Exhibit 10.1

ASSET PURCHASE AGREEMENT

THIS ASSET PURCHASE AGREEMENT (this “Agreement”), is made as of March 8, 2006
(the “Effective Date”), by and among Cardium Therapeutics, Inc., a Delaware
corporation (“Parent”), Innercool Therapies, Inc., a Delaware corporation
(“Buyer”), and Innercool Therapies, Inc., a California corporation (“Seller”).
Certain capitalized terms used in this Agreement are defined on Exhibit A
hereto.

RECITALS

WHEREAS, Seller is engaged in the business of the research, development,
manufacturing, marketing, sale and distribution of products and services
relating to endovascular temperature control therapy (the “Business”); and

WHEREAS, Buyer desires to purchase from Seller, and Seller desires to sell to
Buyer; substantially all of the assets, properties, rights and claims of the
Business on the terms and conditions set forth herein;

NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
representations, warranties, covenants and promises contained herein, the
adequacy and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:

AGREEMENT

ARTICLE 1. THE TRANSACTION

1.1 Purchased Assets. Subject to the terms and conditions of this Agreement, at
the Closing, Seller shall sell, transfer, convey, assign and deliver to Buyer,
and Buyer shall purchase from Seller, all of Seller’s right, title and interest
in the assets, properties, goodwill and rights of Seller used, held for use,
useful for or intended to be used in the Business, other than the Excluded
Assets (collectively, the “Purchased Assets”), including, without limitation,
the following:

(a) Receivables. All accounts and notes receivable, checks and negotiable
instruments arising out of or relating to the Business (the “Receivables”),
including, without limitation, the Receivables listed on Schedule 1.1(a);

(b) Inventory. All inventory of Seller Products and all raw materials, work in
process and finished goods used, held for use, useful for or intended to be used
in the Business, wherever located and whether held by Seller or third parties
(collectively, the “Inventory”), including, without limitation, all those listed
on Schedule 1.1(b);

(c) Machinery and Equipment. All tools, machinery, research and development kits
and instruments, computer equipment and peripherals, servers, office and
scientific equipment (whether testing, diagnostic or otherwise) used, held for
use, useful for or intended to be used in the Business, wherever located and
whether held by Seller or third parties

 

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(the “Machinery and Equipment”), including, without limitation, the Machinery
and Equipment listed on Schedule 1.1(c);

(d) Owned and Leased Vehicles. All vehicles owned by Seller and all rights in
vehicle leases to which Seller is a party, in either case that are used, held
for use, useful for or intended to be used in the Business (the “Owned and
Leased Vehicles”), including, without limitation, the Owned and Leased Vehicles
listed on Schedule 1.1(d);

(e) Personal Property. All personal property, office furnishings, furniture,
supplies and other tangible personal property used, held for use, useful for or
intended to be used in the Business (the “Personal Property”), including,
without limitation, the Personal Property listed on Schedule 1.1(e);

(f) Leased Real Property. All rights in real estate leases to which Seller is a
party used, held for use, useful for or intended to be used in the Business,
including, without limitation, the lease agreement (the “Main Office Lease”) for
the office space located at 3931 Sorrento Valley Blvd., San Diego, California
with E.G. Sirrah, LLC (collectively, the “Real Property Leases”), together with
all of Seller’s right, title and interest in and to all land, buildings,
structures, easements, appurtenances, improvements (including construction in
progress) and fixtures located thereon (the “Leased Real Property”), including,
without limitation, the Real Property Leases and the Leased Real Property listed
on Schedule 1.1(f);

(g) Personal Property Leases. All rights in leases of personal property to which
Seller is a party used, held for use, useful for or intended to be used in the
Business (the “Personal Property Leases”), including, without limitation, the
Personal Property Leases listed on Schedule 1.1(g);

(h) Intellectual Property. All Seller Intellectual Property, including, without
limitation, the Seller Intellectual Property listed on Schedule 1.1(h);

(i) Deposits and Advances. All performance and other bonds, security and other
deposits, advance payments, prepaid credits and deferred charges used, held for
use, useful for or intended to be used in, or arising out of or relating to, the
Business (the “Deposits and Advances”), including, without limitation, the
Deposits and Advances listed on Schedule 1.1(i);

(j) Contracts. All rights under any and all contracts, agreements or commitments
to which Seller is a party that relate to or are used, held for use, useful for
or intended to be used in the Business, including, without limitation, Seller’s
rights under the Master License Agreement by and between Seller and SurModics,
Inc., dated December 1, 1999 (the “SurModics License”) and all other Material
Contracts listed in Section 4.10(a) of the Seller Disclosure Schedule
(collectively, the “Seller Contracts”);

(k) Governmental Approvals. All Governmental Approvals (and pending applications
therefor) used, held for use, useful for or intended to be used in the Business,
including, without limitation, the Governmental Approvals listed on
Schedule 1.1(k);

(l) Claims. All of Seller’s legal or equitable claims, counterclaims, cross
claims and defenses relating to the Business, the operative events relating to
the Business or any

 

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Purchased Asset or Assumed Liability, whether prior to, on or after the Closing
Date, including, without limitation, insurance claims, rights to any insurance
proceeds, and the Seller Claims listed on Schedule 1.1(l) (the “Seller Claims”);

(m) Books and Records. All books, files, papers, agreements, correspondence,
databases, information systems, programs, software, copies of Seller Tax
Returns, documents and records relating to the Purchased Assets, the Transferred
Contractors and/or the Assumed Liabilities, or used, held for use, useful for or
intended to be used in the Business, on whatever medium (the “Books and
Records”);

(n) Goodwill. All goodwill generated by or associated with the Business; and

(o) Other Assets. All other assets, properties, rights and claims used, held for
use, useful for or intended to be used in the Business.

1.2 Excluded Assets. Notwithstanding Section 1.1, the following assets of Seller
(the “Excluded Assets”) shall not be included in the Purchased Assets:

(a) Employee Benefit Contracts. Seller Benefit Plans and contracts of insurance
for employee group medical, dental and life insurance plans;

(b) Certain Other Property. The assets listed on Schedule 1.2(b);

(c) Insurance Policies. All insurance policies (except to the extent specified
in Section 1.1(l));

(d) Records. All personnel records and other records that Seller is required by
law to retain in its possession, and any duplicate copies of the original Tax
Returns that Seller desires to retain; and

(e) Rights Under Certain Agreements. All rights under the Transaction Documents.

1.3 Assumed Liabilities. Subject to the terms and conditions of this Agreement,
at the Closing, Seller shall assign, and Buyer shall assume, the Assumed
Liabilities. For the purposes of this Agreement, the “Assumed Liabilities” shall
mean only the following Liabilities of Seller (and in any event shall not
include any Excluded Liabilities):

(a) any Liability arising after the Closing Date under the Seller Contracts that
are ascertainable solely by reference to the express terms of such Seller
Contracts or have been disclosed to Buyer prior to Closing, copies of which have
been previously provided to Buyer;

(b) any Transfer Taxes;

(c) any post-Closing auditor fees associated with the preparation, audit and
filing of the Historical Financial Information with the SEC;

 

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(d) any payments to Transferred Contractors or employees of Seller terminated in
connection with the transactions contemplated by this Agreement for accrued but
unpaid vacation to the extent that such Transferred Contractors or other
employees do not elect to transfer accrued and unused paid vacation from Seller
to Buyer pursuant to this Agreement; and

(e) the other Liabilities of Seller specifically listed on Schedule 1.3(e), in
an aggregate amount not to exceed Seven Hundred Fifty Two Thousand Three Hundred
Dollars and Eighty Cents ($752,300.80).

1.4 Excluded Liabilities. Except for the Assumed Liabilities, Buyer shall not
assume and shall not be liable or responsible for any Liability of Seller,
irrespective of whether such Liability existed (or related to Seller’s action or
inaction) prior to, on or after the Closing Date (collectively, the “Excluded
Liabilities”). Without limiting the foregoing, Seller shall retain and be
responsible for, and Buyer shall not be obligated to assume, and does not
assume, any Liability at any time arising from or attributable to:

(a) Any assets, properties or Contracts that are not included in the Purchased
Assets;

(b) Any breaches of any Seller Contract on or prior to the Closing Date or any
payments or amounts due under any Seller Contract on or prior to the Closing
Date;

(c) Taxes attributable to or imposed upon Seller, or attributable to or imposed
upon the Purchased Assets or the Business which are allocable to the Pre-Closing
Period;

(d) Any loans, other indebtedness, or accounts payable;

(e) Accidents, misconduct, negligence, or breach of fiduciary duty occurring on
or prior to the Closing Date;

(f) Any legal proceeding initiated at any time, to the extent based principally
upon any action or omission on or prior to the Closing Date, including, without
limitation, any Liability for: (i) infringement or misappropriation of
Intellectual Property Rights; (ii) breach of product warranties; (iii) injury,
death, property damage or losses caused by Seller Products; or (iv) violations
of any Legal Requirements;

(g) Any and all payments, Liabilities, obligations and responsibilities relating
to: (i) accrued but unpaid salary, bonuses, commissions, overtime, deferred
compensation, obligations under any incentive compensation plan, estimated
entitlements to receive supplementary retirement benefits or allowances (whether
pursuant to a contractual obligation or otherwise), severance payments,
termination pay and other special compensation of any kind paid to, accrued with
respect to, or that would be payable to (whether or not as a result of the
Transaction), any present or former Contractor of Seller; and (ii) Seller
Benefit Plans or any employee group medical, dental or life insurance plans or
any other employee matter;

(h) Payments to employees or for payroll Taxes relating to compensation to
Seller’s Contractors allocable to any period through and including the Closing
Date;

 

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(i) The performance of this Agreement and the Transaction;

(j) Any Environmental Law, which Liability relates to or arises out of (i) any
acts or omissions of Seller on or prior to the Closing Date or (ii) any facts,
circumstances or conditions existing on or prior to the Closing Date relating to
Hazardous Substances, including, without limitation, any management, disposal or
arranging for disposal of Hazardous Substances in connection with the Business
or the Purchased Assets or Assumed Liabilities or activities or operations
occurring or conducted in connection with any predecessor operations off the
Business or otherwise;

(k) Any Liability for expenses and fees incurred by Seller incidental to the
preparation of the Transaction Documents, preparation or delivery of materials
or information requested by Buyer, and the consummation of the Transaction,
including, without limitation, all broker, counsel and accounting fees;

(l) Any Liability arising out of transactions, commitments, infringements, acts
or omissions not in the Ordinary Course of Business;

(m) Any Legal Requirement applicable to Seller, the Purchased Assets or the
Assumed Liabilities on or prior to the Closing Date or any Liability for a
violation of such a Legal Requirement;

(n) Any Liability to any shareholders of Seller;

(o) Any Liability to BSC (as defined below) or any third party arising out of or
relating to the BSC Agreement (as defined below);

(p) Except for any payments to Transferred Contractors for accrued but unpaid
vacation expressly assumed by Buyer pursuant to Section 1.3, any Liability
arising out of or in any way relating to Seller’s relationship with its
Contractors (as defined below), including, without limitation, the hiring,
engagement and termination of its Contractors;

(q) Any Liability for credit balances, credit memos and all other amounts due to
customers, suppliers, dealers and distributors and not set forth in the Seller
Disclosure Letter; and

Any costs or expenses incurred in shutting down and removing equipment not
purchased by Buyer and any expenses associated with any Seller Contracts not
assumed by Buyer hereunder.

1.5 Assignment and Assumption.

(a) Notwithstanding anything herein to the contrary, if an attempted sale,
assignment, transfer or delivery of any Purchased Asset would be ineffective
without the Consent of any third party, or if such an act would violate the
rights of any third party in the Purchased Assets or otherwise affect adversely
the rights of Buyer in the Purchased Assets, and the applicable Consent has not
been obtained on or prior to the Closing Date, this Agreement shall not
constitute an actual or attempted sale, assignment, transfer or delivery of such
Purchased Asset (each, a “Restricted Asset”). Unless and until any such Consent
is obtained,

 

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such Restricted Asset shall not constitute a Purchased Asset and any associated
Liability shall not constitute an Assumed Liability for any purpose hereunder.

(b) In any such case, if the Closing has occurred, Seller shall use its best
efforts to obtain, as soon as practicable, such Consent. Buyer shall cooperate
reasonably with Seller in obtaining such Consents, provided, that Buyer shall
not be required to pay any cash consideration therefor or give or allow to
remain in effect any guaranty, letter of credit, performance bond or other
financial assurance.

(c) Until such Consent shall have been obtained, Seller shall at its expense
effect an alternate arrangement, in the form of a license, sublease, operating
agreement or other arrangement, in any case reasonably satisfactory to Buyer,
which results in Buyer receiving all the benefits and bearing all the ordinary
course costs, Liabilities and other obligations with respect to each Restricted
Asset.

(d) The parties acknowledge and agree that the Post-Closing Contracts shall not
be assigned to, or assumed by, Buyer on the Closing Date. On and after the
Closing Date, upon written notice to Seller, Buyer shall have the right, but not
the obligation, to either (i) require Seller to assign the Post-Closing
Contracts to Buyer or (ii) use commercially reasonable efforts to assist Buyer
in entering into new agreements with the counterparties to the Post-Closing
Contracts. Seller agrees that each Post-Closing Contract shall be deemed an
Excluded Asset and an Excluded Liability until Buyer expressly assumes such
Post-Closing Contract in accordance with this Section 1.5, and Seller will not
terminate or breach (or cause a breach of) the Post-Closing Contracts for a
period of sixty (60) days following the Closing Date in furtherance of the
provisions set forth herein.

ARTICLE 2. PURCHASE AND SALE

2.1 Terms of Purchase and Sale. Subject to the terms of this Agreement, as full
consideration for the sale, transfer, conveyance, assignment and delivery of the
Purchased Assets and the execution and delivery of the Transaction Documents by
Seller to Buyer, Buyer will assume the Assumed Liabilities and deliver cash
and/or Parent’s Common Stock, $0.0001 par value per share (“Common Stock”), to
be delivered as follows (collectively, the “Purchase Price”):

(a) At Closing, Buyer will assume the Assumed Liabilities;

(b) At Closing, Buyer will (or cause Parent to) deliver Two Million One Hundred
Twenty Five Thousand (2,125,000) shares of Common Stock to the Escrow Agent (as
defined below) in accordance with Section 2.2 (the “Closing Shares”);

(c) At Closing, Buyer will (or cause Parent to) deliver Three Hundred Seventy
Five Thousand (375,000) shares of Common Stock to the Escrow Agent in accordance
with Section 2.2 (the “Closing Escrow Shares”); and

(d) Within ten (10) Business Days of the Earnout Release Date (as defined below)
and subject to the earnout provisions set forth in Section 2.3, Buyer will
deliver to Seller

 

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Five Million Dollars ($5,000,000) in, at Buyer’s sole discretion, either cash,
Common Stock or a combination of cash and Common Stock (the “Earnout Amount”).

2.2 Escrow. As security for the indemnification obligations of Seller set forth
in this Agreement or any other Transaction Document, Buyer shall, and shall
cause Parent to, deliver to U.S. Bank National Association or another escrow
agent selected by Buyer (the “Escrow Agent”) the Closing Shares and the Closing
Escrow Shares within two (2) Business Days of the Closing Date, which shall be
held in escrow (the “Escrow”) in accordance with the escrow agreement,
substantially in the form attached hereto as Exhibit B (the “Escrow Agreement”),
which Escrow Agreement shall provide that:

(a) The release of the Closing Shares shall be contingent upon, and expressly
conditioned by, the delivery of audited Historical Financial Information by an
independent auditor and the filing of such Historical Financial Information with
the SEC in a form satisfying the Parent’s obligations in connection therewith;
and

(b) The release of the Closing Escrow Shares to Seller shall occur on the Escrow
Release Date, subject to and in accordance with the terms and conditions of this
Agreement and the Escrow Agreement.

2.3 Earnout.

(a) In the event that the Net Sales (as defined below) equals or exceeds Twenty
Million Dollars ($20,000,000) (the “Target Net Sales”), then all of the Earnout
Amount shall be delivered to Seller in accordance with the terms and conditions
of this Agreement and the Escrow Agreement.

(b) For purposes of this Section 2.3, “Net Sales” means total amount of sales
revenue (net of returns and allowances) during a Calendar Year (as defined
below) that directly relates to the sale of Seller’s Celsius Control System and
Accutrol catheter and any related improvements or modifications (including any
applicable royalties and/or net proceeds from any patent litigation settlements
that directly relate to the foregoing).

(c) Within ninety (90) days of the end of each Calendar Year, Buyer shall
calculate the Net Sales for such Calendar Year and submit an officer’s
certificate to Seller setting forth such Net Sales. If Seller does not object in
writing to such officer’s certificate in writing within thirty (30) days of
Buyer’s delivery of such officer’s certificate, then the calculation of Net
Sales for the covered periods shall be binding upon the parties. Buyer shall
cause the Earnout Amount to be paid to Seller within ten (10) days of the
determination of the achievement of the Target Net Sales (the “Earnout Release
Date”). Buyer will deliver to Seller the Earnout Amount, if any, in, at Buyer’s
sole discretion, either cash, Common Stock or a combination of cash and Common
Stock. To the extent that Buyer elects to deliver shares of Common Stock as full
or partial consideration for the Earnout Amount, then the price per share of
such Common Stock shall be equal to the Stated Price on the Earnout Release
Date.

(d) All computations of revenue for purposes of this Section 2.3 will be done by
Buyer on an accrual basis in accordance with GAAP consistent with Buyer’s past
practices of revenue recognition.

 

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2.4 Transfer Taxes; Prorations.

(a) Notwithstanding any Legal Requirements to the contrary, Buyer shall be
responsible for and shall pay any Transfer Taxes when due;

(b) Buyer shall, at its own expense, file all necessary Tax Returns with respect
to all such Transfer Taxes; provided, that, if required by any Legal
Requirement, Seller will join in the execution of any such Tax Returns. To the
extent that Buyer’s payment of Transfer Taxes satisfies any obligation of
Seller, such amount shall be considered to be an adjustment to the Purchase
Price.

(c) Seller shall be responsible for and shall pay any Taxes arising or resulting
from or in connection with the conduct of the Business or the ownership of the
Purchased Assets attributable to the Pre-Closing Period. Buyer shall be
responsible for and shall pay any Taxes arising or resulting from or in
connection with the conduct of the Business or the ownership of the Purchased
Assets attributable to the Post-Closing Period.

(d) All real property, personal property, ad valorem or other similar Taxes (not
including income Taxes) levied with respect to the Purchased Assets or the
Business for a taxable period which includes (but does not end on) the Closing
Date shall be apportioned between Buyer and Seller based on the number of days
included in such period through and including the Closing Date and the number of
days included in such period after the Closing Date.

(e) On or before the Closing Date, Seller shall furnish to Buyer Tax clearance
certificates under California Revenue and Taxation Code Section 6812 and
California Unemployment Insurance Code Section 1732 releasing Buyer from
Liability with respect to any sales or use Tax or employment Tax Liability of
Seller.

