Exhibit 10.1

SECURITIES PURCHASE AGREEMENT

This SECURITIES PURCHASE AGREEMENT (this “Agreement”) is made and entered into
as of June 29, 2011 by and among A.P. Pharma, Inc., a Delaware corporation (the
“Company”), and the purchasers listed on Schedule I hereto (each a “Purchaser”
and together the “Purchasers”). Certain terms used and not otherwise defined in
the text of this Agreement are defined in Section 11 hereof.

RECITALS

WHEREAS, the Company and the Purchasers are executing and delivering this
Agreement in reliance upon the exemption from securities registration afforded
by Section 4(2) of the Securities Act of 1933, as amended (the “Securities
Act”), and Rule 506 of Regulation D (“Regulation D”) as promulgated by the
United States Securities and Exchange Commission (the “Commission”) under the
Securities Act;

WHEREAS, the Company desires to sell to the Purchasers, and the Purchasers
desire to purchase from the Company securities, referred to herein for
convenience as units (the “Units”), with each Unit consisting of: (i) one share
of common stock, $0.01 par value per share (the “Common Stock”), and (ii) one
warrant to purchase 0.5 shares of Common Stock (the “Warrants”), in accordance
with the terms and provisions of this Agreement.

NOW, THEREFORE, in consideration of the foregoing and the mutual
representations, warranties and covenants herein contained, the parties hereto
hereby agree as follows:

1. Authorization of Securities. The Company has authorized the issuance and sale
of Units in an aggregate principal amount of up to $24,000,000. The terms of the
Warrants are set forth in the form of Warrant attached as Exhibit A hereto. The
shares of Common Stock issuable at Closing are referred to herein as the “Common
Shares” and the shares of Common Stock issuable upon exercise of the Warrants
are referred to herein as the “Warrant Shares.” The Common Shares, Warrants and
Warrant Shares are sometimes collectively referred to herein as the
“Securities”.

2. Sale and Purchase of the Units. Upon the terms and subject to the conditions
herein contained, the Company agrees to sell to each Purchaser, and each
Purchaser agrees to purchase from the Company, at the Closing (as defined in
Section 3) that number of Units set forth opposite such purchaser’s name on
Schedule I for the purchase price set forth opposite such purchasers name, which
amount represents the number of Units purchased by such Purchaser multiplied by
the price per Unit of $0.15 (the “Unit Price”). The aggregate price paid by all
Purchasers, as set forth on Schedule I, shall be referred to as the “Total
Purchase Price.” The Common Shares and Warrants included in each Unit will be
issued separately by the Company to each Purchaser.

3. Closing. Subject to the satisfaction of the closing conditions set forth in
Section 7, the closing (the “Closing”), with respect to the transaction
contemplated in Section 2 hereof, shall take place at the offices of Ropes &
Gray LLP, Three Embarcadero Center, San Francisco, California on July 1, 2011,
or at such other time and place as the Company and

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Purchasers may agree, including remotely via the exchange of documents and
signatures (the “Closing Date”).

4. Representations and Warranties of the Purchasers. Each Purchaser, severally
but not jointly, represents and warrants to the Company that the statements
contained in this Section 4 are true and complete as of the date of this
Agreement and will be true and complete as of the date of the Closing:

4.1. Organization. The Purchaser represents that the Purchaser is either an
individual or an entity duly formed, validly existing and in good standing under
the laws of the jurisdiction of its organization, has not been organized,
reorganized or recapitalized specifically for the purpose of investing in the
Company and has all corporate, partnership, limited liability or similar power
and authority, as applicable, to enter into this Agreement and the other
Transaction Documents and instruments referred to herein to which it is a party
and to consummate the transactions contemplated hereby and thereby.

4.2. Validity. The execution, delivery and performance of this Agreement, and
the other Transaction Documents and instruments referred to herein, in each case
to which the Purchaser is a party, and the consummation by the Purchaser of the
transactions contemplated hereby and thereby, have been duly authorized by all
necessary corporate, partnership, limited liability or similar actions, as
applicable, on the part of such Purchaser. This Agreement has been duly executed
and delivered by the Purchaser, and the other Transaction Documents and
instruments referred to herein to which it is a party will be duly executed and
delivered by the Purchaser, and each such agreement and instrument constitutes
or will constitute a valid and binding obligation of the Purchaser, enforceable
against it in accordance with its terms, except as limited by applicable
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, and
any other laws of general application affecting enforcement of creditors’ rights
generally, and as limited by laws relating to the availability of specific
performance, injunctive relief, or other equitable remedies.

4.3. Brokers. There is no broker, investment banker, financial advisor, finder
or other Person which has been retained by or is authorized to act on behalf of
the Purchaser who might be entitled to any fee or commission for which the
Company will be liable in connection with the execution of this Agreement and
the consummation of the transactions contemplated hereby.

4.4. Investment Representations and Warranties. The Purchaser understands and
agrees that the offering and sale of the Securities has not been registered
under the Securities Act or any applicable state securities laws and is being
made in reliance upon federal and state exemptions for transactions not
involving a public offering which depend upon, among other things, the bona fide
nature of the investment intent and the accuracy of the Purchaser’s
representations as expressed herein.

4.5. Investor Questionnaire. In connection with the filing of a Registration
Statement, the Company may require the Purchaser to furnish to the Company such
information regarding the Purchaser and the Registrable Securities, as the
Company may reasonably request in writing and as shall reasonably be required in
connection with the filing of the Registration

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Statement. At least five (5) Business Days prior to the first anticipated filing
date of such Registration Statement, the Company shall notify the Purchaser of
the information the Company requests from the Purchaser.

4.6. Acquisition for Own Account. The Purchaser is acquiring the Securities for
its own account for investment and not with a view toward distribution in a
manner which would violate the Securities Act or any applicable state securities
laws.

4.7. Ability to Protect Its Own Interests and Bear Economic Risks. The
Purchaser, by reason of the business and financial experience of its management,
has the capacity to protect its own interests in connection with the
transactions contemplated by this Agreement and the other Transaction Documents
and is capable of evaluating the merits and risks of the investment in the
Securities. The Purchaser is able to bear the economic risk of an investment in
the Securities and is able to sustain a loss of all of its investment in the
Securities without economic hardship, if such a loss should occur.

4.8. Accredited Investor. The Purchaser is an “accredited investor” as that term
is defined in Regulation D promulgated under the Securities Act.

4.9. Access to Information. The Purchaser has been given access to all Company
documents, records, and other information, and has had adequate opportunity to
ask questions of, and receive answers from, the Company’s officers, employees,
agents, accountants, and representatives concerning the Company’s business,
operations, financial condition, assets, liabilities, and all other matters
relevant to its investment in the Securities. Purchaser understands that an
investment in the Securities bears significant risk and represents that it has
reviewed the SEC Reports, which serve to qualify certain of the Company
representations set forth below.

4.10. Restricted Securities.

(a) The Purchaser understands that the Securities will be characterized as
“restricted securities” under the federal securities laws inasmuch as they are
being acquired from the Company in a private placement under Section 4(2) of the
Securities Act and that under such laws and applicable regulations such
Securities may be resold without registration under the Securities Act only in
certain limited circumstances.

(b) The Purchaser acknowledges that the Securities must be held indefinitely
unless subsequently registered under the Securities Act and under applicable
state securities laws or an exemption from such registration is available. The
Purchaser understands that the Company is under no obligation to register the
Securities, except as provided in the Transaction Documents.

(c) The Purchaser is aware of the provisions of Rule 144 under the Securities
Act which permit limited resale of securities purchased in a private placement.

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4.11. Tax Advisors. The Purchaser has had the opportunity to review with the
Purchaser’s own tax advisors the federal, state and local tax consequences of
this investment, where applicable, and the transactions contemplated by this
Agreement. The Purchaser is relying solely on the Purchaser’s own determination
as to tax consequences or the advice of such tax advisors and not on any
statements or representations of the Company or any of its agents and
understands that the Purchaser (and not the Company) shall be responsible for
the Purchaser’s own tax liability that may arise as a result of this investment
or the transactions contemplated by this Agreement.

4.12. Short Sales, etc. Purchaser represents, warrants and covenants to the
Company that Purchaser has not, either directly or indirectly through an
affiliate, agent or representative of the Company, engaged in any transaction in
the securities of the Company during the thirty (30) days prior to the date that
the Purchaser first learned of the proposed offering of the Securities.
Purchaser represents and warrants to and covenants with the Company that
Purchaser will not engage in any short sales of the Company’s Common Stock prior
to the earlier of (i) the effectiveness of the Registration Statement (either
directly or indirectly through an affiliate, agent or representative) and
(ii) the date as of which the Purchaser may sell any Securities pursuant to Rule
144 promulgated under the Securities Act, to the extent permitted under the
Securities Act.

5. Representations and Warranties by the Company. Except as set forth in the SEC
Reports or as may be disclosed by the Company in a written Disclosure Schedule
provided by the Company to the Purchasers dated the date hereof (the “Disclosure
Schedule”), the Company represents and warrants to the Purchasers that the
statements contained in this Section 5 are true and complete as of the date of
this Agreement and will be true and complete as of the date of the Closing, as
the case may be.

5.1. Capitalization. As of the date hereof, without giving effect to the Closing
or the approval of the Proposal, the authorized capital stock of the Company
consists of 100,000,000 shares of Common Stock, par value $0.01 per share, and
2,500,000 shares of preferred stock, par value $0.01 per share (“Preferred
Stock”). The Company is currently seeking stockholder approval at the 2011
Annual Meeting of Stockholders, to be held on June 29, 2011, to increase the
total number of authorized shares of Common Stock to 1,500,000,000 shares. As of
the date hereof, there are: (i) 40,017,790 shares of Common Stock issued and
outstanding, (ii) no shares of Preferred Stock issued and outstanding, (iii) up
to 37,500,000 shares of Common Stock may be issued upon conversion of the
outstanding principal amount owed under the Company’s Senior Secured Convertible
Notes due 2021 (the “Notes”), and (iv) 6,116,155 shares of Common Stock reserved
for issuance upon exercise of options, warrants and other convertible securities
outstanding as of the date hereof (excluding the Notes). Additionally, the
holders of the Notes currently have the right to purchase up to $3,000,000 in
principal amount of additional Notes. The foregoing does not include additional
shares of Common Stock potentially issuable upon conversion of any principal
balance that may be added to the Notes as a result of the payment in kind of
interest due under the Notes.

5.2. Due Issuance and Authorization of Capital Stock. All of the outstanding
shares of capital stock of the Company have been validly issued and are fully
paid and non-assessable.

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5.3. Organization. The Company (a) is duly incorporated or otherwise organized,
validly existing and in good standing under the laws of the jurisdiction of its
formation, (b) is duly qualified to do business as a foreign entity and is in
good standing in each jurisdiction where the nature of the property owned or
leased by it or the nature of the business conducted by it makes such
qualification necessary, except where the failure to be so qualified would not
have a Material Adverse Effect, and (c) has all requisite corporate power and
authority to own or lease and operate its assets and carry on its business as
presently being conducted.

5.4. Subsidiaries. There are no direct or indirect Subsidiaries of the Company.

5.5. Consents. Neither the execution, delivery or performance of this Agreement
or the other Transaction Documents by the Company, nor the consummation by it of
the obligations and transactions contemplated hereby or thereby (including,
without limitation, the issuance, the reservation for issuance and the delivery
of the Securities) requires any consent of, authorization by, exemption from,
filing with or notice to any Governmental Entity or any other Person, other than
filings required under applicable U.S. federal and state securities laws.

5.6. Authorization; Enforcement. The Company has all requisite corporate power
and has taken all necessary corporate action required for the due authorization,
execution, delivery and, subject to the approval of the Proposal, performance by
the Company of this Agreement and the other Transaction Documents and the
consummation of the transactions contemplated hereby and thereby (including,
without limitation, the issuance of the Securities and the provision to the
Purchaser of the rights contemplated by the Transaction Documents) and no action
on the part of the stockholders of the Company is required, except for approval
of the Proposal the other actions required pursuant to Section 6.9, which will
be completed prior to Closing. The execution, delivery and performance by the
Company of each of the Transaction Documents and the consummation by the Company
of the transactions contemplated hereby and thereby, have been duly authorized
by all necessary corporate action on the part of the Company, except for the
stockholder approval of the Proposal, which will be completed prior to Closing.
This Agreement has been duly executed and delivered by the Company, and the
other Transaction Documents and instruments referred to herein to which it is a
party will be duly executed and delivered by the Company, and each such
agreement constitutes or will constitute a legal, valid and binding obligation
of the Company enforceable against it in accordance with its terms, except to
the extent that enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance, and any other laws of general
application affecting enforcement of creditors’ rights generally, and as limited
by laws relating to the availability of specific performance, injunctive relief,
or other equitable remedies.

5.7. Valid Issuance of Securities. The Common Shares and the Warrants have been
duly and validly authorized and, when issued and paid for pursuant to this
Agreement, the Common Shares will be validly issued, fully paid and
non-assessable, and the Common Shares and the Warrants shall be free and clear
of all Encumbrances. Upon the issuance of the Warrant Shares, the Warrant Shares
will have been duly and validly authorized and, when issued and paid for upon
exercise of the Warrants, will be validly issued, fully paid and non-assessable,
and shall be free and clear of all Encumbrances.

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5.8. No Conflicts. Except as specifically contemplated herein, the execution,
delivery and performance of each of the Transaction Documents and the
consummation of the transactions contemplated hereby and thereby (including,
without limitation, the issuance and reservation for issuance, as applicable, of
the Securities) will not (a) subject to the approval of the Proposal and the
filing of a Certificate of Amendment with the Delaware Secretary of State to
give effect to the share increase under the Proposal, result in a violation of
the certificate of incorporation, as amended, and the by-laws of the Company
(the “Charter Documents”), (b) conflict with or result in the breach of the
terms, conditions or provisions of or constitute a default (or an event which
with notice or lapse of time or both would become a default) under, or give rise
to any right of termination, acceleration or cancellation under, any material
agreement, lease, mortgage, license, indenture, instrument or other contract to
which the Company is a party, (c) result in a violation of any law, rule,
regulation, order, judgment or decree (including, without limitation, U.S.
federal and state securities laws and regulations) applicable to the Company or
by which any property or asset of the Company is bound or affected, (d) result
in a material violation of any rule or regulation of FINRA or its Trading
Markets, or (e) result in the creation of any Encumbrance upon any of the
Company’s assets. The Company is not in violation of its Charter Documents, and
the Company is not in default (and no event has occurred which, with notice or
lapse of time or both, would cause the Company to be in default) under, nor has
there occurred any event giving others (with notice or lapse of time or both)
any rights of termination, amendment, acceleration or cancellation of, any
material agreement, indenture or instrument to which the Company is a party. The
business of the Company is not being conducted in violation of any law,
ordinance or regulation of any Governmental Entity, except where the violation
would not result in a Material Adverse Effect.

5.9. Material Contracts. Each Material Contract is the legal, valid and binding
obligation of the Company, enforceable against the Company in accordance with
its terms, except to the extent that enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, and
any other laws of general application affecting enforcement of creditors’ rights
generally, and as limited by laws relating to the availability of specific
performance, injunctive relief, or other equitable remedies. The Company is in
compliance with all material terms of the Material Contracts, and there has not
occurred any breach, violation or default or any event that, with the lapse of
time, the giving of notice or the election of any Person, or any combination
thereof, would constitute a breach, violation or default by the Company under
any such Material Contract or, to the knowledge of the Company, by any other
Person to any such contract except where such breach, violation or default would
not have a Material Adverse Effect. To the knowledge of the Company, it has not
been notified that any party to any Material Contract intends to cancel,
terminate, not renew or exercise an option under any Material Contract, whether
in connection with the transactions contemplated hereby or otherwise.

