Exhibit
10.34

 
NOTE AND WARRANT PURCHASE
 
AGREEMENT
 
Dated as of June 15, 2007
 
by and among
 
COMMUNICATION INTELLIGENCE CORPORATION
 
and
 
THE PURCHASERS LISTED ON EXHIBIT A
 

 

2007.06.12 Note & Warrant Purchase Agreement

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TABLE OF CONTENTS
                                                                    PAGE
ARTICLE I PURCHASE AND SALE OF NOTES AND WARRANTS
Section 1.1 
Purchase and Sale of Notes and Warrants.
1
Section 1.2
Execution and Borrowing
1
Section 1.3
Warrant Shares
2
 
ARTICLE II REPRESENTATIONS AND WARRANTIES 
Section 2.1
Representations and Warranties of the Company
2
Section 2.2
Representations and Warranties of the Purchasers
12
 
ARTICLE III COVENANTS 
 
 
Section 3.1
Securities Compliance
14
Section 3.2
Registration and Listing
14
Section 3.3
Compliance with Laws
14
Section 3.4
Keeping of Records and Books of Account
14
Section 3.5
Reporting Requirements
15
Section 3.6
Other Agreements
15
Section 3.7
Use of Proceeds
15
Section 3.8
Reporting Status
15
Section 3.9
Disclosure of Transaction
15
Section 3.10
Disclosure of Material Information
16
Section 3.11
Amendments
16
Section 3.12
Reservation of Shares
16
Section 3.13
Disposition of Assets
16
Section 3.14
Non-Shorting
16
 
ARTICLE IV CONDITIONS
 
 
Section 4.1
Conditions Precedent to the Obligation of the Company to Close and to Sell the
Securities
16
Section 4.2
Conditions Precedent to the Obligation of the Purchasers to Close and to
Purchase the Securities
17
 
ARTICLE V CERTIFICATE LEGEND
Section 5.1
Legend
18
 
ARTICLE VI INDEMNIFICATION
Section 6.1
General Indemnity
19
Section 6.2
Indemnification Procedure
19
 
ARTICLE VII MISCELLANEOUS 
Section 7.1
Fees and Expenses
20
Section 7.2
Specific Performance; Consent to Jurisdiction; Venue
21
Section 7.3
Entire Agreement; Amendment
21
Section 7.4
Notices
21
Section 7.5
Waivers
22
Section 7.6
Headings
22
Section 7.7
Successors and Assigns
22
Section 7.8
No Third Party Beneficiaries
22
Section 7.9
Governing Law
22
Section 7.10
Survival
23
Section 7.11
Counterparts
23
Section 7.12
Publicity
23
Section 7.13
Severability
23
Section 7.14
Further Assurances
23
     

2007.06.12 Note & Warrant Purchase Agreement

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NOTE AND WARRANT PURCHASE AGREEMENT
 
This NOTE AND WARRANT PURCHASE AGREEMENT dated as of June 15, 2007 (this
“Agreement”) by and between Communication Intelligence Corporation, a Delaware
corporation (the “Company”), and each of the purchasers of the promissory notes
of the Company whose names are set forth on Exhibit A attached hereto (each a
“Purchaser” and collectively, the “Purchasers”).
 
The parties hereto agree as follows:
 
ARTICLE I

 
PURCHASE AND SALE OF NOTES AND WARRANTS
 
Section 1.1  Purchase and Sale of Notes and Warrants.
 
(a)  Upon the following terms and conditions, the Company shall issue and sell
to the Purchasers, and the Purchasers shall purchase from the Company,
promissory notes in the aggregate principal amount of up to One Million Dollars
($1,000,000) bearing interest at the rate of fifteen percent (15%) per annum, in
substantially the form attached hereto as Exhibit B (the “Notes”). The Company
and the Purchasers are executing and delivering this Agreement in accordance
with and in reliance upon the exemption from securities registration afforded by
Section 4(2) of the U.S. Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder (the “Securities Act”), including Regulation
D (“Regulation D”), and/or upon such other exemption from the registration
requirements of the Securities Act as may be available with respect to any or
all of the investments to be made hereunder.
 
(b)  Upon the following terms and conditions, the Purchasers shall be issued (i)
Warrants, in substantially the form attached hereto as Exhibit C (the
“Warrants”), to purchase the number of shares of Common Stock set forth opposite
such Purchaser’s name on Exhibit A attached hereto. The Warrants shall have an
exercise price equal to the Warrant Price (as defined in the respective Warrant)
and shall be exercisable as stated therein. Each Warrant shall have a term of
three (3) years from the later of i) the date it is issued (the “Issuance Date”)
or ii) June 30, 2007.
 
Section 1.2  Execution and Borrowing.
 
(a) The execution of this Agreement shall take place at the offices of Davis
Wright Tremaine LLP, 1300 S.W. Fifth Avenue, 23rd Floor, Portland, Oregon 97201
(the “Execution”) at 10:00 a.m., Pacific Daylight Time (i) on or before June 15,
2007; provided, that all of the conditions set forth in Article IV hereof and
applicable to the Closing shall have been fulfilled or waived in accordance
herewith, or (ii) at such other time and place or on such date as the Purchasers
and the Company may agree upon (the “Execution Date”).
 
(b) During the period commencing on the Execution Date and terminating on
December 31, 2007 (the Borrowing Period) and subject to the terms and conditions
of this Agreement, the Company may issue and sell the Notes and Warrants to the
Purchasers in an amount not to exceed $1,000,000 (such amount or portions
thereof referred to as the “Purchase Price”). Within five calendar days of the
execution date, $400,000 of the Purchase Price shall be delivered to the Company
by wire transfer to an account designated by the Company and thereupon the
Company shall deliver or cause to be delivered to each Purchaser (x) its Note
for the amount of the Purchase Price being drawn upon and (y) a Warrant to
purchase 3,167,898 shares of Common Stock at an exercise price of $0.25. Each
Note issued under this Section 1.2 shall be due and payable eighteen months
after the date of issuance. The remaining purchase price may be drawn by the
Company in $300,000 tranches upon thirty-one business-days written notice to the
Purchaser under the same procedure as described above.
 
