Exhibit 10.1

SECURITIES PURCHASE AGREEMENT
 
SECURITIES PURCHASE AGREEMENT (the "Agreement"), dated as of November 22 2006,
by and among Discovery Laboratories, Inc., a Delaware corporation, with
headquarters located at 2600 Kelly Road, Suite 100, Warrington, PA 18976 (the
"Company") and Capital Ventures International, a Cayman Islands company (the
"Buyer").
 
WHEREAS:
 
A. The Company and the Buyer is executing and delivering this Agreement in
reliance upon the exemption from securities registration afforded by Section
4(2) of the Securities Act of 1933, as amended (the "1933 Act"), and Rule 506 of
Regulation D ("Regulation D") as promulgated by the United States Securities and
Exchange Commission (the "SEC") under the 1933 Act.
 
B. The Buyer wishes to purchase, and the Company wishes to sell, upon the terms
and conditions stated in this Agreement, 4,629,630 shares (the “Common Shares”)
of the Common Stock, par value $0.001 per share, of the Company (the "Common
Stock") (ii) a warrant to acquire up to 2,314,815 additional shares of Common
Stock, in substantially the form attached hereto as Exhibit A (as exercised,
collectively, the "Warrant Shares").
 
C. Contemporaneously with the execution and delivery of this Agreement, the
parties hereto are executing and delivering a Registration Rights Agreement,
substantially in the form attached hereto as Exhibit B (the "Registration Rights
Agreement") pursuant to which the Company has agreed to provide certain
registration rights with respect to the Common Shares, and the Warrant Shares
under the 1933 Act and the rules and regulations promulgated thereunder, and
applicable state securities laws.
 
D. The Common Shares, the Warrant and the Warrant Shares collectively are
referred to herein as the "Securities".
 
NOW, THEREFORE, the Company and the Buyer hereby agree as follows:
 

 
1.
PURCHASE AND SALE OF COMMON SHARES AND WARRANT

 
(a) Purchase of Common Shares and Warrant. Subject to the satisfaction (or
waiver) of the conditions set forth in Sections 6 and 7 below, the Company shall
issue and sell to the Buyer, and the Buyer agrees to purchase from the Company
on the Closing Date (as defined below), the number of Common Shares, along with
the Warrant to acquire up to that number of Warrant Shares as is set forth above
(the "Closing"). The Closing shall occur on the Closing Date at the offices of
Dickstein Shapiro LLP at 1177 Avenue of the Americas, 47th Floor, New York, NY
10036-2714, or at such other location as may be mutually agreed upon by the
parties
 
(b) Purchase Price. The purchase price for the Common Shares and related Warrant
to be purchased by the Buyer at the Closing shall be $10,000,000 (the "Purchase
Price").
 

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(c) Closing Date. The date and time of the Closing (the "Closing Date") shall be
10:00 a.m., New York City Time, on the date hereof (or such other date and time
as is mutually agreed to by the Company and the Buyer).
 
(d) Form of Payment. On the Closing Date, (i) the Buyer shall pay its respective
Purchase Price to the Company for the Common Shares and Warrant to be issued and
sold to the Buyer at the Closing, by wire transfer of immediately available
funds in accordance with the Company's written wire instructions, and (ii) the
Company shall deliver to the Buyer (A) one or more stock certificates, free and
clear of all restrictive and other legends (except as expressly provided in
Section 2(h) hereof), evidencing the number of Common Shares the Buyer is
purchasing and (B) a Warrant pursuant to which the Buyer shall have the right to
acquire the number of Warrant Shares, in all cases duly executed on behalf of
the Company and registered in the name of the Buyer.
 
2. BUYER'S REPRESENTATIONS, WARRANTIES AND COVENANTS.
 
The Buyer represents and warrants that:
 
(a) Organization and Qualification. Buyer is duly organized and validly existing
in good standing under the laws of the jurisdiction in which it is incorporated
and has the requisite corporate power and authorization to enter into and
perform its obligations under this Agreement, the Registration Rights Agreement,
the Irrevocable Transfer Agent Instructions (as defined in Section 5), the
Warrant and each of the other agreements entered into by the parties hereto in
connection with the transactions contemplated by this Agreement (collectively,
the "Transaction Documents").
 
(b) No Public Sale or Distribution. The Buyer is (i) acquiring the Common Shares
and the Warrant and (ii) upon exercise of the Warrant will acquire the Warrant
Shares issuable upon exercise thereof, in the ordinary course of business for
its own account and not with a view towards, or for resale in connection with,
the public sale or distribution thereof, except pursuant to sales registered or
exempted under the 1933 Act and the Buyer does not have a present arrangement to
effect any distribution of the Securities to or through any person or entity;
provided, however, that by making the representations herein, the Buyer does not
agree to hold any of the Securities for any minimum or other specific term and
reserves the right to dispose of the Securities at any time in accordance with
or pursuant to a registration statement or an exemption under the 1933 Act.
 
(c) Accredited Investor Status. The Buyer is an "accredited investor" as that
term is defined in Rule 501(a) of Regulation D. Buyer hereby represents that (i)
Buyer was contacted regarding the sale of the Securities by the Agent (as
defined below) or the Company (or an authorized agent or representative thereof)
with whom Buyer had a prior substantial pre-existing relationship and (ii) no
Securities were offered or sold to it by means of any form of general
solicitation or general advertising, and in connection therewith, Buyer did not:
(X) receive or review any advertisement, article, notice or other communication
published in a newspaper or magazine or similar media or broadcast over
television or radio whether closed circuit, or generally available; or (Y)
attend any seminar meeting or industry investor conference whose attendees were
invited by any general solicitation or general advertising. Buyer is not itself
a “broker” or a “dealer” as defined in the Securities Exchange Act of 1934, as
amended (the "1934 Act") and is not an “affiliate” of the Company as defined in
Rule 405 promulgated under the Securities Act.
 
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(d) Reliance on Exemptions. The Buyer understands that the Securities are being
offered and sold to it in reliance on specific exemptions from the registration
requirements of United States federal and state securities laws and that the
Company is relying in part upon the truth and accuracy of, and the Buyer's
compliance with, the representations, warranties, agreements, acknowledgments
and understandings of the Buyer set forth herein in order to determine the
availability of such exemptions and the eligibility of the Buyer to acquire the
Securities.
 
(e) Information. The Buyer and its advisors, if any, have been furnished with
all materials relating to the business, finances and operations of the Company
and materials relating to the offer and sale of the Securities which have been
requested by the Buyer. The Buyer and its advisors, if any, have been afforded
the opportunity to ask questions of the Company. Neither such inquiries nor any
other due diligence investigations conducted by the Buyer or its advisors, if
any, or its representatives shall modify, amend or affect the Buyer's right to
rely on the Company's representations and warranties contained herein. The Buyer
understands that its investment in the Securities involves a high degree of risk
and is able to afford a complete loss of such investment. The Buyer has sought
such accounting, legal and tax advice as it has considered necessary to make an
informed investment decision with respect to its acquisition of the Securities.
The Buyer has not relied on any information or advice furnished by or on behalf
of the Agent in connection with the transactions contemplated hereby.
 
(f) No Governmental Review. The Buyer understands that no United States federal
or state agency or any other government or governmental agency has passed on or
made any recommendation or endorsement of the Securities or the fairness or
suitability of the investment in the Securities nor have such authorities passed
upon or endorsed the merits of the offering of the Securities.
 
(g) Transfer or Resale. The Buyer understands that except as provided in the
Registration Rights Agreement: (i) the Securities have not been and are not
being registered under the 1933 Act or any state securities laws, and may not be
offered for sale, sold, assigned or transferred unless (A) subsequently
registered thereunder, (B) the Buyer shall have delivered to the Company an
opinion of counsel, in a form reasonably acceptable to the Company, to the
effect that such Securities to be sold, assigned or transferred may be sold,
assigned or transferred pursuant to an exemption from such registration, or (C)
the Buyer provides the Company with reasonable assurance that such Securities
can be sold, assigned or transferred pursuant to Rule 144 or Rule 144A
promulgated under the 1933 Act, as amended, (or a successor rule thereto)
(collectively, "Rule 144"); (ii) any sale of the Securities made in reliance on
Rule 144 may be made only in accordance with the terms of Rule 144 and further,
if Rule 144 is not applicable, any resale of the Securities under circumstances
in which the seller (or the Person (as defined in Section 3(r)) through whom the
sale is made) may be deemed to be an underwriter (as that term is defined in the
1933 Act) may require compliance with some other exemption under the 1933 Act or
the rules and regulations of the SEC thereunder; and (iii) neither the Company
nor any other Person is under any obligation to register the Securities under
the 1933 Act or any state securities laws or to comply with the terms and
conditions of any exemption thereunder. Notwithstanding the foregoing, the
Securities may be pledged in connection with a bona fide margin account or other
loan secured by the Securities and such pledge of Securities shall not be deemed
to be a transfer, sale or assignment of the Securities hereunder, and no Buyer
effecting a pledge of Securities shall be required to provide the Company with
any notice thereof or otherwise make any delivery to the Company pursuant to
this Agreement or any other Transaction Document, including, without limitation,
this Section 2(g); provided, that in order to make any sale, transfer or
assignment of Securities, the Buyer and its pledgee makes such disposition in
accordance with or pursuant to a registration statement or an exemption under
the 1933 Act.
 