2.5 Allocation of Purchase Price.

(a) The parties agree that the purchase of assets under this Agreement is
intended to be and shall be treated for federal income Tax purposes as an
“applicable asset acquisition” within the meaning of Section 1060 of the Code.
The parties agree to allocate, in accordance with all applicable Treasury
Regulations promulgated under Section 1060 of the Code, the aggregate
consideration paid by Buyer (consisting of the Purchase Price, as adjusted, the
Assumed Liabilities, and all other relevant items that are properly includible
in determining the amount realized by Seller for federal income Tax purposes
(the “Total Tax Consideration”)) among the Purchased Assets. Such allocation
shall be made in a manner consistent with the fair market values of the
Purchased Assets as are agreed between the parties. Seller and Buyer shall
complete an allocation schedule (the “Allocation Schedule”) by April 15, 2006,
which shall set forth the fair market values of the Purchased Assets that the
parties agree to use in making such allocation. Buyer shall deliver to the
Seller a statement containing Buyer’s proposed allocation of the Total Tax
Consideration among the Purchased Assets (the “Allocation Statement”) and a
draft IRS Form 8594 as proposed to be included by Buyer with its Tax Return for
the taxable year of the Closing. Within thirty (30) days after receipt of the
Allocation Statement, Seller shall review and comment on the Allocation
Statement, and provide to Buyer a

 

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draft IRS Form 8594 proposed to be included by Seller in its Tax Return for the
taxable year of the Closing. The parties agree that: (i) such allocation will be
agreed upon in an arm’s length negotiation; (ii) they shall cooperate with each
other in connection with the preparation, execution and filing of all Tax
Returns related to such allocation; and (iii) they shall promptly advise each
other regarding the existence of any Tax audit, controversy or litigation
related to such allocation. Notwithstanding the foregoing, if the parties fail
to agree upon an allocation, the parties shall submit the matter to a
jointly-retained third-party independent accounting firm for determination,
which shall be final and binding on the parties. The cost and expenses of such
third-party independent accounting firm shall be borne equally by Buyer and
Seller.

(b) Buyer and Seller agree to (i) be bound by the Allocation Schedule and
Allocation Statement, (ii) act in a manner consistent with the Allocation
Schedule and Allocation Statement as finally agreed between the parties in
filing of all state and United States federal income tax returns (including,
without limitation, filing their Forms 8594 with their United States federal
income Tax Returns for the taxable year that includes the Closing Date),
(iii) jointly amend such Allocation Statement and Forms 8594 as required to
reflect any adjustments to the Total Tax Consideration, including without
limitation by reason of adjustments to the Purchase Price and (iv) in the course
of any Tax audit, Tax review or Tax litigation relating thereto, to take no
position and cause their Affiliates to take no position inconsistent with the
Allocation Schedule, the Allocation Statement or the Forms 8594 for any Tax
purpose, without the written consent of the other party or unless specifically
required pursuant to a determination by an applicable Tax Authority.

2.6 No Reorganization. Buyer and Seller hereby acknowledge and agree that the
purchase and sale in accordance with this Agreement does not qualify as a
“reorganization” within the meaning of Section 368(a) of the Code and neither
Buyer nor Seller shall prepare or file any Tax Returns containing a position
inconsistent with the such understanding and agreement.

ARTICLE 3. THE CLOSING

3.1 Time and Place of Closing. The closing of the purchase and sale provided for
in this Agreement (the “Closing”) shall occur at the offices of Morrison &
Foerster LLP, 12531 High Bluff Drive, Suite 100, San Diego, California, at 10:00
A.M. on the day on which all of the conditions to closing set forth in Article 8
are satisfied or waived (other than conditions that are intended to be satisfied
at the Closing), or at such other date, time or place as the parties may agree
(the “Closing Date”).

3.2 Closing Deliveries by Seller. At the Closing, Seller shall (a) take all
steps necessary to place Buyer in actual possession and operating control of the
Business and the Purchased Assets and (b) deliver the following items, duly
executed by Seller as applicable, all of which shall be in form and substance
reasonably acceptable to Buyer:

(a) General Assignment and Bill of Sale. General Assignment and Bill of Sale
covering all of the applicable Purchased Assets, substantially in the form
attached hereto as Exhibit C (the “General Assignment and Bill of Sale”);

 

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(b) Intellectual Property Assignment. Any and all documents necessary to perfect
and properly record the assignment to Buyer of all of Seller’s right, title and
interest in and to the Seller Intellectual Property, including, without
limitation:

(i) a trademark assignment, substantially in the form of Exhibit D attached
hereto, for all of the Trademarks (the “Trademark Assignment”);

(ii) a patent assignment, substantially in the form of Exhibit E hereto, for all
of the Patents (the “Patent Assignment”);

(iii) a copyright assignment, substantially in the form of Exhibit F hereto, for
all of the Copyrights (the “Copyright Assignment”); and

(iv) a domain name assignment, substantially in the form of Exhibit G attached
hereto, for all of the Domain Names (the “Domain Name Assignment”).

(c) Other Conveyance Instruments. Executed stock powers for the Closing Shares
and the Closing Escrow Shares as reasonably requested by the Escrow Agent or
Buyer and such other specific instruments of sale, transfer, conveyance and
assignment as Buyer may request;

(d) Assignment of Leases. Assignments of all Real Property Leases and Personal
Property Leases, including, without limitation, the Main Office Lease;

(e) Owned and Leased Vehicles. Vehicle titles and assignments sufficient to
transfer title to the Owned and Leased Vehicles;

(f) Consents. Fully-executed consent to assignment, in form and substance
reasonably satisfactory to Buyer, for the Software License Agreement and
Software Maintenance Agreement with Expandable Software, Inc.;

(g) Payoff and Release Letters. Payoff and release letters from creditors of
Seller, together with UCC-3 termination statements, with respect to any
financing statements filed against any of the Purchased Assets, terminating all
Encumbrances (including, without limitation, Tax liens) on any of the Purchased
Assets, including, without limitation, the duly executed release by KPCB
Holdings, Inc. in favor of Seller;

(h) Opinion of Seller’s Counsel. An opinion, dated as of the Closing Date, from
Heller Ehrman LLP, Seller’s legal counsel, substantially in the form attached
hereto as Exhibit H;

(i) Noncompetition Agreement. The noncompetition agreement executed by John
Dobak, Michael Magers, Brad Klos, Steve Yon and Seller in favor of Buyer and
Parent, substantially in the form attached hereto as Exhibit I (the
“Noncompetition Agreement”);

(j) Offer Letters. Executed offer letters and proprietary information
agreements, each in Buyer’s standard form (collectively, the “Offer Letters”),
from each of the Contractors listed in Schedule 3.2(j) (the “Offerees”);

 

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(k) Employment Agreements. (i) Executed employment or consulting agreements from
each of John Dobak, Michael Magers, Brad Klos and Steve Yon, in a form
satisfactory to Buyer, relating to the employment or consulting arrangement with
Buyer after the Closing (collectively, the “Employment Agreements”) and
(ii) executed releases, in a form satisfactory to Buyer, from such individuals
releasing Seller, Parent and Buyer from all claims against Seller, Parent and
Buyer arising on or before the Closing Date (collectively, the “Releases”);

(l) Officer’s Certificate. A certificate executed on behalf of Seller by its
President or Chief Executive Officer, dated as of the Closing Date, certifying
that: (i) the representations and warranties of Seller set forth in this
Agreement, or in any written statement or certificate that shall be delivered to
Buyer by Seller under this Agreement, without regard to qualifications therein
as to “materiality” or “Material Adverse Effect,” are true and correct on and as
of the date made and as of the Closing Date as if made on the date thereof
(except to the extent such representation or warranty specifies an earlier
date); and (ii) Seller has performed all obligations and covenants required to
be performed by it under this Agreement and any other agreement or document
entered into in connection herewith prior to the Closing Date;

(m) Secretary’s Certificate. A certificate of Seller’s Secretary certifying as
to: (i) the Articles of Incorporation and bylaws of Seller as in effect as of
the Closing Date; (ii) resolutions of Seller’s shareholders and its board of
directors authorizing the execution, delivery and performance of this Agreement
and of all other Transaction Documents; and (iii) the incumbency of Seller’s
officers executing this Agreement and all other Transaction Documents;

(n) Certificate of Good Standing. A certificate from the Secretary of State of
California as to Seller’s good standing and payment of all applicable Taxes;

(o) Certificate of Amendment. Certificate of Amendment to Seller’s Articles of
Incorporation, changing its corporate name to one dissimilar to “Innercool”; and

(p) Books and Records. The Books and Records.

3.3 Closing Deliveries by Buyer. At the Closing, Buyer shall deliver the
following items, duly executed by Buyer as applicable, all of which shall be in
a form and substance reasonably acceptable to Seller:

(a) Closing Shares and Closing Escrow Shares. Delivery of facsimile copies of
stock certificates evidencing the Closing Shares and the Closing Escrow Shares,
with delivery of the original stock certificates within two (2) Business Days of
the Closing Date, to the Escrow Agent; and

(b) Officer’s Certificate. A certificate executed on behalf of Buyer by its
President or Chief Executive Officer, dated as of the Closing Date, certifying
that: (i) the representations and warranties of Buyer set forth in this
Agreement, or in any written statement or certificate that shall be delivered to
Seller by Buyer under this Agreement, without regard to qualifications therein
as to “materiality” or “Material Adverse Effect,” are true and correct on and as
of the date made and as of the Closing Date as if made on the date thereof
(except to the extent such representation or warranty specifies an earlier
date); and (ii) Buyer has performed all

 

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obligations and covenants required to be performed by it under this Agreement
and any other agreement or document entered into in connection herewith prior to
the Closing Date.

(c) Opinion of Buyer’s Counsel. An opinion, dated as of the Closing Date, from
Morrison & Foerster LLP, Seller’s legal counsel, substantially in the form
attached hereto as Exhibit J;

3.4 Closing Deliveries by Buyer and Seller. At the Closing, Buyer and Seller
shall deliver the following items, duly executed:

(a) Assignment and Assumption Agreement. Assignment and Assumption Agreement,
covering all of the Assumed Liabilities, substantially in the form attached
hereto as Exhibit K (the “Assignment and Assumption”);

(b) Escrow Agreement. The Escrow Agreement;

(c) Assignments of Leases. Assignments of all Real Property Leases and Personal
Property Leases, including, without limitation, the Main Office Lease; and

(d) Other Documentation. Such other certificates, instruments or documents
required pursuant to the provisions of this Agreement or otherwise necessary or
appropriate to transfer the Purchased Assets and Assumed Liabilities in
accordance with the terms hereof and consummate the Transaction, and to vest in
Buyer full and complete title to the Purchased Assets, free and clear of all
Encumbrances.

ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF SELLER

Except as set forth in the corresponding sections of the disclosure schedule of
Seller delivered to Buyer concurrently with the execution and delivery of this
Agreement (the “Seller Disclosure Schedule”) (provided, that if any fact or item
disclosed in any section of the Seller Disclosure Schedule shall be relevant to
any other section of this Agreement, then such fact or item shall be deemed to
be disclosed with respect to such other section of this Agreement, but only to
the extent to which it is readily apparent on its face that such fact or item
relates), Seller hereby represents and warrants to Buyer that, as of the
Effective Date (and, to the extent that the Closing does not occur on the
Effective Date, as of the Closing Date):

4.1 Organization and Qualification. Seller is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation, and has all requisite power and authority to own, lease and
operate its properties and to carry on its business as now being conducted.
Seller is duly qualified or licensed as a foreign corporation to conduct
business and is in good standing in each jurisdiction where the character of the
properties owned, leased or operated by it or the nature of its business makes
such qualification or licensing necessary.

4.2 Authority. Seller has all necessary power and authority to execute and
deliver this Agreement and the other Transaction Documents, to perform its
obligations hereunder, and to consummate the Transaction. The execution and
delivery of this Agreement and the other Transaction Documents and the
consummation by Seller of the Transaction have been duly and

 

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validly authorized by all requisite action and no other corporate proceedings on
the part of Seller are necessary to authorize this Agreement or to consummate
the Transaction (other than the approval of this Agreement and the other
Transaction Documents by the shareholders of Seller in accordance with
California law and the Articles of Incorporation and bylaws of Seller). This
Agreement has been, and at Closing the other Transaction Documents will be, duly
and validly executed and delivered by Seller. This Agreement constitutes, and at
Closing the other Transaction Documents will constitute, the legal, valid and
binding obligation of Seller, enforceable against Seller in accordance with
their respective terms, except as may be limited by bankruptcy, insolvency,
reorganization, moratorium and other similar laws and equitable principles
related to or limiting creditors’ rights generally and by the availability of
equitable remedies and defenses.

4.3 No Conflicts; Required Consents.

(a) No Consents other than those set forth in Section 4.3 of the Seller
Disclosure Schedule are required with respect to Seller’s execution and delivery
of this Agreement and the other Transaction Documents, and the consummation of
the Transaction. The execution, delivery and performance of this Agreement and
the other Transaction Documents by Seller do not and will not, with or without
notice or lapse of time: (i) conflict with or violate Seller’s Articles of
Incorporation or bylaws or equivalent organizational documents; (ii) conflict
with or violate any Legal Requirement applicable to Seller or by which any
property or asset of Seller is bound or affected, except where the existence of
such conflict or violation would not, individually or in the aggregate, have a
Material Adverse Effect; (iii) assuming the Consents listed in Section 4.3 of
the Seller Disclosure Schedule are obtained, result in any breach of or
constitute a default under, or give to others any right of termination,
amendment, acceleration or cancellation of, or result in the creation of any
Encumbrance on any property or asset of Seller pursuant to, any note, bond,
mortgage, indenture, contract, agreement, lease, license, permit, franchise or
other instrument or obligation including without limitation, the BSC Agreement,
except where the existence of such breach, default or right or the creation of
such Encumbrance would not, individually or in the aggregate, have a Material
Adverse Effect; (iv) violate or conflict with any other material restriction of
any kind or character to which Seller is subject, except where the existence of
such violation or conflict would not, individually or in the aggregate, have a
Material Adverse Effect; or (v) require Seller to obtain any Consent of, or make
or deliver any filing or notice to, a Governmental Authority.

(b) Without limiting the foregoing, (i) Seller does not have any ongoing
obligations or commitments to BSC (other than as set forth in Section 9.4
“Survival of Certain Terms” of the Securities Purchase Agreement by and between
Seller and BSC and as set forth in Section 9.4(c) “Effect of Termination” of the
Distribution Agreement by and between Seller and BSC) and (ii) the execution,
delivery and performance of this Agreement and the other Transaction Documents
by Seller do not and will not, with or without notice or lapse of time, violate
or otherwise conflict with any rights that BSC may hold as a holder of Seller’s
Preferred Stock.

4.4 Subsidiaries. Seller does not directly or indirectly own any equity or
similar interest in, or any interest convertible into or exchangeable or
exercisable for any equity or

 

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similar interest in, any corporation, partnership, joint venture or other
business association or Entity.

4.5 Financial Statements.

(a) Seller has delivered to Buyer the unaudited balance sheets, and the related
statements of operations, changes in shareholders’ equity and cash flows, of
Seller as of and for the fiscal years ended December 31, 2005 and 2004, together
with the notes thereto. Prior to Closing, or within one week thereafter, Seller
will have delivered to Buyer the unaudited balance sheets, and the related
unaudited statements of operations, changes in shareholders’ equity and cash
flows, of Seller (the “Interim Balance Sheet”) as of and for the two (2) months
ended February 28, 2006 (the “Interim Balance Sheet Date”). The foregoing
financial statements are referred to collectively herein as the “Financial
Statements.”

(b) All of the Financial Statements: (i) are true, accurate and complete in all
material respects; (ii) are consistent with the Books and Records of Seller; and
(iii) present fairly and accurately the financial condition of Seller as of the
respective dates thereof and the results of operations, changes in shareholders’
equity and cash flows of Seller for the periods covered thereby. Seller
maintains a standard system of accounting and internal controls established and
administered in accordance with good business practices sufficient to permit the
preparations of consolidated and consolidating financial statements in
accordance with GAAP.

(c) Seller has no Knowledge of any fact or circumstance which would prevent
Parent and its auditor from preparing, auditing and timely filing the Historical
Financial Information with the SEC as required to satisfy the Parent’s
obligations in connection therewith.

4.6 Absence of Undisclosed Liabilities.

(a) Seller has no material Liabilities other than: (i) those set forth in the
Interim Balance Sheet; (ii) those incurred in connection with the execution of
any of the Transaction Documents; and (iii) other Liabilities expressly
disclosed in this Agreement or the Seller Disclosure Schedule.

(b) As of the Effective Date and as of the Closing, except for the Assumed
Liabilities, Seller does not and will not have any outstanding Liabilities,
including, without limitation, trade payables and indebtedness for borrowed
money (including without limitation, obligations under leases required to be
capitalized in accordance with GAAP) for which Buyer or Parent could become
liable.

4.7 Absence of Changes. Since the Interim Balance Sheet Date: (a) Seller has
conducted the Business in the Ordinary Course of Business; (b) no event or
circumstance has occurred that has had or is reasonably likely to have a
Material Adverse Effect on Seller; and (c) Seller has not taken any action,
agreed to take any action, or omitted to take any action that would constitute a
breach of Section 6.1 or 6.2 if such action or omission were taken between the
Effective Date and the Closing Date.

4.8 Accounts Receivable. Schedule 1.1(a) sets forth an accurate and complete
list of all Receivables existing as of the Effective Date. Each Receivable is:
(a) a valid and legally

 

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binding obligation of the account debtor enforceable in accordance with its
terms, free and clear of all Encumbrances, and not subject to setoffs, adverse
claims, counterclaims, assessments, defaults, prepayments, defenses, and
conditions precedent; (b) a true and correct statement of the account for
merchandise actually sold and delivered to, or for services actually performed
for and accepted by, such account debtor; and (c) fully collectible and will be
collected within ninety (90) days, subject to trade discounts provided in the
Ordinary Course of Business described in Schedule 1.1(a) and any allowance for
doubtful accounts contained in the Interim Balance Sheet. Seller has not
accelerated any such collections.

4.9 Inventory. All of the items in Seller’s Inventory are: (a) valued on the
Financial Statements at the lower of cost or market or net realizable value, on
a first-in, first-out or last in, first out or average cost basis in accordance
with GAAP; (b) of good and merchantable quality, fit for the purpose for which
they are intended, and saleable and useable in the Ordinary Course of Business;
(c) free of defects and damage; and (d) in quantities adequate and not excessive
in relation to the circumstances of the Business and in accordance with Seller’s
past inventory stocking practices. All of the items in Seller’s Inventory meet
Seller’s current standards and specifications.