5.10. Right of First Refusal; Stockholders Agreement; Voting and Registration
Rights. Except as provided in this Agreement or the other Transaction Documents,
no party has any right of first refusal, right of first offer, right of co-sale,
preemptive right or other similar right or any registration right regarding the
securities of the Company. There are no provisions of the Charter Documents, and
no Material Contracts, other than this Agreement or the other Transaction
Documents, that (a) may affect or restrict the voting rights of the Purchaser
with respect to the Securities in its capacity as a stockholder of the Company,
(b) restrict the ability of

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the Purchaser, or any successor thereto or assignee or transferee thereof, to
transfer the Securities, (c) subject to stockholder approval of the Proposal,
would adversely affect the Company’s or the Purchaser’s right or ability to
consummate the transactions contemplated by this Agreement or comply with the
terms of the other Transaction Documents and the transactions contemplated
hereby or thereby, (d) require the vote of more than a majority of the Company’s
issued and outstanding Common Stock, voting together as a single class, to take
or prevent any corporate action, other than those matters requiring a different
vote under Delaware law, or (e) entitle any party to nominate or elect any
director of the Company or require any of the Company’s stockholders to vote for
any such nominee or other person as a director of the Company in each case.

5.11. Previous Issuances. All shares of capital stock and other securities
previously issued by the Company have been issued in transactions registered
under or exempt from the registration requirements under the Securities Act and
all applicable state securities or “blue sky” laws, and in compliance with all
applicable corporate laws. The Company has not violated the Securities Act or
any applicable state securities or “blue sky” laws in connection with the
previous issuance of any shares of capital stock or other securities.

5.12. No Integrated Offering. Neither the Company, nor any of its Affiliates or
any other Person acting on the Company’s behalf, has directly or indirectly
engaged in any form of general solicitation or general advertising with respect
to the Securities, nor have any of such Persons made any offers or sales of any
security of the Company or its Affiliates or solicited any offers to buy any
security of the Company or its Affiliates under circumstances that would require
registration of the Securities under the Securities Act or any other securities
laws or cause this offering of Securities to be integrated with any prior
offering of securities of the Company for purposes of the Securities Act in any
manner that would affect the validity of the private placement exemption under
the Act for the offer and sale of the Securities hereunder.

5.13. Financial Statements.

(a) The Company has filed all reports, schedules, forms, statements and other
documents required to be filed by the Company under the Securities Act and the
Exchange Act, including pursuant to Section 13(a) or 15(d) thereof, since
January 1, 2010 (the foregoing materials, including the exhibits thereto and
documents incorporated by reference therein, being collectively referred to
herein as the “SEC Reports”) on a timely basis or has received a valid extension
of such time of filing and has filed any such SEC Reports prior to the
expiration of any such extension. As of their respective dates, the SEC Reports
complied as to form in all material respects with the requirements of the
Securities Act and the Exchange Act, as applicable, and none of the SEC Reports,
when filed, contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading. All agreements to which the Company is a party or to
which the property or assets of the Company are subject, which are required to
be described in or filed as exhibits to an SEC Report, have been so described or
filed.

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(b) The financial statements of the Company included in the SEC Reports comply
in all material respects with applicable accounting requirements and the rules
and regulations of the Commission with respect thereto as in effect at the time
of filing. Such financial statements have been prepared in accordance with GAAP,
except as may be otherwise specified in such financial statements or the notes
thereto and except that unaudited financial statements may not contain all
footnotes required by GAAP, and fairly present the financial position of the
Company as of and for the dates thereof and the results of operations and cash
flows for the periods then ended, subject, in the case of unaudited statements,
to normal, immaterial, year-end audit adjustments.

5.14. Absence of Litigation. There is no claim, action, suit, arbitration,
investigation or other proceeding pending against, or to the knowledge of the
Company, threatened against or affecting, the Company or any of its properties
or, to the knowledge of the Company, any of its respective officers or directors
before any Governmental Entity.

5.15. Taxes. The Company has properly filed all federal, foreign, state, local,
and other tax returns and reports which are required to be filed by it, which
returns and reports were properly completed and are true and correct in all
material respects, and all taxes, interest, and penalties due and owing have
been timely paid. There are no outstanding waivers or extensions of time with
respect to the assessment or audit of any tax or tax return of the Company, or
claims now pending or matters under discussion between the Company and any
taxing authority in respect of any tax of the Company. The Company has no
material uncertain tax positions pursuant to FASB Interpretation 48 (FIN 48),
Accounting for Uncertainty in Income Taxes.

5.16. Employee Matters.

(a) The Company has disclosed in the SEC Reports any “employee benefit plan”
subject to the Employee Retirement Income Security Act of 1974, as amended
(“ERISA”), that it maintains for employees.

(b) No director or officer or other employee of the Company will become entitled
to any retirement, severance, change of control, or similar benefit or enhanced
or accelerated benefit (including any acceleration of vesting) or lapse of
repurchase rights or obligations with respect to any employee benefit plan
subject to ERISA or other benefit under any compensation plan or arrangement of
the Company (each, an “Employee Benefit Plan”) as a result of the transactions
contemplated in this Agreement.

(c) No executive officer, to the knowledge of the Company, is, or is now
reasonably expected to be, in violation of any term of any employment contract,
confidentiality, disclosure or proprietary information agreement or
non-competition agreement, or any other contract or agreement or any restrictive
covenant with the Company, and, to the knowledge of the Company, the continued
employment of each such executive officer does not subject the Company to any
material liability with respect to any of the foregoing matters.

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(d) The Company is in compliance with all applicable federal, state, local and
foreign statutes, laws (including, without limitation, common law), judicial
decisions, regulations, ordinances, rules, judgments, orders and codes
respecting employment, employment practices, labor, terms and conditions of
employment and wages and hours, except where the failure to comply would not
have a Material Adverse Effect, and no work stoppage or labor strike against the
Company is pending or, to its knowledge, threatened, nor is the Company involved
in or, to its knowledge, threatened with any labor dispute, grievance or
litigation relating to labor matters involving any current or former employees
of the Company or independent contractors. There are no suits, actions,
disputes, claims (other than routine claims for benefits), investigations or
audits pending or, to the knowledge of the Company, threatened in connection
with any Employee Benefit Plan, but excluding any of the foregoing which would
not have a Material Adverse Effect.

5.17. Compliance with Laws.

(a) The Company has been and is in material compliance with the terms of, all
franchises, permits, licenses and other rights and privileges necessary to
conduct the Company’s present and proposed business and is in compliance with
and has not violated, in any material respect, (i) any judgments, orders,
decrees, injunctions or writs applicable to the Company, or (ii) any applicable
provisions of any laws, statutes, ordinances, rules or regulations applicable to
the conduct of the Company’s business, including the ownership, testing,
development, manufacture, packaging, processing, use, distribution, marketing,
labeling, promotion, sale, offer for sale, storage, import, export or disposal
of any drug or drug candidate under development, manufactured or distributed by
the Company (collectively, “Applicable Laws”).

(b) The Company:

(i) has not received any FDA Form 483, notice of adverse finding, warning
letter, untitled letter or other correspondence or notice from the U.S. Food and
Drug Administration (the “FDA”) or any other federal, state, local or foreign
governmental or regulatory authority alleging or asserting material
noncompliance with any Applicable Laws or any licenses, certificates, approvals,
clearances, authorizations, permits and supplements or amendments thereto
required by any such Applicable Laws (“Authorizations”);

(ii) possesses all material Authorizations and such Authorizations are valid and
in full force and effect and the Company is not in material violation of any
term of any such Authorizations;

(iii) has not received notice of any claim, action, suit, proceeding, hearing,
enforcement, investigation, arbitration or other action from the FDA or any
other federal, state, local or foreign governmental or

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regulatory authority or third party alleging that any product operation or
activity is in material violation of any Applicable Laws or Authorizations and
has no knowledge that the FDA or any other federal, state, local or foreign
governmental or regulatory authority or third party is considering any such
claim, litigation, arbitration, action, suit, investigation or proceeding;

(iv) has not received notice that the FDA or any other federal, state, local or
foreign governmental or regulatory authority has taken, is taking or intends to
take action to limit, suspend, modify or revoke any material Authorizations and
has no knowledge that the FDA or any other federal, state, local or foreign
governmental or regulatory authority is considering such action;

(v) has filed, obtained, maintained or submitted all material reports,
documents, forms, notices, applications, records, claims, submissions and
supplements or amendments as required by any Applicable Laws or Authorizations
and that all such reports, documents, forms, notices, applications, records,
claims, submissions and supplements or amendments were materially complete and
correct on the date filed (or were corrected or supplemented by a subsequent
submission); and

(vi) 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, “dear doctor” letter, or other notice
or action relating to the alleged lack of safety or efficacy of any product or
any alleged product defect or violation and, to the Company’s knowledge, no
third party has initiated, conducted or intends to initiate any such notice or
action.

(c) The studies, tests and preclinical and clinical trials conducted by or on
behalf of the Company or any of its subsidiaries were and, if still pending, are
being conducted in accordance with experimental protocols, procedures and
controls pursuant to accepted professional scientific standards and all
Applicable Laws and Authorizations, including, without limitation, the Federal
Food, Drug and Cosmetic Act and the rules and regulations promulgated thereunder
(collectively, “FFDCA”); the descriptions of the results of such studies, tests
and trials contained in the SEC Reports are accurate and complete and fairly
present the data derived from such studies, tests and trials; the Company is not
aware of any studies, tests or trials, the results of which the Company believes
reasonably call into question the study, test, or trial results described or
referred to in the SEC Reports when viewed in the context in which such results
are described and the clinical state of development; and, since January 1, 2008,
the Company has not received any notices or correspondence from the FDA or any
other federal, state, local or foreign governmental or regulatory authority
requiring the termination, suspension or material modification of any studies,
tests or preclinical or clinical trials conducted by or on behalf of the
Company.

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5.18. Brokers. Other than the Placement Agent, there is no investment banker,
broker, finder, financial advisor or other Person that has been retained by or
is authorized to act on behalf of the Company who might be entitled to any fee
or commission in connection with the transactions contemplated by this
Agreement.

5.19. Environmental Matters.

(a) (i) No written notice, notification, demand, request for information,
citation, summons, complaint or order has been received by, and no
investigation, action, claim, suit, proceeding or review is pending or, to the
knowledge of the Company, threatened by any Person against the Company and no
penalty has been assessed against the Company with respect to any matters
relating to or arising out of any Environmental Law; (ii) the Company is in
compliance with all Environmental Laws except where the failure to comply would
not have a Material Adverse Effect; and (iii) to the knowledge of the Company
there are no liabilities of or relating to the Company relating to or arising
out of any Environmental Law except such as would not have a Material Adverse
Effect, and, to the knowledge of the Company, there is no existing condition,
situation or set of circumstances which could reasonably be expected to result
in such a liability.

(b) For purposes of this Agreement, the term “Environmental Laws” means federal,
state, local and foreign statutes, laws, judicial decisions, regulations,
ordinances, rules, judgments, orders, codes, injunctions, permits and
governmental agreements relating to human health and the environment, including,
but not limited to, Hazardous Materials; and the term “Hazardous Material” means
all substances or materials regulated as hazardous, toxic, explosive, dangerous,
flammable or radioactive under any Environmental Law including, but not limited
to: (i) petroleum, asbestos, or polychlorinated biphenyls and (ii) in the United
States, all substances defined as Hazardous Substances, Oils, Pollutants or
Contaminants in the National Oil and Hazardous Substances Pollution Contingency
Plan.

5.20. Intellectual Property Matters.

(a) “Intellectual Property” means any and all of the following arising under the
laws of the United States, any other jurisdiction or any treaty regime: (i) all
inventions (whether patentable or unpatentable and whether or not reduced to
practice), all improvements thereon, and all patents, patent applications and
patent disclosures, together with all reissuances, continuations,
continuations-in-part, revisions, extensions and reexaminations thereof,
(ii) all trademarks, service marks, trade dress, logos, trade names and
corporate names, together with all translations, adaptations, derivations and
combinations thereof and including all goodwill associated therewith, and all
applications, registrations and renewals in connection therewith, (iii) all
copyrightable works, all copyrights and all applications, registrations and
renewals in connection therewith, (iv) all trade secrets and confidential
business information (including, without limitation, ideas,

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research and development, know-how, formulas, compositions, manufacturing and
production processes and techniques, technical data, designs, drawings,
specifications, customer and supplier lists, pricing and cost information and
business and marketing plans and proposals), (v) all computer software
(including, without limitation, data and related documentation and except for
any commercial “shrink-wrapped” software) and source codes (other than open
source codes), (vi) all other proprietary rights, (vii) all copies and tangible
embodiments of the foregoing (in whatever form or medium) and (viii) all
licenses or agreements in connection with the foregoing. “Company Intellectual
Property” means all Intellectual Property which is used in connection with, and
is material to, the business of the Company and all Intellectual Property owned
by the Company, provided that any Intellectual Property that is licensed by the
Company shall be included within the meaning of Company Intellectual Property
only within the scope of use by the Company or in connection with the Company’s
business.

(b) With respect to each item of Company Intellectual Property that is material
to the Company’s business:

(i) The Company possesses all rights, titles and interests in and to the item if
owned by the Company, as applicable, free and clear of any Encumbrance, license
or other restriction, and possesses all rights necessary in the case of a
licensed item to use such item in the manner in which it presently uses the item
or reasonably contemplates using such item, and the Company has taken or caused
to be taken reasonable and prudent steps to protect its rights in and to, and
the validity and enforceability of, the item owned by the Company;

(ii) the item if owned by the Company is not, and if licensed, to the knowledge
of the Company is not, subject to any outstanding injunction, judgment, order,
decree, ruling or charge naming the Company;

(iii) no action, suit, proceeding, hearing, investigation, charge, complaint,
claim or demand is pending that challenges the legality, validity,
enforceability, use or ownership of the item;

(iv) to the knowledge of the Company, the item if owned by the Company does not
infringe upon any valid and enforceable Intellectual Property right or other
right of any third party;

(v) to the knowledge of the Company, no third party has infringed upon or
misappropriated the Company’s intellectual property rights in the item;

(vi) the Company is not party to any option, license, sublicense or agreement of
any kind covering the item that it is in breach or default

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thereunder, and to the knowledge of the Company and no event has occurred which,
with notice or lapse of time, would constitute such a breach or default or
permit termination, modification or acceleration thereunder; and

(vii) each option, license, sublicense or agreement of any kind covering the
item is legal, valid, binding, enforceable and in full force and effect.

(c) All registered patents, copyrights, trademarks and service marks included in
the Company Intellectual Property: (x) if owned by the Company and (y) if
licensed, to the knowledge of the Company, are valid and subsisting and are not
subject to any claims, Encumbrances, taxes or other fees except for periodic
filing, annuity and maintenance fees and Permitted Liens.

(d) None of the Key Employees are obligated under any contract (including,
without limitation, licenses, covenants, or commitments of any nature) or other
agreement, or subject to any judgment, decree, or order of any court or
administrative agency, that would interfere with the use of his or her
reasonable diligence to promote the interests of the Company or that would
conflict with the Company’s business as presently conducted. Neither the
execution, delivery or performance of this Agreement, nor the carrying on of the
Company’s business by the employees of the Company, nor the conduct of the
Company’s businesses as presently conducted, will violate or result in a breach
of the terms, conditions or provisions of, or constitute a default under, any
contract, covenant, or instrument under which any such Key Employee is
obligated, and which violation, breach or default would be materially adverse to
the Company.

(e) The Company has entered into confidentiality and proprietary information and
assignment of inventions agreements, substantially in the form previously
provided to the Purchaser, with the executive officers of the Company. The
Company is not aware of any violation by any such executive officers of such
agreements.

(f) No stockholder, member, director, officer or employee of the Company has any
right, title or interest in any of the Company Intellectual Property.

(g) To the knowledge of the Company, it is not, nor will it be, necessary to
utilize any inventions, trade secrets or proprietary information of any of its
employees made prior to their employment by the Company, except for valid and
enforceable inventions, trade secrets or proprietary information that have been
assigned to the Company.

