the fair market value of the Common Stock per share on the date of grant. The Compensation Committee, in its sole discretion, may affect the cancellation of such options in exchange for a new option grant with a lower exercise price equal to the current fair market value per share at the time of cancellation.

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Option Exercises and Fiscal Year End Holdings

The following table sets forth information with respect to options exercised by the Named Executive Officers during fiscal year 2005 and the number and value of options held at fiscal year end. No stock appreciation rights were exercised and no stock appreciation rights were outstanding at fiscal year end.

Aggregate Option Exercises in Last Fiscal Year
and Fiscal Year End Option Values

(1)                                  The closing price for the Company’s Common Stock as reported by The Nasdaq Stock Market (SmallCap Market System) on December 31, 2005, was $2.10 per share. The indicated value is calculated on the basis of the difference between the option exercise price per share and $2.10, multiplied by the number of shares of Common Stock underlying each “in-the-money” option.

Compensation of Directors

Messrs. Bucy, Gero and Johnston (each non-employee director) receive a cash retainer fee of $1,000 per month. Each non-employee director also receives a fee of $1,000 for each meeting of the Board attended (excluding telephonic meetings) and for each meeting of a committee of the Board attended (exclusive of committee meetings held on the same day as Board meetings). Each non-employee director also receives a fee of $500 for each telephonic meeting attended. Each non-employee director is also reimbursed for all reasonable expenses incurred in attending such meetings. No director who is an employee of the Company receives any fees for service as a director of the Board. However, G. Ward Paxton and T. Joe Head each earned compensation for his services to the Company as an employee as set forth in the Summary Compensation Table. Neither Mr. Paxton nor Mr. Head received any stock options during 2005 or any additional fees for his services as a director of the Board.

Under the Automatic Option Grant Program of the 2005 Plan, as approved by the stockholders on June 14, 2005,  each non-employee director will automatically be granted an option to purchase 10,000 shares of Common Stock upon joining the Board and an option to purchase 5,000 shares of Common Stock on the date of each annual stockholder meeting as long as the director has served at least six months prior to the date of grant.

Employment Agreements

Neither the Company nor its subsidiaries has any employment agreements with any of its Named Executive Officers.

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Stock Performance Information

The following chart illustrates the percentage of change in the cumulative total stockholder return on the Company’s Common Stock during the five year period ending December 31, 2005, compared with the cumulative total return on the Center for Research in Securities Prices (“CRSP”) Total Return Index for The US Nasdaq Stock Market, CRSP Total Return Index for Nasdaq Computer Manufacturing Stocks, and the CRSP Total Return Index for Nasdaq Computer and Data Processing Stocks, respectively, for the same periods.

STOCK PERFORMANCE*

*                                         The comparison assumes (i) $100 was invested on December 29, 2000 in the Company’s Common Stock and in each of the foregoing indices and (ii) that any dividends paid by companies included in the comparative indices were reinvested in additional shares of the same class of equity securities of such companies at the frequency with which dividends were paid during the applicable periods depicted.

The stock performance information depicted in the foregoing chart is not necessarily indicative of future stock performance.

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CERTAIN TRANSACTIONS WITH MANAGEMENT

March 25, 2004 Private Placement

On March 25, 2004, the Company completed a $5,000,000 private placement of 1,000,000 shares of its 5% Preferred Stock and warrants to purchase 556,619 shares of its Common Stock at an initial exercise price of $3.144 per share to various purchasers. The following executive officers, directors and 5% beneficial holders participated in the private placement:

In connection with the private placement, the Company granted each investor, other than Mr. Paxton and Mr. Gero, who continues to own shares of Preferred Stock prior to the sale, the right to purchase a pro rata portion of certain future sales of securities by the Company based on the ratio of the number of shares of Common Stock held by that eligible investor, including any shares of Common Stock issuable upon conversion of the 5% Preferred Stock and the exercise of the warrants owned by that eligible investor, to the total number of shares of Common Stock outstanding immediately prior to the sale, assuming the conversion of outstanding 5% Preferred Stock and the exercise of the outstanding warrants. However, if the future sale is at a price below the average trading price of Common Stock for the ten days preceding the sale, each of the eligible investors will have the right to purchase a pro rata portion of the new securities based on the ratio of the number of shares of Common Stock owned by that eligible investor, assuming the conversion of the 5% Preferred Stock and the exercise of the warrants owned by that investor, to the total number of shares of Common Stock then owned by all the eligible investors, assuming the conversion of all outstanding 5% Preferred Stock and the exercise of all outstanding warrants. This right to purchase expired on March 25, 2005. Prior to its expiration, Enable Growth Partners L.P. exercised its right to purchase in order to participate in the Company’s private placement completed on March 28, 2005 as described below under “—March 28, 2005 Private Placement.”