4.10 Material Contracts.

(a) Section 4.10(a) of the Seller Disclosure Schedule provides a true and
complete list of each of the following contracts to which Seller is party
(collectively, the “Material Contracts”):

(i) Real Property Leases, Personal Property Leases, insurance policies,
Contracts involving the license (or covenant not to sue for the infringement of
intellectual property rights), assignment or transfer of any Seller Intellectual
Property or of Seller’s information systems or software to or from Seller (other
than licenses to Seller arising from the purchase of generally available “off
the shelf” or other standard products), Contracts with current Contractors,
Seller Benefit Plans and Governmental Approvals;

(ii) Any Contract for capital expenditures or for the purchase of goods or
services in excess of Fifty Thousand Dollars ($50,000), except those incurred in
the Ordinary Course of Business and to be performed in three (3) months or less;

(iii) Any Contract obligating Seller to sell or deliver any product or service
at a price which does not cover the cost (including labor, materials and
production overhead) plus the customary profit margin associated with such
product or service;

(iv) Any Contract involving financing or borrowing of money, or evidencing
indebtedness, any Liability for borrowed money, any obligation for the deferred
purchase price of property in excess of Fifty Thousand Dollars ($50,000)
(excluding normal trade payables) or guaranteeing in any way any Contract in
connection with any Person;

(v) Any joint venture, partnership, cooperative arrangement or any other
Contract involving a sharing of profits;

(vi) Any Contract with any Governmental Authority;

 

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(vii) Any Contract with respect to the discharge, storage or removal of
effluent, waste or pollutants;

(viii) Any Contract involving the license of technology (or covenant not to sue
for the infringement of intellectual property rights) to or from Seller or
involving a royalty arrangement pursuant to which Seller has the obligation to
pay, or the right to receive, royalty payments;

(ix) Any power of attorney, proxy or similar instrument;

(x) Any Contract for the manufacture, service or maintenance of any product of
the Business;

(xi) Any Contract for the purchase or sale of any assets other than in the
Ordinary Course of Business or for the option or preferential rights to purchase
or sell any assets;

(xii) Any requirement or output Contract;

(xiii) Any Contract to indemnify any Person or to share in or contribute to the
Liability of any Person;

(xiv) Any Contract containing covenants not to compete in any line of business
or with any Person in any geographical area or that would otherwise result in
Buyer being bound by, or subject to, any non-compete or other restriction on the
operation or scope of its businesses, including, without limitation, the
Business;

(xv) Any Contract related to the acquisition of a business or the equity of any
other Entity;

(xvi) Any other Contract which (x) provides for payment or performance by either
party thereto having an aggregate value of Fifty Thousand Dollars ($50,000) or
more; (y) is not terminable without payment or penalty on thirty (30) days (or
less) notice; or (z) is between, inter alia, an Affiliate and Seller;

(xvii) Any other Contract that involves future payments, performance of services
or delivery of goods or materials to or by Seller of an aggregate amount or
value in excess of Fifty Thousand Dollars ($50,000), on an annual basis, or that
otherwise is material to the Business or prospects of Seller;

(xviii) Any other Contract material to the Business;

(xix) Any warranty Contract with respect to services rendered by Seller or
products sold or leased by Seller;

(xx) Any customer or supplier Contract not entered into in the Ordinary Course
of Business for usual quantities and at normal prices; and

 

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(xxi) Any proposed arrangement currently under negotiation by and between Seller
and a third party of a type that, if entered into, would be a Contract described
in any of (i) through (xx) above.

True, accurate and complete copies of each written Material Contract and true
and complete written summaries of each oral Material Contract (including all
amendments, supplements, modifications and waivers thereof) have been made
available to Buyer by Seller.

(b) Each Material Contract is currently valid and in full force and effect, and
is enforceable by Seller in accordance with its terms. Seller is not in default,
and no party has notified Seller that it is in default, under any Material
Contract. To Seller’s Knowledge, no event has occurred, and no circumstance or
condition exists, that might, with or without notice or lapse of time:
(i) result in a material violation or breach of any of the provisions of any
Material Contract; (ii) give any Person the right to declare a default or
exercise any remedy under any Material Contract; (iii) give any Person the right
to accelerate the maturity or performance of any Material Contract or to cancel,
terminate or modify any Material Contract; or (iv) otherwise have a Material
Adverse Effect on Seller in connection with any Material Contract.

(c) Seller has not waived any of its rights under any Material Contract. To
Seller’s Knowledge, each Person against which Seller has or may acquire any
rights under any Material Contract is solvent and able to satisfy such Person’s
material Liabilities to Seller. Seller’s performance of the Material Contracts
will not result in any violation of or failure by Seller to comply with any
Legal Requirement. The Material Contracts constitute all of the Contracts
necessary to enable Seller to conduct the Business in the manner in which such
Business is currently being conducted and in the manner in which such Business
is proposed to be conducted. The assignment to Buyer of any of the Seller
Contracts shall not result in Buyer being bound by, or subject to, any
non-compete or other restriction on the operation or scope if its businesses,
including, without limitation, the Business.

4.11 Insurance. Section 4.11 of the Seller Disclosure Schedule sets forth an
accurate and complete list of all insurance policies, self-insurance
arrangements and indemnity bonds, currently in effect, that insure the Business
and/or the Purchased Assets (collectively, the “Insurance Policies”). With
respect to each Insurance Policy: (a) the policy is legal, valid, binding, and
enforceable in accordance with its terms and is in full force and effect;
(b) Seller is not in material breach or default of the policy, and to Seller’s
Knowledge no event has occurred which, with notice or the lapse of time, would
constitute such a breach or default, or permit termination or modification of
the policy; (c) to Seller’s Knowledge, no insurer on the policy has been
declared insolvent or placed in receivership, conservatorship or liquidation;
(d) Seller has not received any notice of cancellation or non-renewal of the
policy; (e) the consummation of the Transaction will not cause a breach,
termination, modification, or acceleration of the policy; (f) there is no claim
under the policy that has been improperly filed or as to which any insurer has
questioned, disputed or denied Liability; and (g) Seller has not received any
notice of, nor does Seller have any Knowledge of any facts that might result in,
a material increase in the premium for the policy. As of the Effective Date,
Seller is and has been, insured by insurers, reasonably believed by Seller to be
of recognized financial responsibility and solvency, against such losses and
risks and in such amounts as are customary in the businesses in which it is
engaged.

 

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4.12 Title; Sufficiency; Condition of Assets.

(a) Seller has good and valid title, and has full right and power to sell,
convey, assign, transfer and deliver to Buyer good and valid title, to all of
the Purchased Assets free and clear of any Encumbrances, other than (i) those
Encumbrances resulting from Taxes that have not yet become delinquent,
(ii) minor Encumbrances that do not materially detract from the value of the
property subject thereto or materially impair Seller’s operations, and
(iii) those Encumbrances that have otherwise arisen in the Ordinary Course of
Business. The Purchased Assets are not subject to any preemptive right, right of
first refusal or other right or restriction.

(b) The sale, transfer and assignment of the Purchased Assets as contemplated by
this Agreement will give Buyer possession of, and the right to use, all the
assets required for conducting the Business as presently conducted. Upon
Closing, Buyer will be entitled to the continued possession and use of all
Purchased Assets. Except for the Purchased Assets, there are no other assets
properties or rights, including, without limitation, Intellectual Property
Rights, that are required by Seller, or that will be required by Buyer after the
Closing, to conduct the Business in a manner substantially consistent in all
material respects with the manner in which Seller currently conducts the
Business.

(c) The Purchased Assets: (i) are in good operating condition and repair,
ordinary and reasonable wear and tear excepted; (ii) have been maintained in a
manner consistent with the past maintenance practices of Seller consistent with
industry practices; (iii) are suitable and adequate for continued use in the
Ordinary Course of Business and in conformity with the engineering
specifications for products relating to the Business; and (iv) conform to all
Legal Requirements.

4.13 Real Property Leases.

(a) Seller does not own any real property. Schedule 1.1(f) sets forth an
accurate and complete list of all Real Property Leases. Seller has delivered to
Buyer accurate and complete copies of each Real Property Lease and all
amendments and modifications thereto. All Real Property Leases, and all
amendments and modifications thereto, are in full force and effect and have not
been modified or amended, and there exists no default under any such lease by
Seller, nor any event which, with notice or lapse of time or both, would
constitute a default thereunder by Seller or, to Seller’s Knowledge, by any
third party. To Seller’s Knowledge, there is no pending, contemplated or
threatened condemnation of any of the buildings, land, fixtures or improvements
relating to the Real Property Leases or the Leased Real Property or any part
thereof. There are no parties in possession or, to Seller’s Knowledge, parties
having any current or future right to occupy any of the Real Property Leases
during the terms of such Real Property Leases. To Seller’s Knowledge, (i) the
Leased Real Property conforms in all material respects to all applicable
building, zoning and other Laws, ordinances, rules and regulations, (ii) all
licenses and other approvals necessary for the current occupancy and use of the
Leased Real Property have been obtained and are in full force and effect, and
there have been no violations thereof that individually or in the aggregate have
had or reasonably would be expected to have a Material Adverse Effect, and
(iii) there exists no material breach or violation of any covenant, condition,
restriction, easement, agreement or order affecting any of the Leased Real
Property.

 

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(b) To Seller’s Knowledge, there are no material defects in the physical
condition of any of the Leased Real Property, including, without limitation,
structural elements, mechanical systems, parking and loading areas, and all
buildings and improvements relating thereto are in good operating condition and
repair, ordinary and reasonable wear and tear expected and have been well
maintained. To Seller’s Knowledge, none of the Leased Real Property is located
in an area designated by any Governmental Authority as being within a flood
plain or subject to special flood or other hazards. To Seller’s Knowledge, all
water, sewer, gas, electric, telephone, drainage and other utilities required by
Law or necessary for the operation of the Leased Real Property have been
connected under valid permits and pursuant to valid easements where required,
and are sufficient to service the Leased Real Property and are in good operating
condition.

4.14 Intellectual Property

(a) Schedule 1.1(h) sets forth an accurate and complete list of all Seller
Intellectual Property material to the conduct of the Business as currently
conducted or currently planned or contemplated to be conducted by Seller and
either owned by or registered in Seller’s name (the “Seller Registered
Intellectual Property Rights”), or owned by others and licensed to Seller,
specifying as to each, as applicable: (i) the description of such Seller
Intellectual Property; (ii) the owner of such Seller Intellectual Property;
(iii) in the case of Seller Registered Intellectual Property Rights, the
jurisdictions by or in which such intellectual property has been issued or
registered or in which an application for such issuance or registration has been
filed, including, without limitation, the respective registration or application
numbers and dates of issuance, registration or filing; and (iv) contracts,
licenses, sublicenses, agreements and other arrangements as to which Seller is a
party and pursuant to which any Person (including Seller) is authorized to use
such Seller Intellectual Property, including the identity of all parties
thereto, a description of the nature and subject matter thereof, the applicable
royalty and the term thereof.

(b) Each item of Seller Intellectual Property: (i) is valid, subsisting and in
full force and effect; (ii) has not been abandoned or passed into the public
domain; and (iii) is free and clear of any Encumbrances.

(c) The Seller Intellectual Property set forth on Schedule 1.1(h) constitutes
all the Intellectual Property Rights used in, useful for and/or necessary to the
conduct of the Business as it is currently conducted, and as it is currently
planned or contemplated to be conducted by Seller prior to the Closing and by
Buyer following the Closing, including, without limitation, the design,
development, manufacture, use, import and sale of the Seller Products
(including, without limitation, those currently under development).

(d) Each item of Seller Intellectual Property is either: (i) exclusively owned
by Seller and was written and created solely by employees of Seller acting
within the scope of their employment or by third parties, all of which employees
and third parties have validly and irrevocably assigned all of their rights,
including, without limitation, Intellectual Property Rights therein, to Seller,
and no third party owns or has any rights to any such Seller Intellectual
Property; or (ii) duly and validly licensed to Seller for use in the manner
currently used by Seller in the conduct of the Business and, as it is currently
planned or contemplated to be used by Seller in the conduct of the Business
prior to the Closing and by Buyer following the Closing.

 

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(e) In each case in which Seller has acquired any Intellectual Property Rights
from any Person, Seller has obtained a valid and enforceable assignment
sufficient to irrevocably transfer all rights in such Intellectual Property
Rights to Seller. No Person who has licensed Intellectual Property Rights to
Seller has ownership rights or license rights to improvements made by Seller in
such Intellectual Property Rights. Seller has not transferred ownership of, or
granted any exclusive license of or right to use, or authorized the retention of
any exclusive rights to use or joint ownership of, any Intellectual Property
Rights that is or was Seller Intellectual Property to any Person.

(f) Seller has no Knowledge of any facts, circumstances or information that:
(i) would render any Seller Intellectual Property invalid or unenforceable;
(ii) would adversely affect any pending application for any Seller Registered
Intellectual Property Right; or (iii) could adversely affect or impede the
ability of Seller to use any Seller Intellectual Property in the conduct of the
Business as it is currently conducted or as it is currently planned or
contemplated to be conducted by Seller prior to Closing or by Buyer following
the Closing. Seller has not misrepresented, or failed to disclose, and has no
Knowledge of any misrepresentation or failure to disclose, any fact or
circumstances in any application for any Seller Registered Intellectual Property
Right that would constitute fraud or a misrepresentation with respect to such
application or that would otherwise affect the validity or enforceability of any
Seller Registered Intellectual Property Right.

(g) All necessary registration, maintenance and renewal fees in connection with
each item of Seller Registered Intellectual Property Rights have been paid and
all necessary documents and certificates in connection with such Seller
Registered Intellectual Property Rights have been filed with the relevant
patent, copyright, trademark or other authorities in the United States or
foreign jurisdictions, as the case may be, for the purposes of maintaining such
Seller Registered Intellectual Property Rights. There are no actions that must
be taken by Seller within one hundred twenty (120) days following the Closing
Date, including, without limitation, the payment of any registration,
maintenance or renewal fees or the filing of any responses to office actions,
documents, applications or certificates for the purposes of obtaining,
maintaining, perfecting, preserving or renewing any Registered Intellectual
Property Rights. To the maximum extent provided for by, and in accordance with,
applicable laws and regulations, Seller has recorded in a timely manner each
such assignment of a Registered Intellectual Property Right assigned to Seller
with the relevant Governmental Authority, including, without limitation, the
United States Patent and Trademark Office (the “PTO”), the U.S. Copyright Office
or their respective counterparts in any relevant foreign jurisdiction, as the
case may be.

(h) Seller has taken all necessary action to maintain and protect: (i) the
Seller Intellectual Property; and (ii) the secrecy, confidentiality, value and
Seller’s rights in the Confidential Information and Trade Secrets of Seller and
those provided by any Person to Seller, including by having and enforcing a
policy requiring all current and former Contractors of Seller to execute
appropriate confidentiality and assignment agreements. All copies thereof shall
be delivered to Buyer at Closing. Seller has no Knowledge of any violation or
unauthorized disclosure of any Trade Secret or Confidential Information related
to the Business, the Purchased Assets or the Assumed Liabilities, or obligations
of confidentiality with respect to such. Only Contractors of Seller have had
access to such Trade Secrets and Confidential Information, and each such
Contractor has signed a confidentiality agreement with respect thereto.

 

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(i) The operation of the Business as it is currently conducted, or as it is
currently planned or contemplated to be conducted by Seller prior to the
Closing, including, without limitation, to the design, development, use, import,
branding, advertising, promotion, marketing, manufacture and sale of the Seller
Products (including, without limitation, any currently under development), does
not and will not, and will not when operated by Buyer substantially in the same
manner following the Closing, infringe or misappropriate any Intellectual
Property Rights of any Person, violate any right of any Person (including,
without limitation, any right to privacy or publicity), defame or libel any
Person or constitute unfair competition or trade practices under the laws of any
jurisdiction, and Seller has not received notice from any Person claiming that
such operation or any Seller Product (including, without limitation, any
currently under development) infringes or misappropriates any Intellectual
Property Rights of any Person (including, without limitation, any right of
privacy or publicity), or defames or libels any Person or constitutes unfair
competition or trade practices under the laws of any jurisdiction (nor does
Seller have Knowledge of any basis therefor).

(j) To Seller’s Knowledge, no Person is violating, infringing or
misappropriating any Seller Intellectual Property Right. There are no
Proceedings before any Governmental Authority (including before the PTO)
anywhere in the world related to any of the Seller Intellectual Property,
including, without limitation, any Seller Registered Intellectual Property
Rights. No Seller Intellectual Property or Seller Product is subject to any
Proceeding or any outstanding decree, order, judgment, office action or
settlement agreement or stipulation that restricts in any manner the use,
transfer or licensing thereof by Seller or that may affect the validity, use or
enforceability of such Seller Intellectual Property.

(k) Section 4.10(a) of the Seller Disclosure Schedule lists all Material
Contracts involving the license (or covenant not to sue for the infringement of
intellectual property rights), assignment or transfer of any Seller Intellectual
Property. Seller is not in material breach of, nor has Seller failed to perform
under, any such Material Contracts and, to Seller’s Knowledge, no other party to
any such Material Contracts, is in material breach thereof or has failed to
perform thereunder. To the extent not listed on Section 4.10(a) of the Seller
Disclosure Schedule, Section 4.14(k) of the Seller Disclosure Schedule lists all
Seller Contracts under which Seller has agreed to, or assumed, any obligation or
duty to warrant, indemnify, reimburse, hold harmless, guaranty or otherwise
assume or incur any material Liability, or provide a right of rescission, with
respect to the infringement or misappropriation by Seller or such other Person
of the Intellectual Property Rights of any Person other than Seller. There is no
Seller Contract affecting any Seller Intellectual Property under which there is
any dispute regarding the scope of such Seller Contract, or performance under
such Seller Contract, including with respect to any payments to be made or
received by Seller thereunder.

(l) All Seller Intellectual Property will be fully transferable, alienable or
licensable by Buyer without restriction and without payment of any kind to any
third party. The consummation of the Transaction as contemplated hereby will not
result in any loss of, or the diminishment in value of, any Seller Intellectual
Property or the right to use any Seller Intellectual Property. Neither this
Agreement nor the Transaction, including, without limitation, the assignment to
Buyer, by operation of law or otherwise, of any Seller Contracts will result in
Buyer: (i) granting to any third party any right to, or with respect to, any
Intellectual Property Right owned by, or licensed to, Buyer; (ii) being bound
by, or subject to, any non-compete or

 

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other restriction on the operation or scope of its businesses, including,
without limitation, the Business; or (iii) being obligated to pay any royalties
or other amounts to any third party.

4.15 Customers and Suppliers.

(a) Customers. There has not been any material and adverse change in the
business relationship of Seller with any customer who accounted for more than
five percent (5%) of Seller’s gross sales during the period from December 31,
2003 to the Effective Date (each, a “Material Customer”, and collectively, the
“Material Customers”). Section 4.15(a) of the Seller Disclosure Schedule sets
forth an accurate and complete: (i) list of the 15 largest customers of the
Business determined on the basis of sales revenues for each of the last three
(3) fiscal years and (ii) breakdown of all customer deposits in an amount
greater than Ten Thousand Dollars ($10,000) held by Seller as of the Effective
Date. Seller’s relationship with the Material Customers are good commercial
working relationships, and Seller has not received, nor is aware of, any notice
or intent from a Material Customer to terminate its relationship with Seller.