(h) The Company maintains policies and procedures regarding data security,
privacy and data use that are commercially reasonable and, in any event, comply
with the Company’s obligations to its customers and applicable laws,

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rules and regulations. To the knowledge of the Company, there have not been, and
the transaction contemplated under this Agreement will not result in, any
security breaches of any security policy, data use restriction or privacy breach
under any such policies or any applicable laws, rules or regulations.

5.21. Related-Party Transactions. Except as disclosed in the SEC Reports or as
contemplated hereby, no stockholder who is known by the Company to beneficially
own 5% or more (on a fully-diluted basis) of any class of equity securities, and
no officer or director of the Company or member of his or her immediate family
is currently indebted to the Company, nor is the Company indebted (or committed
to make loans or extend or guarantee credit) to any of such individuals. Except
as set forth in the SEC Reports, as of the date hereof, no stockholder known by
the Company to beneficially own 5% or more (on a fully-diluted basis) of any
class of equity securities, officer or director of the Company and no member of
the immediate family of any stockholder known by the Company to beneficially
owns 5% or more (on a fully-diluted basis) of any class of equity securities,
officer or director of the Company, is a party to any contract with the Company.

5.22. Title to Property and Assets. The Company does not own any real property.
The Company owns or has legally enforceable rights to use or hold for use its
personal property and assets free and clear of all Encumbrances except:
(i) Permitted Liens and (ii) such other Encumbrances, if any, that individually
or in the aggregate, do not and would not detract from the value of any asset or
property of the Company or interfere with the use or contemplated use of any
personal property of the Company. With respect to any real property, the Company
is not in violation in any material respect of any of its leases. All machinery,
equipment, furniture, fixtures and other personal property that is material to
the Company’s business and all buildings, structures and other facilities, if
any, including, without limitation, office or other space used by the Company in
the conduct of its business and material to its business, are in good operating
condition and fit for operation in the ordinary course of business (subject to
normal wear and tear) except for any defects which will not interfere with the
conduct of normal operations of the Company. The Company has delivered to the
Purchaser true and complete copies of any leases related to the real property
used by the Company in the conduct of its business.

5.23. Disclosure. The Company understands and confirms that the Purchaser will
rely on the foregoing representations in effecting transactions in securities of
the Company. No representation or warranty by the Company contained in this
Agreement contains any untrue statement of a material fact or omits to state any
material fact necessary in order to make the statements made therein, in light
of the circumstances under which they were made, not misleading. The Company
acknowledges and agrees that the Purchaser does not make and has not made any
representations or warranties with respect to the transactions contemplated
hereby other than those specifically set forth in Section 4 hereof.

5.24. Absence of Changes. Since the date of the latest financial statements
included in the SEC Reports and except as contemplated by, or in connection
with, this Agreement or the other Transaction Documents, there has not been any
Material Adverse Effect or any event or events that individually or in the
aggregate would reasonably be expected to have a Material Adverse Effect.

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5.25. Suppliers and Customers. The Company does not have any knowledge of any
termination, cancellation or threatened termination or cancellation or
limitation of, or any material dissatisfaction with, the business relationship
between the Company and any material supplier, customer, vendor, customer or
client.

5.26. Regulatory Permits. The Company possesses all material certificates,
authorizations and permits issued by the appropriate federal, state, local or
foreign regulatory authorities necessary to conduct its business, as they are
currently being conducted (“Material Permits”), and the Company has not received
any notice of proceedings relating to the revocation or modification of any
Material Permit.

5.27. Indebtedness. Other than Permitted Indebtedness, the Company (i) has no
outstanding Indebtedness, (ii) is not a party to any contract, agreement or
instrument, the violation of which, or default under which, by any other party
to such contract, agreement or instrument could reasonably be expected to result
in a Material Adverse Effect, (iii) is not in violation of any term of or in
default under any contract, agreement or instrument relating to any
Indebtedness, except where such violations and defaults would not result,
individually or in the aggregate, in a Material Adverse Effect or potential
future violations relating to the inability to honor conversions of indebtedness
into Common Stock due to having an insufficient number of shares of Common Stock
authorized and available for issuance, or (iv) is not a party to any contract,
agreement or instrument relating to any Indebtedness, the performance of which,
in the judgment of the Company’s officers, has or is expected to have a Material
Adverse Effect.

5.28. Investment Company. The Company is not, and is not an Affiliate of, and
immediately after receipt of payment for the Securities, will not be or be an
Affiliate of, an “investment company” within the meaning of the Investment
Company Act of 1940, as amended.

5.29. Accountants. Odenberg, Ullakko, Muranishi & Co. LLP (“OUM”), who expressed
their opinion with respect to the financial statements included in the SEC
Reports, are independent accountants as required by the Securities Act and the
rules and regulations promulgated thereunder. There are no disagreements of any
kind presently existing, or reasonably anticipated by the Company to arise,
between the Company and OUM.

5.30. Application of Takeover Protections. The Company and its Board of
Directors have taken all necessary action, if any, in order to render
inapplicable any control share acquisition, business combination, poison pill
(including any distribution under a rights agreement) or other similar
anti-takeover provision under the Company’s Charter Documents or the laws of its
state of incorporation (including Section 203 of the Delaware General
Corporation Law) that is or could become applicable to each Purchaser as a
result of such Purchaser and the Company fulfilling their obligations or
exercising their rights under the Transaction Documents, including without
limitation as a result of the Company’s issuance of the Securities and such
Purchaser’s ownership of the Securities.

5.31. Shell Company Status. The Company is not and has never been, prior to the
date hereof, an issuer subject to Rule 144(i) under the Securities Act.

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6. Covenants.

6.1. Best Efforts. Each party shall use its best efforts to timely satisfy each
of the conditions to be satisfied by it as provided in Section 7 of this
Agreement.

6.2. Blue Sky. The Company shall, on or before the Closing Date, take such
action as the Company shall reasonably determine is necessary in order to obtain
an exemption for or to qualify the Securities for sale to the Purchasers at the
Closing pursuant to this Agreement under applicable securities or “blue sky”
laws of the states of the United States (or to obtain an exemption from such
qualification), and shall, at the request of any Purchaser, provide evidence of
any such action so taken to such Purchaser(s) on or prior to the Closing Date.
The Company shall make all filings and reports relating to the offer and sale of
the Securities by the Company, as may be required under applicable securities or
“blue sky” laws of the states of the United States following the Closing Date.

6.3. Reporting Status. Until the first anniversary of the Closing, (the
“Reporting Period”), the Company shall (i) file all reports required to be filed
with the Commission pursuant to the Exchange Act or the rules and regulations
thereunder and (ii) not take any action or file any document (whether or not
permitted by the Securities Act or the rules promulgated thereunder) to
terminate or suspend the Company’s reporting and filing obligations under the
Exchange Act or Securities Act.

6.4. Use of Proceeds. The Company will use the proceeds from the sale of the
Securities for general corporate purposes, including research and development,
sales, marketing, working capital and general and administrative expenses.

6.5. Financial Information. As long as any Securities are outstanding, the
Company agrees to send the following to the Purchasers during the Reporting
Period (except to the extent that the following are publicly available, in which
case the Company shall have no obligations under this Section 6.5 with respect
to such publicly available information): (i) within one (1) Business Day after
the filing thereof with the Commission, a copy of its Annual Reports and
Quarterly Reports on Form 10-K or 10-Q, any interim reports or any consolidated
balance sheets, income statements, stockholders’ equity statements and/or cash
flow statements for any period other than annual, any Current Reports on Form
8-K and any registration statements (other than on Form S-8) or amendments filed
pursuant to the Securities Act, (ii) on the same day as the release thereof,
facsimile or e-mailed copies of all press releases issued by the Company, and
(iii) copies of any notices and other information made available or given to the
stockholders of the Company generally, contemporaneously with the making
available or giving thereof to the stockholders. As used herein, “Business Day”
means any day other than Saturday, Sunday or other day on which commercial banks
in The City of New York are authorized or required by law to remain closed.

6.6. Conduct of Business. The business of the Company shall not be conducted in
violation of any law, ordinance or regulation of any governmental entity, except
where such violations would not result, either individually or in the aggregate,
in a Material Adverse Effect.

6.7. Pledge of Securities. The Company acknowledges and agrees that the

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Securities may be pledged by the Purchasers in connection with a bona fide
margin agreement or other loan or financing arrangement that is secured by the
Securities. The pledge of Securities shall not be deemed to be a transfer, sale
or assignment of the Securities hereunder, and in effecting a pledge of
Securities the Purchasers shall not be required to provide the Company with any
notice thereof or otherwise make any delivery to the Company pursuant to this
Agreement or any other Transaction Document. The Company hereby agrees to
execute and deliver such documentation as a pledgee of the Securities may
reasonably request in connection with a pledge of the Securities to such pledgee
by the Purchasers.

6.8. Disclosure of Transactions and Other Material Information. On or before
8:30 a.m., New York City time, on the second Business Day following the date of
this Agreement, the Company shall issue a press release and file a Current
Report on Form 8-K describing the terms of the transactions contemplated by the
Transaction Documents in the form required by the Exchange Act and attaching the
material Transaction Documents as exhibits to such filing (including all
attachments, the “8-K Filing”). Subject to the foregoing, neither the Company
nor the Purchasers shall issue any press releases or any other public statements
with respect to the transactions contemplated hereby; provided, however, that
the Company shall be entitled, without the prior approval of the Purchasers, to
make any press release or other public disclosure with respect to such
transactions (i) in substantial conformity with the 8-K Filing and
contemporaneously therewith and (ii) as is required by applicable law and
regulations. From and after the 8-K Filing, no Purchaser shall be in possession
of any material, nonpublic information received from the Company, any of its
Subsidiaries or any of its respective officers, directors, employees or agents,
that is not disclosed in the 8-K Filing.

6.9. Reservation of Shares. On June 29, 2011, the Company will hold its 2011
Annual Meeting of Stockholders (the “Stockholders Meeting”), at which meeting
the Company will seek stockholder approval for, among other things, an amendment
to the Company’s Certificate of Incorporation to increase the total number of
shares of Common Stock authorized for issuance by the Company to not less than
1,500,000,000 shares (the “Proposal”). Subject to their fiduciary obligations
under applicable law (as determined in good faith by the Company’s Board of
Directors after consultation with the Company’s outside counsel), the Company’s
Board of Directors shall continue to recommend to the Company’s stockholders
that the stockholders vote in favor of the Proposal (the “Company Board
Recommendation”) and take all commercially reasonable action to solicit the
approval of the stockholders for the Proposal unless the Board of Directors
shall have modified, amended or withdrawn the Company Board Recommendation
pursuant to the provisions of the immediately succeeding sentence. Whether or
not the Company’s Board of Directors modifies, amends or withdraws the Company
Board Recommendation pursuant to the immediately preceding sentence, the Company
shall, in accordance with Section 146 of the Delaware General Corporation Law
and the provisions of its Certificate of Incorporation and Bylaws, (i) take all
action necessary to convene the Stockholders Meeting to consider and vote upon
the approval of the Proposal, and (ii) submit the Proposal at the Stockholders
Meeting to the stockholders of the Company for their approval.

7. Conditions of Parties’ Obligations.

7.1. Conditions of the Purchasers’ Obligations at the Closing. The obligations
of the Purchasers under Section 2 hereof are subject to the fulfillment, prior
to the Closing, of all

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of the following applicable conditions, any of which may be waived in whole or
in part by the Purchasers in their absolute discretion. If the following
conditions are not satisfied on or before July 8, 2011, then any Purchaser may
terminate this Agreement with respect to that particular Purchaser upon
providing written notice to the Company.

(a) Representations and Warranties. The representations and warranties of the
Company contained in this Agreement and in any certificate, if any, or other
writing, if any, delivered by the Company pursuant hereto shall be true and
correct on and as of the Closing Date with the same effect as though such
representations and warranties had been made on and as of the Closing Date
(except to the extent expressly made as of an earlier date in which case as of
such earlier date).

(b) Performance. The Company shall have performed and complied in all material
respects with all agreements, obligations and conditions contained in this
Agreement that are required to be performed or complied by it on or before the
applicable Closing.

(c) Qualification Under State Securities Laws. All registrations,
qualifications, permits and approvals, if any, required under applicable state
securities laws shall have been obtained for the lawful execution, delivery and
performance of this Agreement or the other Transaction Documents.

(d) Consents and Waivers. The Company shall have obtained all consents or
waivers necessary to execute and perform its obligations under this Agreement
and the other Transaction Documents. All corporate and other action and
governmental filings necessary to effectuate the terms of this Agreement, the
other Transaction Documents, and other agreements and instruments executed and
delivered by the Company in connection herewith shall have been made or taken,
and no Material Adverse Effect has occurred with respect to the operation of the
Company’s business.

(e) Authorization of Shares. The Proposal shall have been approved at the
Stockholders Meeting, and the Company shall have filed a Certificate of
Amendment with the Delaware Secretary of State giving effect to the Proposal,
thereby authorizing a sufficient number of shares of Common Stock so as to allow
for the issuance at Closing of the Common Shares and the establishment of a
reserve for the Warrant Shares.

(f) No Material Adverse Effect. There shall have been no Material Adverse Effect
with respect to the Company since the date of the latest audited balance sheet
of the Company included in the SEC Reports.

7.2. Conditions of the Company’s Obligations. The obligations of the Company
under Section 2 hereof are subject to the fulfillment prior to or on the Closing
Date of all of the following conditions, any of which may be waived in whole or
in part by the Company: (i) each Purchaser at the Closing shall have performed
all of its obligations hereunder required to

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be performed by it at or prior to the Closing, (ii) the representations and
warranties of the Purchasers at the Closing contained in this Agreement shall be
true and correct at and as of the Closing as if made at and as of the Closing
(except to the extent expressly made as of an earlier date, in which case as of
such earlier date), and (iii) the Proposal shall have been approved at the
Stockholders Meeting. If the foregoing conditions are not satisfied on or before
July 8, 2011, then the Company may terminate this Agreement upon providing
written notice to the Purchasers.

8. Transfer Restrictions; Restrictive Legend.

8.1. Transfer Restrictions. The Purchasers understand that the Company may, as a
condition to the transfer of any of the Securities, require that the request for
transfer be accompanied by an opinion of counsel reasonably satisfactory to the
Company, to the effect that the proposed transfer does not result in a violation
of the Securities Act, unless such transfer is covered by an effective
registration statement or by Rule 144 or Rule 144A under the Securities Act;
provided, however, that an opinion of counsel shall not be required for a
transfer by a Purchaser that is (A) a partnership transferring to its partners
or former partners in accordance with partnership interests, (B) a corporation
transferring to a wholly owned subsidiary or a parent corporation that owns all
of the capital stock of such Purchaser, (C) a limited liability company
transferring to its members or former members in accordance with their interest
in the limited liability company, (D) an individual transferring to such
Purchaser’s family member or trust for the benefit of an individual Purchaser,
(E) transferring its Securities to any Affiliate of such Purchaser, in the case
of an institutional investor, or other Person under common management with such
Purchaser, or (F) a transfer that is made pursuant to a bona fide gift to a
third party; provided, further, that (i) the transferee in each case agrees to
be subject to the restrictions in this Section 8 and provides the Company with a
representation letter containing substantially the same representations and
warranties in Sections 4.3, 4.4, 4.5, 4.6, 4.7, 4.8, 4.9 and 4.10 hereof,
(ii) the Company satisfies itself that the number of transferees is sufficiently
limited and (iii) in the case of transferees that are partners or limited
liability company members, the transfer is for no consideration. It is
understood that the certificates evidencing any Securities may bear
substantially the following legends (in addition to any other legends as legal
counsel for the Company deems necessary or advisable under the applicable state
and federal securities laws or any other agreement to which the Company is a
party):

“THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
ANY APPLICABLE STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT
WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR APPLICABLE STATE SECURITIES
LAWS OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION
IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A OF SUCH ACT.”