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(h) Legends. The Buyer understands that the certificates or other instruments
representing the Common Shares and the Warrant and, until such time as the
resale of the Common Shares and the Warrant Shares have been registered under
the 1933 Act as contemplated by the Registration Rights Agreement, the stock
certificates representing the Warrant Shares, except as set forth below, shall
bear any legend as required by the "blue sky" laws of any state and a
restrictive legend in substantially the following form (and a stop-transfer
order may be placed against transfer of such stock certificates):
 
[NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN][THE
SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN] REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE
SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE
ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL, IN A FORM
REASONABLY ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER
SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT.
NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH
A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE
SECURITIES.
 
(i) Validity; Enforcement. This Agreement and the Registration Rights Agreement
have been duly and validly authorized, executed and delivered on behalf of the
Buyer and shall constitute the legal, valid and binding obligations of the Buyer
enforceable against the Buyer in accordance with their respective terms, except
as rights to indemnity and contribution may be limited by state or federal
securities laws or the public policy underlying such laws, except as such
enforceability may be limited by general principles of equity, including as to
limitations on the enforcement of the remedy of specific performance and other
equitable remedies (regardless of whether such enforceability is considered in a
proceeding in equity or at law), or to applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation and other similar laws relating to, or
affecting generally, the enforcement of applicable creditors' and contracting
parties’ rights and remedies. The persons signing on behalf of Buyer hereby
warrant and represent that they have the authority to execute and deliver this
Agreement on behalf of Buyer.
 
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(j) No Conflicts. The execution, delivery and performance by the Buyer of this
Agreement and the Registration Rights Agreement and the consummation by the
Buyer of the transactions contemplated hereby and thereby will not (i) result in
a violation of the organizational documents of the Buyer or (ii) conflict with,
or constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, indenture or
instrument to which the Buyer is a party, or (iii) result in a violation of any
law, rule, regulation, order, judgment or decree (including federal and state
securities laws) applicable to the Buyer, except in the case of clauses (ii) and
(iii) above, for such conflicts, defaults, rights or violations which would not,
individually or in the aggregate, reasonably be expected to have a material
adverse effect on the ability of the Buyer to perform its obligations hereunder.
 
(k) Residency. The Buyer is a resident of the Cayman Islands.
 
(l)  Illegal Transactions. The Buyer has not, directly or indirectly, and no
Person acting on behalf of or pursuant to any understanding with the Buyer, has
engaged in any transactions in the securities of the Company (including, without
limitation, any Short Sales involving any of the Company’s securities) since the
time that the Buyer was first contacted by the Company or the Agent regarding
the investment in the Company contemplated by this Agreement. The Buyer
covenants that neither it nor any Person acting on its behalf or pursuant to any
understanding with the Buyer will engage, directly or indirectly, in any
transactions in the securities of the Company (including Short Sales) prior to
the time the transactions contemplated by this Agreement are publicly disclosed.
“Short Sales” include, without limitation, all “short sales” as defined in Rule
200 promulgated under Regulation SHO under the Exchange Act and all types of
direct and indirect stock pledges, forward sale contracts, options, puts, calls,
short sales, swaps, derivatives and similar arrangements (including on a total
return basis), and sales and other transactions through non-U.S. broker-dealers
or foreign regulated brokers.
 
(m) No Brokers. Buyer represents and warrants that it has not “engaged,”
“consented to” or “authorized” any broker, finder or intermediary to act on its
behalf, directly or indirectly, as a broker, finder or intermediary in
connection with the transactions contemplated by this Agreement. Buyer agrees to
indemnify and hold harmless the Company from and against all fees, commissions
or other payments owing to any such person or firm acting on behalf of Buyer.
Buyer acknowledges that the Agent is acting as placement agent of the Company in
connection with the Offering and will be compensated by the Company for acting
in such capacity.
 
(n) Reliance on Representations. The Buyer acknowledges that the Company and its
counsel are entitled to rely on the representations and warranties made herein
and otherwise requested by the Company for use in preparation of the
Registration Statement to be filed by the Company pursuant to Registration
Rights Agreement. All such information shall be true, correct and complete as of
the date of this Agreement, the Closing Date and the filing date for any such
Registration Statement. The Buyer will notify the Company of any change in any
such information until such time as the Company is no longer required to keep
the Registration Statement effective.
 
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(o) Pre-existing Registration Rights. The Buyer acknowledges that holders of
500,000 shares of the Company’s Common Stock that have been previously issued by
the Company, or are issuable by the Company upon the exercise of certain
warrants, may have certain “piggyback” and or “demand” registration rights and
may elect to exercise such rights in connection with any registration statement
to be filed by the Company pursuant to the Registration Rights Agreement, and
that the exercise of any such rights, and the performance by the Company of its
obligations in connection therewith shall not be a violation of the terms of
this Agreement and the Registration Rights Agreement.
 
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
 
The Company represents and warrants to the Buyer that:
 
(a) Organization and Qualification. Each of the Company and its "Subsidiaries"
(which for purposes of this Agreement means any entity (i) in which the Company,
directly or indirectly, owns capital stock or holds an equity or similar
interest and (ii) which has operations and material assets) are corporations
duly organized and validly existing in good standing under the laws of the
jurisdiction in which they are incorporated, and have the requisite corporate
power and authorization to own their properties and to carry on their business
as now being conducted. Each of the Company and its Subsidiaries is duly
qualified as a foreign corporation to do business and is in good standing in
every jurisdiction in which its ownership of property or the nature of the
business conducted by it makes such qualification necessary, except to the
extent that the failure to be so qualified or be in good standing would not have
a Material Adverse Effect. As used in this Agreement, "Material Adverse Effect"
means any material adverse effect on the business, properties, assets,
operations, results of operations, condition (financial or otherwise) or
prospects of the Company and its Subsidiaries, taken as a whole, or on the
transactions contemplated hereby and the other Transaction Documents by the
agreements and instruments to be entered into in connection herewith or
therewith, or on the authority or ability of the Company to perform its
obligations under the Transaction Documents; provided, however, that changes
relating to (i) the economy in general, (ii) the Company’s industry in general
or (iii) the Company’s working capital and liquidity shall not in itself be
deemed to arise to a Material Adverse Effect. The Company has no subsidiaries
other than its presently inactive subsidiary, Acute Therapeutics, Inc., which
has been inactive from the date of its inception.
 
(b) Authorization; Enforcement; Validity. The Company has the requisite
corporate power and authority to enter into and perform its obligations under
this Agreement, the Registration Rights Agreement, the Irrevocable Transfer
Agent Instructions (as defined in Section 5), the Warrant and each of the other
agreements entered into by the parties hereto in connection with the
transactions contemplated by this Agreement (collectively, the "Transaction
Documents") and to issue the Securities in accordance with the terms hereof and
thereof. The execution and delivery of the Transaction Documents by the Company
and the consummation by the Company of the transactions contemplated hereby and
thereby, including, without limitation, the issuance of the Common Shares and
the Warrant and the reservation for issuance and the issuance of the Warrant
Shares issuable upon exercise of the Warrant have been duly authorized by the
Company's Board of Directors and no further consent or authorization is required
by the Company, its Board of Directors or its stockholders. This Agreement and
the other Transaction Documents have been duly executed and delivered by the
Company, and constitute the legal, valid and binding obligations of the Company,
enforceable against the Company in accordance with their respective terms,
except as rights to indemnity and contribution may be limited by state or
federal securities laws or the public policy underlying such laws, except as
such enforceability may be limited by general principles of equity, including as
to limitations on the enforcement of the remedy of specific performance and
other equitable remedies (regardless of whether such enforceability is
considered in a proceeding in equity or at law), or to applicable bankruptcy,
insolvency, reorganization, moratorium, liquidation and other similar laws
relating to, or affecting generally, the enforcement of applicable creditors'
and contracting parties’ rights and remedies.
 