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(c)  The number of Warrants and the exercise price thereof for each additional
tranche shall be determined by the volume weighted average price (“VWAP”)of the
Company’s common stock for the thirty (30) business days preceding the date that
the Purchase Price for the specific tranche is due to the Company. The VWAP
would be rounded to the nearest whole cent. The exercise price would be the
second strike price out of the money using $0.05 increments. For example, with
potential exercise prices of $0.10, $0.15, $0.20, $0.25, etc. if the VWAP was
$0.16 then the exercise price would be $0.25. The number of Warrants shall be
calculated using the Cox-Rubenstein Model with a mutually agreed upon
calculation utilizing the following assumptions, 100% volatility, zero dividends
and 7.5% interest rate. Using the calculated VWAP and exercise price, this model
will yield a value for the Warrants, Purchases shall be entitled to such number
of Warrants the value of which equals 75% of the amount borrowed.
 
Section 1.3  Warrant Shares
 
. If at any time any Warrant is exercised and the number of the shares available
is insufficient to effect the exercise, the Company shall seek authorization at
the next scheduled annual meeting of its shareholders to increase the number of
the shares available to effect the exercise of the Warrants and shall reserve
such number of shares for that purpose. Any shares of Common Stock issuable upon
exercise of the Warrants (and such shares when issued) are herein referred to as
the “Warrant Shares.” The Notes, the Warrants and the Warrant Shares are
sometimes collectively referred to herein as the “Securities”.

 
ARTICLE II
 
REPRESENTATIONS AND WARRANTIES
 
Section 2.1  Representations and Warranties of the Company
 
. The Company hereby represents and warrants to the Purchasers, as of the date
hereof and the Closing Date (except as set forth on the Schedule of Exceptions
attached hereto with each numbered Schedule corresponding to the section number
herein), as follows:
 
(a)  Organization, Good Standing and Power. The Company is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Delaware and has the requisite corporate power to own, lease and operate its
properties and assets and to conduct its business as it is now being conducted.
The Company does not have any Subsidiaries (as defined in Section 2.1(g)) or own
securities of any kind in any other entity except as set forth on Schedule
2.1(g) hereto. The Company and each such Subsidiary (as defined in Section
2.1(g)) is duly qualified as a foreign corporation to do business and is in good
standing in every jurisdiction in which the nature of the business conducted or
property owned by it makes such qualification necessary except for any
jurisdiction(s) (alone or in the aggregate) in which the failure to be so
qualified will not have a Material Adverse Effect. For the purposes of this
Agreement, “Material Adverse Effect” means any effect on the business (including
a material change in management), results of operations, prospects, properties,
assets or condition (financial or otherwise) of the Company that is material and
adverse to the Company and its subsidiaries, taken as a whole, and/or any
condition, circumstance, factor or situation (including, without limitation, an
investigation by the Securities and Exchange Commission (the “Commission”)) that
would prohibit or otherwise materially interfere with the ability of the Company
from entering into and performing any of its obligations under the Transaction
Documents (as defined below) in any material respect.
 
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(b)  Authorization; Enforcement. The Company has the requisite corporate power
and authority to enter into and perform this Agreement, the Notes, the Warrants,
the Registration Rights Agreement by and among the Company and the Purchasers,
dated as of the date hereof, substantially in the form of Exhibit E attached
hereto (the “Registration Rights Agreement”) (collectively, the “Transaction
Documents”) and to issue and sell the Securities in accordance with the terms
hereof. The execution, delivery and performance of the Transaction Documents by
the Company and the consummation by it of the transactions contemplated thereby
have been duly and validly authorized by all necessary corporate action, and,
except as set forth on Schedule 2.1(b), no further consent or authorization of
the Company, its Board of Directors or stockholders is required. When executed
and delivered by the Company and each Purchaser, each of the Transaction
Documents shall constitute a valid and binding obligation of the Company
enforceable against the Company in accordance with its terms, except as such
enforceability may be limited by applicable bankruptcy, reorganization,
moratorium, liquidation, conservatorship, receivership or similar laws relating
to, or affecting generally the enforcement of, creditor’s rights and remedies or
by other equitable principles of general application.
 
(c)  Capitalization. The authorized capital stock of the Company as of December
31, 2006 is set forth on Schedule 2.1(c) hereto. All of the outstanding shares
of the Common Stock and any other outstanding security of the Company have been
duly and validly authorized. Except as set forth in this Agreement and as set
forth on Schedule 2.1(c) hereto, no shares of Common Stock or any other security
of the Company are entitled to preemptive rights or registration rights and
there are no outstanding options, warrants, scrip, rights to subscribe to, call
or commitments of any character whatsoever relating to, or securities or rights
convertible into, any shares of capital stock of the Company. Furthermore,
except as set forth in this Agreement and as set forth on Schedule 2.1(c)
hereto, there are no contracts, commitments, understandings, or arrangements by
which the Company is or may become bound to issue additional shares of the
capital stock of the Company or options, securities or rights convertible into
shares of capital stock of the Company. Except for customary transfer
restrictions contained in agreements entered into by the Company in order to
sell restricted securities or as provided on Schedule 2.1(c) hereto, the Company
is not a party to or bound by any agreement or understanding granting
registration or anti-dilution rights to any person with respect to any of its
equity or debt securities. Except as set forth on Schedule 2.1(c), the Company
is not a party to, and it has no knowledge of, any agreement or understanding
restricting the voting or transfer of any shares of the capital stock of the
Company.
 