8.2. Unlegended Certificates. The Company shall be obligated to reissue
unlegended certificates at the request of any holder thereof on or before the
third (3rd) Trading Day following such request if (a) the holder shall have
obtained an opinion of counsel reasonably

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acceptable to the Company to the effect that, or the Company is otherwise
satisfied that, the securities proposed to be disposed of may lawfully be so
disposed of without registration, qualification or legend, or (b) the securities
represented by the certificate containing the foregoing legend have been
registered for resale as contemplated in Section 10 of this Agreement, in which
case the removal shall be predicated on the undertaking by such Purchaser that
the securities will only be sold pursuant to such registration statement(s) or
an available exemption from registration. As used herein “Trading Day” means any
day on which the Common Stock is traded on the Trading Market; provided that
“Trading Day” shall not include any day on which the Common Stock is scheduled
to trade on such exchange or market for less than 4.5 hours or any day that the
Common Stock is suspended from trading during the final hour of trading on such
exchange or market (or if such exchange or market does not designate in advance
the closing time of trading on such exchange or market, then during the hour
ending at 4:00:00 p.m., New York time).

9. Registration, Transfer and Substitution of Certificates for Shares.

9.1. Stock Register; Ownership of Securities. The Company will keep at its
principal office a register in which the Company will provide for the
registration of transfers of the Securities. The Company may treat the Person in
whose name any of the Securities are registered on such register as the owner
thereof and the Company shall not be affected by any notice to the contrary. All
references in this Agreement to a “holder” of any Securities shall mean the
Person in whose name such Securities are at the time registered on such
register.

9.2. Transfer Agent Instruction. Subject to satisfaction of either condition set
forth in Section 8.2, the Company shall issue irrevocable instructions to its
transfer agent, and any subsequent transfer agent, to credit shares to the
applicable balance accounts at The Depository Trust Company (“DTC”), registered
in the name of the Purchaser or its nominee(s), for the Common Shares and, upon
exercise of the Warrants, for the Warrant Shares. The Company warrants that no
instruction other than the Irrevocable Transfer Agent Instructions referred to
in this Section 9.2 will be given by the Company to its transfer agent and that
the Securities shall otherwise be freely transferable on the books and records
of the Company as and to the extent provided in this Agreement and the other
Transaction Documents. If a Purchaser effects a transfer of the Securities in
accordance with Section 8.1, the Company shall permit the transfer and shall
promptly instruct its transfer agent to issue one or more certificates or credit
shares to the applicable balance accounts at DTC in such name and in such
denominations as specified by such Purchaser to effect such transfer. In the
event that any sale, assignment or transfer involves Common Shares or Warrant
Shares sold, assigned or transferred pursuant to an effective registration
statement or pursuant to Rule 144, the transfer agent shall issue such
Securities to the Purchaser, assignee or transferee, as the case may be, without
any restrictive legend. The Company acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to the
Purchasers. Accordingly, the Company acknowledges that the remedy at law for a
breach of its obligations under this Section 9.2 will be inadequate and agrees,
in the event of a breach or threatened breach by the Company of the provisions
of this Section 9.2, that the Purchaser shall be entitled, in addition to all
other available remedies, to an order and/or injunction restraining any breach
and requiring immediate issuance and transfer, without necessity of showing
economic loss and without bond or other security being required.

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9.3. Replacement of Certificates. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of any
certificate representing any of the Securities, and, in the case of any such
loss, theft or destruction, upon delivery of an indemnity agreement reasonably
satisfactory to the Company or, in the case of any such mutilation, upon
surrender of such certificate for cancellation at the office of the Company
maintained pursuant to Section 9.1 hereof, the Company at its expense will
execute and deliver, in lieu thereof, a new certificate representing such
Security, of like tenor.

10. Registration Rights of Purchasers.

10.1. Mandatory Registration. The Company shall prepare, and, as soon as
practicable but in no event later than 30 days after the Closing Date (the
“Filing Deadline”), file with the Commission a Registration Statement under the
Act on appropriate form covering the resale of the full amount of the Common
Shares and Warrant Shares (collectively, the “Registrable Securities”). The
Company shall use its commercially reasonable efforts to have the Registration
Statement declared effective by the Commission as soon as practicable, but in no
event later than the date (the “Effectiveness Deadline”), which shall be either
(i) in the event that the Commission does not review the Registration Statement,
90 days after the Closing Date, or (ii) in the event that the Commission reviews
the Registration Statement, 120 days after the Closing Date (but in any event,
no later than two Business Days from the Commission indicating that it has no
further comments on the Registration Statement).

10.2. Limitation on Registrable Securities. In the event that the Staff of the
Commission (the “Staff”) determines that the full amount of the Registrable
Securities cannot be registered on the Registration Statement due to limitations
under Rule 415 of the Act, then Company shall: (i) register the resale of that
portion of the Registrable Securities as the Staff may permit under its
interpretations of Rule 415, and (ii) undertake to register the remaining
portion of the Registrable Securities as soon as registration would be permitted
under Rule 415, as determined by the Company in good faith based on the Staff’s
publicly available interpretations of Rule 415.

10.3. Effect of Failure to File and Obtain and Maintain Effectiveness of
Registration Statement. Subject to Section 10.2, if (a) a Registration Statement
covering all of the Registrable Securities required to be covered thereby and
required to be filed by the Company pursuant to this Agreement is (i) not filed
with the Commission on or before the Filing Deadline (a “Filing Failure”) or
(ii) not declared effective by the Commission on or before the Effectiveness
Deadline (an “Effectiveness Failure”) or (b) on any day after the Effective
Date, sales of all of the Registrable Securities required to be included on such
Registration Statement cannot be made (other than during an Allowable Grace
Period) pursuant to such Registration Statement (including, without limitation,
because of a failure to keep such Registration Statement effective, to disclose
such information as is necessary for sales to be made pursuant to such
Registration Statement or to register a sufficient number of shares of Common
Stock) (a “Maintenance Failure”) then, in satisfaction of the damages to any
holder of Registrable Securities by reason of any such delay in or reduction of
its ability to sell the underlying shares of Common Stock, the Company shall pay
to each holder of Registrable Securities relating to such Registration Statement
an amount in cash equal to one percent (1.0%) of such holder’s Pro Rata Interest
in the Total Purchase Price on each of the following dates: (i) the day of a
Filing

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Failure and on every thirtieth day (pro rated for periods totaling less than 30
days) thereafter until such Filing Failure is cured; (ii) the day of an
Effectiveness Failure and on every thirtieth day (pro rated for periods totaling
less than 30 days) thereafter until such Effectiveness Failure is cured; and
(iii) the initial day of a Maintenance Failure and on every thirtieth day (pro
rated for periods totaling less than 30 days) thereafter until such Maintenance
Failure is cured. The payments to which a holder shall be entitled pursuant to
this Section 10.3 are referred to herein as “Registration Delay Payments;”
provided that no such payment shall continue beyond the later of: (i) a period
of six months, or (ii) one year from the Closing. The first such Registration
Delay Payment shall be paid within three Business Days after the event or
failure giving rise to such Registration Delay Payment occurred and all other
Registration Delay Payments shall be paid on the earlier of (I) the last day of
the calendar month during which such Registration Delay Payments are incurred
and (II) the third Business Day after the event or failure giving rise to the
Registration Delay Payments is cured. In the event the Company fails to make
Registration Delay Payments in a timely manner, such Registration Delay Payments
shall bear interest at the rate of one percent (1.0%) per month (prorated for
partial months) until paid in full, provided that no such payment shall continue
beyond the later of: (i) a period of six months, or (ii) one year from the
Closing.

10.4. Related Obligations. At such time as the Company is obligated to file a
Registration Statement with the Commission pursuant to Section 10.1 hereof, the
Company will use commercially reasonable efforts to effect the registration of
the Registrable Securities in accordance with the intended method of disposition
thereof and, pursuant thereto, the Company shall have the following obligations:

(a) The Company shall submit to the Commission, within two Business Days after
the Company learns that no review of a particular Registration Statement will be
made by the staff of the Commission or that the staff has no further comments on
a particular Registration Statement, as the case may be, a request for
acceleration of effectiveness of such Registration Statement to a time and date
not later than two Business Days after the submission of such request. The
Company shall keep each Registration Statement effective pursuant to Rule 415 at
all times until the earlier of (i) the date as of which the Purchasers may sell
all of the Registrable Securities covered by such Registration Statement without
restriction or limitation pursuant to Rule 144 and without the requirement to be
in compliance with Rule 144(c)(1) (or any successor thereto) promulgated under
the Securities Act or (ii) the date on which the Purchasers shall have sold all
of the Registrable Securities covered by such Registration Statement (the
“Registration Period”). The Company shall ensure that each Registration
Statement (including any amendments or supplements thereto and prospectuses
contained therein) shall not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein, or necessary to
make the statements therein (in the case of prospectuses, in the light of the
circumstances in which they were made) not misleading.

(b) The Company shall prepare and file with the Commission such amendments
(including post-effective amendments) and supplements to a Registration
Statement and the prospectus used in connection with such

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Registration Statement, which prospectus is to be filed pursuant to Rule 424
promulgated under the Securities Act, as may be necessary to keep such
Registration Statement effective at all times during the Registration Period,
and, during such period, comply with the provisions of the Securities Act with
respect to the disposition of all Registrable Securities of the Company covered
by such Registration Statement until such time as all of such Registrable
Securities shall have been disposed of in accordance with the intended methods
of disposition by the seller or sellers thereof as set forth in such
Registration Statement.

(c) The Company shall furnish to the Purchasers without charge, (i) promptly
after the Registration Statement including such Purchaser’s Registrable
Securities is prepared and filed with the Commission, at least one copy of such
Registration Statement and any amendment(s) thereto, including financial
statements and schedules, all documents incorporated therein by reference, if
requested by the Purchaser, all exhibits and each preliminary prospectus,
(ii) upon the effectiveness of any Registration Statement, 10 copies of the
prospectus included in such Registration Statement and all amendments and
supplements thereto (or such other number of copies as the Purchaser may
reasonably request) and (iii) such other documents, including copies of any
preliminary or final prospectus, as the Purchaser may reasonably request from
time to time in order to facilitate the disposition of the Registrable
Securities.

(d) The Company shall notify the Purchasers in writing of the happening of any
event, as promptly as practicable after becoming aware of such event, as a
result of which the prospectus included in a Registration Statement, as then in
effect, includes an untrue statement of a material fact or omission to state a
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading (provided that in no event shall such notice contain any material,
nonpublic information), and, promptly prepare a supplement or amendment to such
Registration Statement to correct such untrue statement or omission, and deliver
10 copies of such supplement or amendment to the Purchasers (or such other
number of copies as the Purchasers may reasonably request). The Company shall
also promptly notify the Purchasers in writing (i) when a prospectus or any
prospectus supplement or post-effective amendment has been filed, and when a
Registration Statement or any post-effective amendment has become effective
(notification of such effectiveness shall be delivered to the Purchasers by
facsimile on the same day of such effectiveness and by overnight mail), (ii) of
any request by the Commission for amendments or supplements to a Registration
Statement or related prospectus or related information, and (iii) of the
Company’s reasonable determination that a post-effective amendment to a
Registration Statement would be appropriate.

(e) The Company shall use commercially reasonable efforts to prevent the
issuance of any stop order or other suspension of effectiveness of a
Registration Statement, or the suspension of the qualification of any of the
Registrable Securities for sale in any jurisdiction and, if such an order or

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suspension is issued, to obtain the withdrawal of such order or suspension at
the earliest possible moment and to notify the Purchaser who holds Registrable
Securities being sold of the issuance of such order and the resolution thereof
or its receipt of notice of the initiation or threat of any proceeding for such
purpose.

(f) If a Purchaser is required under applicable securities law to be described
in the Registration Statement as an underwriter, at the reasonable request of
the Purchaser, the Company shall furnish to the Purchaser, on the date of the
effectiveness of the Registration Statement and thereafter from time to time on
such dates as the Purchaser may reasonably request (i) a letter, dated such
date, from the Company’s independent certified public accountants in form and
substance as is customarily given by independent certified public accountants to
underwriters in an underwritten public offering, addressed to the Purchaser, and
(ii) an opinion, dated as of such date, of counsel representing the Company for
purposes of such Registration Statement, in form, scope and substance as is
customarily given in an underwritten public offering, addressed to the
Purchaser.

(g) If a Purchaser is required under applicable securities law to be described
in the Registration Statement as an underwriter, upon the written request of the
Purchaser in connection with the Purchaser’s due diligence requirements, if any,
the Company shall make available for inspection by (i) the Purchaser and its
legal counsel and (ii) one firm of accountants or other agents retained by the
Purchaser (collectively, the “Inspectors”), all pertinent financial and other
records, and pertinent corporate documents and properties of the Company
(collectively, the “Records”), as shall be reasonably deemed necessary by each
Inspector solely for the purpose of establishing a due diligence defense under
underwriter liability under the Act, and cause the Company’s officers, directors
and employees to supply all information which any Inspector may reasonably
request; provided, however, that each Inspector shall agree to hold in strict
confidence and shall not make any disclosure (except to the Purchaser) or use of
any Record or other information which the Company determines in good faith to be
confidential, and of which determination the Inspectors are so notified, unless
(a) the disclosure of such Records is necessary to avoid or correct a
misstatement or omission in any Registration Statement or is otherwise required
under the Securities Act, (b) the release of such Records is ordered pursuant to
a final, non-appealable subpoena or order from a court or government body of
competent jurisdiction, or (c) the information in such Records has been made
generally available to the public other than by disclosure in violation of this
or any other Transaction Document. The Purchaser agrees that it shall, upon
learning that disclosure of such Records is sought in or by a court or
governmental body of competent jurisdiction or through other means, give prompt
notice to the Company and allow the Company, at its expense, to undertake
appropriate action to prevent disclosure of, or to obtain a protective order
for, the Records deemed confidential. Nothing herein (or in any other
confidentiality agreement between the Company and the Purchaser) shall be deemed
to limit the Purchaser’s ability to sell Registrable Securities in a manner
which is otherwise consistent with applicable laws and regulations.

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(h) The Company shall hold in confidence and not make any disclosure of
information concerning the Purchasers provided to the Company unless
(i) disclosure of such information is necessary to comply with federal or state
securities laws, (ii) the disclosure of such information is necessary to avoid
or correct a misstatement or omission in any Registration Statement, (iii) the
release of such information is ordered pursuant to a subpoena or other final,
non-appealable order from a court or governmental body of competent jurisdiction
or (iv) such information has been made generally available to the public other
than by disclosure in violation of this Agreement or any other agreement. The
Company agrees that it shall, upon learning that disclosure of such information
concerning the Purchasers is sought in or by a court or governmental body of
competent jurisdiction or through other means, give prompt written notice to the
Purchasers and allow the Purchasers, at each Purchaser’s expense, to undertake
appropriate action to prevent disclosure of, or to obtain a protective order
for, such information.

(i) The Company shall cooperate with the Purchasers and, to the extent
applicable, facilitate the timely preparation and delivery of certificates (not
bearing any restrictive legend) representing the Registrable Securities to be
offered pursuant to a Registration Statement and enable such certificates to be
in such denominations or amounts, as the case may be, as the Purchasers may
reasonably request and registered in such names as the Purchasers may request.

(j) If requested by a Purchaser, the Company shall (i) as soon as practicable
incorporate in a prospectus supplement or post-effective amendment such
information as the Purchaser reasonably requests to be included therein relating
to the sale and distribution of Registrable Securities, including, without
limitation, information with respect to the number of Registrable Securities
being offered or sold, the purchase price being paid therefor and any other
terms of the offering of the Registrable Securities to be sold in such offering;
(ii) as soon as practicable make all required filings of such prospectus
supplement or post-effective amendment after being notified of the matters to be
incorporated in such prospectus supplement or post-effective amendment; and
(iii) as soon as practicable, supplement or make amendments to any Registration
Statement if reasonably requested by the Purchaser.

(k) The Company shall use commercially reasonable efforts to cause the
Registrable Securities covered by a Registration Statement to be registered with
or approved by such other governmental agencies or authorities as may be
necessary to consummate the disposition of such Registrable Securities.