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(c) Issuance of Securities. The Common Shares and the Warrant are duly
authorized and, upon issuance in accordance with the terms hereof and receipt by
the Company of the Purchase Price therefor, shall be validly issued and free
from all taxes, liens and charges (other than arising under federal or state
securities or “blue sky” laws and regulations) with respect to the issue thereof
and the Common Shares shall be fully paid and nonassessable with the holders
being entitled to all rights accorded to a holder of Common Stock. As of the
Closing Date, the Company shall have duly authorized and reserved for issuance a
number of shares of Common Stock which equals the number of Warrant Shares. The
Company shall, so long as any portion of the Warrant is outstanding, take all
action necessary to reserve and keep available out of its authorized and
unissued Capital Stock, solely for the purpose of effecting the exercise of the
Warrant, 100% of the number of shares of Common Stock issuable upon exercise of
the Warrant (subject to reduction from time to time for Common Stock issued upon
exercise of the Warrant). Upon exercise in accordance with the Warrant, the
Warrant Shares will be validly issued, fully paid and nonassessable and free
from all taxes, liens and charges with respect to the issue thereof (other than
arising under federal or state securities or “blue sky” laws and regulations),
with the holders being entitled to all rights accorded to a holder of Common
Stock. Subject to the accuracy of the representations and warranties of Buyer
contained in Section 2 of this Agreement, issuance by the Company of the
Securities contemplated by this Agreement are exempt from the registration
requirements of the 1933 Act.
 
(d) No Conflicts. The execution, delivery and performance of the Transaction
Documents by the Company and the consummation by the Company of the transactions
contemplated hereby and thereby (including, without limitation, the issuance of
the Common Shares and Warrant and reservation for issuance and issuance of the
Warrant Shares) will not (i) result in a violation of the Certificate of
Incorporation (as defined below) or Bylaws (as defined below) of the Company or
any of its Subsidiaries or (ii) conflict with, or constitute a default (or an
event which with notice or lapse of time or both would become a default) under,
or give to others any rights of termination, amendment, acceleration or
cancellation of, any material agreement, indenture or instrument to which the
Company or any of its Subsidiaries is a party, or (iii) result in a violation of
any law, rule, regulation, order, judgment or decree (including federal and
state securities laws and regulations and the rules and regulations of the
Principal Market) applicable to the Company or any of its Subsidiaries or by
which any property or asset of the Company or any of its Subsidiaries is bound
or affected, except in the case of clauses (ii) and (ii), above, for such
matters which, either individually or in the aggregate, would not reasonably be
expected to have a Material Adverse Effect.
 
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(e) Consents. Except for the filing of a Notice of Additional Listing with
NASDAQ (which the Company will file with NASDAQ no later than the Closing Date),
registration of the Common Shares and the Warrant Shares issuable upon exercise
of the Warrant under the Securities Act, the listing of the Common Shares and
the Warrant Shares on the Nasdaq Global Market and such consents, notifications,
approvals, authorizations, registrations or qualifications as may be required
under the Exchange Act and applicable state securities or “blue sky” laws in
connection with the purchase of the Securities by Buyer, the Company is not
required to obtain any consent, authorization or order of, or make any filing or
registration with, any court, governmental agency or any regulatory or
self-regulatory agency or any other Person in order for it to execute, deliver
or perform any of its obligations under or contemplated by the Transaction
Documents, in each case in accordance with the terms hereof or thereof. The
Company and its Subsidiaries are unaware of any facts or circumstances that
might prevent the Company from obtaining or effecting any of the registration,
application or filings pursuant to the preceding sentence. Except for such
matters that, either individually or in the aggregate, would not reasonably be
expected to have a Material Adverse Effect, the Company is not in violation of
the listing requirements of the Principal Market and has no knowledge of any
facts that would reasonably lead to delisting or suspension of the Common Stock
in the foreseeable future.
 
(f) Acknowledgment Regarding Buyer's Purchase of Securities. The Company
acknowledges and agrees that the Buyer is acting solely in the capacity of arm's
length purchaser with respect to the Transaction Documents and the transactions
contemplated hereby and thereby and that the Buyer is not (i) an officer or
director of the Company, (ii) an "affiliate" of the Company (as defined in Rule
144) or (iii) to the Knowledge of the Company (defined below), a "beneficial
owner" of more than 10% of the Common Stock (as defined for purposes of Rule
13d-3 of the Securities Exchange Act of 1934, as amended (the "1934 Act")). The
Company further acknowledges that the Buyer is not acting as a financial advisor
or fiduciary of the Company (or in any similar capacity) with respect to the
Transaction Documents and the transactions contemplated hereby and thereby, and
any advice given by the Buyer or any of its representatives or agents in
connection with the Transaction Documents and the transactions contemplated
hereby and thereby is merely incidental to the Buyer's purchase of the
Securities. The Company further represents to the Buyer that the Company's
decision to enter into the Transaction Documents has been based solely on the
independent evaluation by the Company and its representatives. For the purposes
of this Agreement, the term “Knowledge of the Company” shall mean the knowledge,
after due inquiry, of the President and Chief Executive Officer, the Chief
Financial Officer, the Executive Vice President and General Counsel and any
other Executive Vice Presidents or persons holding comparable positions in the
Company.
 
(g) No General Solicitation; Placement Agent's Fees. Neither the Company, nor
any of its affiliates, nor, to the Knowledge of the Company, any Person acting
on its or their behalf, has engaged in any form of general solicitation or
general advertising (within the meaning of Regulation D) in connection with the
offer or sale of the Securities. The Company shall be responsible for the
payment of any placement agent's fees, financial advisory fees, or brokers'
commissions for any placement agent, financial advisor or broker engaged by the
Company or its affiliates or acting on behalf of the Company relating to or
arising out of the transactions contemplated hereby. The Company shall pay, and
hold the Buyer harmless against, any fees, commissions or other payments or
related expense (including, without limitation, attorney's fees and
out-of-pocket expenses) arising in connection with any such claim. The Company
has engaged Jefferies & Co. as placement agent in connection with the sale of
the Securities (the "Agent"). Other than the Agent, the Company has not engaged
any placement agent or other agent in connection with the sale of the
Securities.
 
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(h) No Integrated Offering. None of the Company, its Subsidiaries, any of their
affiliates, and any Person acting on their behalf has taken any action to sell,
offer for sale or solicit offers to buy any securities of the Company which
would require registration of any of the Securities under Section 5 of the 1933
Act, unless such offer, issuance or sale was or shall be within the exemptions
of Section 4 of the 1933 Act. The Company has offered securities for sale only
to “accredited investors” within the meaning of Rule 501 under the Securities
Act. The Company is not required to obtain stockholder approval of the
transactions contemplated by this Agreement under the listing or maintenance
requirements of the Primary Market. None of the Company, its Subsidiaries, their
affiliates and any Person acting on their behalf will take any action or steps
that would require registration of any of the Securities under the 1933 Act or
cause the offering of the Securities to be integrated with other offerings, for
purposes of the 1933 Act or the requirements of the Principal Market.
 
(i) Application of Takeover Protections; Rights Agreement. 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 Certificate of Incorporation or the laws of
the State of Delaware which is or could become applicable to the Buyer as a
result of the transactions contemplated by this Agreement, including, without
limitation, the Company's issuance of the Securities and the Buyer's ownership
of the Securities.
 
(j) SEC Documents; Financial Statements. During the two years prior to the date
hereof, the Company has timely filed all reports, schedules, forms, statements
and other documents required to be filed by it with the SEC pursuant to the
reporting requirements of the 1934 Act (all of the foregoing filed prior to the
date hereof or prior to the date of the Closing, and all exhibits included
therein and financial statements and schedules thereto and documents
incorporated by reference therein being hereinafter referred to as the "SEC
Documents"). As of their respective dates, the SEC Documents complied in all
material respects with the requirements of the 1934 Act and the rules and
regulations of the SEC promulgated thereunder applicable to the SEC Documents,
and none of the SEC Documents, at the time they were filed with the SEC,
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. The Company’s Subsidiary is not required to file any reports or
other documents with the SEC. As of their respective dates, the financial
statements of the Company included in the SEC Documents complied as to form in
all material respects with applicable accounting requirements and the published
rules and regulations of the SEC with respect thereto. Such financial statements
have been prepared in accordance with United States generally accepted
accounting principles, consistently applied, during the periods involved (except
(i) as may be otherwise indicated in such financial statements or the notes
thereto, or (ii) in the case of unaudited interim statements, to the extent they
may exclude footnotes or may be condensed or summary statements) and fairly
present in all material respects the financial position of the Company as of the
dates thereof and the results of its operations and cash flows for the periods
then ended (subject, in the case of unaudited statements, to normal year-end
audit adjustments). With respect to the transactions contemplated by this
Agreement, none of the information referred to in Section 2(d) of this Agreement
provided by or on behalf of the Company to the Buyer which is not included in
the SEC Documents contains any untrue statement of a material fact or omits to
state any material fact necessary in order to make the statements therein, in
the light of the circumstance under which they are or were made, not misleading.
 
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(k) Absence of Certain Changes. Except as disclosed in the
 
SEC Documents and Schedule 3(k), since September 30, 2006, there has been no
material adverse change and no material adverse development in the business,
properties, operations, condition (financial or otherwise), results of
operations or prospects of the Company or its Subsidiaries. Except as disclosed
in the SEC Documents and Schedule 3(k), since September 30, 2006, the Company
has not (i) declared or paid any dividends, (ii) sold any assets, individually
or in the aggregate, in excess of $500,000 outside of the ordinary course of
business or (iii) had capital expenditures, individually or in the aggregate, in
excess of $500,000. The Company has not taken any steps to seek protection
pursuant to any bankruptcy law nor does the Company have any knowledge or reason
to believe that its creditors intend to initiate involuntary bankruptcy
proceedings or any actual knowledge of any fact which would reasonably lead a
creditor to do so.
 