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(d)  Issuance of Securities. The Notes and the Warrants to be issued have been
duly authorized by all necessary corporate action and, when paid for or issued
in accordance with the terms hereof, the Notes shall be validly issued and
outstanding, free and clear of all liens, encumbrances and rights of refusal of
any kind. When the Warrant Shares are issued and paid for in accordance with the
terms of this Agreement and as set forth in the Warrants, such shares will be
duly authorized by all necessary corporate action and validly issued and
outstanding, fully paid and non-assessable, free and clear of all liens,
encumbrances and rights of refusal of any kind and the holders shall be entitled
to all rights accorded to a holder of Common Stock.
 
(e)  No Conflicts. The execution, delivery and performance of the Transaction
Documents by the Company, the performance by the Company of its obligations
under the Notes and the consummation by the Company of the transactions
contemplated hereby and thereby, and the issuance of the Securities as
contemplated hereby, do not and will not (i) violate or conflict with any
provision of the Company’s Certificate of Incorporation (the “Certificate”) or
Bylaws (the “Bylaws”), each as amended to date, or any Subsidiary’s comparable
charter documents, (ii) conflict with, or constitute a default (or an event
which with notice or lapse of time or both would become a default) under, or
give to others any rights of termination, amendment, acceleration or
cancellation of, any agreement, mortgage, deed of trust, indenture, note, bond,
license, lease agreement, instrument or obligation to which the Company or any
of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries’ respective properties or assets are bound, or (iii) result in a
violation of any federal, state, local or foreign statute, rule, regulation,
order, judgment or decree (including federal and state securities laws and
regulations) applicable to the Company or any of its Subsidiaries or by which
any property or asset of the Company or any of its Subsidiaries are bound or
affected, except, in all cases, for such conflicts, defaults, terminations,
amendments, acceleration, cancellations and violations as would not,
individually or in the aggregate, have a Material Adverse Effect (other than
violations pursuant to clauses (i) or (iii) (with respect to federal and state
securities laws)). Neither the Company nor any of its Subsidiaries is required
under federal, state, foreign or local law, rule or regulation to obtain any
consent, authorization or order of, or make any filing or registration with, any
court or governmental agency in order for it to execute, deliver or perform any
of its obligations under the Transaction Documents or issue and sell the
Securities in accordance with the terms hereof (other than any filings, consents
and approvals which may be required to be made by the Company under applicable
state and federal securities laws, rules or regulations or any registration
provisions provided in the Registration Rights Agreement).
 
(f)  Commission Documents, Financial Statements. The Common Stock of the Company
is registered pursuant to Section 12(b) or 12(g) of the Securities Exchange Act
of 1934, as amended (the “Exchange Act”), and the Company has timely filed all
reports, schedules, forms, statements and other documents required to be filed
by it with the Commission pursuant to the reporting requirements of the Exchange
Act (all of the foregoing including filings incorporated by reference therein
being referred to herein as the “Commission Documents”). At the times of their
respective filings, the Form 10-Q for the fiscal quarters ended March 31, 2007,
(the “Form 10-Q”) and the Form 10-K for the fiscal year ended December 31, 2006,
(the “Form 10-K”) complied in all material respects with the requirements of the
Exchange Act and the rules and regulations of the Commission promulgated
thereunder and other federal, state and local laws, rules and regulations
applicable to such documents, and the Form 10-Q and Form 10-K did not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. As of their respective dates, the financial statements of the
Company included in the Commission Documents complied as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the Commission or other applicable rules and regulations with
respect thereto. Such financial statements have been prepared in accordance with
generally accepted accounting principles (“GAAP”) applied on a consistent basis
during the periods involved (except (i) as may be otherwise indicated in such
financial statements or the Notes thereto or (ii) in the case of unaudited
interim statements, to the extent they may not include footnotes or may be
condensed or summary statements), and fairly present in all material respects
the financial position of the Company and its Subsidiaries as of 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 year-end audit
adjustments).
 
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(g)  Subsidiaries. Schedule 2.1(g) hereto sets forth each Subsidiary of the
Company, showing the jurisdiction of its incorporation or organization and
showing the percentage of each person’s ownership of the outstanding stock or
other interests of such Subsidiary. For the purposes of this Agreement,
“Subsidiary” shall mean any corporation or other entity of which at least a
majority of the securities or other ownership interest having ordinary voting
power (absolutely or contingently) for the election of directors or other
persons performing similar functions are at the time owned directly or
indirectly by the Company and/or any of its other Subsidiaries. All of the
outstanding shares of capital stock of each Subsidiary have been duly authorized
and validly issued, and are fully paid and non-assessable. There are no
outstanding preemptive, conversion or other rights, options, warrants or
agreements granted or issued by or binding upon any Subsidiary for the purchase
or acquisition of any shares of capital stock of any Subsidiary or any other
securities convertible into, exchangeable for or evidencing the rights to
subscribe for any shares of such capital stock. Neither the Company nor any
Subsidiary is subject to any obligation (contingent or otherwise) to repurchase
or otherwise acquire or retire any shares of the capital stock of any Subsidiary
or any convertible securities, rights, warrants or options of the type described
in the preceding sentence except as set forth on Schedule 2.1(g) hereto. Neither
the Company nor any Subsidiary is party to, nor has any knowledge of, any
agreement restricting the voting or transfer of any shares of the capital stock
of any Subsidiary.
 
(h)  No Material Adverse Change. Since March 31, 2007 the Company has not
experienced or suffered any Material Adverse Effect, except as disclosed on
Schedule 2.1(h) hereto.
 
