Issuer:

Digital Ally, Inc., "DGLY"

Investors:

Gans Family Investments, LLLP ("GFI") and certain other investors acceptable to GFI (collectively, the "Investors").

Securities:

$2 million in aggregate principal amount of Senior Secured Convertible Notes (the "Notes") and warrants (the "Warrants") to purchase shares of Common Stock, $0.001 par value, of the Company (the "Common Stock").

Maturity Date:

The Notes will mature on the twenty-fourth month anniversary of the closing date, except as otherwise provided in the Notes (the "Maturity Date").

Interest:

6% per annum, payable quarterly in cash.

Rank:

The Notes will be designated by the Company as senior indebtedness, and will be secured by a perfected first priority security interest in all of the assets of the Company (including without limitation receivables and inventory), of its subsidiaries, and will be senior in right of payment to all of the Company's existing and future indebtedness, subject to permitted liens (as defined in the definitive documentation). Neither the Company, nor any of its subsidiaries, currently formed or formed in the future, will grant a security interest in any assets of the Company. So long as any Notes remain outstanding, the Company will not incur any new debt, except for (x) trade payables in the ordinary course of business, (y) permitted subordinated indebtedness (as defined in the definitive documentation), and (z) such other indebtedness designated as permitted indebtedness in the definitive documentation.

Conversion Price:

The Investor may elect to convert the Notes into shares of Common Stock at a conversion price (the "Conversion Price") equal to the Market Price (as defined below), in each case, subject to adjustment, including full ratchet anti-dilution upon the issuance of any shares of Common Stock or securities convertible into shares of Common Stock below the then-existing Conversion Price. Anti-dilution adjustments to the conversion price of the Notes shall be downward only, except in the event of a reverse split or similar event. Customary exceptions shall apply including stock options issued to employees. The Conversion Price of the Notes shall also be subject to customary adjustments for stock splits, dividends, recapitalizations and similar events.

Amortization

Commencing on the 6 month anniversary of the closing date, (the "Initial Amortization Date"), the Company will redeem a fraction of the Notes the numerator of which is equal to the initial principal amount of the Notes and the denominator of which is equal to the amount of months from the Initial Amortization Date to the Maturity date (each monthly amount, the "Monthly Amortization Amount"). The investors will have the ability to defer payments.

Payment of Amortization & Interest:

The Company may elect to pay the Monthly Amortization Amount and/or Interest in cash or by that number of shares of Common Stock equal to (a) the sum of the Monthly Amortization Amount and Interest (the "Monthly Payment Amount") to be paid in shares of Common Stock divided by (b) the lesser of (i) the then existing Conversion Price and (ii) 80% of the Amortization/Interest Market Price (as defined below), provided that on each such date (1) the Company meets standard equity conditions, and (2) all shares of Common Stock delivered in satisfaction of the Monthly Payment Amount can be delivered without restrictive legends and immediately eligible for resale without restriction or limitation. The Company shall make such election no later than the twenty-first (21^st) Trading Day immediately prior to the applicable amortization date (each, an "Amortization Notice Date")

Company Call/Forced Conversion:

As long as equity conditions have been met and the Company's common stock price exceeds 200% of the original Conversion Price for a period of twenty (20) consecutive trading days, the Company may elect to force a conversion/call the entire balance of the Debentures. The investor will always have the ability to voluntarily convert the debenture during the period.

Warrants:

The Company shall issue a number of warrants, each to purchase one share of Common Stock, in a quantity equal to 35% of the number of shares of Common Stock the Investor would receive if the Notes were converted at the Conversion Price on the trading day immediately prior to the execution and delivery of the subscription agreement. The warrants shall expire five (5) years from their initial issuance date. The initial exercise price shall be equal to 120% of the Market Price (subject to adjustment for stock splits, dividends, recapitalizations and similar events)(the "Original Exercise Price"), subject to adjustment. The warrants shall have full ratchet anti- dilution to the then-existing exercise price of the warrants and the number of shares of Common Stock issuable upon exercise of the warrants upon the issuance of any shares of Common Stock or securities convertible into shares of Common Stock below the then-existing exercise price. Anti-dilution adjustments to the exercise price of the Warrants shall be downward only, except in the event of a reverse split or similar event. The warrants shall also be subject to customary adjustments for stock splits, dividends, recapitalizations and similar events. The warrants will be exercisable for cash; provided, however, if a prospectus covering the shares of Common Stock underlying the warrants is not available, the Investor may exercise the warrant using standard cashless exercise provisions. The warrants will carry customary black scholes fundamental transaction and dividend protection provisions.

Limitations on Beneficial
Ownership:

Notwithstanding anything herein to the contrary, no Note or Warrant of any Investor shall be convertible or exercisable, as applicable, if after such exercise such Investor (or any number of Investors acting in concert so as to form a "group") would beneficially own more than 4.99% of the shares of Common Stock then outstanding (as defined under Section 13(d) of the Securities Act of 1933, as amended).

Nasdaq Vote:

The company will agree to file a proxy within 45 days after the Company files the 10K, seeking shareholder approval for the contemplated transaction. In no event prior to the shareholder approval will the notes be convertible into shares representing more than 19.9% of the shares outstanding.

Right of Participation:

The Investors shall have the right to participate for 50% of any future offering by the Company until the two (2) year anniversary of the Closing Date.

Customary Terms:

The definitive documentation will contain such additional and supplementary provisions, including, without limitation, customary representations, warranties, covenants (including a negative covenant on patents), agreements, non-price based anti-dilution protections, change of control provisions, payments and remedies, as are appropriate to preserve and protect economic benefits intended to be conveyed to the Company and to the Investors pursuant hereto.

Expense Reimbursement:

$35,000 Payable to documentation counsel upon signing of the term sheet. The Company will pay all of Investor's actual and reasonably documented due diligence, travel and legal fees and expenses related to this transaction, regardless of whether the transaction is consummated or not; provided, that such fees for the documentation of the transaction shall not exceed $50,000 without the prior consent of the Company. Such fees will be due in part as the Investor may request from time to time, and in full upon the earlier of the closing or the termination of negotiations with respect to this transaction.