(b) Suppliers. There has not been any material and adverse change in the
business relationship of Seller with any supplier, sole source supplier or any
supplier from whom Seller purchased more than five percent (5%) of the total
goods or services which it purchased during the period from December 31, 2003 to
the Effective Date (each, a “Material Supplier”, and collectively, the “Material
Suppliers”). Section 4.15(b) of the Seller Disclosure Schedule sets forth an
accurate and complete: (i) list of the nine largest suppliers of the Business
determined on the basis of dollar volume for last fiscal year; (ii) list of all
sole source suppliers of significant goods or services to the Business with
respect to which practical alternative sources of supply are not available on
comparable terms and conditions; and (iii) breakdown of the amounts paid to each
such sole source supplier for each of the last three fiscal years. Seller’s
relationships with the Material Suppliers are good commercial working
relationships, and Seller has not received, nor is aware of, any notice or
intent from a Material Supplier to terminate its relationship with Seller.

(c) Distributors. There has not been any material and adverse change in the
business relationship of Seller with any dealer or distributor (whether pursuant
to a commission, royalty or other arrangement) who accounted for more than five
percent (5%) of the total goods or services sold by Seller during the period
from December 31, 2003 to the Effective Date (each, a “Material Distributor”,
and collectively, the “Material Distributors”). Section 4.15(c) of the Seller
Disclosure Schedule sets forth an accurate and complete: (i) list of dealers and
distributors of the Business; (ii) breakdown of the amounts paid to each such
dealer and distributor for each of the last three fiscal years; (iii) list of
all dealers and distributors that have been granted an exclusive dealership or
distributorship with Seller; and (iv) breakdown of the amounts paid to each such
dealer and distributor for each of the last three fiscal years. Seller’s
relationship with the Material Distributors are good commercial working
relationships, and Seller has not received, nor is aware of, any notice or
intent from a Material Distributor to terminate its relationship with Seller.

(d) No Special Arrangements. Seller is not a party to any oral or written
agreements or arrangement with any customer, supplier, dealer or distributor
related to the

 

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offering of discounts, extended warranties, service contracts, rights of return
or any other similar agreements or arrangements.

4.16 Employees and Consultants.

(a) Employees and Contracts. No employee of Seller has been granted the right to
continued employment by Seller or to any material compensation following
termination of employment with Seller. Seller has no Knowledge that any officer,
director, employee or consultant of Seller (collectively, the “Contractors”)
intends to terminate his or her employment or other engagement with Seller, nor
does Seller have a present intention to terminate the employment or engagement
of any Contractor. The Offerees constitute all of the Contractors necessary for
Buyer to continue the operations of the Business as it had been prior to the
Effective Date.

(b) Compensation. Section 4.16(b) of the Seller Disclosure Schedule sets forth
an accurate, correct and complete list of all: (i) employees of Seller,
including each employee’s name, title or position, present annual compensation
(including bonuses, commissions and deferred compensation), accrued and unused
paid vacation and other paid leave, years of service, interests in any incentive
compensation plan, and estimated entitlements to receive supplementary
retirement benefits or allowances (whether pursuant to a contractual obligation
or otherwise); (ii) individuals who are currently performing services for Seller
related to the Business who are classified as “consultants” or “independent
contractors;” (iii) bonuses, severance payments, termination pay and other
special compensation of any kind paid to, accrued with respect to, or that would
be payable to (as a result of the Transaction), any present or former Contractor
since the Interim Balance Sheet Date; (iv) increases in any employee’s wage or
salary since the Interim Balance Sheet Date; and (v) increases or changes in any
other benefits or insurance provided to any employees since the Interim Balance
Sheet Date. No employee of Seller is eligible for payments that would constitute
“parachute payments” under Section 280G of the Code.

(c) Disputes. There are no grievances, complaints, charges, claims, disputes or
controversies pending or, to Seller’s Knowledge, threatened involving any
employee or group of employees. Seller has not suffered or sustained any work
stoppage and, to Seller’s Knowledge, no such work stoppage is threatened.

(d) Compliance with Legal Requirements. Seller has materially complied with all
Legal Requirements related to the employment of its employees, including
provisions related to wages, hours, leaves of absence, equal opportunity,
occupational health and safety, workers’ compensation, severance, employee
handbooks or manuals, collective bargaining and the payment of social security
and other Taxes. Seller has no Liability under any Legal Requirements related to
employment and attributable to an event occurring or a state of facts existing
prior to the date thereof (other than those Liabilities arising in the Ordinary
Course of Business).

(e) WARN Act. Seller is in material compliance with the Worker Readjustment and
Notification Act (29 U.S.C. § 2101) and applicable California law (California
Labor Code § 1400 et. seq.) (collectively “WARN Act”), including, without
limitation, all

 

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obligations to promptly and correctly furnish all notices required to be given
thereunder in connection with any “plant closing” or “mass layoff” to “affected
employees,” “representatives” and any state dislocated worker unit and local
government officials. No reduction in the notification period under the WARN Act
is being relied upon by Seller. Section 4.16(e) of the Seller Disclosure
Schedule sets forth an accurate, correct and complete list of all employees
terminated (except with cause, by voluntarily departure or by normal
retirement), laid off or subjected to a reduction of more than fifty percent
(50%) in hours or work during the two full calendar months and the partial month
preceding this representation and warranty.

(f) Unions. Seller has no collective bargaining agreements with any of its
employees. There is no labor union organizing or election activity pending or,
to Seller’s Knowledge, threatened with respect to Seller.

4.17 Seller Benefit Plans. Seller has maintained and funded all of its employee
benefit plans (collectively, the “Seller Benefit Plans”) in accordance with
their terms and all applicable laws. Neither Seller nor any Member of the
controlled group maintains or contributes to, or has ever maintained or
contributed to, any Defined Benefit Plan or Multiemployer Plan. Nothing
contained in any of the Seller Benefit Plans will obligate Buyer to provide any
benefits to employees, former employees or beneficiaries of employees or former
employees, or to make any contributions to any plans from and after the Closing.

4.18 Compliance with Laws; Governmental Approvals. Seller is not now, and during
the past five years has not been, in conflict with, or in default, breach or
violation of, any Legal Requirement applicable to Seller, or by which any
property or asset of Seller is bound or affected, except where such conflict,
default, breach or violation has not had, or reasonably could not have, a
Material Adverse Effect on Seller. Seller is in possession of all Governmental
Approvals necessary for Seller to own, lease and operate its properties or to
carry on the Business as it is now being conducted, except where the failure to
obtain such Governmental Approval would not, individually or in the aggregate,
have a Material Adverse Effect. No suspension or cancellation of any
Governmental Approvals is pending or, to Seller’s Knowledge, threatened, and
except for those Governmental Approvals set forth in Section 4.18 of the Seller
Disclosure Schedule, no other Governmental Approval is required to be obtained
or filed in connection with the execution and delivery of this Agreement and the
other Transaction Documents.

4.19 Litigation. There is no Proceeding pending or, to Seller’s Knowledge,
threatened against or affecting Seller, or any property or asset of Seller. To
Seller’s Knowledge, no event has occurred, and no condition or circumstance
exists, that might directly or indirectly give rise to or serve as a basis for
the commencement of any such Proceeding. Neither Seller nor any property or
asset of Seller is subject to any Order or any proposed Order that would prevent
or materially delay the consummation of the Transaction or would have a Material
Adverse Effect.

4.20 Environmental Matters. Except as set forth in Section 4.20 of the Seller
Disclosure Schedule: (a) Seller has no Liability under, nor has Seller ever
violated in any material respect, any Environmental Law (as defined below);
(b) to Seller’s Knowledge, any property owned, operated, leased or used by
Seller and any facilities and operations thereon are presently in material
compliance with all applicable Environmental Laws; (c) Seller has never

 

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entered into or been subject to any judgment, consent decree, compliance order
or administrative order with respect to any environmental or health and safety
matter or received any request for information, notice, demand letter,
administrative inquiry or formal or informal complaint or claim with respect to
any environmental or health and safety matter or the enforcement of any
Environmental Law; and (d) Seller does not have any Knowledge that any of the
items enumerated in subsection (c) of this paragraph will be forthcoming.

4.21 Taxes.

(a) Seller has timely filed all Tax Returns relating to the Business (including
for purposes of this Section 4.21, without limitation, the acquisition,
ownership and use of the Purchased Assets) that it is required to have filed.
All such Tax Returns are true, correct and complete in all respects. All Taxes
required to have been paid by the Seller (whether or not shown to be payable on
such Tax Returns or on subsequent assessments with respect thereto) have been
paid in full on a timely basis. The Seller does not have any Liabilities for
Taxes not yet required to have been paid, other than Liabilities for Taxes
reflected on the Interim Balance Sheet, or incurred in the Ordinary Course of
Business or in connection with the purchase and sale under this Agreement since
the date of the Interim Balance Sheet.

(b) Seller has complied in all respects with all applicable laws, rules and
regulations relating to withholding Taxes and information reporting, and, within
the time and in the manner prescribed by law, Seller has withheld from employee
wages and other payments and paid over to the proper Governmental Authorities
all amounts required to have been so withheld and paid over all Taxes (whether
or not relating to the Business) all amounts required to have been so withheld
and paid over in connection with amounts paid or owing by Seller to any
employee, independent contractor, creditor, shareholder, or other third party.

(c) There are no liens for Taxes on the Purchased Assets, other than liens for
Taxes not yet due and payable.

(d) No audit or other proceeding concerning any Tax Return or Tax Liability
relating to the Business is currently pending or, to the Seller’s Knowledge,
threatened. There are no existing circumstances which reasonably may be expected
to result in the assertion of any claim for Taxes against the Seller with
respect to the Business by any Governmental Authority with respect to any period
for which Tax Returns are required to have been filed or Tax is required to have
been paid. No issue has been raised by any Governmental Authority with respect
to Taxes of the Seller concerning the Business in any prior examination which,
by application of the same or similar principles, could reasonably be expected
to result in a proposed deficiency for any other taxable period relating to the
Business. No claim has ever been made by any Governmental Authority in a
jurisdiction where Seller does not file Tax Returns relating to the Business
that Seller is or may be subject to taxation by that jurisdiction with respect
to the Business.

(e) Seller has treated itself as owner of each of the Purchased Assets for Tax
purposes. None of the Purchased Assets is the subject of a “safe-harbor lease”
within the provisions of former Section 168(f)(8) of the Code, as in effect
prior to amendment by the Tax Equity and Fiscal Responsibility Act of 1982. None
of the Purchased Assets directly or

 

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indirectly secures any debt the interest on which is tax exempt under
Section 103(a) of the Code. None of the Purchased Assets is “tax-exempt use
property” within the meaning of Section 168(h) of the Code.

(f) Seller is not a party to any contract or agreement that will have continuing
effect after the Closing Date and is an Assumed Liability that under certain
circumstances could require any payment (or be deemed to give rise to any
payment) that would be a parachute payment within the meaning of Section 280G of
the Code.

(g) Seller, in connection with the Business, (i) is not a party to any joint
venture, partnership or other agreement or arrangement which is treated as a
partnership for federal income Tax purposes, (ii) does not own any interest in
an entity which constitutes a Purchased Asset (or which owns a Purchased Asset)
that is either is treated as an entity disregarded as separate from its owner
for federal Tax purposes, or is an entity as to which an election pursuant to
Treasury Regulations Section 301.7701-3 has been made.

(h) The transactions set forth in this Agreement are not subject to the Tax
withholding provisions of Section 3406 of the Code (back-up withholding) or of
any other provision of Law.

(i) Seller is a “United States person” within the meaning of Section 7701(a)(30)
of the Code.

4.22 Brokers. No broker, finder or investment banker is entitled to any
brokerage, finder’s or other fee or commission in connection with the
Transaction based upon arrangements made by or on behalf of Seller.

4.23 Fraudulent Conveyance; Solvency. Seller is not entering into the
Transaction with the intent to hinder, delay or defraud any Person to which it
is, or may become, indebted. Seller is not now insolvent and will not be
rendered insolvent by the Transaction. As used in this Section, “insolvent”
means that the sum of the debts and other probable Liabilities of Seller exceeds
the present fair saleable value of Seller’s assets. Immediately after giving
effect to the consummation of the Transaction: (a) Seller will be able to pay
its Liabilities as they become due in the usual course of its business;
(b) Seller will have sufficient capital to conduct its present or proposed
business; (c) Seller will have assets (calculated at fair market value) that
exceed its Liabilities; and (d) taking into account all pending and threatened
litigation, final judgments against Seller in actions for monetary damages are
not reasonably anticipated to be rendered at a time when, or in amounts such
that, Seller will be unable to satisfy any such judgments promptly in accordance
with their terms (taking into account the maximum probably amount of such
judgments in any such actions and the earliest reasonable time at which such
judgments might be rendered) as well as all other obligations of Seller. The
cash available to Seller, after taking into account all other anticipated uses
of the cash, will be sufficient to pay all such debts and judgments promptly in
accordance with their terms.

4.24 Transactions with Affiliates. There are no existing contracts,
transactions, indebtedness or other arrangements, or any related series thereof,
between Seller, on the one hand, and any of the directors, officers or other
Affiliates of Seller, on the other hand.

 

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4.25 Product Warranties. All of the Purchased Assets manufactured, sold or
delivered by Seller are in conformity with all applicable contractual
commitments and applicable law and all express and implied warranties, and
Seller is not liable (and, to Seller’s Knowledge, there is no reasonable basis
for any present or future action, suit, proceeding, hearing, investigation,
charge, complaint, claim or demand against it giving rise to any such Liability)
for replacement thereof or other damages in connection therewith in excess of
any warranty reserve specifically established with respect thereto and included
on the face of Seller’s latest balance sheet. None of the Purchased Assets
manufactured, sold or delivered by Seller are subject to any guaranty, warranty
or other indemnity. Seller has not been notified of any claims for (and Seller
does not have any Knowledge of any threatened claims for) any extraordinary
product returns, warranty obligations or product services relating to any of the
Purchased Assets. There have been no product recalls, withdrawals or seizures
with respect to any of the Purchased Assets manufactured, sold or delivered by
Seller. To Seller’s Knowledge, there is no: (a) fact relating to any Purchased
Assets that could be reasonably likely to impose upon Seller a duty to recall
any Purchased Assets or a duty to warn customers of a defect in any Purchased
Assets; or (b) latent or overt design, manufacturing or other defect in any
Purchased Assets.

4.26 Product Liabilities. Seller has not had nor does Seller have any Liability
(and, to Seller’s Knowledge, there is no reasonable basis for any present or
future action, suit, proceeding, hearing, investigation, charge, complaint,
claim or demand against it giving rise to any Liability) arising out of any
injury to individuals or property as a result of the ownership, possession or
use of any of the Purchased Assets manufactured, sold or delivered by Seller.

4.27 Bank Accounts. Section 4.27 of the Seller Disclosure Schedule sets forth an
accurate and complete list of all bank accounts, including the names and
addresses of the financial institutions in which Seller has a bank account and
the names of all Persons authorized to draw thereon or with access thereto.

4.28 Permits. Section 4.28 of the Seller Disclosure Schedule lists all material
permits, registrations, authorizations, licenses, franchises, certifications and
other approvals (collectively, the “Approvals”) obtained by Seller from any
third party, including, without limitation, any industry standards association
or Governmental Authority. Each Approval is validly held by Seller, is in full
force and effect, and Seller is operating in material compliance therewith.
Except for the Approvals, none of the Purchased Assets have been marketed,
advertised, sold or distributed as having or meeting any other certification,
standard or approval. None of the Approvals is subject to termination as a
result of the execution of this Agreement by Seller or the consummation of the
Transactions, and, to Seller’s Knowledge, Buyer will not be required to obtain
any further Approvals to continue the conduct of Seller’s operations after the
Closing.

4.29 Bulk Sales. There are no “bulk sales” Legal Requirements applicable to the
Transaction.

4.30 Foreign Corrupt Practices Act.

(a) During the five (5)-year period prior to the Effective Date, Seller has not
(nor, to Seller’s Knowledge, has any director, officer, agent, or employee of
Seller nor any other Person, acting on behalf of Seller) directly or indirectly
in respect of the Business: (i) used any of

 

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Seller’s funds for unlawful contributions, gifts, entertainment or other
unlawful expenses relating to political activity; (ii) made any unlawful payment
to foreign or domestic government officials or employees or to foreign or
domestic political parties or campaigns from Seller’s funds; (iii) violated any
provision of the Foreign Corrupt Practices Act of 1977; (iv) established or
maintained any unlawful or unrecorded fund of Seller’s monies or other assets;
(v) made any false or fictitious entry on the books or records of Seller; or
(vi) made any bribe, rebate, payoff, influence payment, kickback or other
unlawful payment, to any Person, private or public, regardless of form, whether
in money, property or services, to obtain favorable treatment in securing
business or to obtain special concessions for Seller, or to pay for favorable
treatment for business secured or for special concessions already obtained for
Seller.

(b) Seller and, to Seller’s Knowledge, its Representatives have not, to obtain
or retain business, directly or indirectly offered, paid or promised to pay, or
authorized the payment of, any money or other thing of value (including any fee,
gift, sample, travel expense or entertainment with a value in excess of one
hundred dollars ($100.00) in the aggregate to any one individual in any year) or
any commission payment in excess of any amount permitted by law to: (i) any
Person who is an official, officer, agent, employee or representative of any
Governmental Authority or of any existing or prospective customer (whether
government owned or nongovernment owned); (ii) any political party or official
thereof; (iii) any candidate for political or political party office; or
(iv) any other individual or entity; while knowing or having reason to believe
that all or any portion of such money or thing of value would be offered, given,
or promises, directly or indirectly, to any such official, officer, agent,
employee, representative, political party, political party official, candidate,
individual, or any entity affiliated with such customer, political party or
official or political office.

(c) Seller has made all payments to third parties by check mailed to such third
parties’ principal place of business or by wire transfer to a bank located in
the same jurisdiction as such party’s principal place of business. Each
transaction is properly and accurately recorded on the Books and Records of
Seller, and each document upon which entries in Seller’s Books and Records are
based is complete and accurate in all respects. Seller maintains a system of
internal accounting controls adequate to insure that Seller maintains no
off-the-books accounts and that Seller’s assets are used only in accordance with
Seller’s management directives.