(i)  No Undisclosed Liabilities. Except as disclosed on Schedule 2.1(i) hereto,
neither the Company nor any of its Subsidiaries has incurred any liabilities,
obligations, claims or losses (whether liquidated or unliquidated, secured or
unsecured, absolute, accrued, contingent or otherwise) other than those incurred
in the ordinary course of the Company’s or its Subsidiaries respective
businesses or which, individually or in the aggregate, are not reasonably likely
to have a Material Adverse Effect.
 
(j)  No Undisclosed Events or Circumstances. Since March 31, 2007, except as
disclosed on Schedule 2.1(j) hereto, no event or circumstance has occurred or
exists with respect to the Company or its Subsidiaries or their respective
businesses, properties, prospects, operations or financial condition, which,
under applicable law, rule or regulation, requires public disclosure or
announcement by the Company but which has not been so publicly announced or
disclosed.
 
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(k)  Indebtedness. Schedule 2.1(k) hereto sets forth as of the date hereof all
outstanding secured and unsecured Indebtedness of the Company or any Subsidiary,
or for which the Company or any Subsidiary has commitments. For the purposes of
this Agreement, “Indebtedness” shall mean (a) any liabilities for borrowed money
or amounts owed in excess of $300,000 (other than trade accounts payable
incurred in the ordinary course of business), (b) all guaranties, endorsements
and other contingent obligations in respect of Indebtedness of others, whether
or not the same are or should be reflected in the Company’s balance sheet (or
the notes thereto), except guaranties by endorsement of negotiable instruments
for deposit or collection or similar transactions in the ordinary course of
business; and (c) the present value of any lease payments in excess of $25,000
due under leases required to be capitalized in accordance with GAAP. Neither the
Company nor any Subsidiary is in default with respect to any Indebtedness.
 
(l)  Title to Assets. Each of the Company and the Subsidiaries has good and
valid title to all of its real and personal property reflected in the Commission
Documents, free and clear of any mortgages, pledges, charges, liens, security
interests or other encumbrances, except for those indicated on Schedule 2.1(l)
hereto or such that, individually or in the aggregate, do not cause a Material
Adverse Effect. All said leases of the Company and each of its Subsidiaries are
valid and subsisting and in full force and effect.
 
(m)  Actions Pending. There is no action, suit, claim, investigation,
arbitration, alternate dispute resolution proceeding or other proceeding pending
or, to the knowledge of the Company, threatened against the Company or any
Subsidiary which questions the validity of this Agreement or any of the other
Transaction Documents or any of the transactions contemplated hereby or thereby
or any action taken or to be taken pursuant hereto or thereto. Except as set
forth on Schedule 2.1(m) hereto, there is no action, suit, claim, investigation,
arbitration, alternate dispute resolution proceeding or other proceeding pending
or, to the knowledge of the Company, threatened against or involving the
Company, any Subsidiary or any of their respective properties or assets, which
individually or in the aggregate, would reasonably be expected, if adversely
determined, to have a Material Adverse Effect. There are no outstanding orders,
judgments, injunctions, awards or decrees of any court, arbitrator or
governmental or regulatory body against the Company or any Subsidiary or any
officers or directors of the Company or Subsidiary in their capacities as such,
which individually or in the aggregate, could reasonably be expected to have a
Material Adverse Effect.
 
(n)  Compliance with Law. The business of the Company and the Subsidiaries has
been and is presently being conducted in accordance with all applicable federal,
state and local governmental laws, rules, regulations and ordinances, except as
set forth in the Commission Documents or on Schedule 2.1(n) hereto or such that,
individually or in the aggregate, the noncompliance therewith could not
reasonably be expected to have a Material Adverse Effect. The Company and each
of its Subsidiaries have all franchises, permits, licenses, consents and other
governmental or regulatory authorizations and approvals necessary for the
conduct of its business as now being conducted by it unless the failure to
possess such franchises, permits, licenses, consents and other governmental or
regulatory authorizations and approvals, individually or in the aggregate, could
not reasonably be expected to have a Material Adverse Effect.
 
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(o)  Taxes. The Company and each of the Subsidiaries has accurately prepared and
filed all federal, state and other tax returns required by law to be filed by
it, has paid or made provisions for the payment of all taxes shown to be due and
all additional assessments, and adequate provisions have been and are reflected
in the financial statements of the Company and the Subsidiaries for all current
taxes and other charges to which the Company or any Subsidiary is subject and
which are not currently due and payable. Except as disclosed on Schedule 2.1(o)
hereto, none of the federal income tax returns of the Company or any Subsidiary
have been audited by the Internal Revenue Service. The Company has no knowledge
of any additional assessments, adjustments or contingent tax liability (whether
federal or state) of any nature whatsoever, whether pending or threatened
against the Company or any Subsidiary for any period, nor of any basis for any
such assessment, adjustment or contingency.
 
(p)  Certain Fees. Except as set forth on Schedule 2.1(p) hereto, the Company
has not employed any broker or finder or incurred any liability for any
brokerage or investment banking fees, commissions, finders’ structuring fees,
financial advisory fees or other similar fees in connection with the Transaction
Documents.
 
(q)  Disclosure. To the best of the Company’s knowledge, neither this Agreement
or the Schedules hereto nor any other documents, certificates or instruments
furnished to the Purchasers by or on behalf of the Company or any Subsidiary in
connection with the transactions contemplated by this Agreement contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements made herein or therein, in the light of the
circumstances under which they were made herein or therein, not misleading.
 
(r)  Operation of Business. Except as set forth on Schedule 2.1(r) hereto, the
Company and each of the Subsidiaries owns or possesses the rights to all
patents, trademarks, domain names (whether or not registered) and any patentable
improvements or copyrightable derivative works thereof, websites and
intellectual property rights relating thereto, service marks, trade names,
copyrights, licenses and authorizations which are necessary for the conduct of
its business as now conducted without any conflict with the rights of others.
 