(l) The Company shall otherwise use commercially reasonable efforts to comply
with all applicable rules and regulations of the Commission in connection with
any registration hereunder.

(m) Within two Business Days after a Registration Statement that covers
Registrable Securities is ordered effective by the Commission, the

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Company shall deliver to the transfer agent for such Registrable Securities
(with copies to the Purchasers) confirmation that such Registration Statement
has been declared effective by the Commission.

(n) Notwithstanding anything to the contrary herein, at any time after the
Effective Date, the Company may delay the disclosure of material, non-public
information concerning the Company the disclosure of which at the time is not,
in the good faith opinion of the Board of Directors and its counsel, in the best
interest of the Company and, in the opinion of counsel to the Company, otherwise
required (a “Grace Period”); provided, that the Company shall promptly
(i) notify the Purchasers in writing of the existence of material, non-public
information giving rise to a Grace Period (provided that in each notice the
Company will not disclose the content of such material, non-public information
to the Purchasers) and the date on which the Grace Period will begin, and
(ii) notify the Purchasers in writing of the date on which the Grace Period
ends; and, provided further, that the Grace Periods shall not exceed an
aggregate of 30 Trading Days during any 365-day period and the first day of any
Grace Period must be at least 15 days after the last day of any prior Grace
Period (each, an “Allowable Grace Period”). For purposes of determining the
length of a Grace Period above, the Grace Period shall begin on and include the
date the Purchasers receive the notice referred to in clause (i) and shall end
on and include the later of the date the Purchasers receive the notice referred
to in clause (ii) and the date referred to in such notice. The provisions of
Section 10.4(e) hereof shall not be applicable during the period of any
Allowable Grace Period. Upon expiration of the Grace Period, the Company shall
again be bound by the first sentence of Section 10.4(d) with respect to the
information giving rise thereto unless such material, non-public information is
no longer applicable. Notwithstanding anything to the contrary, the Company
shall cause its transfer agent to deliver unlegended shares of Common Stock to a
transferee of any Purchaser in accordance with the terms of this Agreement in
connection with any sale of Registrable Securities with respect to which a
Purchaser has entered into a contract for sale, and delivered a copy of the
prospectus included as part of the applicable Registration Statement (unless an
exemption from such prospectus delivery requirement exists), prior to the
Purchaser’s receipt of the notice of a Grace Period and for which the Purchaser
has not yet settled.

(o) Neither the Company nor any Subsidiary or affiliate thereof shall identify
any Purchaser as an underwriter in any public disclosure or filing with the
Commission or any applicable Trading Market and any Purchaser being deemed an
underwriter by the Commission shall not relieve the Company of any obligations
it has under this Agreement or any other Transaction Document.

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10.5. Obligations of the Purchasers.

(a) At least five Business Days prior to the first anticipated filing date of a
Registration Statement, the Company shall notify each Purchaser in writing of
the information the Company requires from such Purchaser in order to have that
Purchaser’s Registrable Securities included in such Registration Statement. It
shall be a condition precedent to the obligations of the Company to complete the
registration pursuant to this Agreement with respect to the Registrable
Securities of a particular Purchaser that the Purchaser shall furnish to the
Company such information regarding itself, the Registrable Securities held by it
and the intended method of disposition of the Registrable Securities held by it
as shall be reasonably required to effect the effectiveness of the registration
of such Registrable Securities and shall execute such documents in connection
with such registration as the Company may reasonably request.

(b) Each Purchaser, by its acceptance of the Registrable Securities, agrees to
cooperate with the Company as reasonably requested by the Company in connection
with the preparation and filing of any Registration Statement hereunder, unless
the Purchaser has notified the Company in writing of the Purchaser’s election to
exclude all of the Purchaser’s Registrable Securities from such Registration
Statement.

(c) Each Purchaser agrees that, upon receipt of any notice from the Company of
the happening of any event of the kind described in Section 10.4(e) or the first
sentence of 10.4(d), the Purchaser will immediately discontinue disposition of
Registrable Securities pursuant to any Registration Statement(s) covering such
Registrable Securities until the Purchaser’s receipt of the copies of the
supplemented or amended prospectus contemplated by Section 10.4(e) or the first
sentence of 10.4(d) or receipt of notice that no supplement or amendment is
required. Notwithstanding anything to the contrary, the Company shall cause its
transfer agent to deliver unlegended shares of Common Stock to a transferee of
the Purchaser in accordance with the terms of this Agreement in connection with
any sale of Registrable Securities with respect to which the Purchaser has
entered into a contract for sale prior to the Purchaser’s receipt of a notice
from the Company of the happening of any event of the kind described in
Section 10.4(e) or the first sentence of 10.4(d) and for which the Purchaser has
not yet settled.

(d) Each Purchaser covenants and agrees that it will comply with the prospectus
delivery requirements of the Securities Act as applicable to it or an exemption
therefrom in connection with sales of Registrable Securities pursuant to the
Registration Statement.

10.6. Expenses of Registration. All reasonable expenses, other than underwriting
discounts and commissions incurred in connection with registrations, filings or
qualifications pursuant to Section 10, including, without limitation, all
registration, listing and qualifications fees, printers and accounting fees, and
fees and disbursements of counsel for the Company, shall be paid by the Company.

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10.7. Reports under the Exchange Act. With a view to making available to the
Purchasers the benefits of Rule 144 promulgated under the Securities Act or any
other similar rule or regulation of the Commission that may at any time permit
the Purchasers to sell securities of the Company to the public without
registration (“Rule 144”), the Company agrees to:

(a) make and keep public information available, as those terms are understood
and defined in Rule 144, during the Reporting Period;

(b) file with the Commission in a timely manner all reports and other documents
required of the Company under the Exchange Act; and

(c) furnish to the Purchasers so long as any Purchaser owns Registrable
Securities, promptly upon request during the Reporting Period, (i) a written
statement by the Company, if true, that it has complied with the reporting
requirements of Rule 144, the Securities Act and the Exchange Act, (ii) a copy
of the most recent annual or quarterly report of the Company and such other
reports and documents so filed by the Company and (iii) such other information
as may be reasonably requested to permit the Purchasers to sell such securities
pursuant to Rule 144 without registration.

10.8. Assignment of Registration Rights. The rights under Section 10 shall be
automatically assignable by a Purchaser to any transferee of all or any portion
of the Purchaser’s Registrable Securities if: (i) the Purchaser agrees in
writing with the transferee or assignee to assign such rights and a copy of such
agreement is furnished to the Company within a reasonable time after such
assignment; (ii) the Company is, within a reasonable time after such transfer or
assignment, furnished with written notice of (a) the name and address of such
transferee or assignee and (b) the securities with respect to which such
registration rights are being transferred or assigned; (iii) immediately
following such transfer or assignment the further disposition of such securities
by the transferee or assignee is restricted under the Securities Act or
applicable state securities laws; (iv) at or before the time the Company
receives the written notice contemplated by clause (ii) of this sentence the
transferee or assignee agrees in writing with the Company to be bound by all of
the provisions contained herein; and (v) such transfer shall have been made in
accordance with the applicable requirements of this Agreement.

10.9. Indemnification.

(a) Company Indemnification. The Company will indemnify each Purchaser who holds
Registrable Securities (if Registrable Securities held by such Purchaser are
included in the securities as to which such registration is being effected),
each of its officers and directors, partners, members and each person
controlling such Purchaser within the meaning of Section 15 of the Securities
Act, against all expenses, claims, losses, damages or liabilities (or actions in
respect thereof), including any of the foregoing incurred in settlement of any
litigation, commenced or threatened, arising out of or based on (A) any untrue
statement (or alleged untrue statement) of a material fact contained in any
Registration Statement, prospectus, offering circular or other document, or any
amendment or supplement thereto, incident to any such Registration Statement, or
based on any

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omission (or alleged omission) to state therein a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading, or (B) any violation by
the Company of the Securities Act, the Exchange Act, state securities laws or
any rule or regulation promulgated under such laws applicable to the Company in
connection with any such registration, and in each case, the Company will
reimburse each such Purchaser, each of its officers and directors, partners,
members and each person controlling such Purchaser, for any legal and any other
expenses reasonably incurred, as such expenses are incurred, in connection with
investigating, preparing or defending any such claim, loss, damage, liability or
action, provided that the Company will not be liable in any such case to the
extent that any such claim, loss, damage, liability or expense arises out of or
is based on (X) any untrue statement or omission or alleged untrue statement or
omission made in reliance upon and in conformity with written information
furnished to the Company by an instrument duly executed by such Purchaser or
controlling person, and stated to be specifically for use therein, (Y) the use
by a Purchaser of an outdated or defective prospectus after the Company has
notified such Purchaser in writing that the prospectus is outdated or defective
or (Z) a Purchaser’s (or any other indemnified person’s) failure to send or give
a copy of the prospectus or supplement (as then amended or supplemented), if
required, pursuant to Rule 172 under the Securities Act (or any successor rule)
to the Persons asserting an untrue statement or alleged untrue statement or
alleged untrue statement or omission or alleged omission at or prior to the
written confirmation of the sale of Registrable Securities to such person if
such statement or omission was corrected in such prospectus or supplement;
provided, further, that the indemnity agreement contained in this
Section 10.9(a) shall not apply to amounts paid in settlement of any such loss,
claim, damage, liability or action if such settlement is effected without the
consent of the Company (which consent shall not be unreasonably withheld).

(b) Purchaser Indemnification. Each Purchaser holding Registrable Securities
will, if Registrable Securities held by such Purchaser are included in the
securities as to which such registration is being effected, severally and not
jointly, indemnify the Company, each of its directors and officers, other
holders of the Company’s securities covered by such Registration Statement, each
person who controls the Company within the meaning of Section 15 of the
Securities Act, and each such holder, each of its officers and directors and
each person controlling such holder within the meaning of Section 15 of the
Securities Act, against all claims, losses, damages and liabilities (or actions
in respect thereof) arising out of or based on: (A) any untrue statement (or
alleged untrue statement) of a material fact contained in any such Registration
Statement, prospectus, offering circular or other document, or any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, to the extent, and
only to the extent, that such untrue statement (or alleged untrue statement) or
omission (or alleged omission) is made in such Registration Statement,
prospectus, offering circular or other document in reliance upon and in
conformity with written information furnished

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to the Company by an instrument duly executed by such Purchaser and stated to be
specifically for use therein, or (B) any violation by such Purchaser of the
Securities Act, the Exchange Act, state securities laws or any rule or
regulation promulgated under such laws applicable to such Purchaser, and in each
case, such Purchaser will reimburse the Company, each other holder, and
directors, officers, persons, underwriters or control persons of the Company and
the other holders for any legal or any other expenses reasonably incurred, as
such expenses are incurred, in connection with investigating or defending any
such claim, loss, damage, liability or action; provided, that the indemnity
agreement contained in this Subsection 10.9(b) shall not apply to amounts paid
in settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of such indemnifying Purchaser (which
consent shall not be unreasonably withheld or delayed). The liability of any
Purchaser for indemnification under this Section 10.9 (b) in its capacity as a
seller of Registrable Securities shall not exceed the amount of net proceeds to
such Purchaser of the securities sold in any such registration.

(c) Notice and Procedure. Each party entitled to indemnification under this
Section 10.9 (the “Indemnified Party”) shall give written notice to the party
required to provide indemnification (the “Indemnifying Party”) promptly after
such Indemnified Party has actual knowledge of any claim as to which indemnity
may be sought, and shall permit the Indemnifying Party to assume the defense of
any such claim or any litigation resulting therefrom, provided that counsel for
the Indemnifying Party, who shall conduct the defense of such claim or
litigation, shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in such
defense at such party’s expense, and provided further that the failure of any
Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations under this Agreement unless the failure to
give such notice is materially prejudicial to an Indemnifying Party’s ability to
defend such action and provided further, that the Indemnifying Party shall not
assume the defense for matters as to which there is a conflict of interest or
there are separate and different defenses. No Indemnifying Party, in the defense
of any such claim or litigation, shall, except with the consent of each
Indemnified Party (whose consent shall not be unreasonably withheld), consent to
entry of any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation.

(d) Contribution. If the indemnification provided for in this Section 10.9 is
held by a court of competent jurisdiction to be unavailable to an Indemnified
Party with respect to any losses, claims, damages or liabilities referred to
herein, the Indemnifying Party, in lieu of indemnifying such Indemnified Party
thereunder, shall to the extent permitted by applicable law contribute to the
amount paid or payable by such Indemnified Party as a result of such loss,
claim, damage or liability in such proportion as is appropriate to reflect the
relative fault of the Indemnifying Party on the one hand and of the

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Indemnified Party on the other in connection with the untrue statement or
omission that resulted in such loss, claim, damage or liability, as well as any
other relevant equitable considerations. The relative fault of the Indemnifying
Party and of the Indemnified Party shall be determined by a court of law by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission to state a material fact relates to
information supplied by the Indemnifying Party or by the Indemnified Party and
the parties’ relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission; provided, that in no event
shall any contribution by a Purchaser hereunder exceed the proceeds from the
offering received by such Purchaser. The amount paid or payable by a party as a
result of any loss, claim, damage or liability shall be deemed to include,
subject to the limitations set forth in this Agreement, any reasonable
attorneys’ or other reasonable fees or expenses incurred by such party in
connection with any proceeding to the extent such party would have been
indemnified for such fees or expenses if the indemnification provided for in
this Section 10.9 was available to such party in accordance with its terms.

(e) Survival. The obligations of the Company and the Purchasers under this
Section 10.9 shall survive completion of any offering of Registrable Securities
in a Registration Statement and the termination of this Agreement. The indemnity
and contribution agreements contained in this Section 10.9 are in addition to
any liability that the Indemnifying Parties may have to the Indemnified Parties
and are not in diminution or limitation of other remedies or causes of action
that the parties may have under the Transaction Documents.

11. Definitions. Unless the context otherwise requires, the terms defined in
this Section 11 shall have the meanings specified for all purposes of this
Agreement.

Except as otherwise expressly provided, all accounting terms used in this
Agreement, whether or not defined in this Section 11, shall be construed in
accordance with GAAP. If the Company has one or more Subsidiaries, such
accounting terms shall be determined on a consolidated basis for the Company and
each of its Subsidiaries, and the financial statements and other financial
information to be furnished by the Company pursuant to this Agreement shall be
consolidated and presented with consolidating financial statements of the
Company and each of its Subsidiaries.

“Affiliate” shall have the meaning ascribed to such term in Rule 12b-2 of the
General Rules and Regulations under the Exchange Act.

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

“Commission” means the Securities and Exchange Commission.

“Effective Date” means the date the Registration Statement pursuant to
Section 11 has been declared effective by the Commission.

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“Encumbrances” means a lien, claim, judgment, charge, mortgage, security
interest, pledge, escrow, equity or other encumbrance other than restrictions
pursuant to any applicable state or federal securities laws.

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

“FINRA” means the Financial Industry Regulatory Authority.

“GAAP” means U.S. generally accepted accounting principles consistently applied.

“Governmental Entity” means any national, federal, state, municipal, local,
territorial, foreign or other government or any department, commission, board,
bureau, agency, regulatory authority or instrumentality thereof, or any court,
judicial, administrative or arbitral body or public or private tribunal.

“Indebtedness” means (1) all indebtedness for borrowed money, (2) all
obligations issued, undertaken or assumed as the deferred purchase price of
property or services (including, without limitation, “capital leases” in
accordance with GAAP) (other than trade payables entered into in the ordinary
course of business), (3) all reimbursement or payment obligations with respect
to letters of credit, surety bonds and other similar instruments, (4) all
obligations evidenced by notes, bonds, debentures or similar instruments,
including obligations so evidenced incurred in connection with the acquisition
of property, assets or businesses, (5) all indebtedness created or arising under
any conditional sale or other title retention agreement, or incurred as
financing, in either case with respect to any property or assets acquired with
the proceeds of such indebtedness (even though the rights and remedies of the
seller or bank under such agreement in the event of default are limited to
repossession or sale of such property), (6) all monetary obligations under any
leasing or similar arrangement which, in connection with GAAP, consistently
applied for the periods covered thereby, is classified as a capital lease,
(7) all indebtedness referred to in clauses (1) through (6) above secured by (or
for which the holder of such Indebtedness has an existing right, contingent or
otherwise, to be secured by) any mortgage, lien, pledge, charge, security
interest or other encumbrance upon or in any property or assets (including
accounts and contract rights) owned by any Person, even though the Person which
owns such assets or property has not assumed or become liable for the payment of
such indebtedness, and (8) all Contingent Obligations in respect of indebtedness
or obligations of others of the kinds referred to in clauses (1) through
(7) above.