4.31 Regulatory Authorities. Seller: (i) is and at all times has been in
material compliance with all statutes, rules, regulations, ordinances, orders,
decrees and guidances applicable to the ownership, testing, development,
manufacture, packaging, processing, inspecting, handling, installing, servicing,
recordkeeping, use (including instructing and training users), distribution,
marketing, labeling, promotion, sale, offer for sale, storage, import, export or
disposal of any product manufactured or distributed by Seller (“Applicable
Regulatory Laws”); (ii) has not received any notice of adverse finding, warning
letter, untitled letter or other correspondence or notice from the FDA or any
other Governmental Authority alleging or asserting noncompliance with any
Applicable Regulatory Laws or any licenses, certificates, approvals, clearances,
authorizations, permits and supplements or amendments thereto required by any
such Applicable Regulatory Laws (“Regulatory Authorizations”); (iii) possesses
all necessary Regulatory Authorizations, such Regulatory Authorizations are
valid and in full force and effect and Seller is not in material violation of
any term of any such Regulatory Authorizations; (iv) has not received notice of
any pending or threatened claim, suit, proceeding,

 

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hearing, enforcement, audit, investigation, arbitration or other action from any
Governmental Authority or third party alleging that any company operation or
activity is in violation of any Applicable Regulatory Law or Regulatory
Authorization and has no Knowledge or reason to believe that any such
Governmental Authority or third party is considering any such claim, suit,
proceeding, hearing, enforcement, audit, investigation, arbitration or other
action; (v) has not received notice that any Governmental Authority has taken,
is taking or intends to take action to limit, suspend, modify or revoke any
Regulatory Authorizations and has no Knowledge or reason to believe that any
such Governmental Authority is considering such action; (vi) has filed,
obtained, maintained or submitted all reports, documents, forms, notices,
applications, records, claims, submissions and supplements or amendments as
required by any Applicable Regulatory Law or Regulatory Authorization and that
all such reports, documents, forms, notices, applications, records, claims,
submissions and supplements or amendments were complete and correct on the date
filed (or were corrected or supplemented by a subsequent submission); and
(vii) has not, either voluntarily or involuntarily, initiated, conducted, or
issued or caused to be initiated, conducted or issued, any recall, market
withdrawal or replacement, safety alert, post sale warning, “dear doctor”
letter, or other notice or action relating to an alleged lack of safety or
efficacy of any product, any alleged product defect, or violation of any
Applicable Regulatory Law or Regulatory Authorization; Seller is not aware of
any facts that would cause Seller to initiate any such notice or action; and
Seller does not have any Knowledge or reason to believe that any Governmental
Authority or third party intends to initiate any such notice or action.

4.32 Compliance with Health Care Laws. Seller is not in material violation of
any Health Care Law. For purposes of this Agreement, “Health Care Laws” means
(i) all applicable federal and state fraud and abuse laws, including, without
limitation, the federal Anti-Kickback Statute (42 U.S.C. §1320a-7(b)), the Stark
Law (42 U.S.C. §1395nn), the civil False Claims Act (31 U.S.C. §3729 et seq.),
Sections 1320a-7 and 1320a-7a of Title 42 of the United States Code and the
regulations promulgated pursuant to such statutes; (ii) the Health Insurance
Portability and Accountability Act of 1996 (Pub. L. No. 104-191) and the
regulations promulgated thereunder, (iii) Medicare (Title XVIII of the Social
Security Act) and the regulations promulgated thereunder; (iv) Medicaid (Title
XIX of the Social Security Act) and the regulations promulgated thereunder;
(v) the Medicare Prescription Drug, Improvement, and Modernization Act of 2003
(Pub. L. No. 108-173) and the regulations promulgated thereunder; (vi) quality,
safety and accreditation standards and requirements of all applicable state laws
or regulatory bodies; and (vii) any and all other applicable health care laws,
regulations, manual provisions, policies and administrative guidance, each of
(i) through (vii) as may be amended from time to time.

4.33 Securities Representations. Seller hereby represents and warrants as to the
representations and warranties set forth in Exhibit L.

4.34 Full Disclosure. No statement (including, without limitation, the
representations, warranties and covenants) by Seller contained in this
Agreement, the Seller Disclosure Schedule, the exhibits and schedules attached
hereto, the Transaction Documents, and any document, written statement or
certificate furnished to Buyer and its Representatives by Seller pursuant hereto
or in connection with the Transaction, contains any untrue statement of a
material fact or omits to state a material fact necessary in order to make the
statements contained herein or therein not misleading.

 

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ARTICLE 5. REPRESENTATIONS AND WARRANTIES OF BUYER AND PARENT

Except as set forth in the corresponding sections of the disclosure schedules of
Buyer and Parent delivered to Seller concurrently with the execution and
delivery of this Agreement (the “Buyer Disclosure Schedules”) (provided, that if
any fact or item disclosed in any section of the Buyer Disclosure Schedule shall
be relevant to any other section of this Agreement, then such fact or item shall
be deemed to be disclosed with respect to such other section of this Agreement,
but only to the extent to which it is readily apparent on its face that such
fact or item relates), Buyer and Parent hereby represent and warrant to Seller
that, as of the Effective Date (and, to the extent that the Closing does not
occur on the Effective Date, as of the Closing Date):

5.1 Organization and Good Standing. Each of Parent and Buyer is a corporation
duly organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation, and has all requisite power and authority to own,
lease and operate its properties and to carry on its business as now being
conducted. Each of Parent and Buyer is duly qualified or licensed as a foreign
corporation to conduct business and is in good standing in each jurisdiction
where the character of the properties owned, leased or operated by it or the
nature of its business makes such qualification or licensing necessary, except
where the failure to be so duly qualified or licensed and in good standing would
not have a Material Adverse Effect.

5.2 Authority. Each of Parent and Buyer has all necessary power and authority to
execute and deliver this Agreement and the other Transaction Documents, to
perform its obligations hereunder, and to consummate the Transaction. The
execution and delivery of this Agreement and the other Transaction Documents and
the consummation by each of Parent and Buyer of the Transaction have been duly
and validly authorized by all requisite action and no other corporate proceeding
on the part of Parent and Buyer, respectively, is necessary to authorize this
Agreement and the other Transaction Documents or to consummate the Transaction.
This Agreement has been, and at Closing the other Transaction Documents will be,
duly and validly executed and delivered by each of Parent and Buyer. This
Agreement constitutes, and at Closing the other Transaction Documents will
constitute, the legal, valid and binding obligation of each of Parent and Buyer,
enforceable against Parent and Buyer in accordance with their respective terms,
except as may be limited by bankruptcy, insolvency, reorganization, moratorium
and other similar laws and equitable principles related to or limiting
creditors’ rights generally and by the availability of equitable remedies and
defenses.

5.3 No Conflicts; Required Consents. No Consents other than those set forth in
Section 5.3 of the Buyer Disclosure Schedule are required with respect to the
execution and delivery of this Agreement and the other Transaction Documents,
and the consummation of the Transaction by Parent and Buyer. The execution,
delivery and performance of this Agreement and the other Transaction Documents
by Parent and Buyer do not and will not, with or without notice or lapse of
time:

(a) conflict with or violate the Certificate of Incorporation or bylaws or
equivalent organizational documents of Parent or Buyer;

(b) conflict with or violate any Legal Requirement applicable to Parent or Buyer
or by which any property or asset of Parent or Buyer is bound or affected,
except where

 

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the existence of such conflict or violation would not, individually or in the
aggregate, have a Material Adverse Effect;

(c) assuming the Consents listed in Section 5.3 of the Buyer Disclosure Schedule
are obtained, result in any breach of or constitute a default under, or give to
others any right of termination, amendment, acceleration or cancellation of, or
result in the creation of any Encumbrance on any property or asset of Parent or
Buyer pursuant to, any note, bond, mortgage, indenture, contract, agreement,
lease, license, permit, franchise or other instrument or obligation, except
where the existence of such breach, default or right or the creation of such
Encumbrance would not, individually or in the aggregate, have a Material Adverse
Effect;

(d) violate or conflict with any other material restriction of any kind or
character to which Parent or Buyer is subject, except where the existence of
such violation or conflict would not, individually or in the aggregate, have a
Material Adverse Effect; or

(e) require Parent or Buyer to obtain any Consent of, or make or deliver any
filing or notice to, a Governmental Authority.

5.4 Brokers. No broker, finder or investment banker is entitled to any
brokerage, finder’s or other fee or commission in connection with the
Transaction based upon arrangements made by or on behalf of Parent or Buyer.

ARTICLE 6. CONDUCT PRIOR TO CLOSING

6.1 Seller’s Conduct of the Business. From the Effective Date until the Closing
Date, Seller covenants and agrees that the Business shall be conducted only in,
and Seller shall not take any action except in, the Ordinary Course of Business
and in a manner consistent with past practice; and Seller shall use its best
efforts to preserve substantially intact the business organization of Seller, to
keep available the services of the current Contractors of Seller and to preserve
the current relationships of Seller with customers, suppliers, distributors,
dealers and other Persons with which Seller has significant business relations.
Seller shall promptly notify Buyer of any event or occurrence not in the
Ordinary Course of Business of Seller, and any event of which Seller is aware
which reasonably would be expected to have a Material Adverse Effect on Seller
(even if the likelihood of such event has previously been disclosed or could
result from any item set forth in the Seller Disclosure Schedule). Without
limiting the generality of the foregoing, except as expressly contemplated by
this Agreement or disclosed in the Seller Disclosure Schedule, Seller shall not,
from the Effective Date until the Closing Date, directly or indirectly, do or
propose to do any of the following without the prior written consent of Buyer:

(a) Declare or pay any dividends on or make any other distributions (whether in
cash, stock or property) with respect to any of its capital stock, or split,
combine or reclassify any of its capital stock or issue or authorize the
issuance of any other securities in respect of, in lieu of or in substitution
for shares of its capital stock, or repurchase or otherwise acquire, directly or
indirectly, any shares of its capital stock except from former employees,
directors and consultants in accordance with agreements providing for the
repurchase of shares at cost in connection with any termination of service to
Seller;

(b) Issue, deliver, sell, or purchase any shares of Seller’s stock;

 

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(c) Cause or permit any amendments to its Articles of Incorporation or bylaws
that would have an adverse effect on the Transaction;

(d) Enter into any commitment or transaction not in the Ordinary Course of
Business;

(e) Terminate any employees or grant severance or termination pay to any
Contractor;

(f) Enter into any transaction with its officers, directors or shareholders or
their Affiliates;

(g) Amend or otherwise modify the material terms of any Seller Contract or
Governmental Approval;

(h) Transfer to any Person any rights to Seller’s Intellectual Property Rights;

(i) Sell, lease, license or otherwise dispose of any of Seller’s assets outside
of the Ordinary Course of Business;

(j) Commence a Proceeding other than for the routine collection of bills;

(k) Acquire or agree to acquire by merging, consolidating or entering into a
joint venture arrangement with, or by purchasing a substantial portion of the
assets of, or by any other manner, any business or any corporation, partnership,
association or other business organization or division thereof, or otherwise
acquire or agree to acquire any assets which are material, individually or in
the aggregate, to the financial condition, results of operations, business or
properties of Seller taken as a whole;

(l) Adopt, amend or terminate any employee benefit plans, programs, policies or
other arrangements, or enter into any employment contract, pay any special bonus
or special remuneration to any director, employee or consultant, or increase the
salaries or wage rates of its employees other than pursuant to scheduled
employee reviews under Seller’s normal employee review cycle, or in connection
with the hiring of employees other than officers in the Ordinary Course of
Business, in all cases consistent with past practice;

(m) Incur any indebtedness for borrowed money or guarantee any such indebtedness
or issue or sell any debt securities or guarantee any debt securities of others;

(n) Revalue any of its assets, including writing down the value of inventory or
writing off notes or accounts receivable other than in the Ordinary Course of
Business and consistent with past practice;

(o) Pay, discharge or satisfy any Liability, other than the payment, discharge
or satisfaction of obligations in the Ordinary Course of Business or Liabilities
reflected or reserved against in Seller’s Financial Statements;

 

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(p) Make any material tax election other than in the Ordinary Course of Business
and consistent with past practice, change any material tax election, adopt any
material tax accounting method other than in the Ordinary Course of Business and
consistent with past practice, change any material tax accounting method, enter
into any closing agreement, or settle any Tax claim or assessment applicable to
any Tax claim or assessment;

(q) Fail to pay or otherwise satisfy its monetary obligations as they become
due, except such as are being contested in good faith;

(r) Waive or commit to waive any rights with a value in excess of Ten Thousand
Dollars ($10,000), or forgive any indebtedness owed to Seller;

(s) Cancel, materially amend or renew any insurance policy other than in the
Ordinary Course of Business;

(t) Take any action or fail to take any action that would cause a Material
Adverse Effect; or

(u) Enter into any contract or agree, in writing or otherwise, to take any of
the actions described above in this Section 6.1, or any action that would make
any of its representations or warranties contained in this Agreement untrue or
incorrect in any material respect or prevent it from performing or cause it not
to perform its covenants hereunder.

6.2 No Solicitation. Until the earlier of (a) the Closing and (b) the
termination of this Agreement pursuant to its terms, Seller shall not, and
Seller shall cause its Representatives not to, directly or indirectly:
(i) initiate, solicit or encourage (including by way of furnishing information
regarding the Business or the Purchased Assets or Assumed Liabilities) any
inquiries, or make any statements to third parties, which may reasonably be
expected to lead to any proposal concerning the sale of Seller, the Business or
the Purchased Assets or Assumed Liabilities (whether by way of merger, purchase
of capital shares, purchase of assets or otherwise) (a “Competing Transaction”);
or (ii) hold any discussions or enter into any agreements with, or provide any
information or respond to, any third party concerning a potential Competing
Transaction or cooperate in any way with, agree to, assist or participate in,
solicit, consider, entertain, facilitate or encourage any effort or attempt by
any third party to do or seek any of the foregoing. If at any time prior to the
earlier of (x) the Closing and (y) the termination of this Agreement pursuant to
its terms, Seller is approached in any manner by a third party concerning a
Competing Transaction (a “Competing Party”), Seller shall promptly inform Buyer
regarding such contact and furnish Buyer with a copy of any inquiry or proposal,
or, if not in writing, a description thereof, including the name of such
Competing Party, and Seller shall keep Buyer informed of the status and details
of any future notices, requests, correspondence or communications related
thereto.

6.3 Cooperation; Financial Statements. Seller will use its best efforts, and
will cooperate with Buyer in all respects, to cause the consummation of the
Transaction in accordance with the terms and conditions hereof, including,
without limitation, providing, and directing its independent accounting firm to
provide, to Buyer all financial statements (including

 

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such firm’s unqualified audit opinion thereon) to the extent required to be
included in any report filed by Buyer under the Exchange Act, within the time
required for filing such report.

6.4 Restrictions on Seller Dissolution and Other Actions. Seller shall not
liquidate, dissolve, make any distribution of the proceeds received pursuant to
this Agreement, or enter into any proceeding relating to bankruptcy, insolvency,
liquidation or dissolution until the lapse of more than twelve (12) months after
the Closing Date (the “12 Month Period”). In addition, at all times during the
12 Month Period Seller shall: (a) promptly pay its Liabilities as they become
due; (b) maintain sufficient capital with which to continue its proposed
operations; and (c) maintain assets (calculated at fair market value) that
exceed its Liabilities.

ARTICLE 7. ADDITIONAL AGREEMENTS AND COVENANTS

7.1 Shareholder Vote. Seller shall promptly after the Effective Date and before
the Closing Date obtain the consent of its shareholders and shall take all
action required by California Law and its Articles of Incorporation and bylaws
for the purpose of approving this Agreement, the other Transaction Documents and
the consummation of the Transaction.

7.2 Certain Notifications. Seller shall give prompt notice to Buyer, and Buyer
shall give prompt notice to Seller, of: (a) the occurrence or non-occurrence of
any event, the occurrence or non-occurrence of which reasonably could be
expected to cause any representation or warranty of such party contained in this
Agreement to be untrue or inaccurate in any material respect at or prior to the
Closing Date; and (b) any failure of Seller or Buyer, as the case may be, to
comply with or satisfy any covenant, condition or agreement to be complied with
or satisfied by it hereunder; provided, that the delivery of any notice pursuant
to this Section 7.2 shall not limit or otherwise affect any remedies available
to the party receiving such notice.

7.3 Access to Information. On and after the Effective Date, Seller shall:
(a) give Buyer and its Representatives full access to Seller’s buildings,
offices, and other facilities, to Persons having business relationships with
Seller (including suppliers, licensees, customers and distributors), and to all
its books and records, whether located on their premises or at another location;
(b) permit Buyer to make such inspections as it may require; (c) cause its
officers to furnish Buyer with such financial, operating, technical and product
data and other information with respect to the Business and the assets of Seller
as it from time to time may request, including financial statements and
schedules required to be included in any report filed by Buyer pursuant to the
Exchange Act; (d) allow Buyer the opportunity to interview Seller’s employees
and other personnel and Affiliates; and (e) assist and cooperate with Buyer in
the development of integration plans for implementation by Buyer following the
Closing; provided, that no investigation pursuant to this Section 7.3 shall
affect or be deemed to modify any representation or warranty made by Seller or
Buyer herein.

7.4 Best Efforts. From the Effective Date until the Closing, each of Seller and
Buyer shall use their respective best efforts to cause to be fulfilled and
satisfied all of the other party’s conditions to Closing set forth in Article 8.

7.5 Consents. Seller will use best efforts to obtain prior to Closing all
Consents from Governmental Authorities or under any contracts or other
agreements as may be required in

 

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connection with the Transaction so as to preserve all rights of and benefits to
Seller thereunder. At the request of Seller, Buyer shall provide Seller with
such assistance and information as is reasonably requested by Seller to obtain
such Consents. Any costs incurred in obtaining the Consents shall be borne by
Seller.

7.6 Expenses. Whether or not the Transaction is consummated, except as otherwise
provided herein, all fees and expenses incurred in connection with the
Transaction including, without limitation, all legal, accounting, financial,
advisory, consulting and all other fees and expenses of third parties incurred
by a party in connection with the negotiation and effectuation of the terms and
conditions of this Agreement and the Transaction contemplated hereby, shall be
the obligation of the respective party incurring such fees and expenses.

7.7 Confidentiality. On and after the Effective Date, Seller will, and will
cause its Representatives to, hold in strict confidence, and not disclose to any
third party, without the prior written consent of Buyer, all confidential
information received by it in connection with the Transaction, except as may be
required by applicable Legal Requirements or as otherwise contemplated herein.

7.8 Non-Disparagement. On and after the Effective Date, Seller will not (and
will cause its Representatives not to): (a) make any negative statement or
communication regarding the Business, Parent or Buyer or any of their respective
Representatives or Contractors with the intent to harm the Business, Parent or
Buyer; or (b) make any derogatory or disparaging statement or communication
regarding the Business, Parent or Buyer or any of their respective
Representatives or Contractors.

7.9 Employees.

(a) Transferred Contractors. As of the Closing Date, Parent or Buyer will extend
offers of employment pursuant to the terms and conditions of the Offer Letters
to the Offerees. Offerees who, on or immediately after the Closing Date, accept
Parent or Buyer’s offer of employment and become employees of Parent or Buyer
shall be referred to herein as the “Transferred Contractors.” Seller
acknowledges that (i) to the fullest extent permitted by Law, Parent and Buyer
will have no obligation to offer employment to any individual who is not a
Transferred Contractor and (ii) it is possible that certain Offerees will not
accept Parent’s or Buyer’s offer of employment, and Seller agrees that Parent
and Buyer shall have no Liability (except as contemplated in Section 1.3)
whatsoever with respect to any Offeree who is offered employment but who does
not become a Transferred Contractor. Parent and Buyer shall not assume any
Liability whatsoever and Seller shall retain, bear and discharge all Liabilities
with respect to all current and former Contractors who do not become Transferred
Contractors.