(s)  Environmental Compliance. The Company and each of its Subsidiaries have
obtained all material approvals, authorization, certificates, consents,
licenses, orders and permits or other similar authorizations of all governmental
authorities, or from any other person, that are required under any Environmental
Laws. “Environmental Laws” shall mean all applicable laws relating to the
protection of the environment including, without limitation, all requirements
pertaining to reporting, licensing, permitting, controlling, investigating or
remediating emissions, discharges, releases or threatened releases of hazardous
substances, chemical substances, pollutants, contaminants or toxic substances,
materials or wastes, whether solid, liquid or gaseous in nature, into the air,
surface water, groundwater or land, or relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
hazardous substances, chemical substances, pollutants, contaminants or toxic
substances, material or wastes, whether solid, liquid or gaseous in nature. To
the best of the Company’s knowledge, the Company has all necessary governmental
approvals required under all Environmental Laws as necessary for the Company’s
business or the business of any of its subsidiaries. To the best of the
Company’s knowledge, the Company and each of its subsidiaries are also in
compliance with all other limitations, restrictions, conditions, standards,
requirements, schedules and timetables required or imposed under all
Environmental Laws. Except for such instances as would not individually or in
the aggregate have a Material Adverse Effect, there are no past or present
events, conditions, circumstances, incidents, actions or omissions relating to
or in any way affecting the Company or its subsidiaries that violate or may
violate any Environmental Law after the Closing Date or that may give rise to
any environmental liability, or otherwise form the basis of any claim, action,
demand, suit, proceeding, hearing, study or investigation (i) under any
Environmental Law, or (ii) based on or related to the manufacture, processing,
distribution, use, treatment, storage (including without limitation underground
storage tanks), disposal, transport or handling, or the emission, discharge,
release or threatened release of any hazardous substance.
 
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(t)  Books and Records; Internal Accounting Controls. The records and documents
of the Company and its Subsidiaries accurately reflect in all material respects
the information relating to the business of the Company and the Subsidiaries,
the location and collection of their assets, and the nature of all transactions
giving rise to the obligations or accounts receivable of the Company or any
Subsidiary. The Company and each of its Subsidiaries maintain a system of
internal accounting controls sufficient, in the judgment of the Company’s board
of directors, to provide reasonable assurance that (i) transactions are executed
in accordance with management’s general or specific authorizations, (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain asset accountability, (iii) access to assets is permitted only in
accordance with management’s general or specific authorization and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate actions are taken with respect to any
differences.
 
(u)  Material Agreements. Except for the Transaction Documents (with respect to
clause (i) only), as disclosed in the Commission Documents or as set forth on
Schedule 2.1(u) hereto, or as would not be reasonably likely to have a Material
Adverse Effect, (i) the Company and each of its Subsidiaries have performed all
obligations required to be performed by them to date under any written or oral
contract, instrument, agreement, commitment, obligation, plan or arrangement,
filed or required to be filed with the Commission (the “Material Agreements”),
(ii) neither the Company nor any of its Subsidiaries has received any notice of
default under any Material Agreement and, (iii) to the best of the Company’s
knowledge, neither the Company nor any of its Subsidiaries is in default under
any Material Agreement now in effect.
 
(v)  Transactions with Affiliates. Except as set forth on Schedule 2.1(v) hereto
and in the Commission Documents, there are no loans, leases, agreements,
contracts, royalty agreements, management contracts or arrangements or other
continuing transactions between (a) the Company, any Subsidiary or any of their
respective customers or suppliers on the one hand, and (b) on the other hand,
any officer, employee, consultant or director of the Company, or any of its
Subsidiaries, or any person owning at least 5% of the outstanding capital stock
of the Company or any Subsidiary or any member of the immediate family of such
officer, employee, consultant, director or stockholder or any corporation or
other entity controlled by such officer, employee, consultant, director or
stockholder, or a member of the immediate family of such officer, employee,
consultant, director or stockholder which, in each case, is required to be
disclosed in the Commission Documents or in the Company’s most recently filed
definitive proxy statement on Schedule 14A, that is not so disclosed in the
Commission Documents or in such proxy statement.
 
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(w)  Securities Act of 1933. Based in material part upon the representations
herein of the Purchasers, the Company has complied and will comply with all
applicable federal and state securities laws in connection with the offer,
issuance and sale of the Securities hereunder. Neither the Company nor anyone
acting on its behalf, directly or indirectly, has or will sell, offer to sell or
solicit offers to buy any of the Securities or similar securities to, or solicit
offers with respect thereto from, or enter into any negotiations relating
thereto with, any person, or has taken or will take any action so as to bring
the issuance and sale of any of the Securities under the registration provisions
of the Securities Act and applicable state securities laws, and neither the
Company nor any of its affiliates, nor any person acting on its or their behalf,
has engaged in any form of general solicitation or general advertising (within
the meaning of Regulation D under the Securities Act) in connection with the
offer or sale of any of the Securities.
 
(x)  Employees. Neither the Company nor any Subsidiary has any collective
bargaining arrangements or agreements covering any of its employees, except as
set forth on Schedule 2.1(x) hereto. Except as set forth on Schedule 2.1(x)
hereto, neither the Company nor any Subsidiary has any employment contract,
agreement regarding proprietary information, non-competition agreement,
non-solicitation agreement, confidentiality agreement, or any other similar
contract or restrictive covenant, relating to the right of any officer, employee
or consultant to be employed or engaged by the Company or such Subsidiary
required to be disclosed in the Commission Documents that is not so disclosed.
No officer, consultant or key employee of the Company or any Subsidiary whose
termination, either individually or in the aggregate, would be reasonably likely
to have a Material Adverse Effect, has terminated or, to the knowledge of the
Company, has any present intention of terminating his or her employment or
engagement with the Company or any Subsidiary.
 