“Key Employee” means each of the Company’s executive officers.

“Knowledge” by a Person of a particular fact or other matter means the
following: (a) if the Person is an individual, that such individual is actually
aware or reasonably should be aware, after due inquiry, by virtue of such
person’s office, of such fact or other matter; and (b) if the Person is an
Entity, any executive officer of such Person is actually aware or reasonably
should be aware, after due inquiry, of such fact or other matter.

“Lien” means any mortgage, lien, pledge, charge, security interest or other
similar encumbrance upon or in any property or assets (including accounts and
contract rights).

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“Material Adverse Effect” means any (i) adverse effect on the issuance or
validity of the Securities or the transactions contemplated hereby or on the
ability of the Company to perform its obligations under this Agreement or the
other Transaction Documents, or (ii) material adverse effect on the condition
(financial or otherwise), prospects, properties, assets, liabilities, business
or operations of the Company.

“Material Contract” means all written and oral contracts, agreements, deeds,
mortgages, leases, subleases, licenses, instruments, notes, commitments,
commissions, undertakings, arrangements and understandings (i) which by their
terms involve, or would reasonably be expected to involve, aggregate payments by
or to the Company during any twelve month period in excess of $100,000, (ii) the
breach of which by the Company would reasonably be expected to have a Material
Adverse Effect, or (iii) which are required to be filed as exhibits by the
Company with the Commission pursuant to Items 601(b)(2), 601(b)(4) or 601(b)(10)
of Regulation S-K promulgated by the Commission.

“Person” means and includes all natural persons, corporations, business trusts,
associations, companies, partnerships, joint ventures, limited liability
companies and other entities and governments and agencies and political
subdivisions.

“Permitted Indebtedness” means (1) Indebtedness existing on the Closing Date and
disclosed in the SEC Reports, (2) Purchase Money Indebtedness, (3) Indebtedness
to trade creditors incurred in the ordinary course of business, (4) the Notes,
including up to $3,000,000 of additional principal amount of Notes that may be
issued upon exercise of the purchase right held by the Note holders, and
(5) extensions, refinancings and renewals of any items of Permitted Indebtedness
in clauses (1) and (2) hereof, provided that the principal amount is not
increased, other than by their existing terms, or the terms modified to impose
more burdensome terms upon Company and such Indebtedness shall not be secured by
any additional collateral.

“Permitted Liens” means any Lien disclosed in an SEC Report and: (1) any Lien
for taxes not yet due or delinquent or being contested in good faith by
appropriate proceedings for which adequate reserves have been established in
accordance with GAAP, (2) any statutory Lien arising in the ordinary course of
business by operation of law with respect to a liability that is not yet due or
delinquent, (3) any Lien created by operation of law, such as materialmen’s
liens, mechanics’ liens and other similar liens, arising in the ordinary course
of business with respect to a liability that is not yet due or delinquent or
that are being contested in good faith by appropriate proceedings, (4) Liens
(a) upon or in any equipment acquired or held by the Company or any of its
Subsidiaries to secure the purchase price of such equipment or indebtedness
incurred solely for the purpose of financing the acquisition or lease of such
equipment, or (b) existing on such equipment at the time of its acquisition,
provided that the Lien is confined solely to the property so acquired and
improvements thereon, and the proceeds of such equipment, (5) Liens incurred in
connection with the extension, renewal or refinancing of the indebtedness
secured by Liens of the type described in clauses (1) through (4) above,
provided that any extension, renewal or replacement Lien shall be limited to the
property encumbered by the existing Lien and the principal amount of the
Indebtedness being extended, renewed or refinanced does not increase,
(7) leases, subleases, licenses and sublicenses granted to others in the
ordinary course of the Company’s business, not interfering in any material
respect with the business of the Company and its Subsidiaries taken as a whole,
and (8) Liens in favor of customs and revenue authorities

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

arising as a matter of law to secure payments of custom duties in connection
with the importation of goods.

“Placement Agent” means MTS Securities, LLC.

“Pro Rata Interest” means the number of Units purchased by each Purchaser,
relative to the total number of Units being sold hereunder, as reflected on
Schedule I attached hereto.

“Purchase Money Indebtedness” means Indebtedness, incurred at the time of, or
within 30 days after, the acquisition of any fixed assets for the purpose of
financing all or any part of the acquisition cost thereof.

“Purchaser” has the meaning assigned to it in the introductory paragraph of this
Agreement and shall include any Affiliates of the Purchaser.

“Registration Statement” means a registration statement or registration
statements of the Company filed under the Securities Act pursuant to Section 10
hereof.

“Required Holders” means Purchasers who purchase, in the aggregate, at least 66%
of the total number of Units offered and sold hereby.

“Subsidiary” means any corporation, association trust, limited liability
company, partnership, joint venture or other business association or entity
(i) at least 50% of the outstanding voting securities of which are at the time
owned or controlled directly or indirectly by the Company or (ii) with respect
to which the Company possesses, directly or indirectly, the power to direct or
cause the direction of the affairs or management of such Person.

“Trading Market” means the following markets or exchanges on which the Common
Stock is listed or quoted for trading on the date in question: the NYSE Amex
Equities, the NASDAQ Capital Market, the NASDAQ Global Market, the NASDAQ Global
Select Market, the New York Stock Exchange or the OTC Markets Group Inc.

“Transaction Documents” means this Agreement and the Warrant.

12. Enforcement.

12.1. Cumulative Remedies. None of the rights, powers or remedies conferred upon
the Purchasers on the one hand or the Company on the other hand shall be
mutually exclusive, and each such right, power or remedy shall be cumulative and
in addition to every other right, power or remedy, whether conferred by this
Agreement, any of the other Transaction Documents or now or hereafter available
at law, in equity, by statute or otherwise.

12.2. No Implied Waiver. Except as expressly provided in this Agreement, no
course of dealing between the Company and the Purchasers or any other holder of
shares of Common Stock and no delay in exercising any such right, power or
remedy conferred hereby or by any of the other Transaction Documents or now or
hereafter existing at law in equity, by statute or otherwise, shall operate as a
waiver of, or otherwise prejudice, any such right, power or remedy.

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

13. Confidentiality. Except as otherwise agreed in writing by the Company, each
Purchaser agrees that it will use reasonable care to keep confidential and not
disclose, divulge, or use for any purpose (other than to monitor its investment
in the Company) any confidential information obtained from the Company pursuant
to the terms of the Transaction Documents (including notice of the Company’s
intention to file a registration statement), unless such confidential
information (a) is known or becomes known to the public in general (other than
as a result of a breach of this Section 13 by the Purchaser), (b) is or has been
independently developed or conceived by the Purchaser without use of the
Company’s confidential information, (c) is or has been made known or disclosed
to the Purchaser by a third party without knowledge by the Purchaser of any
obligation of confidentiality such third party owes to the Company with respect
to the information or (d) was known to the Purchaser prior to disclosure to the
Purchaser by the Company; provided, however, that the Purchaser may disclose
confidential information (i) to its attorneys, accountants, consultants, and
other professionals to the extent necessary to obtain their services in
connection with monitoring its investment in the Company provided that the
Purchaser informs such person that such information is confidential and directs
such person to maintain the confidentiality of such information; (ii) to any
prospective purchaser of any Securities from the Purchaser, if such prospective
purchaser agrees to be bound by the provisions of this Section 13; (iii) to any
Affiliate, partner, member, stockholder or advisor of the Purchaser in the
ordinary course of business, provided that the Purchaser informs such person
that such information is confidential and directs such person to maintain the
confidentiality of such information; or (iv) as may otherwise be required by
law, provided that the Purchaser promptly notifies the Company of such
disclosure and, if requested by the Company, reasonably cooperates with the
Company at the Company’s sole expense to minimize the extent of any such
required disclosure. Notwithstanding anything to the contrary herein, the
confidentiality obligations of this Section 13 shall survive the termination of
this Agreement. Notwithstanding the foregoing, the provisions of this Section 13
shall not apply after the 8-K Filing.

14. Miscellaneous.

14.1. Waivers and Amendments. Upon the approval of the Company and the written
consent of the Required Holders, the obligations of the Company and the rights
of the Purchasers under this Agreement may be waived (either generally or in a
particular instance, either retroactively or prospectively and either for a
specified period of time or indefinitely). Neither this Agreement, nor any
provision hereof, maybe changed, waived, discharged or terminated orally or by
course of dealing, but only by an instrument in writing executed by the Company
and the Required Holders.

14.2. Notices. All notices, requests, consents, and other communications under
this Agreement shall be in writing and shall be deemed delivered (a) when
delivered, if delivered personally, (b) four business days after being sent by
registered or certified mail, return receipt requested, postage prepaid; (c) one
business day after being sent via a reputable nationwide overnight courier
service guaranteeing next business day delivery, or (d) when receipt is
acknowledged, in the case of facsimile, in each case to the intended recipient
as set forth below, with respect to the Company, and to the addresses set forth
on Schedule I with respect to the Purchasers.

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

If to the Company:

A.P. Pharma, Inc.

123 Saginaw Drive

Redwood City, CA 94063

Attention: John Whelan

Facsimile No.: (650) 365-6490

with a copy to:

Ropes & Gray LLP

Three Embarcadero Center

San Francisco, CA 94111

Attention: Ryan Murr, Esq.

Facsimile No.: (415) 315-6026

or at such other address as the Company or each Purchaser each may specify by
written notice to the other parties hereto in accordance with this Section 14.2.

14.3. No Waivers. No failure or delay by any party in exercising any right,
power or privilege hereunder shall operate as a waiver thereof nor shall any
single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. The rights and
remedies herein provided shall be cumulative and not exclusive of any rights or
remedies provided by law.

14.4. Successors and Assigns. All the terms and provisions of this Agreement
shall be binding upon and inure to the benefit of and be enforceable by the
respective parties hereto, the successors and permitted assigns of each
Purchaser and the successors of the Company, whether so expressed or not. None
of the parties hereto may assign its rights or obligations hereof without the
prior written consent of the Company, except that a Purchaser may, without the
prior consent of the Company, assign its rights to purchase the Securities
hereunder to any of its Affiliates (provided such Affiliate agrees to be bound
by the terms of this Agreement and makes the same representations and warranties
set forth in Section 4 hereof). This Agreement shall not inure to the benefit of
or be enforceable by any other Person.

14.5. Headings. The headings of the Sections and paragraphs of this Agreement
have been inserted for convenience of reference only and do not constitute a
part of this Agreement.

14.6. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California without regard to its
conflict of law principles.

14.7. Jurisdiction. Any suit, action or proceeding seeking to enforce any
provision of, or based on any matter arising out of or in connection with, this
Agreement or the transactions contemplated hereby may be brought in any federal
or state court located in the City and County of San Francisco, California, and
each of the parties hereby consents to the

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jurisdiction of such courts (and of the appropriate appellate courts therefrom)
in any such suit, action or proceeding and irrevocably waives, to the fullest
extent permitted by law, any objection which it may now or hereafter have to the
laying of the venue of any such suit, action or proceeding in any such court or
that any such suit, action or proceeding which is brought in any such court has
been brought in an inconvenient forum. Process in any such suit, action or
proceeding may be served on any party anywhere in the world, whether within or
without the jurisdiction of any such court. Without limiting the foregoing, each
party agrees that service of process on such party as provided in Section 14.2
shall be deemed effective service of process on such party.

14.8. Waiver of Jury Trial. TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW WHICH
CANNOT BE WAIVED, THE PURCHASERS AND THE COMPANY HEREBY WAIVE AND COVENANT THAT
NEITHER THE COMPANY NOR THE PURCHASERS WILL ASSERT, ANY RIGHT TO TRIAL BY JURY
ON ANY ISSUE IN ANY PROCEEDING, WHETHER AS PLAINTIFF, DEFENDANT OR OTHERWISE, IN
RESPECT OF ANY ISSUE, CLAIM, DEMAND, ACTION OR CAUSE OF ACTION ARISING OUT OF OR
BASED UPON THIS AGREEMENT, ANY OTHER AGREEMENT OR THE SUBJECT MATTER HEREOF OR
THEREOF OR IN ANY WAY CONNECTED WITH, RELATED OR INCIDENTAL TO THE DEALINGS OF
THE PURCHASER AND THE COMPANY HEREUNDER OR THEREUNDER, IN EACH CASE WHETHER NOW
EXISTING OR HEREAFTER ARISING AND WHETHER IN TORT OR CONTRACT OR OTHERWISE. The
Company acknowledges that it has been informed by the Purchasers that the
provisions of this Section 14.8 constitute a material inducement upon which the
Purchaser are relying and will rely in entering into this Agreement. The
Purchaser or the Company may file an original counterpart or a copy of this
Section 14.8 with any court as written evidence of the consent of the Purchaser
and the Company to the waiver of the right to trial by jury.

14.9. Counterparts; Effectiveness. This Agreement may be executed in any number
of counterparts and by different parties hereto in separate counterparts, with
the same effect as if all parties had signed the same document. All such
counterparts (including counterparts delivered by facsimile or other electronic
format) shall be deemed an original, shall be construed together and shall
constitute one and the same instrument. This Agreement shall become effective
when each party hereto shall have received counterparts hereof signed by all of
the other parties hereto.

14.10. Entire Agreement. The Transaction Documents contain the entire agreement
among the parties hereto with respect to the subject matter hereof and thereof
and, except as set forth below, such agreements supersede and replace all other
prior agreements, written or oral, among the parties hereto with respect to the
subject matter hereof and thereof. Notwithstanding the foregoing, the
Transaction Documents shall not supersede any confidentiality or other
non-disclosure agreements that may be in place between the Company and any
Purchaser.

14.11. Severability. If any provision of this Agreement shall be found by any
court of competent jurisdiction to be invalid or unenforceable, the parties
hereby waive such provision to the extent that it is found to be invalid or
unenforceable. Such provision shall, to the maximum extent allowable by law, be
modified by such court so that it becomes enforceable,

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

and, as modified, shall be enforced as any other provision hereof, all the other
provisions hereof continuing in full force and effect.

14.12. Disclaimer for H&Q Funds. A copy of the Declaration of Trust, as amended
and restated, for each of the H&Q Funds is on file with the Secretary of State
of the Commonwealth of Massachusetts, and notice is hereby given that this
Agreement is executed on behalf of the H&Q Funds by an officer or trustee of the
H&Q Funds in his or her capacity as an officer or trustee of the H&Q Funds, and
not individually, and that the obligations of or arising out of this Agreement
are not binding upon any of the trustees, officers or shareholders individually
but are binding only upon the assets and property of each of the H&Q Funds.

*        *        *

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IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase
Agreement to be duly executed as of the day and year first written above.

 

THE COMPANY A.P. Pharma, Inc. By:  

/s/ John B. Whelan

  Name:  

John B. Whelan

  Title:  

Chief Executive Officer

[PURCHASER’S SIGNATURE PAGE SEPARATELY ATTACHED]

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

SCHEDULE I

 

Purchaser

  

No. Units Purchased

    

Total Purchase Price

 

Tang Capital Partners, LP

     50,000,000       $ 7,500,000.00   

14159, L.P.

     180,000       $ 27,000.00   

Baker Brothers Life Sciences, L.P.