(b) Workers’ Compensation. Parent and Buyer shall have no Liability whatsoever
and Seller shall retain, bear and discharge all Liabilities (whether absolute,
contingent or otherwise) relating to workers’ compensation claims made by any
(i) Transferred Contractor filed or presented before the Closing Date,
(ii) Transferred Contractor filed or presented after the Closing Date but
relating to claims and/or injuries arising before the Closing Date and
(iii) current or former Contractor of Seller who does not become a Transferred
Contractor.

 

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(c) Mutual Cooperation. Seller shall provide promptly to Buyer, at Buyer’s
request, and to the extent legally permissible, any information or copies of
personnel records (including addresses, dates of birth, dates of hire and
dependent information) relating to the Offerees or relating to the service of
the Offerees with Seller prior to the Closing Date. Seller, Parent and Buyer
shall each cooperate with the other and shall provide to the other such
documentation, information and assistance as is reasonably necessary to effect
the provisions of this Section 7.9.

7.10 Bulk Sales Law Waiver. Subject to Section 10.2, each party hereto agrees to
waive compliance by the other with any applicable bulk sales Legal Requirements
in connection with the Transaction.

7.11 Certificate of Amendment. Seller shall prepare for filing with the
Secretary of State of California a Certificate of Amendment to Seller’s Articles
of Incorporation, changing its corporate name to one dissimilar to “Innercool”
or any of Seller’s Trademarks.

7.12 Financial Statements.

(a) From and after the Closing, Seller shall assist Buyer in preparing and
delivering to Parent and Buyer, or causing to be prepared and delivered to
Parent and Buyer, the historical financial information of the Business which
Parent reasonably determines is required to be audited and filed by Parent with
the SEC pursuant to Item 9 of the Current Report on Form 8-K as contemplated by
the Exchange Act, and the rules and regulations promulgated thereunder as such
required financial information is modified by any relief granted to Parent by
the SEC with respect to the scope of financial information required to be filed
(the “Historical Financial Information”). Seller shall use best efforts to
ensure that the Historical Financial Information will be prepared in accordance
with GAAP as of the dates and for the periods indicated. Seller will also
cooperate in all reasonable respects with Parent’s auditors (the “Audit
Accountants”) in connection with this audit of the Historical Financial
Information, including, without limitation, the preparation, execution and
delivery of management representation letters by Seller’s Contractors reasonably
necessary to complete such audit.

(b) Seller will cooperate in all reasonable respects with Parent in Parent’s
preparation of the pro forma financial information relating to the acquisition
of the Business to the extent Parent reasonably determines such pro forma
financial information is required to be filed by Parent with the SEC pursuant to
Item 9 of the Current Report on Form 8-K as contemplated by the Exchange Act and
the rules and regulations promulgated thereunder (the “Pro Forma Information,”
and together with the Historical Financial Information, the “Required
Information”), including, without limitation, providing such financial and other
information, records and documents relating to the Business as may be necessary
to prepare such Pro Forma Information, providing access to such of Seller’s
personnel, advisors and accountants as may be necessary to prepare such Pro
Forma Information, and generally cooperating with Parent’s reasonable requests
in order to facilitate such preparation.

(c) The parties acknowledge that any Parent filings under the Securities Act
that require the Required Information also necessitate timely cooperation,
including, without limitation, cooperation in the performance of incremental
audit procedures necessary, by Seller

 

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to facilitate the execution and filing of an accountant’s consent. Seller
covenants and agrees to promptly cooperate from and after the Closing Date to
facilitate such actions and will use commercially reasonable efforts to
facilitate the Audit Accountant’s performance of such procedures.

ARTICLE 8. CONDITIONS TO CLOSING

8.1 Conditions Precedent to Obligations of Parent and Buyer. The obligations of
Parent and Buyer to consummate the Transaction are subject to the satisfaction
of the following conditions, unless waived by Parent and Buyer in writing:

(a) Representations and Warranties. The representations and warranties of Seller
set forth in this Agreement, or in any written statement or certificate that
shall be delivered to Buyer by Seller under this Agreement, without regard to
qualifications therein as to “materiality” or “Material Adverse Effect,” shall
be true and correct on and as of the date made and as of the Closing Date as if
made on the date thereof (except to the extent such representation or warranty
specifies an earlier date).

(b) Performance of Obligations. Seller shall have performed in all material
respects all obligations and covenants required to be performed by it under this
Agreement and any other agreement or document entered into in connection
herewith prior to the Closing Date.

(c) No Material Adverse Change. There shall have been no material adverse change
in the assets, Liabilities, business, financial condition or prospects of Seller
from the Effective Date through the Closing Date, and Seller shall not have
suffered any material loss or damage to any of its assets, whether or not
covered by insurance, since the Interim Balance Sheet Date.

(d) Shareholder Consent. Seller shall have obtained the consent of its
shareholders approving this Agreement, the Transaction Documents and the
consummation of the Transaction.

(e) Legal Requirements. No Legal Requirement shall be in effect which prohibits
or materially restricts the consummation of the Transaction at the Closing, or
which otherwise adversely affects in any material respect the right or ability
of Buyer to own, operate or control the Business or the Purchased Assets, in
whole or material part, and no Proceeding is pending or threatened in writing by
a Governmental Authority which is reasonably likely to result in a Legal
Requirement having such an effect.

(f) Indebtedness. Seller shall deliver to Buyer any and all documentation
reasonably requested by Buyer evidencing the discharge, satisfaction and
repayment in full of any and all outstanding indebtedness of Seller. All credit
cards issued by Seller to Seller’s Contractors shall have been cancelled and
delivered to Buyer.

(g) Closing Deliveries. Seller shall have delivered to Buyer all of the closing
documents and agreements set forth in Sections 3.2 and 3.4.

 

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8.2 Conditions Precedent to Obligations of Seller. The obligations of Seller to
consummate the Transaction are subject to the satisfaction of the following
conditions, unless waived by Seller in writing:

(a) Representations and Warranties. The representations and warranties of Parent
and Buyer set forth in this Agreement, or in any written statement or
certificate that shall be delivered to Seller by Parent and Buyer under this
Agreement, without regard to qualifications therein as to “materiality” or
“Material Adverse Effect,” shall be true and correct on and as of the date made
and as of the Closing Date as if made on the date thereof (except to the extent
such representation or warranty specifies an earlier date).

(b) Performance of Obligations. Parent and Buyer shall have performed in all
material respects all obligations and covenants required to be performed by them
under this Agreement and any other agreement or document entered into in
connection herewith prior to the Closing Date.

(c) Deliveries. Buyer shall have delivered to Seller all of the closing
documents and agreements set forth Sections 3.3 and 3.4.

ARTICLE 9. TERMINATION

9.1 Circumstances for Termination. At any time prior to the Closing, this
Agreement may be terminated by written notice:

(a) by the mutual written consent of Buyer and Seller;

(b) by either Buyer or Seller if the other party is in breach of any provision
of this Agreement, which breach would give rise to a failure to satisfy any
condition set forth in Section 8.1(a) and (b), and Section 8.2(a) and (b),
provided, that the terminating party is not, on the date of termination, in
material breach of any material provision of this Agreement;

(c) by either Buyer or Seller if the Closing has not occurred on or prior to
March 13, 2006 (the “Outside Closing Date”) for any reason, provided, that the
terminating party shall not have breached its obligations hereunder in any
manner that shall have contributed to the failure to consummate the Closing by
such date; and

(d) by either Buyer or Seller if satisfaction of a closing condition of the
terminating party in Article 8 is impossible, provided, that the terminating
party is not, on the date of termination, in material breach of any material
provision of this Agreement.

9.2 Effect of Termination. If this Agreement is terminated in accordance with
Section 9.1, all obligations of the parties hereunder shall terminate, except
for the obligations set forth in this Article 9 and Sections 7.7, 7.8 and
Article 11; provided, that such termination shall not release either party from
any Liability that has already accrued as of the effective date of such
termination, and shall not constitute a waiver or release of, or otherwise be
deemed to prejudice or adversely affect, any rights, remedies or claims, whether
for damages or otherwise, which a party may have hereunder, at law, equity or
otherwise or which may arise out of or in connection with such termination.

 

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ARTICLE 10. INDEMNIFICATION

10.1 Survival of Representations and Warranties

(a) All representations and warranties of Seller in this Agreement or any other
Transaction Document shall survive the Closing until the date that is eighteen
(18) months following the Closing Date, at which time the remaining Closing
Escrow Shares will be released to Seller (the “Escrow Release Date”); provided,
that any claim for indemnification based upon a breach of any such
representation or warranty and asserted prior to the Escrow Release Date by
written notice in accordance with Section 10.3 shall survive until final
resolution of such claim.

(b) The representations and warranties contained in this Agreement (and any
right to indemnification for breach thereof) shall not be affected by any
investigation, verification or examination by Buyer.

10.2 Indemnification Obligation. Subject to the limitations set forth in this
Article 10, Seller (the “Indemnitor”) shall indemnify, defend and hold harmless
Parent, Buyer and their respective Representatives (collectively, the
“Indemnitee”) from and against any and all Damages (whether or not involving a
third-party claim) arising out of, relating to or resulting from: (a) any breach
of a representation or warranty of Seller contained in this Agreement or in any
other Transaction Document; (b) fraud or an intentional misrepresentation by
Seller of any of their representations or warranties in this Agreement, any
Transaction Document, or in any Schedule, Exhibit, certificate, financial
statement, agreement or other instrument delivered under or in connection with
this Agreement; (c) any breach of a covenant of Seller contained in this
Agreement or in any other Transaction Document; (d) any Excluded Asset or
Excluded Liability; (e) the ownership or operation of Seller prior to the
Closing; (f) any claims or obligations (including without limitation, claims for
personal injury, death or property damage) relating to, resulting from or in
connection with any products that are sold by Seller prior the Closing; (g) any
judgment, claim, arbitral award or settlement in connection with any disputing
shareholder of Seller relating to the consummation of the Transaction; (h) any
and all Taxes (or the nonpayment thereof except to the extent set forth on the
Seller Disclosure Schedule) of Seller; (i) any and all Taxes of any Person
(other than Seller) imposed on Parent or Buyer which relate to an event or
transaction occurring before the Closing or in connection with the Closing
(except to the extent set forth on the Seller Disclosure Schedule) imposed on
Buyer or Parent; (j) the approval of this Agreement by Seller and its Board of
Directors and shareholders; (k) Seller’s approval, performance and obligations
of and under the BSC Agreement; and/or (l) any noncompliance with applicable
bulk sales or fraudulent transfer Legal Requirements in connection with the
Transaction.

10.3 Procedures for Indemnification.

(a) The Indemnitee shall give written notice (the “Indemnification Notice”) of
any Damages or the commencement of any Proceeding by a third party with respect
to any matter referred to in Section 10.2 thereof to the Indemnitor and the
Escrow Agent, which Indemnification Notice shall include a description of the
Damages or Proceeding, the amount thereof (if known and quantifiable) and the
basis for the Damages or Proceeding; provided, that

 

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failure of the Indemnitee to give the Indemnification Notice as provided herein
shall not relieve the Indemnitor of its obligations hereunder.

(b) If the Indemnitor does not object to the Damages within twenty (20) Business
Days of Indemnitee’s delivery of the Indemnification Notice to Indemnitor, after
Indemnitee’s delivery of a written notice of cancellation (the “Cancellation
Notice”) to the Indemnitor and the Escrow Agent, the Indemnitee shall be
entitled to immediately offset the aggregate amount of Damages set forth in the
Indemnification Notice against the Closing Escrow Shares (whether by means of
the cancellation of any shares of Common Stock issuable to Indemnitor or
otherwise). Indemnitor may object to the claim on the Indemnification Notice by
delivery to Indemnitee (with a copy to the Escrow Agent) of such objection in
writing within twenty (20) Business Days of Indemnitee’s delivery of the
Indemnification Notice to Indemnitor. In case Indemnitor shall so object in
writing to any claim or claims by Indemnitee made in any Indemnification Notice,
Indemnitee shall have thirty (30) days after receipt of such objection to
respond in a written statement that describes the nature of such objection
and/or Indemnitor’s assessment of the amount of the Damages. If after such
thirty (30) day period there remains a dispute as to any claims, Indemnitee and
Indemnitor shall attempt in good faith for thirty (30) days to agree upon the
rights of the respective parties with respect to each of such claims. If no
agreement can be reached after good faith negotiation between the parties
pursuant to this Section, then the parties shall subject such dispute to the
dispute resolution procedures set forth in Section 11.13.

(c) Indemnitor shall be entitled to participate in the defense of such action,
lawsuit, proceeding, investigation or other claim giving rise to an Indemnitee’s
claim for indemnification at such Indemnitor’s expense, and at its option
(subject to the limitations set forth below) shall be entitled to assume the
defense thereof by appointing a nationally recognized and reputable counsel
reasonably acceptable to the Indemnitee to be the lead counsel in connection
with such defense; provided that:

(i) the Indemnitee shall be entitled to participate in the defense of such claim
and to employ counsel of its choice for such purpose; provided that the fees and
expenses of such separate counsel shall be borne by the Indemnitee (other than
any fees and expenses of such separate counsel that are incurred prior to the
date the Indemnitor effectively assumes control of such defense which,
notwithstanding the foregoing, shall be borne by the Indemnitor, and except that
the Indemnitor shall pay all of the fees and expenses of such separate counsel
if the Indemnitee has been advised by counsel that a reasonable likelihood
exists of a conflict of interest between the Indemnitor and the Indemnitee);

(ii) the Indemnitor shall not be entitled to assume control of such defense
(unless otherwise agreed to in writing by the Indemnitee) and shall pay the fees
and expenses of counsel retained by the Indemnitee if: (A) the claim for
indemnification relates to or arises in connection with any criminal or
quasi-criminal proceeding, action, indictment, allegation or investigation;
(B) the Indemnitee reasonably believes an adverse determination with respect to
the action, lawsuit, investigation, proceeding or other claim giving rise to
such claim for indemnification would be detrimental to or injure the
Indemnitee’s reputation or future business prospects; (C) the claim seeks an
injunction or equitable relief against the Indemnitee; (D) the Indemnitee has
been advised by counsel that a reasonable likelihood exists of a conflict

 

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of interest between the Indemnitor and the Indemnitee; (E) the claim involves
environmental matters in which case the Indemnitee shall have sole control and
management authority over the resolution of such claim (including hiring legal
counsel and environmental consultants, conducting environmental investigations
and cleanups, negotiating with governmental agencies and third parties and
defending or settling claims and actions); provided that the Indemnitee shall
keep the Indemnitor apprised of any major developments relating to any
environmental claim; (F) upon petition by the Indemnitee, the appropriate court
rules that the Indemnitor failed or is failing to vigorously prosecute or defend
such claim; or (G) the Indemnitee reasonably believes that the Damages relating
to the claim could exceed the maximum amount that such Indemnitee could then be
entitled to recover under the applicable provisions of Article 10; and

(iii) if the Indemnitor shall control the defense of any such claim, the
Indemnitor shall obtain the prior written consent of the Indemnitee before
entering into any settlement of a claim or ceasing to defend such claim if,
pursuant to or as a result of such settlement or cessation, injunctive or other
equitable relief will be imposed against the Indemnitee or if such settlement
does not expressly and unconditionally release the Indemnitee from all
Liabilities with respect to such claim, without prejudice.

10.4 Limitations on Indemnification. Notwithstanding anything herein to the
contrary, Seller shall not be obligated to indemnify Parent and Buyer under this
Article 10 unless the aggregate of all Damages to Parent and Buyer collectively
exceed One Hundred Thousand Dollars ($100,000) (the “Seller’s Basket”), in which
case Parent and Buyer shall be entitled to recover all Damages, including the
amount equal to the Seller’s Basket. The right to indemnification, payment of
Damages or other remedy based on the representations, warranties, covenants and
obligations of the Indemnitor contained herein will not be affected by any
investigation or diligence conducted by the Indemnitee with respect to the
accuracy or inaccuracy of or compliance with, any such representation, warranty,
covenant or obligation. In determining the amount of any indemnity, there shall
be taken into account any insurance proceeds or other similar recovery or offset
realized, directly or indirectly, by the party to be indemnified.

10.5 Remedies. The indemnification obligations of Seller under Sections 10.2(a)
and (c) and the repayment of any Damages by Seller to Parent and Buyer under
Sections 10.2(a) and (c) may be satisfied by a Purchase Price adjustment to be
accomplished by the delivery to Buyer of Closing Escrow Shares, and any tendered
shares of Common Stock shall have an aggregate Stated Price (calculated as of
the Indemnification Determination Date) equal to the Damages. In no event shall
Seller have any liability pursuant to this Agreement, including this Article 10,
beyond its obligation to fulfill its indemnity obligations hereunder by
delivering, in certain circumstances and in accordance with this Article 10, a
number of shares not to exceed, in the aggregate, the number of Closing Escrow
Shares; provided, however, that Seller’s limitation of liability pursuant to
this Section 10.5 shall not apply during the twelve (12) month period following
the Closing Date to Seller’s breach of any representation, warranty or covenant
set forth in Sections 4.3(b), 4.5(c), 4.12(a), 4.14 or 7.12 of this Agreement.

 

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10.6 Allocation of Taxes to the Pre-Closing Period. For purposes of determining
under this Agreement whether a Tax Liability shall be assigned to a Pre-Closing
Period or a Post-Closing Period, the following principles shall apply.

(a) In the case of Taxes arising in a taxable period relating to the Business
that includes, but does not end on, the Closing Date, except as provided in
paragraph (b) below, the allocation of such Taxes between a Pre-Closing Period
and a Post-Closing Period shall be made on the basis of an interim closing of
the books as of the end of the Closing Date.

(b) In the case of any Taxes that are payable for a taxable period that
includes, but does not end on, the Closing Date, for purposes of this Agreement
the portion of such Tax which relates to the Pre-Closing Period included in such
taxable period shall (i) except as provided in (ii) and (iii) below, to the
extent feasible, be determined on a specific identification basis, according to
the date of the event or transaction giving rise to the Tax, (ii) in the case of
any Taxes that are periodically assessed ad valorem Taxes and Taxes not
otherwise reasonably allocable to specific transactions or events, other than
Taxes based upon or related to income or receipts, or franchise Taxes, be deemed
to be the amount of such Tax for the entire taxable period multiplied by a
fraction, the numerator of which is the number of days in the taxable period
ending on the Closing Date, and the denominator of which is the number of days
in the entire taxable period, and (iii) in the case of any Tax based upon or
related to income or receipts, or franchise Taxes, be deemed equal to the amount
which would be payable if the relevant taxable period ended as of the end of the
Closing Date. All determinations necessary to give effect to the foregoing
allocations shall be made in a manner consistent with the prior practice of the
Seller.