As part of the private placement, the Company entered into a Registration Rights Agreement, pursuant to which it agreed file a registration statement to register the shares of Common Stock issuable upon the conversion of the preferred stock and upon the exercise of the warrants issued to the investors in the private placement. Because the Company failed to have the registration statement declared effective by July 24, 2004, the terms of the Registration Rights Agreement required the payment of liquidated damages to the investors equal to 2% of the aggregate purchase price paid to the Company in the private placement for each thirty-day period, pro rated for any shorter period, that the effectiveness of the registration statement was delayed. The registration statement was declared effective on August 6, 2004, and the Company paid Gryphon and Enable liquidated damages of $9,967 and $3,900 respectively. Mr. Paxton and Mr. Gero agreed to waive the payment of their liquidated damages.

March 28, 2005 Private Placement

On March 28, 2005, the Company completed a $2,663,000 private placement of 1,065,200 shares of its Series 2 5% Preferred Stock and warrants to purchase 532,600 shares of its Common Stock at an initial exercise price of $2.77 per share to various purchasers. The following executive officers, directors and 5% beneficial holders participated in the private placement:

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December 2, 2005 Private Placement

On December 2, 2005, the Company completed a $1,230,843 private placement of 564,607 shares of its Series 3 5% Preferred Stock and warrants to purchase 282,306 shares of its Common Stock at an initial exercise price of $2.58 per share to various purchasers. The following executive officers, directors and 5% beneficial holders participated in the private placement:

The terms of this private placement are described in Proposals Two and Three.

Since January 1, 2004, there have been no other transactions, or currently proposed transactions, between the Company and any of its executive officers, directors or 5% beneficial holders, or member of the immediate family of the foregoing persons, in which one of the foregoing individuals or entities had an interest of more than $60,000.

COMPLIANCE WITH SECTION 16 REPORTING REQUIREMENTS

Section 16(a) of the Exchange Act requires the Company’s directors and officers, and persons who own more than 10% of a registered class of the Company’s equity securities, to file initial reports of ownership and reports of changes in ownership with the SEC. Such persons are required by SEC regulation promulgated pursuant to the Exchange Act to furnish the Company with copies of all Section 16(a) report forms they file with the SEC.

Based solely on its review of the copies of such report forms received by it with respect to fiscal year 2005, the Company believes that all filing requirements applicable to its directors, officers and persons who own more than 10% of a registered class of the Company’s equity securities have been timely complied with in accordance with Section 16(a) of the Exchange Act.

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STOCKHOLDER PROPOSALS

Stockholders may submit proposals on matters appropriate for stockholder action at subsequent annual meetings of the stockholders consistent with Rule 14a-8 promulgated under the Exchange Act. For such proposals to be considered for inclusion in the Proxy Statement and Proxy relating to the 2007 Annual Meeting of Stockholders, such proposals must be received by the Company not later than January 12, 2007. Such proposals should be directed to Intrusion Inc., 1101 East Arapaho Road, Richardson, Texas 75081, Attention:  Secretary (telephone:  (972) 234-6400; telecopy:  (972) 234-1467).

Pursuant to Rule 14a-4(c) of the Exchange Act of 1934, if a stockholder who intends to present a proposal at the 2007 Annual Meeting of Stockholders does not notify the Company of such proposal on or prior to March 28, 2007, then management proxies would be allowed to use their discretionary voting authority to vote on the proposal when the proposal is raised at the annual meeting, even though there is no discussion of the proposal in the 2007 proxy statement.

EXPENSES OF SOLICITATION

All costs incurred in the solicitation of Proxies for the Meeting will be borne by the Company. In addition to the solicitation by mail, officers and employees of the Company may solicit Proxies by telephone, telefax or personally, without additional compensation. The Company may also make arrangements with brokerage houses and other custodians, nominees and fiduciaries for the forwarding of solicitation materials to the beneficial owners of shares of Common Stock held of record by such persons, and the Company may reimburse such brokerage houses and other custodians, nominees and fiduciaries for their out-of-pocket expenses incurred in connection therewith. In addition, Mellon Investor Services LLC has been retained by the Company to aid in the solicitation of Proxies and will solicit Proxies by mail, telephone, internet, telefax and personal interview and may request brokerage houses and nominees to forward soliciting material to beneficial owners of Common Stock. For these services, Mellon Investor Services LLC will be paid fees not to exceed approximately $7,500, plus reasonable incidental expenses.