(l) No Undisclosed Events, Liabilities, Developments or Circumstances. Except
for the transactions contemplated by this Agreement, no material event,
liability, development or circumstance has occurred or exists with respect to
the Company or its Subsidiaries or their respective business, properties,
prospects, operations or financial condition, that would be required to be
disclosed by the Company under applicable securities laws on a registration
statement on Form S-1 filed with the SEC relating to an issuance and sale by the
Company of its Common Stock and which has not been publicly announced.
 
(m) Conduct of Business; Regulatory Permits. Neither the Company nor its
Subsidiaries is in violation of any term of or in default under the Certificate
of Incorporation or Bylaws or their organizational charter or bylaws,
respectively. To the Knowledge of the Company, neither the Company nor any
Subsidiary is in violation of any judgment, decree or order or any statute,
ordinance, rule or regulation applicable to the Company or its Subsidiaries, and
neither the Company nor any of its Subsidiaries will conduct its business in
violation of any of the foregoing, except for possible violations which would
not, individually or in the aggregate, have a Material Adverse Effect. Without
limiting the generality of the foregoing, to the Knowledge of the Company, the
Company is not in violation in any material respect of any of the rules,
regulations or requirements of the Principal Market and the Company has no
Knowledge of any facts or circumstances that would reasonably lead to delisting
or suspension of the Common Stock by the Principal Market in the foreseeable
future. Since December 31, 2005, (i) the Common Stock has been designated for
quotation or listed on the Principal Market, (ii) trading in the Common Stock
has not been suspended by the SEC or the Principal Market and (iii) except as
disclosed in Schedule 3(m), the Company has received no communication, written
or oral, from the SEC or the Principal Market regarding the violation of a
Nasdaq Marketplace Rule or the suspension or delisting of the Common Stock from
the Principal Market. The Company and its Subsidiaries possess all certificates,
authorizations and permits issued by the appropriate federal, state or foreign
regulatory authorities necessary to conduct their respective businesses, except
where the failure to possess such certificates, authorizations or permits would
not have, individually or in the aggregate, a Material Adverse Effect, and, to
the Knowledge of the Company, neither the Company nor any such Subsidiary has
received any notice of proceedings relating to the revocation or modification of
any such certificate, authorization or permit.
 
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(n) Foreign Corrupt Practices. To the Knowledge of the Company, neither the
Company, nor any of its Subsidiaries, nor any director, officer, agent, employee
or other Person acting on behalf of the Company or any of its Subsidiaries has,
in the course of its actions for, or on behalf of, the Company knowingly and
intentionally (i) used any corporate funds for any unlawful contribution, gift,
entertainment or other unlawful expenses relating to political activity; (ii)
made any direct or indirect unlawful payment to any foreign or domestic
government official or employee from corporate funds; (iii) violated or is in
violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977, as
amended; or (iv) made any unlawful bribe, rebate, payoff, influence payment,
kickback or other unlawful payment to any foreign or domestic government
official or employee.
 
(o) Sarbanes-Oxley Act. The Company is in compliance with all applicable
provisions of the Sarbanes-Oxley Act of 2002 that are effective as of the date
hereof, and all applicable rules and regulations promulgated by the SEC
thereunder that are effective as of the date hereof, except where such
noncompliance would not reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect.
 
(p) Transactions With Affiliates. Except as set forth in the SEC Documents, none
of the officers, directors or employees of the Company is presently a party to
any transaction with the Company or any of its Subsidiaries (other than for
ordinary course services as employees, officers or 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 such officer, director or
employee or, to the Knowledge of the Company, any corporation, partnership,
trust or other entity in which any such officer, director, or employee has a
substantial interest or is an officer, director, trustee or partner.
 
(q) Equity Capitalization. As of November 16, 2006, the authorized capital stock
of the Company consists of 180 million shares of Common Stock and 5 million
shares of Preferred Stock, of which (i) 64,949,901 shares are issued and
outstanding, 11,207,822 shares are reserved for issuance pursuant to the
Company's stock option (of which 9,472,786 relate to outstanding options),
4,210,203 shares are reserved for issuance pursuant to securities (other than
the aforementioned options and the Warrant) exercisable or exchangeable for, or
convertible into, shares of Common Stock, and 362,972 shares are reserved for
issuance pursuant to the Company’s 401(k) Plan. All such outstanding shares have
been validly issued and are fully paid and nonassessable. Except as disclosed in
Schedule 3(q) or as described in or contemplated by the SEC Documents: (i) none
of the Company's capital stock is subject to preemptive rights or any other
similar rights or any liens or encumbrances suffered or permitted by the
Company; (ii) there are no outstanding options, warrants, scrip, rights to
subscribe to, calls or commitments of any character whatsoever relating to, or
securities or rights convertible into, or exercisable or exchangeable for, any
capital stock of the Company or any of its Subsidiaries, or contracts,
commitments, understandings or arrangements by which the Company or any of its
Subsidiaries is or may become bound to issue additional capital stock of the
Company or any of its Subsidiaries or options, warrants, scrip, rights to
subscribe to, calls or commitments of any character whatsoever relating to, or
securities or rights convertible into, or exercisable or exchangeable for, any
capital stock of the Company or any of its Subsidiaries; (iii) except for
Indebtedness of the Company incurred in the ordinary course of business of the
Company, which in the aggregate would not reasonably be expected to have a
Material Adverse Effect, there are no outstanding debt securities, notes, credit
agreements, credit facilities or other agreements, documents or instruments
evidencing material Indebtedness of the Company or any of its Subsidiaries or by
which the Company or any of its Subsidiaries is or may become bound; (iv) except
for financing statements related to Indebtedness of the Company described in the
SEC Documents, there are no financing statements securing obligations in any
material amounts, either singly or in the aggregate, filed in connection with
the Company or any of its Subsidiaries; (v) there are no material agreements or
arrangements under which the Company or any of its Subsidiaries is obligated to
register the sale of any of their securities under the 1933 Act (except pursuant
to the Registration Rights Agreement); (vi) there are no outstanding securities
or instruments of the Company or any of its Subsidiaries which contain any
redemption or similar provisions, and there are no contracts, commitments,
understandings or arrangements by which the Company or any of its Subsidiaries
is or may become bound to redeem a security of the Company or any of its
Subsidiaries; (vii) there are no securities or instruments containing
anti-dilution or similar provisions that will be triggered by the issuance of
the Securities; (viii) the Company does not have any stock appreciation rights
or "phantom stock" plans or agreements or any similar plan or agreement; and
(ix) the Company and its Subsidiaries have no material liabilities or
obligations required to be disclosed in the SEC Documents but not so disclosed
in the SEC Documents, other than those incurred in the ordinary course of the
Company's or its Subsidiaries' respective businesses and which, individually or
in the aggregate, would not reasonably be expected to have a Material Adverse
Effect.
 
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(r)  Indebtedness and Other Contracts. Except as disclosed in or contemplated by
the SEC Documents or on Schedule 3(r), neither the Company nor any of its
Subsidiaries (i) has any outstanding Indebtedness (as defined below), (ii) is a
party to any contract, agreement or instrument, the violation of which, or
default under which, by the other party(ies) to such contract, agreement or
instrument could reasonably be expected to result in a Material Adverse Effect,
(iii) is in violation of any term of or in default under any contract, agreement
or instrument relating to any Indebtedness, except where such violations and
defaults would not result, individually or in the aggregate, in a Material
Adverse Effect, or (iv) is a party to any contract, agreement or instrument
relating to any Indebtedness, the performance of which, in the judgment of the
Company's officers, has or is expected to have a Material Adverse Effect. For
purposes of this Agreement: (x) "Indebtedness" of any Person means, without
duplication (A) all indebtedness for borrowed money, (B) all obligations issued,
undertaken or assumed as the deferred purchase price of property or services
(including, without limitation, "capital leases" in accordance with generally
accepted accounting principles) (other than trade payables entered into in the
ordinary course of business), (C) all reimbursement or payment obligations with
respect to letters of credit, surety bonds and other similar instruments, (D)
all obligations evidenced by notes, bonds, debentures or similar instruments,
including obligations so evidenced incurred in connection with the acquisition
of property, assets or businesses, (E) all indebtedness created or arising under
any conditional sale or other title retention agreement, or incurred as
financing, in either case with respect to any property or assets acquired with
the proceeds of such indebtedness (even though the rights and remedies of the
seller or bank under such agreement in the event of default are limited to
repossession or sale of such property), (F) all monetary obligations under any
leasing or similar arrangement which, in connection with generally accepted
accounting principles, consistently applied for the periods covered thereby, is
classified as a capital lease, (G) all indebtedness referred to in clauses (A)
through (F) above secured by (or for which the holder of such Indebtedness has
an existing right, contingent or otherwise, to be secured by) any mortgage,
lien, pledge, charge, security interest or other encumbrance upon or in any
property or assets (including accounts and contract rights) owned by any Person,
even though the Person which owns such assets or property has not assumed or
become liable for the payment of such indebtedness, and (H) all Contingent
Obligations in respect of indebtedness or obligations of others of the kinds
referred to in clauses (A) through (G) above; (y) "Contingent Obligation" means,
as to any Person, any direct or indirect liability, contingent or otherwise, of
that Person with respect to any indebtedness, lease, dividend or other
obligation of another Person if the primary purpose or intent of the Person
incurring such liability, or the primary effect thereof, is to provide assurance
to the obligee of such liability that such liability will be paid or discharged,
or that any agreements relating thereto will be complied with, or that the
holders of such liability will be protected (in whole or in part) against loss
with respect thereto; and (z) "Person" means an individual, a limited liability
company, a partnership, a joint venture, a corporation, a trust, an
unincorporated organization and a government or any department or agency
thereof.
 