(c) The party paying any Tax for a period that includes but does not end on the
Closing Date shall be entitled to payment from the other party with respect to
the Taxes allocated to that other party under Section 10.6. Such payment shall
be made in cash within ten (10) days of a written demand therefor, which demand
shall not be made more than fifteen (15) days prior to the due date of such Tax.

ARTICLE 11. MISCELLANEOUS PROVISIONS

11.1 Amendments and Waivers. This Agreement may not be amended, supplemented or
modified, except by an agreement in writing signed by each of the parties.
Either party may waive compliance by the other party with any term or provision
of this Agreement; provided, that such waiver shall not operate as a waiver of,
or estoppel with respect to, any other or subsequent failure. No waiver shall be
effective unless it is in writing and is signed by the party asserted to have
granted such waiver.

11.2 Notices. All notices, requests, demands and other communications required
or permitted under this Agreement shall be in writing and shall be deemed to
have been duly given, made and received (a) when delivered personally or by
telecopy, (b) one (1) day following the day when deposited with a reputable,
established overnight courier service for delivery to the intended addressee, or
(c) three (3) days following the day when deposited with the United States
Postal Service as first class, registered or certified mail, postage prepaid and
addressed as set forth below:

 

If to Parent or Buyer:

   Cardium Therapeutics, Inc.    3611 Valley Center Drive, Suite 525    San
Diego, California 92130   

Attention: President and CEO

  

Telephone No.: (858) 436-1000

  

Facsimile No.: (858) 436-1011

 

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With a copy, which shall not constitute notice, given in the manner prescribed
above, to:

 

   Morrison & Foerster LLP    12531 High Bluff Drive, Suite 100    San Diego,
California, 92130-2040    Attn: John A. de Groot, Esq.   

Telephone No.: (858) 720-5100

  

Facsimile No.: (858) 720-5125

If to Seller:    Innercool Therapies, Inc.    3931 Sorrento Valley Blvd.    San
Diego, California 92121    Attention: President and CEO    Telephone No.:
(858) 677-6390    Facsimile No.: (858) 677-6391

With a copy, which shall not constitute notice, given in the manner prescribed
above, to:

 

   Heller Ehrman LLP    4350 La Jolla Village Drive 7th Floor    San Diego, CA
92122-1246    Attention: Michael S. Kagnoff, Esq.    Telephone No.:
(858) 450-5729    Facsimile No.: (858) 450-8499

Any party may alter its notice address by notifying the other parties of such
change of address in conformity with the provisions of this Section.

11.3 Governing Law. This Agreement is to be construed in accordance with and
governed by the internal laws of the State of California (as permitted by
Section 1646.5 of the California Civil Code or any similar successor provision)
or any similar successor provision, without giving effect to any choice of law
rule that would cause the application of the laws of any jurisdiction other than
the internal laws of the State of California to the rights and duties of the
parties.

11.4 Exhibits and Schedules. All Exhibits and Schedules attached hereto are
hereby incorporated by reference into, and made a part of, this Agreement.

11.5 Assignments Prohibited; Successors and Assigns. Seller shall not assign, or
suffer or permit an assignment (by operation of law or otherwise) of, its rights
or obligations under or interest in this Agreement without the prior written
consent of Buyer. Any purported

 

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assignment or other disposition by Seller, except as permitted herein, shall be
null and void. Buyer may assign all or any portion of this Agreement without
Seller’s prior written consent.

11.6 No Third-Party Beneficiaries. The terms and provisions of this Agreement
are intended solely for the benefit of each party hereto and their respective
successors and permitted assigns, and the parties do not intend to confer
third-party beneficiary rights upon any other Person.

11.7 Counterparts. This Agreement may be executed (including, without
limitation, by facsimile signature) in one or more counterparts, with the same
effect as if the parties had signed the same document. Each counterpart so
executed shall be deemed to be an original, and all such counterparts shall be
construed together and shall constitute one agreement.

11.8 Severability. If any provision of this Agreement, or the application of any
such provision to any Person or set of circumstances, shall be determined to be
invalid, unlawful, void or unenforceable to any extent, the remainder of this
Agreement, and the application of such provision to Persons or circumstances
other than those as to which it is determined to be invalid, unlawful, void or
unenforceable, shall not be impaired or otherwise affected and shall continue to
be valid and enforceable to the fullest extent permitted by law.

11.9 Entire Agreement. This Agreement and the Transaction Documents collectively
contain the entire understanding among the parties hereto with respect to the
subject matter hereof and supersedes all prior and contemporaneous agreements
and understandings, inducements or conditions, express or implied, oral or
written, including the Term Sheet, dated as of January 24, 2006, between the
parties. The parties intend that this Agreement, together with the Transaction
Documents referred to above, be the several, complete and exclusive embodiment
of their agreement, and that any evidence, oral or written, of a prior or
contemporaneous agreement that alters or modifies this Agreement shall not be
admissible in any proceeding concerning this Agreement. The express terms hereof
control and supersede any course of performance and/or usage of the trade
inconsistent with any of the terms hereof.

11.10 Interpretation. Unless otherwise indicated herein, with respect to any
reference made in this Agreement to a Section (or Article, Subsection,
Paragraph, Subparagraph or Clause), Exhibit or Schedule, such reference shall be
to a section (or article, subsection, paragraph, subparagraph or clause) of, or
an exhibit or schedule to, this Agreement. The table of contents and any
article, section, subsection, paragraph or subparagraph headings contained in
this Agreement and the recitals at the beginning of this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Whenever the words “include,” “includes” or
“including” are used in this Agreement, they shall be deemed, as the context
indicates, to be followed by the words “but (is/are) not limited to.” Words used
herein, regardless of the number and gender specifically used, shall be deemed
and construed to include any other number, singular or plural, and any other
gender, masculine, feminine or neuter, as the context indicates is appropriate.
Where specific language is used to clarify or illustrate by example a general
statement contained herein, such specific language shall not be deemed to
modify, limit or restrict the construction of the general statement which is
being clarified or illustrated.

 

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11.11 Construction. The construction of this Agreement shall not take into
consideration the party who drafted or whose representative drafted any portion
of this Agreement, and no canon of construction shall be applied that resolves
ambiguities against the drafter of a document. The parties are sophisticated and
have been represented by lawyers throughout this Transaction who have carefully
negotiated the provisions hereof. As a consequence, the parties do not believe
the presumption of California Civil Code Section 1654 and similar laws or rules
relating to the interpretation of contracts against the drafter of any
particular clause should be applied in this case and therefore waive its
effects.

11.12 Expenses of the Parties. Subject to provisions contained herein relating
to recovery of fees in connection with legal actions or proceedings, each party
shall bear the expenses incurred by such party in connection with the
negotiation and execution of this Agreement and the consummation of the
Transaction, except that the expenses of Seller shall be deemed to be expenses
of and borne by the shareholders.

11.13 Jurisdiction. Any action or proceeding seeking to enforce any provision
of, or based on any right arising out of, this Agreement may be brought against
any of the parties only in the courts of the State of California, County of San
Diego, or, if it has or can acquire the necessary jurisdiction, in the United
States District Court for the Southern District of California. Each of the
parties consents to the exclusive jurisdiction of such courts (and the
appropriate appellate courts) in any such action or proceeding and waives any
objection to venue laid therein. Process in any action or proceeding referred to
in the preceding sentence may be served on any party anywhere in the world.

11.14 Recovery of Fees by Prevailing Party. If any legal action, including,
without limitation, an action for arbitration or injunctive relief, is brought
relating to this Agreement or the breach or alleged breach hereof, the
prevailing party in any final judgment or arbitration award, or the
non-dismissing party in the event of a voluntary dismissal by the party
instituting the action, shall be entitled to the full amount of all reasonable
expenses, including all court costs, arbitration fees and actual attorneys’ fees
paid or incurred in good faith.

11.15 Further Assurances. Seller agrees to (a) furnish upon request to Parent
and Buyer such further information, (b) execute and deliver to Parent and Buyer
such other documents, and (c) do such other acts and things, all Parent and
Buyer may reasonably request for the purpose of carrying out the intent of this
Agreement and the Transaction.

11.16 Time of the Essence. With regard to all dates and time periods set forth
or referred to in this Agreement, time is of the essence.

11.17 Confidentiality. Except as otherwise set forth herein, Seller acknowledges
that the Transaction is of a confidential nature and shall not be disclosed
except to consultants, advisors and Affiliates, or as required by law. Seller
shall not make any public disclosure of the terms of this Agreement, except as
required by law or as otherwise expressly permitted herein.

[Signatures Follow On a Separate Page]

 

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IN WITNESS WHEREOF, each of the parties has caused this Asset Purchase Agreement
to be executed on its behalf by their respective officers thereunto duly
authorized all as of the Effective Date.

 

“Seller”

Innercool Therapies, Inc., a California corporation

By:   

/s/ Michael Magers

Name:   

Michael Magers

Title:   

President

“Buyer”

Innercool Therapies, Inc., a Delaware corporation

By:   

/s/ Tyler M. Dylan

Name:   

Tyler M. Dylan

Title:   

Chief Business Officer

“Parent”

Cardium Therapeutics, Inc.

By:   

/s/ Tyler M. Dylan

Name:   

Tyler M. Dylan

Title:   

Chief Business Officer

[SIGNATURE PAGE TO ASSET PURCHASE AGREEMENT]

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EXHIBIT A

CERTAIN DEFINITIONS

“12 Month Period” shall have the meaning specified in Section 6.4.

“Affiliate” shall mean any member of the immediate family (including spouse,
brother, sister, descendant, ancestor or in-law) of any officer, director or
holder of five percent (5%) or more of the outstanding equity interests of
Seller or any corporation, partnership, trust or other entity in which Seller or
any such family member has a five percent (5%) or greater interest or is a
director, officer, partner or trustee. The term Affiliate shall also include any
entity which controls, is controlled by, is under common control with any of the
individuals or entities described in the preceding sentence.

“Agreement” shall mean the Asset Purchase Agreement to which this Exhibit A is
attached (including the Seller Disclosure Schedule and all other schedules and
exhibits attached hereto), as amended from time to time.

“Allocation Schedule” shall have the meaning specified in Section 2.5(a).

“Applicable Regulatory Laws” shall have the meaning specified in Section 4.31.

“Approvals” shall have the meaning specified in Section 4.28.

“Assignment and Assumption” shall have the meaning specified in Section 3.4(a).

“Assumed Liabilities” shall have the meaning specified in Section 1.3.

“Audit Accountants” shall have the meaning specified in Section 7.12.

“Books and Records” shall have the meaning specified in Section 1.1(m).

“BSC” means Boston Scientific Corporation.

“BSC Agreement” means that certain Securities Purchase Agreement by and between
Seller and BSC, dated as of April 12, 2004 together with all agreements that
were entered into in connection therewith (including, without limitation, the
Agreement and Plan of Merger and the Distribution Agreement) and together with
all amendments, whether written or oral, thereto and including any rights that
BSC may have as a holder of Seller’s Preferred Stock under Seller’s current
Articles of Incorporation or otherwise.

“Business” shall have the meaning set forth in the first Recital.

“Business Day” means any day other than (a) a Saturday or a Sunday or (b) a day
on which banking and savings and loan institutions are authorized or required by
law to be closed.

 

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“Buyer” shall have the meaning set forth in the Preamble.

“Buyer Disclosure Schedule” shall have the meaning specified in Article 5.

“Calendar Year” shall mean one of the following periods: (i) the period
beginning on the Closing Date and ending December 31, 2006; (ii) the period
beginning on January 1, 2007 and ending December 31, 2007; (iii) the period
beginning on January 1, 2008 and ending on December 31, 2008; (iv) the period
beginning on January 1, 2009 and ending on December 31, 2009; (v) the period
beginning on January 1, 2010 and ending on December 31, 2010; or (vi) the period
beginning on January 1, 2011 and ending on December 31, 2011.

“Cancellation Notice” shall have the meaning specified in Section 10.3(b).

“Closing” shall have the meaning specified in Section 3.1.

“Closing Date” shall have the meaning specified in Section 3.1.

“Closing Escrow Shares” shall have the meaning specified in Section 2.1(c).

“Closing Shares” shall have the meaning specified in Section 2.1(b).

“Code” shall mean the Internal Revenue Code of 1986, as amended.

“Common Stock” shall mean Parent’s common stock, par value $0.0001 per share.

“Competing Party” shall have the meaning specified in Section 6.2.

“Competing Transaction” shall have the meaning specified in Section 6.2.

“Confidential Information” shall mean all Trade Secrets and other confidential
and/or proprietary information of a Person, including information derived from
reports, investigations, research, work in progress, codes, marketing and sales
programs, financial projections, cost summaries, pricing formula, contract
analyses, financial information, projections, confidential filings with any
state or federal agency, and all other confidential concepts, methods of doing
business, ideas, materials or information prepared or performed for, by or on
behalf of such Person by its employees, officers, directors, agents,
representatives or consultants.

“Consent” shall mean any approval, consent, ratification, permission, waiver or
authorization (including any Governmental Approval).

“Contract” shall mean any agreement, contract, consensual obligation, promise,
understanding, arrangement, commitment or undertaking of any nature (whether
written or oral and whether express or implied), whether or not legally binding.

“Contractors” shall have the meaning specified in Section 4.16(a).

 

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“Copyright Assignment” shall have the meaning specified in Section 3.2(b).

“Copyrights” shall mean all copyrights, including in and to works of authorship
and all other rights corresponding thereto throughout the world, whether
published or unpublished, including rights to prepare, reproduce, perform,
display and distribute copyrighted works and copies, compilations and derivative
works thereof.

“Damages” shall mean and include any loss (including diminution in value),
damage, injury, decline in value, lost opportunity, Liability, claim, demand,
settlement, judgment, award, fine, penalty, Tax, fee (including any legal fee,
accounting fee, expert fee or advisory fee), charge, cost (including any cost of
investigation) or expense of any nature (including reasonable attorneys’ fees).

“Defined Benefit Plan” shall mean either a plan described in Section 3(35) of
ERISA or a plan subject to the minimum funding standards set forth in
Section 302 of ERISA and Section 412 of the Code.

“Deposits and Advances” shall have the meaning specified in Section 1.1(i).

“Domain Name” shall mean www.innercool.com and any other domain names relating
to the Business.

“Domain Name Assignment” shall have the meaning specified in Section 3.2(b).

“Earnout Amount” shall have the meaning specified in Section 2.1(d).

“Earnout Release Date” shall have the meaning specified in Section 2.3(c).

“Effective Date” shall have the meaning specified in the Preamble.

“Employment Agreements” shall have the meaning specified in Section 3.2(l).

“Encumbrance” shall mean any lien, pledge, hypothecation, charge, mortgage,
security interest, encumbrance, equity, trust, equitable interest, claim,
preference, right of possession, lease, tenancy, license, encroachment,
covenant, infringement, interference, Order, proxy, option, right of first
refusal, preemptive right, community property interest, legend, defect,
impediment, exception, reservation, limitation, impairment, imperfection of
title, condition or restriction of any nature (including any restriction on the
voting of any security, any restriction on the transfer of any security or other
asset, any restriction on the receipt of any income derived from any asset, any
restriction on the use of any asset and any restriction on the possession,
exercise or transfer of any other attribute of ownership of any asset).

“Entity” shall mean any corporation (including any non-profit corporation),
general partnership, limited partnership, limited liability partnership, joint
venture, estate, trust or company (including any limited liability company or
joint stock company).

 

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“Environmental Law” shall mean any environmental or health or safety-related
law, regulation, rule, ordinance, or by-law at the foreign, federal, state or
local level, whether existing as of the Effective Date, previously enforced, or
subsequently enacted.

“ERISA” shall mean the Employee Retirement Income Security Act of 1974, as
amended.

“Escrow” shall have the meaning specified in Section 2.2.

“Escrow Agent” shall have the meaning specified in Section 2.2.

“Escrow Agreement” shall have the meaning specified in Section 2.2.

“Escrow Amount” shall have the meaning specified in Section 2.1(e).

“Escrow Release Date” shall have the meaning specified in Section 10.1.

“Estoppel Letters” shall have the meaning specified in Section 3.2(e).

“Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.

“Excluded Assets” shall have the meaning specified in Section 1.2.

“Excluded Liabilities” shall have the meaning specified in Section 1.4.

“FDA” means the U.S. Food and Drug Administration.

“Financial Statements” shall have the meaning specified in Section 4.5(a).

“GAAP” means U.S. generally accepted accounting principles in effect on the date
on which they are to be applied pursuant to this Agreement, applied consistently
throughout the relevant periods.

“General Assignment and Bill of Sale” shall have the meaning specified in
Section 3.2(a).

“Governmental Approval” shall mean any: (a) permit, license, certificate,
concession, approval, consent, ratification, permission, clearance,
confirmation, exemption, waiver, franchise, certification, designation, rating,
registration, variance, qualification, accreditation or authorization issued,
granted, given or otherwise made available by or under the authority of any
Governmental Authority or pursuant to any Legal Requirement, including, without
limitation, the FDA; or (b) right under any Contract with any Governmental
Authority, including, without limitation, the FDA.

“Governmental Authority” shall mean any: (a) nation, principality, state,
commonwealth, province, territory, county, municipality, district or other
jurisdiction of any nature; (b) federal, state, local, municipal, foreign or
other government; (c) governmental or quasi governmental

 

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authority of any nature (including any governmental division, subdivision,
department, agency, bureau, branch, office, commission, council, board,
instrumentality, officer, official, representative, organization, unit, body or
Entity and any court or other tribunal), including, without limitation, the FDA;
(d) multinational organization or body; or (e) individual, Entity or body
exercising, or entitled to exercise, any executive, legislative, judicial,
administrative, regulatory, police, military or taxing or arbitral authority or
power of any nature.

“Historical Financial Information” shall have the meaning specified in
Section 7.12(a).

“Indemnification Determination Date” shall mean the date that the final amount
of the Damages are determined by the parties or a court of competent
jurisdiction pursuant to the indemnification procedures set forth in
Section 10.3.

“Indemnification Notice” shall have the meaning specified in Section 10.3(a).

“Indemnitee” shall have the meaning specified in Section 10.2.

“Indemnitor” shall have the meaning specified in Section 10.2.

“Independent Accounting Firm” shall mean an independent accounting firm of
international reputation mutually acceptable to Buyer and Seller.

“Insurance Policies” shall have the meaning specified in Section 4.11.

“Intellectual Property Rights” shall mean any or all rights in and to
intellectual property and intangible industrial property rights, including,
without limitation (a) Patents, Trade Secrets, Copyrights, Mask Works,
Trademarks and (b) any rights similar, corresponding or equivalent to any of the
foregoing anywhere in the world.

“Interest Rate” shall mean the prime rate as published in the Wall Street
Journal.

“Interim Balance Sheet” shall have the meaning specified in Section 4.5(a).

“Interim Balance Sheet Date” shall have the meaning specified in Section 4.5(a).

“Inventory” shall have the meaning specified in Section 1.1(b).

“IRS” means the Internal Revenue Service.