(y)  Absence of Certain Developments. Except as provided on Schedule 2.1(y)
hereto, since March 31, 2007, neither the Company nor any Subsidiary has:
 
(i)  issued any stock, bonds or other corporate securities or any right, options
or warrants with respect thereto;
 
(ii)  borrowed any amount in excess of $300,000 or incurred or become subject to
any other liabilities in excess of $100,000 (absolute or contingent) except
current liabilities incurred in the ordinary course of business which are
comparable in nature and amount to the current liabilities incurred in the
ordinary course of business during the comparable portion of its prior fiscal
year, as adjusted to reflect the current nature and volume of the business of
the Company and its Subsidiaries;
 
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(iii)  discharged or satisfied any lien or encumbrance in excess of $250,000 or
paid any obligation or liability (absolute or contingent) in excess of $250,000,
other than current liabilities paid in the ordinary course of business;
 
(iv)  declared or made any payment or distribution of cash or other property to
stockholders with respect to its stock, or purchased or redeemed, or made any
agreements so to purchase or redeem, any shares of its capital stock, in each
case in excess of $50,000 individually or $100,000 in the aggregate;
 
(v)  sold, assigned or transferred any other tangible assets, or canceled any
debts or claims, in each case in excess of $250,000, except in the ordinary
course of business;
 
(vi)  sold, assigned or transferred any patent rights, trademarks, trade names,
copyrights, trade secrets or other intangible assets or intellectual property
rights in excess of $250,000, or disclosed any proprietary confidential
information to any person except to customers in the ordinary course of business
or to the Purchasers or their representatives;
 
(vii)  suffered any material losses or waived any rights of material value,
whether or not in the ordinary course of business, or suffered the loss of any
material amount of prospective business;
 
(viii)  made any changes in employee compensation except in the ordinary course
of business and consistent with past practices;
 
(ix)  made capital expenditures or commitments therefor that aggregate in excess
of $500,000;
 
(x)  entered into any material transaction, whether or not in the ordinary
course of business;
 
(xi)  made charitable contributions or pledges in excess of $25,000;
 
(xii)  suffered any material damage, destruction or casualty loss, whether or
not covered by insurance;
 
(xiii)  experienced any material problems with labor or management in connection
with the terms and conditions of their employment; or
 
(xiv)  entered into an agreement, written or otherwise, to take any of the
foregoing actions.
 
(z)  Public Utility Holding Company Act and Investment Company Act Status. The
Company is not a “holding company” or a “public utility company” as such terms
are defined in the Public Utility Holding Company Act of 1935, as amended. The
Company is not, and as a result of and immediately upon the Closing will not be,
an “investment company” or a company “controlled” by an “investment company,”
within the meaning of the Investment Company Act of 1940, as amended.
 
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(aa)  ERISA. No liability to the Pension Benefit Guaranty Corporation has been
incurred with respect to any Plan by the Company or any of its Subsidiaries
which is or would be materially adverse to the Company and its Subsidiaries. The
execution and delivery of this Agreement and the issuance and sale of the
Securities will not involve any transaction which is subject to the prohibitions
of Section 406 of the Employee Retirement Income Security Act of 1974, as
amended (“ERISA”) or in connection with which a tax could be imposed pursuant to
Section 4975 of the Internal Revenue Code of 1986, as amended, provided that, if
any of the Purchasers, or any person or entity that owns a beneficial interest
in any of the Purchasers, is an “employee pension benefit plan” (within the
meaning of Section 3(2) of ERISA) with respect to which the Company is a “party
in interest” (within the meaning of Section 3(14) of ERISA), the requirements of
Sections 407(d)(5) and 408(e) of ERISA, if applicable, are met. As used in this
Section 2.1(aa), the term “Plan” shall mean an “employee pension benefit plan”
(as defined in Section 3 of ERISA) which is or has been established or
maintained, or to which contributions are or have been made, by the Company or
any Subsidiary or by any trade or business, whether or not incorporated, which,
together with the Company or any Subsidiary, is under common control, as
described in Section 414(b) or (c) of the Code.
 
(bb)  Independent Nature of Purchasers. The Company acknowledges that the
obligations of each Purchaser under the Transaction Documents are several and
not joint with the obligations of any other Purchaser, and no Purchaser shall be
responsible in any way for the performance of the obligations of any other
Purchaser under the Transaction Documents. The Company acknowledges that the
decision of each Purchaser to purchase Securities pursuant to this Agreement has
been made by such Purchaser independently of any other purchase and
independently of any information, materials, statements or opinions as to the
business, affairs, operations, assets, properties, liabilities, results of
operations, condition (financial or otherwise) or prospects of the Company or of
its Subsidiaries which may have made or given by any other Purchaser or by any
agent or employee of any other Purchaser, and no Purchaser or any of its agents
or employees shall have any liability to any Purchaser (or any other person)
relating to or arising from any such information, materials, statements or
opinions. The Company acknowledges that nothing contained herein, or in any
Transaction Document, and no action taken by any Purchaser pursuant hereto or
thereto, shall be deemed to constitute the Purchasers as a partnership, an
association, a joint venture or any other kind of entity, or create a
presumption that the Purchasers are in any way acting in concert or as a group
with respect to such obligations or the transactions contemplated by the
Transaction Documents. The Company acknowledges that it has elected to provide
all Purchasers with the same terms and Transaction Documents for the convenience
of the Company and not because it was required or requested to do so by the
Purchasers. The Company acknowledges that such procedure with respect to the
Transaction Documents in no way creates a presumption that the Purchasers are in
any way acting in concert or as a group with respect to the Transaction
Documents or the transactions contemplated hereby or thereby.
 