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(s) Absence of Litigation. Except as described in the SEC Documents, there are
no actions, suits, proceedings, inquiries or investigations before or by the
Principal Market, any court, public board, government agency, self-regulatory
organization or body pending or, to the Knowledge of the Company, threatened
against or affecting the Company, the Common Stock or any of its Subsidiaries or
any of the Company's or the Company's Subsidiary's officers or directors,
whether of a civil or criminal nature or otherwise, which, individually or in
the aggregate, might reasonably be expected to have a Material Adverse Effect.
 
(t) Insurance. The Company and each of its Subsidiaries are insured by insurers
of recognized financial responsibility against such losses and risks and in such
amounts as management of the Company believes to be prudent and customary in the
businesses in which the Company and its Subsidiaries are engaged. Neither the
Company nor any Subsidiary has received any notice or obtained any Knowledge of
circumstances indicating that they will not be able to renew their existing
insurance coverage (modified to the extent deemed prudent and customary by the
management of the Company) as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that is commercially reasonable and not reasonably likely to
result in a Material Adverse Effect.
 
(u) Employee Relations. The Company and its Subsidiaries believe that their
relations with their employees are good. No executive officer of the Company (as
defined in Rule 501(f) of the 1933 Act) has notified the Company that such
officer intends to leave the Company or otherwise terminate such officer's
employment with the Company. No executive officer of the Company, to the
Knowledge of the Company, is, or is now expected to be, in violation of any
material term of any employment contract, confidentiality, disclosure or
proprietary information agreement, non-competition agreement, or any restrictive
covenant to which the Company and such executive are parties, and, to the
Knowledge of the Company, the continued employment of each such executive
officer does not subject the Company or any of its Subsidiaries to any liability
with respect to any of the foregoing matters. The Company and its Subsidiaries
are in compliance with all federal, state, local and foreign laws and
regulations respecting employment and employment practices, terms and conditions
of employment and wages and hours, except where failure to be in compliance
would not, either individually or in the aggregate, reasonably be expected to
result in a Material Adverse Effect.
 
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(v) Title. Except as described in or contemplated by the SEC Documents, the
Company and its Subsidiaries have good and marketable title to all personal
property owned by them which is material to their respective business, in each
case free and clear of all liens, encumbrances and defects except such as do not
materially affect the value of such property and do not interfere with the use
made and proposed to be made of such property by the Company and any of its
Subsidiaries. Any real property and facilities held under lease by the Company
and any of its Subsidiaries are held by them under valid, subsisting and
enforceable leases with such exceptions as are not material and do not interfere
with the use made and proposed to be made of such property and buildings by the
Company and its Subsidiaries. The Company owns no real property.
 
(w) Intellectual Property Rights. The Company owns or licenses all the
proprietary rights ("Intellectual Property Rights") which are necessary for the
business of the Company as now conducted. The Company does not have any
Knowledge of any infringement by the Company or its Subsidiaries of Intellectual
Property Rights of others. To the Knowledge of the Company, there is no claim,
action or proceeding being made, brought or threatened against the Company or
any of its Subsidiaries regarding its Intellectual Property Rights. The Company
has no Knowledge of any facts or circumstances which might give rise to any of
the foregoing infringements or claims, actions or proceedings. The Company and
its Subsidiaries have taken commercially reasonable measures to protect the
secrecy, confidentiality and value of all of their Intellectual Property Rights.
 
(x) Environmental Laws. To the Knowledge of the Company, the Company and its
Subsidiaries (i) are in compliance with any and all Environmental Laws (as
hereinafter defined), (ii) have received all permits, licenses or other
approvals required of them under applicable Environmental Laws to conduct their
respective businesses and (iii) are in compliance with all terms and conditions
of any such permit, license or approval where, in each of the foregoing clauses
(i), (ii) and (iii), the failure to so comply could be reasonably expected to
have, individually or in the aggregate, a Material Adverse Effect. The term
"Environmental Laws" means all federal, state or local laws relating to
pollution or protection of human health or the environment (including, without
limitation, ambient air, surface water, groundwater, land surface or subsurface
strata), including, without limitation, laws relating to emissions, discharges,
releases or threatened releases of chemicals, pollutants, contaminants, or toxic
or hazardous substances or wastes (collectively, "Hazardous Materials") into the
environment, or otherwise relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of Hazardous Materials,
as well as all authorizations, codes, decrees, demands or demand letters,
injunctions, judgments, licenses, notices or notice letters, orders, permits,
plans or regulations issued, entered, promulgated or approved thereunder.
 
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(y) Tax Status. The Company and each of its Subsidiaries (i) has made or timely
filed all federal and material state income and other tax returns, reports and
declarations required by any jurisdiction to which it is subject, (ii) has paid
all taxes and other governmental assessments and charges that are material in
amount, shown or determined to be due on such returns, reports and declarations,
except those being contested in good faith and (iii) has set aside on its books
provision reasonably adequate for the payment of any taxes payable for periods
subsequent to the periods to which such returns, reports or declarations apply.
To the Knowledge of the Company, there are no unpaid taxes in any material
amount claimed to be due and payable by the taxing authority of any jurisdiction
and no factual basis for any such claim.
 
(z) Internal Accounting and Disclosure Controls. The Company and each of its
Subsidiaries maintain a system of internal accounting controls sufficient to
provide reasonable assurance that (i) transactions are executed in accordance
with management's general or specific authorizations, (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles (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 difference. The
Company maintains disclosure controls and procedures (as such term is defined in
Rule 13a-14 under the 1934 Act) that are designed to ensure that information
required to be disclosed by the Company in the reports that it files or submits
under the 1934 Act (i) is recorded, processed, summarized and reported, within
the time periods specified in the rules and forms of the SEC, and (ii) is
accumulated and communicated to the Company’s management, including its
principal executive officer or officers and its principal financial officer or
officers, as appropriate, to allow timely decisions regarding required
disclosure.
 
(aa) Form S-3 Eligibility. The Company is eligible to register the Common Shares
and the Warrant Shares for resale by the Buyer using Form S-3 promulgated under
the 1933 Act.
 
(bb) Off Balance Sheet Arrangements. There is no transaction, arrangement, or
other relationship between the Company and an unconsolidated or other off
balance sheet entity that is required to be disclosed by the Company in its
Exchange Act filings and is not so disclosed and that would be reasonably likely
to have a Material Adverse Effect.
 
(cc) Manipulation of Price. The Company has not, and, to the Knowledge of the
Company, no one acting on its behalf has, (i) taken, directly or indirectly, any
action designed to cause or to result in the stabilization or manipulation of
the price of any security of the Company to facilitate the sale or resale of any
of the Securities, (ii) sold, bid for, purchased, or paid any compensation for
soliciting purchases of, any of the Securities, other than the Agents' placement
of the Securities, or (iii) paid or agreed to pay to any person any compensation
for soliciting another to purchase any other securities of the Company.
 
(dd) Transfer Taxes. On the Closing Date, all stock transfer or other taxes
(other than income or similar taxes) which are required to be paid in connection
with the sale and transfer of the Securities to be sold to the Buyer hereunder
will be, or will have been, fully paid or provided for by the Company, and all
laws imposing such taxes will be or will have been complied with.
 