ADDITIONAL INFORMATION AVAILABLE

Upon the written request of any stockholder, the Company will furnish, without charge, a copy of the Company’s 2005 Annual Report on Form 10-KSB, as filed with the SEC, including the financial statements and schedules thereto. The request should be directed to the Secretary at the Company’s offices indicated above.

The Company’s 2005 Annual Report on Form 10-KSB accompanies this Proxy Statement. The Annual Report on
Form 10-KSB, which includes financial statements, does not form and is not to be deemed part of this Proxy Statement.

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OTHER BUSINESS

As of the date of this Proxy Statement, the Board and management are not aware of any other matter, other than those described herein, which will be presented for consideration at the Meeting. Should any other matter requiring a vote of the stockholders properly come before the Meeting or any adjournment thereof, the enclosed Proxy confers upon the persons named in and entitled to vote the shares represented by such Proxy discretionary authority to vote the shares represented by such Proxy in accordance with their best judgment in the interest of the Company on such matters. The persons named in the enclosed Proxy also may, if it is deemed advisable, vote such Proxy to adjourn the Meeting from time to time.

Please sign, date and return promptly the enclosed Proxy at your earliest convenience in the enclosed envelope, which requires no postage if mailed in the United States.

Richardson, Texas
May 12, 2006

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Appendix A

Securities Purchase Agreement

SECURITIES PURCHASE AGREEMENT

This Securities Purchase Agreement (this “Agreement”) is dated as of December 2, 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.

“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.

“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-

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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) securities issued to a registered broker-dealer engaged by the Company to seek financing on the Company’s behalf, paid as compensation for actually obtaining any such financing, (g) 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 (h) securities issued upon the conversion or exercise of any of the capital stock, convertible securities, options or warrants described in clauses (a) through (g), provided that in the case of this clause (h) 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; and the Company’s 1,200,000 shares of 5% Series 2 Convertible Preferred Stock par value $0.01 per share, designated pursuant the Certificate of Designation filed with the Delaware Secretary of State on March 24, 2005.

“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 565,000 shares of the Company’s Series 3 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).

“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 $2.18 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.

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

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“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.

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

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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 565,000 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 565,000.  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 $2.18, with an exercise price equal to $2.58, subject to adjustment therein;

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

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

(vi)                              the written voting agreement, in the form of Exhibit F attached 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; and

(vii)                           a legal opinion of Company Counsel, in the form of Exhibit D attached hereto.

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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 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;

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(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.

(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 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

9

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 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

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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 (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 the 5% Convertible Preferred Stock and the affirmative vote of all of the holders of the outstanding shares of the 5% Series 2 Convertible Preferred Stock, (vii) any approval of the Company’s stockholders required under the rules and regulations of the Nasdaq Stock Market prior to the conversion of the Preferred Stock or exercise of the Warrants acquired by Purchasers who are also directors or officers of the Company as of the date hereof, and (viii) the Shareholder Approval (collectively, the “Required Approvals”).

(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

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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 November 15, 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, 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) or in the SEC Reports, there are no stockholders agreements, voting agreements or other similar agreements with respect to the Company’s capital stock to which the Company is a party or, to the knowledge of the Company, between or among any of the Company’s stockholders.

(h)                                 SEC Reports; Financial Statements.  The Company has filed all reports, schedules, forms, statements and other documents required to be filed by 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

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

(j)                                     Litigation.  Except as set forth in the SEC Reports, 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

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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, 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, (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, except where the failure to possess such permits could not have or reasonably be expected to result in a Material Adverse Effect (“Material Permits”), and neither the Company nor any Subsidiary has received any notice of proceedings relating to the revocation or modification of any Material Permit.

(n)                                 Title to Assets.  The Company and the Subsidiaries have good and 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.

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(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, none of the officers or directors of the Company and, to the knowledge of the Company, none of the employees of the Company is presently a party to any transaction with the Company or any Subsidiary (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner, in each case in excess of $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

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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 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.

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(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, 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 and consummation of the transactions contemplated by the Transaction Documents, 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 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 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

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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, 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.  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 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.

(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.

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(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, 2005 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 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

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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 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),

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(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 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.

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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 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

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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”), 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 five Trading Days after such damages have begun to accrue) for each Trading Day after the Legend Removal Date until such certificate is

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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 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

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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 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.

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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 and (B) 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 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.

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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, 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) 

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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 present to its next annual meeting of shareholders a proposal to obtain 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 five 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 by such Eligible Purchaser, for a Subsequent Financing Notice, the Company shall promptly, but no later than one 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 fifth Trading Day, such Eligible Purchaser shall be deemed to have notified the Company that it does not elect to participate.

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(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.

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

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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 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

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portfolio manager that made the investment decision to purchase the Securities covered by this Agreement.

ARTICLE V

MISCELLANEOUS