(cc)  No Integrated Offering. Neither the Company, nor any of its affiliates,
nor any person acting on its or their behalf, has directly or indirectly made
any offers or sales of any security or solicited any offers to buy any security
under circumstances that would cause the offering of the Securities pursuant to
this Agreement to be integrated with prior offerings by the Company for purposes
of the Securities Act which would prevent the Company from selling the
Securities pursuant to Regulation D and Rule 506 thereof under the Securities
Act, or any applicable exchange-related stockholder approval provisions, nor
will the Company or any of its affiliates or subsidiaries take any action or
steps that would cause the offering of the Securities to be integrated with
other offerings. Except as set forth on Schedule 2.1(cc), the Company does not
have any registration statement pending before the Commission or currently under
the Commission’s review and, except as set forth in the Commission Documents and
on Schedule 2.1(cc), the Company has not offered or sold any of its equity
securities or debt securities convertible into shares of Common Stock.
 
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(dd)  Sarbanes-Oxley Act
 
. The Company is in substantial compliance with the applicable provisions of the
Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), and the rules and
regulations promulgated thereunder, that are effective and intends to comply
substantially with other applicable provisions of the Sarbanes-Oxley Act, and
the rules and regulations promulgated thereunder, upon the effectiveness of such
provisions.
 
Section 2.2  Representations and Warranties of the Purchasers
 
. Each of the Purchasers hereby represents and warrants to the Company with
respect solely to itself and not with respect to any other Purchaser as follows
as of the date hereof and as of the Closing Date:
 
(a)  Organization and Standing of the Purchasers. If the Purchaser is an entity,
such Purchaser is a corporation, limited liability company or partnership duly
incorporated or organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation or organization.
 
(b)  Authorization and Power. Each Purchaser has the requisite power and
authority to enter into and perform the Transaction Documents and to purchase
the Securities being sold to it hereunder. The execution, delivery and
performance of the Transaction Documents by each Purchaser and the consummation
by it of the transactions contemplated hereby have been duly authorized by all
necessary corporate or partnership action, and no further consent or
authorization of such Purchaser or its Board of Directors, stockholders, or
partners, as the case may be, is required. When executed and delivered by the
Purchasers and the Company, the other Transaction Documents shall constitute
valid and binding obligations of each Purchaser enforceable against such
Purchaser in accordance with their terms, except as such enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium,
liquidation, conservatorship, receivership or similar laws relating to, or
affecting generally the enforcement of, creditor’s rights and remedies or by
other equitable principles of general application.
 
(c)  No Conflict. The execution, delivery and performance of the Transaction
Documents by the Purchaser and the consummation by the Purchaser of the
transactions contemplated thereby and hereby do not and will not (i) violate any
provision of the Purchaser’s charter or organizational documents, (ii) conflict
with, or constitute a default (or an event which with notice or lapse of time or
both would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, mortgage, deed of
trust, indenture, note, bond, license, lease agreement, instrument or obligation
to which the Purchaser is a party or by which the Purchaser’s respective
properties or assets are bound, or (iii) result in a violation of any federal,
state, local or foreign statute, rule, regulation, order, judgment or decree
(including federal and state securities laws and regulations) applicable to the
Purchaser or by which any property or asset of the Purchaser are bound or
affected, except, in all cases, other than violations pursuant to clauses (i) or
(iii) (with respect to federal and state securities laws) above, except, for
such conflicts, defaults, terminations, amendments, acceleration, cancellations
and violations as would not, individually or in the aggregate, materially and
adversely affect the Purchaser’s ability to perform its obligations under the
Transaction Documents.
 
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(d)  Acquisition for Investment. Each Purchaser is purchasing the Securities
solely for its own account for the purpose of investment and not with a view to
or for sale in connection with distribution. Each Purchaser does not have a
present intention to sell any of the Securities, nor a present arrangement
(whether or not legally binding) or intention to effect any distribution of any
of the Securities to or through any person or entity; provided, however, that by
making the representations herein, such Purchaser does not agree to hold the
Securities for any minimum or other specific term and reserves the right to
dispose of the Securities at any time in accordance with Federal and state
securities laws applicable to such disposition. Each Purchaser acknowledges that
it (i) has such knowledge and experience in financial and business matters such
that Purchaser is capable of evaluating the merits and risks of Purchaser’s
investment in the Company, (ii) is able to bear the financial risks associated
with an investment in the Securities and (iii) has been given full access to
such records of the Company and the Subsidiaries and to the officers of the
Company and the Subsidiaries as it has deemed necessary or appropriate to
conduct its due diligence investigation.
 
(e)  Rule 144. Each Purchaser understands that the Securities must be held
indefinitely unless such Securities are registered under the Securities Act or
an exemption from registration is available. Each Purchaser acknowledges that
such person is familiar with Rule 144 of the rules and regulations of the
Commission, as amended, promulgated pursuant to the Securities Act (“Rule 144”),
and that such Purchaser has been advised that Rule144 permits resales only under
certain circumstances. Each Purchaser understands that to the extent that Rule
144 is not available, such Purchaser will be unable to sell any Securities
without either registration under the Securities Act or the existence of another
exemption from such registration requirement.
 
(f)  General. Each Purchaser understands that the Securities are being offered
and sold in reliance on a transactional exemption from the registration
requirements of federal and state securities laws and the Company is relying
upon the truth and accuracy of the representations, warranties, agreements,
acknowledgments and understandings of such Purchaser set forth herein in order
to determine the applicability of such exemptions and the suitability of such
Purchaser to acquire the Securities. Each Purchaser understands that no United
States federal or state agency or any government or governmental agency has
passed upon or made any recommendation or endorsement of the Securities. None of
the Purchasers has engaged in any short sale of the Company’s Common Stock prior
to the consummation of the transaction contemplated by this Agreement.
 