“Knowledge” An individual shall be deemed to have “Knowledge” of a particular
fact or other matter if: (a) such individual is actually aware of such fact or
other matter or (b) a prudent individual could be expected to discover or
otherwise become aware of such fact or other matter in the course of conducting
after due and diligent inquiry concerning the truth or existence of such fact or
other matter. Seller shall be deemed to have “Knowledge” of a particular fact or
other matter if any of its directors, officers or employees with the authority
to establish policy for

 

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Seller actually has knowledge of or should have been able to obtain knowledge of
such fact or other matter after due and diligent inquiry of Seller’s employees,
Representatives, advisors, attorneys and accountants.

“Leased Real Property” shall have the meaning set forth in Section 1.1(f).

“Legal Requirement” shall mean any federal, state, local, municipal, foreign or
other law, statute, legislation, constitution, principle of common law,
resolution, ordinance, code, Order, edict, decree, proclamation, treaty,
convention, rule, regulation, permit, ruling, directive, pronouncement,
requirement (licensing or otherwise), specification, determination, decision,
opinion or interpretation that is, has been or may in the future be issued,
enacted, adopted, passed, approved, promulgated, made, implemented or otherwise
put into effect by or under the authority of any Governmental Authority.

“Liability” shall mean any debt, obligation, duty or liability of any nature
(including any unknown, undisclosed, unmatured, unaccrued, unasserted,
contingent, indirect, conditional, implied, vicarious, derivative, joint,
several or secondary liability), regardless of whether such debt, obligation,
duty or liability would be required to be disclosed on a balance sheet prepared
in accordance with generally accepted accounting principles and regardless of
whether such debt, obligation, duty or liability is immediately due and payable.

“Machinery and Equipment” shall have the meaning specified in Section 1.1(c).

“Main Office Lease” shall have the meaning specified in Section 1.1(f).

“Mask Works” shall mean all mask works, mask work registrations and applications
therefor, and any equivalent or similar rights in semiconductor masks, layouts,
architectures or topology.

“Material Adverse Effect” means:

(a) with respect to Parent or Buyer, any event, change or effect that, when
taken individually or together with all other adverse events, changes and
effects, is or is reasonably likely to prevent or materially delay consummation
of the Transaction or otherwise to prevent Parent or Buyer or its respective
subsidiaries from performing its obligations under this Agreement; and

(b) with respect to Seller, any event, change or effect that, when taken
individually or together with all other adverse events, changes and effects, is
or is reasonably likely (i) to be materially adverse to the condition (financial
or otherwise), properties, assets (including Purchased Assets), Liabilities
(including Assumed Liabilities), business, operations, results of operations or
prospects of Seller or the Business or (ii) to prevent or materially delay
consummation of the Transaction or otherwise to prevent Seller from performing
its obligations under this Agreement.

“Material Contracts” shall have the meaning specified in Section 4.10.

 

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“Material Customer” shall have the meaning specified in Section 4.15(a).

“Material Distributor” shall have the meaning specified in Section 4.15(c).

“Material Supplier” shall have the meaning specified in Section 4.15(b).

“Multiemployer Plan” shall mean a plan described in Section 3(37) of ERISA.

“Net Sales” shall have the meaning specified in Section 2.3(a).

“Noncompetition Agreement” shall have the meaning specified in Section 3.2(j).

“Notice of Disagreement” shall have the meaning specified in Section 2.4(b).

“Offer Letters” shall have the meaning specified in Section 3.2(j).

“Offerees” shall have the meaning specified in Section 3.2(j).

“Order” shall mean any: (a) temporary, preliminary or permanent order, judgment,
injunction, edict, decree, ruling, pronouncement, determination, decision,
opinion, verdict, sentence, stipulation, subpoena, writ or award that is or has
been issued, made, entered, rendered or otherwise put into effect by or under
the authority of any court, administrative agency or other Governmental
Authority; or (b) Contract with any Governmental Authority that is or has been
entered into in connection with any Proceeding.

“Ordinary Course of Business” shall describe any action taken by a party if:
(a) such action is consistent with such party’s past practices and is taken in
the ordinary course of such party’s normal day to day operations; (b) such
action is taken in accordance with sound and prudent business practices;
(c) such action is not required to be authorized by such party’s shareholders,
board of directors or any committee thereof and does not require any other
separate or special authorization of any nature; and (d) such action is similar
in nature and magnitude to actions customarily taken, without any separate or
special authorization, in the ordinary course of the normal day to day
operations of other Entities that are engaged in businesses similar to such
party’s business.

“Outside Closing Date” shall have meaning specified in Section 9.1(c).

“Owned and Leased Vehicles” shall have the meaning specified in Section 1.1(d).

“Parent” shall have the meaning specified in the Preamble.

“Patent Assignment” shall have the meaning specified in Section 3.2(b).

“Patents” shall mean all United States and foreign patents and utility models
and applications therefor and all reissues, divisions, re-examinations,
renewals, extensions, provisionals,

 

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continuations and continuations-in-part thereof, and equivalent or similar
rights anywhere in the world in inventions and discoveries, including invention
disclosures related to the Business or any Purchased Assets or Assumed
Liabilities.

“Person” shall mean any individual, Entity or Governmental Authority.

“Personal Property” shall have the meaning specified in Section 1.1(e).

“Personal Property Leases” shall have the meaning specified in Section 1.1(g).

“Post-Closing Contracts” shall collectively refer to (a) Seller’s existing
Development and Supply Agreement with American Galvano, dated August 7, 2003;
(b) the Distribution Agreement between Seller and TaylorBryant, PTY. LTD., dated
as of September 1, 2003; (c) Seller’s Supplier Agreements with each of,
(i) Alpha Sensors, Inc., (ii) Exact Manufacturing, (iii) Extrusioneering, Inc.,
(iv) Micropump Inc., (v) Parter Medical, (vi) PHS, (vii) Putnam Plastics,
(viii) Servometer Corp., and (ix) Titan Scan; (d) Seller’s Agreement with
Occupational Services, Inc., dated May 5, 1999; and (e) Seller’s Consulting
agreements/arrangements with each of (i) Mark Wieczorek, (ii) Ken Stack,
(iii) Steve Reitzler, (iv) James Grove, (v) Sal Villegas, (vi) Adib Dauod,
(vii) Corey Magers, (viii) Tom Vyse, (ix) Bhupesh Mahendru, (x) Karen Liu,
(xi) Elizabeth Dutra, (xii) Carol Detamore, (xiii) Dawn Mills and (ix) James
Andrade.

“Post-Closing Period” shall mean any taxable period beginning after the close of
business on the Closing Date or, in the case of any Tax period which includes,
but does not begin, after the close of business on the Closing Date, the portion
of such period beginning after the close of business on the Closing Date.

“Pre-Closing Period” shall mean any taxable period ending on or before the close
of business on the Closing Date or, in the case of any taxable period which
includes, but does not end on, the Closing Date, the portion of such period up
to and including the Closing Date.

“Proceeding” shall mean any action, suit, litigation, arbitration, proceeding
(including any civil, criminal, administrative, investigative or appellate
proceeding), prosecution, contest, hearing, inquiry, inquest, audit, examination
or investigation that is, has been or may in the future be commenced, brought,
conducted or heard at law or in equity or before any Governmental Authority or
any arbitrator or arbitration panel.

“Pro Forma Information” shall have the meaning specified in Section 7.12(b).

“PTO” shall have the meaning specified in Section 4.14(g).

“Purchase Price” shall have the meaning specified in Section 2.1.

“Purchased Assets” shall have the meaning specified in Section 1.1.

“Real Property Leases” shall have the meaning specified in Section 1.1(f).

 

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“Receivables” shall have the meaning specified in Section 1.1(a).

“Registered Intellectual Property Rights” shall mean all United States,
international and foreign: (a) Patents, including applications therefor;
(b) registered Trademarks, applications to register Trademarks, including
intent-to-use applications, or other registrations or applications related to
Trademarks; (c) Copyright registrations and applications to register Copyrights;
(d) Mask Work registrations and applications to register Mask Works; and (e) any
other Intellectual Property Rights that is the subject of an application,
certificate, filing, registration or other document issued by, filed with, or
recorded by, any state, government or other public legal authority at any time.

“Regulatory Authorizations” shall have the meaning specified in Section 4.31.

“Releases” shall have the meaning specified in Section 3.2(l).

“Representatives” shall mean officers, directors, employees, attorneys,
accountants, advisors, agents, distributors, licensees, shareholders,
stockholders, subsidiaries and lenders of a party. In addition, all Affiliates
of Seller shall be deemed to be “Representatives” of Seller.

“Required Information” shall have the meaning specified in Section 7.12(b).

“Restricted Asset” shall have the meaning specified in Section 1.5(a).

“SEC” shall mean the Securities and Exchange Commission.

“Securities Act” shall mean the Securities Act of 1933, as amended.

“Seller” shall have the meaning set forth in the Preamble.

“Seller Benefit Plans” shall have the meaning specified in Section 4.17.

“Seller Claims” shall have the meaning specified in Section 1.1(l).

“Seller Contracts” shall have the meaning specified in Section 1.1(j).

“Seller Disclosure Schedule” shall have the meaning specified in Article 4.

“Seller Intellectual Property” shall mean all Intellectual Property Rights
related to the Business, the Purchased Assets or the Assumed Liabilities and
held by Seller, whether owned or controlled, licensed, owned or controlled by or
for, licensed to, or otherwise held by or for the benefit of Seller, including
the Seller Registered Intellectual Property Rights.

“Seller Products” shall mean all products and services manufactured, made,
designed, maintained, supported, developed, sold, licensed, marketed, or
otherwise distributed or provided (or planned or envisioned to be manufactured,
made, designed, maintained, supported,

 

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developed, sold, licensed, marketed, or otherwise distributed or provided) by or
for Seller (including all versions and releases thereof, whether already
distributed or provided, under development, planned or conceived, or otherwise),
together with any related materials, information or data, including, without
limitation, the names, numbers (e.g., part numbers) and packaging associated
with such products and services.

“Seller Registered Intellectual Property Rights” shall have the meaning
specified in Section 4.14(a).

“Seller’s Basket” shall have the meaning specified in Section 10.4.

“Shares” shall mean the Closing Shares, the Closing Escrow Shares and such
additional shares of Common Stock issuable as full and/or partial consideration
for the Earnout Amount in accordance with the terms and conditions of this
Agreement.

“Stated Price” shall mean the average of the closing sales price of one share of
Common Stock (rounded to the nearest ten thousandth of a dollar) on the
over-the-counter market, Pink Sheets or other national securities exchange or
automated interdealer quotation system on which the Common Stock is then listed
or quoted (as reported in the New York City edition of the Wall Street Journal
or, if not reported thereby, another nationally recognized source) for the ten
trading days preceding the Earnout Release Date or Indemnification Determination
Date, as the case may be.

“SurModics License” shall have the meaning specified in Section 1.1(j).

“Tax” (and, with correlative meaning, “Taxes” and “Taxable”) means any federal,
state, local, foreign or other tax or similar governmental fee, levy, assessment
or charge of any king whatsoever, including, without limitation, all income,
gross receipts, license, payroll, employment, excise, severance, stamp,
occupation, premium, windfall profits, environmental, customs duties, capital
stock, ad valorem, value added, inventory, franchise, profits, withholding,
social security (or similar), unemployment, disability, real property, personal
property, unclaimed property, escheat, sales, use, transfer, registration,
alternative or add-on minimum, or estimated tax, and including any interest,
penalty, or addition thereto, whether disputed or not, together with any
penalty, addition to tax or additional amount with respect thereto, and any
interest on any of the foregoing.

“Tax Authority” means any Governmental Authority responsible for the imposition,
assessment or collection of any Tax.

“Tax Return” shall mean any return, statement, declaration, notice, certificate
or other document that is or has been filed with or submitted to, or required to
be filed with or submitted to, any Governmental Authority in connection with the
determination, assessment, collection or payment of any Tax or in connection
with the administration, implementation or enforcement of or compliance with any
Legal Requirement related to any Tax.

 

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“Total Tax Consideration” shall have the meaning specified in Section 2.5(a).

“Trade Secrets” shall mean all trade secrets under applicable law and other
rights in know-how and confidential or proprietary information, processing,
manufacturing or marketing information, including new developments, inventions,
processes, ideas or other proprietary information that provide Seller with
advantages over competitors who do not know or use it and documentation thereof
(including related papers, blueprints, drawings, chemical compositions,
formulae, diaries, notebooks, specifications, designs, methods of manufacture
and data processing software, compilations of information) and all claims and
rights related thereto.

“Trademark Assignment” shall have the meaning specified in Section 3.2(b).

“Trademarks” shall mean any and all trademarks, service marks, logos, trade
names, corporate names, Internet domain names and addresses and general-use
e-mail addresses, and all goodwill associated therewith throughout the world.

“Transaction” shall mean, collectively, the transactions contemplated by this
Agreement.

“Transaction Documents” shall mean this Agreement, the Escrow Agreement, the
Noncompetition Agreement, the Offer Letters, the Employment Agreements, the
Releases, the Assignment and Assumption and all other agreements, certificates,
instruments, documents and writings delivered by Parent, Buyer and/or Seller in
connection with the Transaction.

“Transfer Taxes” shall mean all federal, state, local or foreign sales, use,
transfer, real property transfer, mortgage recording, stamp duty, value-added or
similar Taxes that may be imposed in connection with the transfer of Purchased
Assets to Buyer or assumption of Assumed Liabilities, pursuant to this
Agreement, together with any additions to Tax or penalties with respect thereto
and any interest on the foregoing.

“Transferred Contractors” shall have the meaning specified in Section 7.9(a).

“WARN Act” shall have the meaning specified in Section 4.16(e).

“Working Capital” as of a given date shall mean the amount calculated by
subtracting the current Liabilities of Seller included in the Assumed
Liabilities as of that date from the current assets of Seller included in the
Purchased Assets as of that date.

 

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EXHIBIT L

INVESTMENT REPRESENTATIONS AND WARRANTIES

1. Seller represents and warrants to Parent and Buyer that Seller understands
that the Shares have not been registered under the Securities Act or any state
securities laws. Seller also represents and warrants it understands that the
Shares are being offered and sold pursuant to exemptions from registration
contained in the Securities Act and state securities laws based in part upon
Seller’s representations contained in this Agreement and this Exhibit. Seller
further hereby represents and warrants as follows: (a) Seller is an “accredited
investor” as that term is defined in Regulation D under the Securities Act; and
(b) Seller’s office or offices in which its investment decision was made is
located in San Diego, California.

2. Transfer Restrictions. Seller acknowledges and agrees that the Shares are
subject to restrictions on transfer as set forth in this Agreement.

3. Subject to Cancellation. Seller acknowledges and agrees that the Shares are
subject to Parent’s and Buyer’s right to indemnification pursuant to Article 10
of this Agreement and the number of Shares is subject to reduction following a
successful indemnification claim, pursuant to Article 10 of this Agreement.
Seller hereby grants Parent and Buyer a power of attorney and appoints Parent
and Buyer its attorney in fact for purposes of effectuating the cancellation of
the Shares, to the extent such cancellation is provided for in this Agreement.
So long as the Shares remain subject to Parent’s and Buyer’s rights pursuant to
this Agreement, all certificates evidencing such Shares shall bear the following
legend:

“THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE IN CERTAIN CIRCUMSTANCES
SUBJECT TO CANCELLATION AND FORFEITURE IN SATISFACTION OF CERTAIN OBLIGATIONS
OWED TO CARDIUM THERAPEUTICS, INC., AND ITS SUCCESSORS AND ASSIGNS, PURSUANT TO
THE TERMS OF THAT CERTAIN ASSET PURCHASE AGREEMENT DATED AS OF MARCH 8, 2006. A
COPY OF SUCH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF CARDIUM
THERAPEUTICS, INC.”

4. California Corporate Securities Law. THE SALE OF THE SECURITIES WHICH ARE THE
SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF
CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR
THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH
QUALIFICATION OR IN THE ABSENCE OF AN EXEMPTION FROM SUCH QUALIFICATION IS
UNLAWFUL. PRIOR TO THE ACCEPTANCE OF SUCH CONSIDERATION BY SELLER, THE RIGHTS OF
ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH

 

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QUALIFICATION BEING OBTAINED OR AN EXEMPTION FROM SUCH QUALIFICATION BEING
AVAILABLE.

5. Further Investment Representations of Recipients of Shares. Seller further
hereby represents and warrants as follows:

(a) Seller Bears Economic Risk. Seller is capable of evaluating the merits and
risks of its investment in Parent and has the capacity to protect its own
interests. Seller must bear the economic risk of this investment indefinitely
unless the Shares are registered pursuant to the Securities Act, or any
exemption from registration is available. Seller understands that Parent has no
present intention of registering the Shares. Seller also understands that there
is no assurance that any exemption from registration under the Securities Act
will be available and that, even if available, such exemption may not allow
Seller to transfer all or any portion of the Shares under the circumstances; the
amounts or at the times Seller might propose.

(b) Speculative Investment. Seller realizes that the Shares are a highly
speculative investment, and it is able, without impairing its financial
condition, to hold the Shares for an indefinite period of time and to suffer a
complete loss on its investment.

(c) Acquisition for Own Account. Seller is acquiring the Shares for Seller’s own
account for investment only, and not with a view towards their distribution.
Seller has no present intention of selling, offering to sell or otherwise
disposing of or distributing its Shares or any portion thereof.

(d) Seller Can Protect Its Interest. Seller represents that by reason of its, or
of its management’s, business or financial experience, Seller has the capacity
to protect its own interests. Further, Seller is aware of no publication of any
advertisement in connection with the Transaction.

(e) Information. Seller is aware of Parent’s business affairs and financial
condition and has acquired sufficient information about Parent to reach an
informed and knowledgeable decision to acquire the Shares. Seller has received
and read Parent’s financial statements and has had an opportunity to discuss
Parent’s business, management and financial affairs with directors, officers and
management of Parent and has had the opportunity to review Parent’s operations
and facilities. Seller has also had the opportunity to ask questions of, and
receive answers from, Parent and its management regarding the terms and
conditions of the Transaction. Seller has received all information as it deems
necessary and appropriate to enable it to evaluate the financial risk inherent
in acquiring the Shares and has received satisfactory and complete information
concerning the business and financial condition of Parent in response to all
inquiries in respect thereof. In addition, Seller has read or reviewed and is
familiar with Parent’s annual report on Forms 10-KSB for the year ended
September 30, 2005 and each subsequently filed report on Forms 10-QSB and 8-K as
filed with the SEC under the Exchange Act and as the same may be amended.

 

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(f) Rule 144. Seller acknowledges and agrees that the Shares must be held
indefinitely unless they are subsequently registered under the Securities Act or
an exemption from such registration is available. Seller has been advised or is
aware of the provisions of Rule 144 promulgated under the Securities Act as in
effect from time to time, which permits limited resale of shares purchased in a
private placement subject to the satisfaction of certain conditions, including,
among other things: the availability of certain current public information about
Parent, the resale occurring following the required holding period under Rule
144 and the number of shares being sold during any three-month period not
exceeding specified limitations.

 

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