     9,820,000       $ 1,473,000.00   

Biotechnology Value Fund, LP

     2,923,034       $ 438,455.10   

Biotechnology Value Fund II, LP

     1,969,000       $ 295,350.00   

Investment 10, LLC

     869,600       $ 130,440.00   

BVF Investments, LLC

     7,571,700       $ 1,135,755.00   

2400 Franklin Templeton Funds – Franklin Biotechnology Fund

     240,566       $ 36,084.90   

4402 Franklin Strategic Series – Franklin Biotechnology Discovery Fund

     10,903,203       $ 1,635,480.45   

4912 FTIF – Franklin Biotechnology Discovery Fund

     3,522,898       $ 528,434.70   

Hutchin Hill Capital L55, Ltd.

     6,666,667       $ 1,000,000.05   

H&Q Healthcare Investors

     9,200,000       $ 1,380,000.00   

H&Q Life Sciences Investors

     4,133,334       $ 620,000.10   

IsZo Capital LP

     12,333,334       $ 1,850,000.10   

Mark Pearson

     2,666,667       $ 400,000.05   

The Wygod Family Revocable Living Trust w/a/d 12-15-08

     3,000,000       $ 450,000.00   

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

Kevin M. Cameron

     166,667       $ 25,000.05   

Charles A. Mele

     166,667       $ 25,000.05   

Obsidian Management LLC

     3,333,334       $ 500,000.10   

Perceptive Life Sciences Master Fund, Ltd.

     26,666,667       $ 4,000,000.05   

RTW Master Fund, Ltd.

     3,333,334       $ 500,000.10   

Srinivas Akkaraju

     333,334       $ 50,000.10                     

Total

     160,000,006       $ 24,000,000.90                     

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EXHIBIT A

FORM OF COMMON STOCK WARRANT

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FORM OF WARRANT

THIS WARRANT AND THE UNDERLYING SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”) OR THE SECURITIES LAWS
OF ANY STATE OF THE UNITED STATES. THE SECURITIES MAY NOT BE SOLD, OFFERED FOR
SALE, PLEDGED, HYPOTHECATED, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER APPLICABLE SECURITIES
LAWS OR UNLESS OFFERED, SOLD, PLEDGED, HYPOTHECATED OR TRANSFERRED PURSUANT TO
AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THOSE LAWS. THE
COMPANY SHALL BE ENTITLED TO REQUIRE AN OPINION OF COUNSEL SATISFACTORY TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED TO THE EXTENT THAT AN OPINION IS
REQUIRED PURSUANT TO THE AGREEMENT UNDER WHICH THE SECURITIES WERE ISSUED.

A.P. PHARMA, INC.

WARRANT TO PURCHASE COMMON STOCK

 

[No. CW]   July [—], 2011

Void After July [—], 2016

THIS CERTIFIES THAT, for value received and subject to the terms and conditions
set forth below, [—], or assigns (the “Holder”), is entitled to subscribe for
and purchase at the Exercise Price (defined below) from A.P. Pharma, Inc., a
Delaware corporation, with its principal office at 123 Saginaw Drive, Redwood
City, CA 94063 (the “Company”) up to [—] shares of the Common Stock of the
Company (the “Common Stock”), subject to adjustment as provided herein. This
Warrant is one of a series of Warrants being issued pursuant to the terms of the
Securities Purchase Agreement, dated June [29], 2011, by and among the Company
and the original Holder of this Warrant and the other parties named therein (the
“Purchase Agreement”). Capitalized terms not otherwise defined herein shall have
the respective meanings ascribed to such terms in the Purchase Agreement.

1. DEFINITIONS. As used herein, the following terms shall have the following
respective meanings:

(a) “Exercise Period” shall mean the period commencing on the date of issuance
and ending July [—], 2016, unless sooner terminated as provided below.

(b) “Exercise Price” shall mean $0.18 per share, subject to adjustment pursuant
to Section 5 below.

(c) “Warrant Shares” shall mean the shares of the Company’s Common Stock
issuable upon exercise of this Warrant, subject to adjustment pursuant to the
terms herein, including but not limited to adjustment pursuant to Section 5
below.

2. EXERCISE OF WARRANT.

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2.1. Method of Exercise. The rights represented by this Warrant may be exercised
in whole or in part at any time during the Exercise Period, by delivery of the
following to the Company at its address set forth above (or at such other
address as it may designate by notice in writing to the Holder):

(a) An executed Notice of Exercise in the form attached hereto;

(b) Payment of the Exercise Price either (i) in cash or by check or wire
transfer of immediately available funds, or (ii) pursuant to a Cashless
Exercise, if then permitted, as described below; and

(c) This Warrant.

Upon the exercise of the rights represented by this Warrant, shares of Common
Stock shall be issued for the Warrant Shares so purchased, and shall be
registered in the name of the Holder or persons affiliated with the Holder, if
the Holder so designates, on or before the third (3rd) Trading Day after the
rights represented by this Warrant shall have been so exercised and shall be
issued in certificate form and delivered to the Holder, if so requested.

The person in whose name any Warrant Shares are to be issued upon exercise of
this Warrant shall be deemed to have become the holder of record of such shares
on the date on which this Warrant was surrendered and payment of the Exercise
Price was made, irrespective of the date of issuance of the shares of Common
Stock, except that, if the date of such surrender and payment is a date when the
stock transfer books of the Company are closed, such person shall be deemed to
have become the holder of such shares at the close of business on the next
succeeding date on which the stock transfer books are open.

2.2. Cashless Exercise. Notwithstanding any provisions herein to the contrary,
if, at any time during the Exercise Period the Registration Statement is not
then effective and available for the resale of the Warrant Shares, then the
Holder may, in lieu of exercising this Warrant for cash pursuant to Section 2.1,
elect to exercise the Warrant on a cashless basis by surrendering this Warrant
at the principal office of the Company, together with the properly endorsed
Notice of Exercise, and the Company shall thereupon issue to the Holder a number
of shares of Common Stock computed using the following formula:

 

     X =    Y(B – A)              D

Where:

  

X =

  

the number of shares of Common Stock to be issued to the Holder

  

Y =

  

the number of shares of Common Stock purchasable upon exercise of all of the
Warrant or, if only a portion of the Warrant is being exercised, the portion of
the Warrant being exercised.

  

A =

  

the Exercise Price.

  

B =

  

the Current Market Price of one share of Common Stock.

“Current Market Price” means on any particular date:

(a) if the Common Stock is traded on any registered national stock exchange,
including the NYSE, NASDAQ or NYSE Amex (each, a “National Exchange”), the
closing price of the Common Stock of the Company on such market on the day prior
to the applicable date of valuation;

(b) if the Common Stock is traded over-the-counter, but not on a National
Exchange, the closing bid price of the Common Stock of the Company on the day
prior to the applicable date of valuation; and

(c) if there is no active public market for the Common Stock, the value thereof,
as determined in good faith by the Board of Directors of the Company upon due
consideration of the proposed determination thereof by the Holder.

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2.3. Partial Exercise. If this Warrant is exercised in part only, the Company
shall, upon surrender of this Warrant, execute and deliver, within 10 days of
the date of exercise, a new Warrant evidencing the rights of the Holder, or such
other person as shall be designated in the Notice of Exercise, to purchase the
balance of the Warrant Shares purchasable hereunder. If the Holder exercises
this Warrant or attempts to exercise this Warrant before the Company shall have
delivered to the Holder a new Warrant as contemplated above, then the Holder
shall be deemed to have validly exercised this Warrant pursuant to this
Section 2 without having complied with the requirements of Section 2.1(c). In no
event shall this Warrant be exercised for a fractional Warrant Share, and the
Company shall not distribute a Warrant exercisable for a fractional Warrant
Share. Fractional Warrant Shares shall be treated as provided in Section 6
hereof.

2.4. No Settlement for Cash. The Warrant cannot be settled with the Company for
cash.

2.5. Exercise Limitation. Notwithstanding any provisions herein to the contrary,
the Holder shall not be entitled to exercise this Warrant for a number of
Warrant Shares in excess of that number of Warrant Shares which, upon giving
effect to such exercise, would cause the aggregate number of shares of Common
Stock beneficially owned by the Holder to exceed 9.99% of the outstanding shares
of the Common Stock following such exercise. For purposes of the foregoing
proviso, the aggregate number of shares of Common Stock beneficially owned by
the Holder shall include the number of shares of Common Stock issuable upon
exercise of this Warrant with respect to which determination of such proviso is
being made, but shall exclude the shares of Common Stock which would be issuable
upon (i) exercise of the remaining, unexercised Warrants beneficially owned by
the Holder and (ii) exercise or conversion of the unexercised or unconverted
portion of any other securities of the Company beneficially owned by the Holder
subject to a limitation on conversion or exercise analogous to the limitation
contained herein. Except as set forth in the preceding sentence, for purposes of
this Section 2.5, beneficial ownership shall be calculated in accordance with
Section 13(d) of the Exchange Act. Notwithstanding the foregoing, the Holder may
waive the foregoing limitation, or increase or decrease the foregoing limitation
to any other percentage, by written notice to the Company; provided that a
waiver by the Holder of the foregoing limitation or a request to increase such
limitation requires not less than 61 days prior written notice (with such waiver
of the foregoing limitation or request to increase such limitation taking effect
only upon the expiration of such 61 day notice period and applying only to the
Holder and not to any other holder of Warrants sold pursuant to the Purchase
Agreement). For purposes of this Section 2.5, in determining the number of
outstanding shares of Common Stock, the Holder may rely on the number of
outstanding shares of Common Stock as reflected in (x) the Company’s most recent
quarterly report on Form 10-Q or annual report on Form 10-K, as the case may be,
filed with the SEC on the date thereof, (y) a more recent public announcement by
the Company or (z) any other notice by the Company or its transfer agent setting
forth the number of shares of Common Stock outstanding. Upon the written request
of the Holder, the Company shall within three (3) Business Days confirm in
writing or by electronic mail to the Holder the number of shares of Common Stock
then outstanding. In any case, the number of outstanding shares of Common Stock
shall be determined after giving effect to the conversion or exercise of
securities of the Company, including this Warrant, by the Holder since the date
as of which such number of outstanding shares of Common Stock was reported.

3. COVENANTS OF THE COMPANY.

3.1. Covenants as to Warrant Shares. If at any time the number of authorized but
unissued shares of Common Stock shall not be sufficient to permit exercise of
this Warrant, the Company will take such corporate action as may, in the opinion
of its counsel, be necessary to increase its authorized but unissued shares of
Common Stock (or other securities as provided herein) to such number of shares
as shall be sufficient for such purposes.

3.2. No Impairment. Except and to the extent as waived or consented to by the
Holder or otherwise in accordance with Section 12 hereof, the Company will not,
by amendment of its Certificate of Incorporation (as such may be amended from
time to time), or through any means, avoid or seek to avoid the observance or
performance of any of the terms to be observed or performed hereunder by the
Company, but will at all times in good faith assist in the carrying out of all
the provisions of this Warrant and in the taking of all such action as may be
necessary or appropriate in order to protect the exercise rights of the Holder
against impairment.

3.3. Notices of Record Date. In the event of any taking by the Company of a
record of the holders of any class of securities for the purpose of determining
the holders thereof who are entitled to receive any dividend (other than a cash
dividend which is the same as cash dividends paid in previous quarters) or other
distribution, the Company

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

shall mail to the Holder, at least ten (10) days prior to the date specified
herein, a notice specifying the date on which any such record is to be taken for
the purpose of such dividend or distribution.

4. REPRESENTATIONS OF HOLDER.

4.1. Acquisition of Warrant for Personal Account. The Holder represents and
warrants that it is acquiring the Warrant and the Warrant Shares solely for its
account for investment and not with a present view toward the public or
distribution of said Warrant or Warrant Shares or any part thereof and has no
intention of selling or distributing said Warrant or Warrant Shares or any
arrangement or understanding with any other persons regarding the sale or
distribution of said Warrant, except as would not result in a violation of the
Securities Act. The Holder will not, directly or indirectly, offer, sell,
pledge, transfer or otherwise dispose of (or solicit any offers to buy, purchase
or otherwise acquire or take a pledge of) the Warrant except in accordance with
the Securities Act and will not, directly or indirectly, offer, sell, pledge,
transfer or otherwise dispose of (or solicit any offers to buy, purchase or
otherwise acquire or take a pledge of) the Warrant Shares except in accordance
with the provisions of Section 10 of the Purchase Agreement or pursuant to and
in accordance with the Securities Act.

4.2. Securities Are Not Registered.

(a) The Holder understands that the offer and sale of the Warrant or the Warrant
Shares have not been registered under the Securities Act on the basis that no
distribution or public offering of the stock of the Company is to be effected.
The Holder realizes that the basis for the exemption may not be present if,
notwithstanding its representations, the Holder has a present intention of
acquiring the securities for a fixed or determinable period in the future,
selling (in connection with a distribution or otherwise), granting any
participation in, or otherwise distributing the securities. The Holder has no
such present intention.

(b) The Holder recognizes that the Warrant and the Warrant Shares must be held
indefinitely unless they are subsequently registered under the Securities Act or
an exemption from such registration is available. The Holder recognizes that the
Company has no obligation to register the Warrant or, except as provided in the
Purchase Agreement, the Warrant Shares, or to comply with any exemption from
such registration.

(c) The Holder is aware that neither the Warrant nor the Warrant Shares may be
sold pursuant to Rule 144 adopted under the Securities Act unless certain
conditions are met, including, among other things, the existence of a public
market for the shares, the availability of certain current public information
about the Company, the resale following the required holding period under Rule
144 and the number of shares being sold during any three month period not
exceeding specified limitations. Holder is aware that any such sale made in
reliance on Rule 144, if Rule 144 is available, may be made only in accordance
with the terms of Rule 144.

4.3. Disposition of Warrant and Warrant Shares.

(a) The Holder further agrees not to make any disposition of all or any part of
the Warrant or Warrant Shares in any event unless and until:

(i) The Company shall have received a letter secured by the Holder from the SEC
stating that no action will be recommended to the SEC with respect to the
proposed disposition;

(ii) There is then in effect a registration statement under the Securities Act
covering such proposed disposition and such disposition is made in accordance
with said registration statement; or

(iii) The Holder shall have notified the Company of the proposed disposition and
shall have furnished the Company with a detailed statement of the circumstances
surrounding the proposed disposition, and if reasonably requested by the
Company, the Holder shall have furnished the Company with an opinion of counsel,
reasonably satisfactory to the Company, for the Holder to the effect that such
disposition will not require registration of such Warrant or Warrant Shares
under the Securities Act or any applicable state securities laws; provided, that
no opinion shall be required for any disposition made or to be made in
accordance with the provisions of Rule 144.

(b) The Holder understands and agrees that all certificates evidencing the
Warrant Shares to be issued to the Holder may bear a legend in substantially the
following form; provided, that such legend shall be removed (or such Warrant

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

Shares shall be issued without such legend upon exercise of this Warrant) as
required pursuant to Section 8 of the Purchase Agreement:

THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
ANY APPLICABLE STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT
WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR APPLICABLE STATE SECURITIES
LAWS OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION
IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A OF SUCH ACT.

5. ADJUSTMENT OF EXERCISE PRICE. In the event of changes in the outstanding
Common Stock of the Company by reason of stock dividends, split-ups,
recapitalizations, reclassifications, combinations or exchanges of shares,
separations, reorganizations, liquidations, or the like, the number and class of
shares available under the Warrant in the aggregate and the Exercise Price shall
be correspondingly adjusted to give the Holder of the Warrant, on exercise for
the same aggregate Exercise Price, the total number, class, and kind of shares
as the Holder would have owned had the Warrant been exercised prior to the event
and had the Holder continued to hold such shares until after the event requiring
adjustment. The form of this Warrant need not be changed because of any
adjustment in the number, class, and kind of shares subject to this Warrant. The
Company shall promptly provide a certificate from an authorized officer
notifying the Holder in writing of any adjustment in the Exercise Price and/or
the total number, class, and kind of shares issuable upon exercise of this
Warrant, which certificate shall specify the Exercise Price and number, class
and kind of shares under this Warrant after giving effect to such adjustment.