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(ee) Disclosure. The Company confirms that, with the exception of the
transactions contemplated by this Agreement, neither it nor, to the Knowledge of
the Company, any other Person acting on its behalf has provided the Buyer or its
agents or counsel with any information that constitutes material, nonpublic
information. The Company understands and confirms that the Buyer will rely on
the foregoing representations in effecting transactions in securities of the
Company. All disclosure provided by the Company to the Buyer regarding the
Company, its business and the transactions contemplated hereby, including the
Schedules to this Agreement, furnished by or on behalf of the Company are true
and correct 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 the light of the circumstances under which they were made, not
misleading. To the Knowledge of the Company, no event or circumstance has
occurred or information exists with respect to the Company or any Subsidiary or
either of its or their respective business, properties, operations or financial
conditions, which, under applicable law, rule or regulation, requires public
disclosure or announcement by the Company but which has not been so publicly
announced or disclosed (assuming for this purpose that the Company's reports
filed under the Exchange Act of 1934, as amended, are being incorporated into an
effective registration statement filed by the Company under the 1933 Act). The
Company acknowledges and agrees that the Buyer does not make and has not made
any representations or warranties with respect to the transactions contemplated
hereby other than those specifically set forth in the Transaction Documents.
 
(ff) Acknowledgement Regarding Buyer's Trading Activity. Anything in this
Agreement or elsewhere herein to the contrary notwithstanding, but subject to
compliance by the Buyer with applicable law, it is understood and acknowledged
by the Company (i) that the Buyer has not been asked to agree, nor has the Buyer
agreed, to desist from purchasing or selling, long and/or short, securities of
the Company, or "derivative" securities based on securities issued by the
Company or to hold the Securities for any specified term; (ii) that past or
future open market or other transactions by the Buyer, 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 the
Buyer, and counter parties in "derivative" transactions to which the Buyer is a
party, directly or indirectly, presently may have a "short" position in the
Common Stock, and (iv) that the Buyer shall not be deemed to have any
affiliation with or control over any arm's length counter-party in any
"derivative" transaction. The Company further understands and acknowledges that
(a) the Buyer may engage in hedging activities at various times during the
period that the Securities are outstanding and (b) such hedging activities (if
any) could reduce the value of the existing stockholders' equity interests in
the Company at and after the time that the hedging activities are being
conducted.
 
(gg) No Implied Representations. All of the Company’s representations and
warranties are contained in this Agreement, and no other representations or
warranties by the Company shall be implied.
 
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4. COVENANTS.
 
(a) Best Efforts. Each party shall use its best efforts timely to satisfy each
of the covenants and the conditions to be satisfied by it as provided in
Sections 5, 6 and 7 of this Agreement.
 
(b) Form D and Blue Sky. The Company agrees to file a Form D with respect to the
Securities as required under Regulation D and to provide a copy thereof to the
Buyer promptly after such filing. The Company, on or before the Closing Date,
shall take such action as the Company shall reasonably determine is necessary in
order to obtain an exemption for or to qualify the Securities for sale to the
Buyer at the Closing pursuant to this Agreement under applicable securities or
"Blue Sky" laws of the states of the United States (or to obtain an exemption
from such qualification), and shall provide evidence of any such action so taken
to the Buyer on or prior to the Closing Date. The Company shall make all filings
and reports relating to the offer and sale of the Securities required under
applicable securities or "Blue Sky" laws of the states of the United States only
in such jurisdictions as Buyer shall reasonably request following the Closing
Date.
 
(c) Reporting Status. Until the date which is the later of the date on which
(i) the Investor (as defined in the Registration Rights Agreement) shall have
sold all the Common Shares and Warrant Shares and the Warrant is no longer
outstanding or (ii) the Company is no longer obligated under the Registration
Rights Agreement to maintain the registration statement filed thereunder (the
"Reporting Period"), the Company shall timely file all reports required to be
filed with the SEC pursuant to the 1934 Act, and the Company shall not terminate
its status as an issuer required to file reports under the 1934 Act even if the
1934 Act or the rules and regulations thereunder would otherwise permit such
termination.
 
(d) Use of Proceeds. The Company will use substantially all of the proceeds from
the sale of the Securities for purposes set forth in the Registration Statement
to be filed by the Company pursuant to the Registration Rights Agreement but in
no event for (i) the repayment of any outstanding Indebtedness of the Company or
any of its Subsidiaries or (ii) the redemption or repurchase of any of its or
its Subsidiaries' equity securities.
 
(e) Financial Information. The Company agrees to send the following to each
Investor during the Reporting Period (i) unless the following are filed with the
SEC through EDGAR and are available to the public through the EDGAR system,
within one (1) Business Day after the filing thereof with the SEC, a copy of its
Annual Reports on Form 10-K, its Quarterly Reports on Form 10-Q, any Current
Reports on Form 8-K and any registration statements (other than on Form S-8) or
amendments filed pursuant to the 1933 Act, and (ii) to the extent not filed with
the SEC through EDGAR, copies of any notices and other information made
available or given to the stockholders of the Company generally,
contemporaneously with the making available or giving thereof to the
stockholders. As used herein, "Business Day" means any day other than Saturday,
Sunday or other day on which the Primary Market or commercial banks in The City
of New York are authorized or required by law to remain closed.
 
(f) Listing. The Company shall promptly secure the listing of all of the
Registrable Securities (as defined in the Registration Rights Agreement) upon
each national securities exchange and automated quotation system, if any, upon
which shares of Common Stock are then listed (subject to official notice of
issuance) and shall maintain, so long as any other shares of Common Stock shall
be so listed, such listing of all Registrable Securities from time to time
issuable under the terms of the Transaction Documents. The Company shall
maintain the Common Stock's authorization for listing on the Principal Market.
Neither the Company nor any of its Subsidiaries shall take any action which
would be reasonably expected to result in the delisting or suspension of the
Common Stock on the Principal Market. The Company shall pay all fees and
expenses in connection with satisfying its obligations under this Section 4(f).
 
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(g) Fees. Subject to Section 8 below, at the Closing the Company shall pay an
expense allowance to the Buyer or its designee(s) in an amount equal to $15,000
(reduced by the amount of any deposit heretofore paid) to cover the costs, fees
and expenses incurred in connection with the preparation, execution and
performance of this Agreement and the transactions contemplated hereunder, which
amount shall be withheld by Buyer from the Purchase Price at the Closing. The
Company shall be responsible for the payment of any fees or commissions due to
any placement agent, financial advisor, or broker engaged by Buyer relating to
or arising out of the transactions contemplated hereby, including, without
limitation, any fees payable to the Agent.
 
(h) Pledge of Securities. The Company acknowledges and agrees that the
Securities may be pledged by an Investor (as defined in the Registration Rights
Agreement) in connection with a bona fide margin agreement or other loan or
financing arrangement that is secured by the Securities. The pledge of
Securities shall not be deemed to be a transfer, sale or assignment of the
Securities hereunder, and no Investor effecting a pledge of Securities shall be
required to provide the Company with any notice thereof or otherwise make any
delivery to the Company pursuant to this Agreement or any other Transaction
Document, including, without limitation, Section 2(g) of this Agreement;
provided that an Investor and its pledgee shall be required to comply with the
provisions of Section 2(g) of this Agreement in order to effect a sale, transfer
or assignment of Securities to such pledgee. The Company hereby agrees to
execute and deliver such documentation as a pledgee of the Securities may
reasonably request in connection with a pledge of the Securities to such pledgee
by an Investor.
 
(i) Disclosure of Transactions and Other Material Information. The Company
shall, on or before 8:30 a.m., New York City Time, no later than the first
Business Day after the date of this Agreement, issue a press release (the "Press
Release") disclosing the material terms of the transactions contemplated hereby.
The Company shall provide the Buyer an advance copy of the Press Release and
agrees to consider comments that the Buyer may provide but shall nevertheless be
entitled to make such disclosure as it deems appropriate to meet its disclosure
obligations under the 34 Act. On or before 8:30 a.m., New York City Time, no
later than the third Business Day following the Closing Date, the Company shall
file a Current Report on Form 8-K describing the terms of the transactions
contemplated by the Transaction Documents in the form required by the 1934 Act,
and attaching the material Transaction Documents (including, without limitation,
this Agreement (without the schedules), the form of Warrant and the Registration
Rights Agreement) as exhibits to such filing (including all attachments, the
"8-K Filing"). From and after the issuance of the Press Release, the Buyer shall
not be in possession of any material, nonpublic information received from the
Company, any of its Subsidiaries or any of its respective officers, directors,
employees or agents, that is not disclosed in the Press Release. The Company
shall not, and shall cause each of its Subsidiaries and each of their respective
officers, directors, employees and agents, not to, provide the Buyer with any
material, nonpublic information regarding the Company or any of its Subsidiaries
from and after the filing of the Press Release without the express written
consent of the Buyer pursuant to a Confidentiality and Nondisclosure Agreement.
 
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(j) Reservation of Shares. The Company shall at all times have authorized, and
reserved for the purpose of issuance, from and after the Closing Date, the
number of shares of Common Stock issuable upon exercise of the Warrant being
issued at the Closing (reduced from time to time by the number of shares of
Common Stock that shall have been previously exercised under the Warrant) in
conformity with Section 3(c).
 
(k) Conduct of Business. The Company shall use commercially reasonable efforts
to conduct its business to avoid violations of any law, ordinance or regulation
of any governmental entity, except where such violations would not, either
individually or in the aggregate, be reasonably expected to result in a Material
Adverse Effect.
 