6. FRACTIONAL SHARES. No fractional shares shall be issued upon the exercise of
this Warrant as a consequence of any adjustment pursuant hereto. All Warrant
Shares (including fractions) issuable upon exercise of this Warrant may be
aggregated for purposes of determining whether the exercise would result in the
issuance of any fractional share. If, after aggregation, the exercise would
result in the issuance of a fractional share, the Company shall, in lieu of
issuance of any fractional share, pay the Holder otherwise entitled to such
fraction a sum in cash equal to the product resulting from multiplying the then
current fair market value of an Exercise Share by such fraction.

7. CERTAIN EVENTS. In the event of, at any time during the Exercise Period, any
capital reorganization, or any reclassification of the capital stock of the
Company (other than a change in par value or from par value to no par value or
no par value to par value or as a result of a stock dividend or subdivision,
split-up or combination of shares), or the consolidation or merger of the
Company with or into another corporation (other than a merger solely to effect a
reincorporation of the Company into another state), in each case, in which the
stockholders of the Company immediately prior to such capital reorganization,
reclassification, consolidation or merger, will hold less than a majority of the
outstanding shares of the Company or resulting corporation immediately after
such capital reorganization, reclassification, consolidation or merger, or the
sale or other disposition of all or substantially all of the properties and
assets of the Company and its subsidiaries, taken as a whole, in its entirety to
any other person, other than sales or other dispositions that do not require
stockholder approval (each, an “Event”), the Company shall provide to the Holder
ten (10) days’ advance written notice of such Event, and the Holder shall have
the option, in its sole discretion and upon providing advanced written notice to
the Company, to cause any unexercised portion of the Warrant to be deemed
automatically exercised pursuant to Section 2.2 immediately prior to the
consummation of such Event. This Warrant will be binding upon the successors and
assigns of the Company upon an Event.

8. RIGHTS UPON DISTRIBUTION OF ASSETS; RIGHTS OFFERINGS.

8.1. If the Company shall declare or make any dividend or other distribution of
its assets (or rights to acquire its assets) to holders of shares of Common
Stock, by way of return of capital or otherwise (including, without limitation,
any distribution of cash, stock or other securities, property or options by way
of a dividend, spin off, reclassification, corporate rearrangement, scheme of
arrangement or other similar transaction) (a “Distribution”), at any time after
the issuance of this Warrant, then, in each such case, upon each exercise of
this Warrant from time to time, in whole or in part, the Holder shall be
entitled to participate in such Distribution to the same extent that the Holder
would have participated therein if the Holder had held the number of shares of
Common Stock acquirable upon each such exercise of this Warrant immediately
before the date of which a record is taken for such

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

Distribution, or, if no such record is taken, the date as of which the record
holders of shares of Common Stock are to be determined for the participation in
such Distribution. To the extent that the Holder’s participation in any
Distribution is limited by virtue of the beneficial ownership limitations set
forth in Section 2.5, then the portion of such Distribution that is so-limited
shall be held in abeyance for the benefit of the Holder until such time, if
ever, as its right thereto would not result in the Holder exceeding the
beneficial ownership limits set forth in Section 2.5.

8.2. In addition to any adjustments pursuant to Section 5 above, if at any time
the Company grants, issues or sells any Options, Convertible Securities or
rights to purchase stock, warrants, securities or other property pro rata to the
record holders of the Common Stock (the “Purchase Rights”), then the Holder will
be entitled to acquire, upon the terms applicable to such Purchase Rights, the
aggregate Purchase Rights which the Holder could have acquired if the Holder had
held the number of shares of Common Stock acquirable upon complete exercise of
this Warrant (without regard to any limitations on the exercise of this Warrant)
immediately before the date on which a record is taken for the grant, issuance
or sale of such Purchase Rights, or, if no such record is taken, the date as of
which the record holders of shares of Common Stock are to be determined for the
grant, issue or sale of such Purchase Rights. For purposes of this Section 8.2:
(i) “Convertible Securities” shall mean any stock or securities (other than
Options) directly or indirectly convertible into or exercisable or exchangeable
for shares of Common Stock; and (ii) “Options” shall mean any rights, warrants
or options to subscribe for or purchase shares of Common Stock or Convertible
Securities.

9. NO STOCKHOLDER RIGHTS. This Warrant in and of itself shall not entitle the
Holder to any voting rights or, except as otherwise set forth herein, other
rights as a stockholder of the Company.

10. TRANSFER OF WARRANT. Subject to applicable laws and compliance with
Section 4.3 hereof, this Warrant and all rights hereunder are transferable, by
the Holder in person or by duly authorized attorney, upon delivery of this
Warrant and the form of assignment attached hereto to any transferee designated
by Holder. The transferee shall sign an investment letter in form and substance
satisfactory to the Company.

11. LOST, STOLEN, MUTILATED OR DESTROYED WARRANT. If this Warrant is lost,
stolen, mutilated or destroyed, the Company may, on such terms as to indemnity
or otherwise as it may reasonably impose (which shall, in the case of a
mutilated Warrant, include the surrender thereof), issue a new Warrant of like
denomination and tenor as the Warrant so lost, stolen, mutilated or destroyed.
Any such new Warrant shall constitute an original contractual obligation of the
Company, whether or not the allegedly lost, stolen, mutilated or destroyed
Warrant shall be at any time enforceable by anyone.

12. MODIFICATIONS AND WAIVER. This Warrant and any provision hereof may be
changed, waived, discharged or terminated only by an instrument in writing
signed by the Company and (i) Purchasers holding Warrants representing at least
50% of the number of Warrant Shares then issuable upon exercise of the Warrants
sold under the Purchase Agreement, provided, however, that such modification,
amendment or waiver is made with respect to all Warrants issued under the
Purchase Agreement and does not adversely affect the Holder without adversely
affecting all holders of Warrants in a similar manner; or (ii) the Holder.

13. NOTICES, ETC. All notices required or permitted hereunder shall be in
writing and shall be deemed effectively given: (a) upon personal delivery to the
party to be notified, (b) when sent by confirmed email or facsimile if sent
during normal business hours of the recipient, if not, then on the next business
day, (c) five days after having been sent by registered or certified mail,
return receipt requested, postage prepaid, or (d) one business day after deposit
with a nationally recognized overnight courier, specifying next day delivery,
with written verification of receipt. All communications shall be sent to the
Company at the address set forth above and to the Holders at the addresses
listed on the signature page to the Purchase Agreement, or at such other address
as the Company or Holder may designate by ten days’ advance written notice to
the other party hereto.

14. ACCEPTANCE. Receipt of this Warrant by the Holder shall constitute
acceptance of and agreement to all of the terms and conditions contained herein.

15. GOVERNING LAW. This Warrant and all rights, obligations and liabilities
hereunder shall be governed by the laws of the State of California without
regard to the principles of conflict of laws.

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

16. DESCRIPTIVE HEADINGS. The descriptive headings of the several paragraphs of
this Warrant are inserted for convenience only and do not constitute a part of
this Warrant. The language in this Warrant shall be construed as to its fair
meaning without regard to which party drafted this Warrant.

17. SEVERABILITY. The invalidity or unenforceability of any provision of this
Warrant in any jurisdiction shall not affect the validity or enforceability of
such provision in any other jurisdiction, or affect any other provision of this
Warrant, which shall remain in full force and effect.

18. ENTIRE AGREEMENT. This Warrant and the Purchase Agreement constitute the
entire agreement between the parties pertaining to the subject matter contained
in it and supersede all prior and contemporaneous agreements, representations,
and undertakings of the parties, whether oral or written, with respect to such
subject matter.

[Signature Page Follows]

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IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its
duly authorized officer as of July [—], 2011.

 

A.P. PHARMA, INC. By:   

 

Name:   

 

Title:   

 

Address:   

123 Saginaw Drive

Redwood City, CA 94063

Attention: Chief Executive Officer

Facsimile No.: (650) 365-6490

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

NOTICE OF EXERCISE

TO: A.P. PHARMA, INC.

(1) The undersigned hereby elects to (check one box only):

q purchase      shares of the Common Stock of A.P. Pharma, Inc. (the “Company”)
pursuant to the terms of the attached Warrant, and tenders herewith payment of
the exercise price in full for such shares, together with all applicable
transfer taxes, if any.

q purchase the number of shares of Common Stock of the Company by cashless
exercise, to the extent permitted under Section 2.2, pursuant to the terms of
the Warrant as shall be issuable upon cashless exercise of the portion of the
Warrant relating to      shares, and shall tender payment of all applicable
transfer taxes, if any.

(2) Please issue a certificate or certificates representing said shares of
Common Stock in the name of the undersigned or in such other name as is
specified below:

 

 

 

(Name)

 

 

 

(Address)

(3) The undersigned represents that (i) the aforesaid shares of Common Stock are
being acquired for the account of the undersigned for investment and not with a
view to, or for resale in connection with, the distribution thereof and that the
undersigned has no present intention of distributing or reselling such shares in
violation of the Securities Act of 1933, as amended (the “Securities Act”);
(ii) the undersigned is aware of the Company’s business affairs and financial
condition and has acquired sufficient information about the Company to reach an
informed and knowledgeable decision regarding its investment in the Company;
(iii) the undersigned is experienced in making investments of this type and has
such knowledge and background in financial and business matters that the
undersigned is capable of evaluating the merits and risks of this investment and
protecting the undersigned’s own interests; (iv) the undersigned understands
that the shares of Common Stock issuable upon exercise of this Warrant have not
been registered under the Securities Act, by reason of a specific exemption from
the registration provisions of the Securities Act, which exemption depends upon,
among other things, the bona fide nature of the investment intent as expressed
herein, and, because such securities have not been registered under the
Securities Act, they must be held indefinitely unless subsequently registered
under the Securities Act or an exemption from such registration is available;
(v) the undersigned is aware that the aforesaid shares of Common Stock may not
be sold pursuant to Rule 144 adopted under the Securities Act unless certain
conditions are met and until the undersigned has held the shares for the time
period prescribed by Rule 144, that among the conditions for use of the Rule is
the availability of current information to the public about the Company and that
the Company has not made such information available and has no present plans to
do so; and (vi) the undersigned agrees not to make any disposition of all or any
part of the aforesaid shares of Common Stock unless and until there is then in
effect a registration statement under the Securities Act covering such proposed
disposition and such disposition is made in accordance with said registration
statement, or the undersigned has furnished the Company with an opinion of
counsel, reasonably satisfactory to the Company, to the effect that such
disposition is not required to be registered pursuant to the Securities Act or
any applicable state securities laws; provided, that no opinion shall be
required for any disposition made or to be made in accordance with the
provisions of Rule 144.

 

 

 

Date

   

 

Signature

   

 

Print name

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

ASSIGNMENT FORM

(To assign the foregoing Warrant, subject to compliance with section 4.3 hereof,
execute this form and supply required information. Do not use this form to
purchase shares.)

FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are
hereby assigned to

 

Name:

 

 

  (Please Print)

Address:  

 

  (Please Print)

Dated:             , 20

 

Holder’s Signature:  

 

 

Holder’s Address:  

 

 

NOTE: The signature to this Assignment Form must correspond with the name as it
appears on the face of the Warrant, without alteration or enlargement or any
change whatever. Officers of corporations and those acting in a fiduciary or
other representative capacity should file proper evidence of authority to assign
the foregoing Warrant.

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PURCHASER SIGNATURE PAGE

The undersigned Purchaser hereby executes the Securities Purchase Agreement with
A.P. Pharma, Inc. (the “Company”) and hereby authorizes this signature page to
be attached to a counterpart of such document executed by a duly authorized
officer of the Company.

 

          

Number of Units to be
Purchased

       

Name of Purchaser

     50,000,000       

Tang Capital Partners, LP

By:        /s/ Kevin Tang

Name:   Kevin Tang

              Managing Director

 

180,000       

14159, L.P.

By:        14159 Capital, L.P., its general partner

              14159 Capital (GP), LLC, its general partner

          /s/ Felix Baker

Name:    Felix Baker

               Managing Member

 

9,820,000       

Baker Brothers Life Sciences, L.P.

By:        Baker Brothers Life Sciences Capital, L.P., its general partner

              Baker Brothers Life Sciences Capital (GP), LLC, its general
partner

         /s/ Felix Baker

Name:   Felix Baker

              Managing Member

 

2,923,034       

Biotechnology Value Fund, LP

By:  /s/ Mark Lampert

Name:  Mark Lampert

             President of BVF Inc.

             General Partner of BVF Partners LP

             General Partner of Biotechnology Value Fund, LP

 

1,969,000       

Biotechnology Value Fund II, LP

By:  /s/ Mark Lampert

Name:  Mark Lampert

             President of BVF Inc.

             General Partner of BVF Partners LP

             General Partner of Biotechnology Value Fund II, LP

 

869,600       

Investment 10, LLC

By:  /s/ Mark Lampert

Name:  Mark Lampert

             President of BVF Inc.

             General Partner of BVF Partners LP

             Attorney-in-fact for Investment 10, LLC

 

7,571,700       

BVF Investments, LLC

By:  /s/ Mark Lampert

Name:  Mark Lampert

             President of BVF Inc.

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

        

            General Partner of BVF Partners LP

            Manager of BVF Investments, LLC

 

240,566       

2400 Franklin Templeton Funds – Franklin Biotechnology Fund

By: /s/ Daniel P. Goss

Name: Daniel P. Goss

 

10,903,203       

4402 Franklin Strategic Series – Franklin Biotechnology Discovery Fund

By: /s/ Daniel P. Goss

Name: Daniel P. Goss

 

3,522,898       

4912 FTIF – Franklin Biotechnology Discovery Fund

By: /s/ Daniel P. Goss

Name: Daniel P. Goss

 

6,666,667       

Hutchin Hill Capital L55, Ltd.

By: /s/ Mark Haas

Name: Mark Haas

            Officer

 

9,200,000       

H&Q Healthcare Investors

By: /s/ Daniel R. Omstead

Name: Daniel R. Omstead

            President

The name H&Q Healthcare Investors is the designation of the Trustees for the
time being under an Amended and Restated Declaration of Trust Dated April 21,
1987, as amended, and all persons dealing with H&Q Healthcare Investors must
look solely to the trust property for the enforcement of any claim against H&Q
Healthcare Investors, as neither the Trustees, officers nor shareholders assume
any personal liability for obligations entered into on behalf of H&Q Healthcare
Investors.

 

4,133,334       

H&Q Life Sciences Investors

By: /s/ Daniel R. Omstead

Name: Daniel R. Omstead

            President

The name H&Q Life Sciences Investors is the designation of the Trustees for the
time being under an Amended and Restated Declaration of Trust Dated February 20,
1992, as amended, and all persons dealing with H&Q Life Science Investors must
look solely to the trust property for the enforcement of any claim against H&Q
Life Science Investors, as neither the Trustees, officers nor shareholders
assume any personal liability for obligations entered into on behalf of H&Q Life
Science Investors.

 

12,333,334       

IsZo Capital LP

By: /s/ Brian Sheehy

Name: Brian Sheehy

            Managing Partner

 

2,666,667       

Mark Pearson

By: /s/ Mark Pearson

Name: Mark Pearson

 

3,000,000       

The Wygod Family Revocable Living Trust w/a/d 12-15-08

By: /s/ Martin J. Wygod

Name: Martin J. Wygod

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

         

            Trustee

 

166,667        

Kevin M. Cameron

By: /s/ Kevin M. Cameron

Name: Kevin M. Cameron

            Individual Investor

 

166,667        

Charles A. Mele

By: /s/ Charles A. Mele

Name: Charles A. Mele

 

3,333,334        

Obsidian Management LLC

By: /s/ Carl Berg

Name: Carl Berg

            Member

 

26,666,667        

Perceptive Life Sciences Master Fund, Ltd.

By: /s/ James Mannix

Name: James Mannix

            COO

 

3,333,334        

RTW Master Fund, Ltd.

By: /s/ Roderick Wong

Name: Roderick Wong

            Managing Member

 

333,334        

Srinivas Akkaraju

By: /s/ Srinivas Akkaraju

Name: Srinivas Akkaraju