(l) Additional Issuances of Securities.
 
(i)For purposes of this Section 4(m), the following definitions shall apply.
 
"Convertible Securities" means any stock or securities (other than Options)
convertible into or exercisable or exchangeable for shares of Common Stock.
 
"Options" means any rights, warrants or options to subscribe for or purchase
shares of Common Stock or Convertible Securities.
 
"Common Stock Equivalents" means, collectively, Options and Convertible
Securities.
 
(ii)From the date hereof until the date that is the later of (A) seventy-five
(75) days from the Closing Date and (b) the Effective Date (as defined in the
Registration Rights Agreement) (the "Trigger Date"), other than in respect of
the shares described on Schedule 4(m), the Company will not, directly or
indirectly, file any registration statement with the SEC other than the
Registration statement (as defined in the Registration Rights Agreement). From
the date hereof until the Trigger Date, the Company will not, other than with
respect to the transactions described on Schedule 4(m), directly or indirectly,
offer, sell, grant any option to purchase, or otherwise dispose of (or announce
any offer, sale, grant or any option to purchase or other disposition of) any of
its or its Subsidiaries' equity or equity equivalent securities, including
without limitation any debt, preferred stock or other instrument or security
that is, at any time during its life and under any circumstances, convertible
into or exchangeable or exercisable for shares of Common Stock or Common Stock
Equivalents (any such offer, sale, grant, disposition or announcement being
referred to as a "Subsequent Placement").
 
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5. TRANSFER RESTRICTIONS; TRANSFER AGENT INSTRUCTIONS.
 
(a) Transfer Restrictions. The legend set forth in Section 2(h) shall be removed
and the Company shall issue a certificate without such legend or any other
legend to the holder of the applicable Securities upon which the legend is
stamped, if (i) such Securities are registered for resale under the 1933 Act,
(ii) in connection with a sale, assignment or other transfer, such holder
provides the Company with an opinion of counsel, in a generally acceptable form,
to the effect that such sale, assignment or transfer of such Securities may be
made without registration under the applicable requirements of the 1933 Act, or
(iii) such holder provides the Company with reasonable assurance (in form
acceptable to the Company) that such Securities can be sold, assigned or
transferred pursuant to Rule 144. The Company shall use commercially reasonable
efforts to cause Company Counsel (as defined below) to issue the legal opinion
included in the Irrevocable Transfer Agent Instructions to the Company’s
transfer agent within five business days of the Effective Date. Following the
Effective Date or at such earlier time as a legend is no longer required for
certain Securities, the Company will no later than five Business Days following
the delivery by the Buyer to the Company or the Company’s transfer agent of a
legended certificate representing such Securities, instruct its transfer agent
to deliver to the Buyer a certificate representing such Securities that is free
from all restrictive and other legends. The Company shall pay all transfer agent
and related fees in connection with such issuance and provided that the Transfer
Agent is participating in The Depository Trust Company ("DTC") Fast Automated
Securities Transfer Program, upon the request of the Buyer, deliver such shares
to the Buyer's or its designee's balance account with DTC through its Deposit
Withdrawal Agent Commission system. Following the Effective Date and upon the
delivery to the Buyer of any certificate representing Securities that is free
from all restrictive and other legends, the Buyer agrees that any sale of such
Securities shall be made pursuant to the Registration Statement and in
accordance with the plan of distribution described therein or pursuant to an
available exemption from the registration requirements of the 1933 Act. 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 Section 2(h).
 
(b) Transfer Agent Instructions. The Company shall issue irrevocable
instructions to its transfer agent, and any subsequent transfer agent, to issue
certificates or credit shares to the applicable balance accounts at DTC,
registered in the name of the Buyer or its respective nominee(s), for the
Warrant Shares in such amounts as specified from time to time by the Buyer to
the Company upon exercise of the Warrant (and payment in full for the Warrant
Shares) in the form of Exhibit C attached hereto (the "Irrevocable Transfer
Agent Instructions"). The Company represents and warrants that no instruction
other than the Irrevocable Transfer Agent Instructions referred to in this
Section 5, and stop transfer instructions to give effect to Section 2(g) hereof,
will be given by the Company to its transfer agent with respect to the
Securities, and that the Securities shall otherwise be freely transferable on
the books and records of the Company as and to the extent provided in this
Agreement and the other Transaction Documents.
 
(c) Breach. The Company acknowledges that a breach by it of its obligations
under this Section 5 will cause irreparable harm to the Buyer. Accordingly, the
Company acknowledges that the remedy at law for a breach of its obligations
under this Section 5 will be inadequate and agrees, in the event of a breach or
threatened breach by the Company of the provisions of this Section 5, that the
Buyer shall be entitled, in addition to all other available remedies, to an
order and/or injunction restraining any breach and requiring immediate issuance
and transfer, without the necessity of showing economic loss and without any
bond or other security being required.
 
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6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
 
The obligation of the Company hereunder to issue and sell the Common Shares and
the related Warrant to the Buyer at the Closing is subject to the satisfaction,
at or before the Closing Date, of each of the following conditions, provided
that these conditions are for the Company's sole benefit and may be waived by
the Company at any time in its sole discretion by providing the Buyer with prior
written notice thereof:
 
(a)  The Buyer shall have executed each of the Transaction Documents to which it
is a party and delivered the same to the Company.
 
(b)  The Buyer shall have delivered to the Company the Purchase Price, less the
amounts withheld pursuant to Section 4(g), for the Common Shares and the related
Warrant being purchased by the Buyer at the Closing by wire transfer of
immediately available funds pursuant to the wire instructions provided by the
Company.
 
(c) The representations and warranties of the Buyer shall be true and correct in
all material respects as of the date when made and as of the Closing Date as
though made at that time (except for representations and warranties that speak
as of a specific date), and the Buyer shall have performed, satisfied and
complied in all material respects with the covenants, agreements and conditions
required by this Agreement to be performed, satisfied or complied with by the
Buyer at or prior to the Closing Date.
 
7. CONDITIONS TO BUYER'S OBLIGATION TO PURCHASE.
 
The obligation of the Buyer to purchase the Common Shares and the related
Warrant at the Closing is subject to the satisfaction, at or before the Closing
Date, of each of the following conditions, provided that these conditions are
for the Buyer's sole benefit and may be waived by the Buyer at any time in its
sole discretion by providing the Company with prior written notice thereof:
 
(a) The Company shall have executed and delivered to the Buyer (i) each of the
Transaction Documents and (ii) the Common Shares (in such amounts as the Buyer
shall request) and the related Warrant (in such amounts as the Buyer shall
request) being purchased by the Buyer at the Closing pursuant to this Agreement.
 
(b) The Company shall have delivered to the Buyer a copy of the Irrevocable
Transfer Agent Instructions, in the form of Exhibit C attached hereto, which
instructions shall have been delivered to and acknowledged in writing by the
Company's transfer agent.
 
(c)  The Common Stock (I) shall be listed on the Principal Market and (II) shall
not have been suspended, as of the Closing Date, by the SEC or the Principal
Market from trading on the Principal Market nor shall suspension by the SEC or
the Principal Market have been threatened, as of the Closing Date, either (A) in
writing by the SEC or the Principal Market or (B) by falling below the minimum
listing maintenance requirements of the Principal Market.
 
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(d) The Company shall have delivered to the Buyer a certificate, executed by the
Secretary of the Company and dated as of the Closing Date, as to (i) the
resolutions consistent with Section 3(b) as adopted by the Company's Board of
Directors in a form reasonably acceptable to the Buyer, (ii) the Certificate of
Incorporation and (iii) the Bylaws, each as in effect at the Closing, in the
form attached hereto as Exhibit E.
 
(e)  The representations and warranties of the Company shall be true and correct
as of the date when made and as of the Closing Date as though made at that time
(except for representations and warranties that speak as of a specific date) and
the Company shall have performed, satisfied and complied in all respects with
the covenants, agreements and conditions required by the Transaction Documents
to be performed, satisfied or complied with by the Company at or prior to the
Closing Date. The Buyer shall have received a certificate, executed by the Chief
Executive Officer of the Company, dated as of the Closing Date, to the foregoing
effect and as to such other matters as may be reasonably requested by the Buyer
in the form attached hereto as Exhibit F.
 
(f) The Company shall have obtained all governmental, regulatory or third party
consents and approvals, if any, necessary for the sale of the Common Shares and
the Warrant.
 
(g) The Company shall have delivered to the Buyer such other documents relating
to the transactions contemplated by this Agreement as the Buyer or its counsel
may reasonably request.
 
8. TERMINATION. In the event that the Closing shall not have occurred with
respect to a Buyer on or before five (5) days from the date hereof due to the
Company's or the Buyer's failure to satisfy the conditions set forth in Sections
6 and 7 above (and the nonbreaching party's failure to waive such unsatisfied
condition(s)), the nonbreaching party shall have the option to terminate this
Agreement with respect to such breaching party at the close of business on such
date without liability of any party to any other party.
 
9. MISCELLANEOUS.
 
(a) Governing Law; Jurisdiction; Jury Trial. All questions concerning the
construction, validity, enforcement and interpretation of this Agreement shall
be governed by the internal laws of the State of New York, without giving effect
to any choice of law or conflict of law provision or rule (whether of the State
of New York or any other jurisdictions) that would cause the application of the
laws of any jurisdictions other than the State of New York. Each party hereby
irrevocably submits to the exclusive jurisdiction of the state and federal
courts sitting in The City of New York, Borough of Manhattan for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is brought in an inconvenient forum or that the
venue of such suit, action or proceeding is improper. Each party hereby
irrevocably waives personal service of process and consents to process being
served in any such suit, action or proceeding by mailing a copy thereof to such
party at the address for such notices to it under this Agreement and agrees that
such service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law. EACH PARTY HEREBY IRREVOCABLY
WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE
ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF
THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY. 
 
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(b) Counterparts. This Agreement may be executed in two or more identical
counterparts, all of which shall be considered one and the same agreement and
shall become effective when counterparts have been signed by each party and
delivered to the other party; provided that a facsimile signature shall be
considered due execution and shall be binding upon the signatory thereto with
the same force and effect as if the signature were an original, not a facsimile
signature.
 
(c) Headings. The headings of this Agreement are for convenience of reference
and shall not form part of, or affect the interpretation of, this Agreement.
 
(d) Severability. If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of the remainder of this Agreement in that
jurisdiction or the validity or enforceability of any provision of this
Agreement in any other jurisdiction.
 
(e) Entire Agreement; Amendments. This Agreement supersedes all other prior oral
or written agreements between the Buyer, the Company, their affiliates and
Persons acting on their behalf with respect to the matters discussed herein, and
this Agreement and the instruments referenced herein contain the entire
understanding of the parties with respect to the matters covered herein and
therein and, except as specifically set forth herein or therein, neither the
Company nor the Buyer makes any representation, warranty, covenant or
undertaking with respect to such matters. No provision of this Agreement may be
amended other than by an instrument in writing signed by the Company and the
Buyer. No provision hereof may be waived other than by an instrument in writing
signed by the party against whom enforcement is sought. No such amendment shall
be effective to the extent that it applies to less than all of the holders of
the Common Shares then outstanding.
 
(f) Notices. Any notices, consents, waivers or other communications required or
permitted to be given under the terms of this Agreement must be in writing and
will be deemed to have been delivered: (i) upon receipt, when delivered
personally; (ii) upon receipt, when sent by facsimile (provided confirmation of
transmission is mechanically or electronically generated and kept on file by the
sending party); or (iii) one Business Day after deposit with an overnight
courier service, in each case properly addressed to the party to receive the
same. The addresses and facsimile numbers for such communications shall be:
 
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If to the Company:
 
Discovery Laboratories, Inc.
2600 Kelly Road, Suite 100
Warrington, PA 18976
Telephone: (215) 488-9300
Facsimile: (215) 488-9301
Attention: John G. Cooper, CFO

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

Dickstein Shapiro LLP
1177 Avenue of the Americas
New York, NY 10036-2714
Telephone: (212) 277-6686
Facsimile: (212) 277-6501
Attn: Ira L. Kotel

If to the Transfer Agent:
 
Continental Stock Transfer & Trust Company
Attn.: Bill Seegraber
17 Battery Place, 8th Floor
New York, NY 10004
Telephone:  (212) 509-4000
Facsimile:  (212) 509-4000
 

 
If to the Buyer:
 
Capital Ventures International
c/o Heights Capital Management, Inc.
101 California Street, Suite 3250
San Francisco, CA 94111
Telephone: (415) 403-6500
Facsimile: (415) 403-6525
Attention: Martin Kobinger

 
or to such other address and/or facsimile number and/or to the attention of such
other Person as the recipient party has specified by written notice given to
each other party five (5) days prior to the effectiveness of such change.
Written confirmation of receipt (A) given by the recipient of such notice,
consent, waiver or other communication, (B) mechanically or electronically
generated by the sender's facsimile machine containing the time, date, recipient
facsimile number and an image of the first page of such transmission or (C)
provided by an overnight courier service shall be rebuttable evidence of
personal service, receipt by facsimile or receipt from an overnight courier
service in accordance with clause (i), (ii) or (iii) above, respectively.
 
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(g) Successors and Assigns. This Agreement shall be binding upon and inure to
the benefit of the parties and their respective successors and assigns.
 
(h) No Third Party Beneficiaries. This Agreement is intended for the benefit of
the parties hereto and their respective permitted successors and assigns, and is
not for the benefit of, nor may any provision hereof be enforced by, any other
Person, except that the Agent may rely upon the representations and warranties
contained in Sections 2 and 3 hereof.
 
(i) Survival. Unless this Agreement is terminated under Section 8, the
representations and warranties of the Company and the Buyer contained in
Sections 2 and 3, the agreements and covenants set forth in Sections 4, 5 and 9
shall survive the Closing and the delivery and exercise of Securities, as
applicable.
 
(j) Further Assurances. Each party shall do and perform, or cause to be done and
performed, all such further acts and things, and shall execute and deliver all
such other agreements, certificates, instruments and documents, as any other
party may reasonably request in order to carry out the intent and accomplish the
purposes of this Agreement and the consummation of the transactions contemplated
hereby.
 
(k) Indemnification. In consideration of the Buyer's execution and delivery of
the Transaction Documents and acquiring the Securities thereunder and in
addition to all of the Company's other obligations under the Transaction
Documents, the Company shall defend, protect, indemnify and hold harmless the
Buyer, any affiliate of Buyer and each of their respective partners, members,
officers, directors, employees and investors and any of the foregoing Persons'
accounting and legal representatives retained in connection with the
transactions contemplated by this Agreement (collectively, the "Indemnitees")
from and against any and all actions, causes of action, suits, claims, losses,
costs, penalties, fees, liabilities and damages, and expenses in connection
therewith (irrespective of whether any such Indemnitee is a party to the action
for which indemnification hereunder is sought), and including reasonable
attorneys' fees and disbursements (the "Indemnified Liabilities"), incurred by
any Indemnitee as a result of, or arising out of, or relating to (a) any
misrepresentation or breach of any representation or warranty made by the
Company in the Transaction Documents or any other certificate, instrument or
document contemplated hereby or thereby, or (b) any breach of any covenant,
agreement or obligation of the Company contained in the Transaction Documents or
any certificate, instrument or document contemplated hereby or thereby To the
extent that the foregoing undertaking by the Company may be unenforceable for
any reason, the Company shall make the maximum contribution to the payment and
satisfaction of each of the Indemnified Liabilities which is permissible under
applicable law. Except as otherwise set forth herein, the mechanics and
procedures with respect to the rights and obligations under this Section 9(k)
shall be the same as those set forth in Section 6 of the Registration Rights
Agreement.
 
(l) No Strict Construction. The language used in this Agreement will be deemed
to be the language chosen by the parties to express their mutual intent, and no
rules of strict construction will be applied against any party.
 
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(m) Remedies. The Buyer shall have all rights and remedies set forth in the
Transaction Documents and all rights and remedies which such holders have under
any law. Any Person having any rights under any provision of this Agreement
shall be entitled to enforce such rights specifically to recover damages by
reason of any breach of any provision of this Agreement and to exercise all
other rights granted by law.
 
(n) Payment Set Aside. To the extent that the Company makes a payment or
payments to the Buyer hereunder or pursuant to any of the other Transaction
Documents or the Buyer enforces or exercises its rights hereunder or thereunder,
and such payment or payments or the proceeds of such enforcement or exercise or
any part thereof are subsequently invalidated, declared to be fraudulent or
preferential, set aside, recovered from, disgorged by or are required to be
refunded, repaid or otherwise restored to the Company, a trustee, receiver or
any other Person under any law (including, without limitation, any bankruptcy
law, state or federal law, common law or equitable cause of action), then to the
extent of any such restoration the obligation or part thereof originally
intended to be satisfied shall be revived and continued in full force and effect
as if such payment had not been made or such enforcement or setoff had not
occurred.
 
[Signature Page Follows]
 

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IN WITNESS WHEREOF, the Buyer and the Company have caused its respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.

        COMPANY:       DISCOVERY LABORATORIES, INC.  
   
   
    By:  
/s/ John Cooper
 

--------------------------------------------------------------------------------

Name: John Cooper
Title: Executive Vice President & CFO    

 

--------------------------------------------------------------------------------

IN WITNESS WHEREOF, the Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.
 

        BUYER:       CAPITAL VENTURES INTERNATIONAL   BY: Heights Capital
Management, Inc., its authorized signatory  
   
   
    By:  
/s/ Martin Kobinger
 

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Name: Martin Kobinger 
Title: Investment Manager