(g)  No General Solicitation. Each Purchaser acknowledges that the Securities
were not offered to such Purchaser by means of any form of general or public
solicitation or general advertising, or publicly disseminated advertisements or
sales literature, including (i) any advertisement, article, notice or other
communication published in any newspaper, magazine, or similar media, or
broadcast over television or radio, or (ii) any seminar or meeting to which such
Purchaser was invited by any of the foregoing means of communications. Each
Purchaser, in making the decision to purchase the Securities, has relied upon
independent investigation made by it and has not relied on any information or
representations made by third parties.
 
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(h)  Accredited Investor. Each Purchaser is an “accredited investor” (as defined
in Rule 501 of Regulation D), and such Purchaser has such experience in business
and financial matters that it is capable of evaluating the merits and risks of
an investment in the Securities. Such Purchaser is not required to be registered
as a broker-dealer under Section 15 of the Exchange Act and such Purchaser is
not a broker-dealer. Each Purchaser acknowledges that an investment in the
Securities is speculative and involves a high degree of risk.
 
(i)  Certain Fees. The Purchasers have not employed any broker or finder or
incurred any liability for any brokerage or investment banking fees,
commissions, finders’ structuring fees, financial advisory fees or other similar
fees in connection with the Transaction Documents.
 
(j)  Independent Investment. No Purchaser has agreed to act with any other
Purchaser for the purpose of acquiring, holding, voting or disposing of the
Securities purchased hereunder for purposes of Section 13(d) under the Exchange
Act, and each Purchaser is acting independently with respect to its investment
in the Securities.
 
ARTICLE III 
 
COVENANTS
 
The Company covenants with each Purchaser as follows, which covenants are for
the benefit of each Purchaser and their respective permitted assignees.
 
Section 3.1  Securities Compliance
 
. The Company shall notify the Commission in accordance with its rules and
regulations, of the transactions contemplated by any of the Transaction
Documents and shall take all other necessary action and proceedings as may be
required and permitted by applicable law, rule and regulation, for the legal and
valid issuance of the Securities to the Purchasers, or their respective
subsequent holders.
 
Section 3.2  Registration and Listing
 
. The Company shall use its reasonable best efforts to cause its Common Stock to
continue to be registered under Sections 12(b) or 12(g) of the Exchange Act, to
comply in all respects with its reporting and filing obligations under the
Exchange Act, to comply with all requirements related to any registration
statement filed pursuant to this Agreement, and to 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 such registration or to
terminate or suspend its reporting and filing obligations under the Exchange Act
or Securities Act, except as permitted herein. The Company shall use its
reasonable best efforts to continue the listing or trading of its Common Stock
on the OTC Bulletin Board or any successor market.
 
Section 3.3  Compliance with Laws
 
. The Company shall comply, and cause each Subsidiary to comply, with all
applicable laws, rules, regulations and orders, noncompliance with which would
be reasonably likely to have a Material Adverse Effect.
 
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Section 3.4  Keeping of Records and Books of Account
 
. The Company shall keep and cause each Subsidiary to keep adequate records and
books of account, in which complete entries will be made in accordance with GAAP
consistently applied, reflecting all financial transactions of the Company and
its Subsidiaries, and in which, for each fiscal year, all proper reserves for
depreciation, depletion, obsolescence, amortization, taxes, bad debts and other
purposes in connection with its business shall be made.
 
Section 3.5  Reporting Requirements
 
. If the Company ceases to file its periodic reports with the Commission, or if
the Commission ceases making these periodic reports available via the Internet
without charge, then the Company shall furnish the following to each Purchaser
so long as such Purchaser shall be obligated hereunder to purchase the
Securities or shall beneficially own Warrant Shares:
 
(a)  Quarterly Reports filed with the Commission on Form 10-Q as soon as
available, and in any event within forty-five (45) days after the end of each of
the first three fiscal quarters of the Company;
 
(b)  Annual Reports filed with the Commission on Form 10-K as soon as available,
and in any event within ninety (90) days after the end of each fiscal year of
the Company; and
 
(c)  Copies of all notices, information and proxy statements in connection with
any meetings, that are, in each case, provided to holders of shares of Common
Stock, contemporaneously with the delivery of such notices or information to
such holders of Common Stock.
 
Section 3.6  Other Agreements
 
. The Company shall not enter into any agreement in which the terms of such
agreement would restrict or impair the right or ability to perform of the
Company or any Subsidiary under any Transaction Document.
 
Section 3.7  Use of Proceeds
 
. The proceeds from the sale of the Securities will be used by the Company for
working capital and general corporate purposes.
 
Section 3.8  Reporting Status
 
. So long as a Purchaser beneficially owns any of the Securities, the Company
shall timely file all reports required to be filed with the Commission pursuant
to the Exchange Act, and the Company shall not terminate its status as an issuer
required to file reports under the Exchange Act even if the Exchange Act or the
rules and regulations thereunder would permit such termination.
 
Section 3.9  Disclosure of Transaction
 
. The Company shall issue a press release describing the material terms of the
transactions contemplated hereby (the “Press Release”) on the day of the
Closing; provided, however, that if Closing occurs after 4:00 P.M. Eastern Time
on any Trading Day but in no event later than one hour after the Closing, the
Company shall issue the Press Release no later than 9:00 A.M. Eastern Time on
the first Trading Day following the Closing Date. The Company shall also file
with the Commission a Current Report on Form 8-K (the “Form 8-K”) describing the
material terms of the transactions contemplated hereby (and attaching as
exhibits thereto this Agreement, the Note, the Registration Rights Agreement and
the form of Warrant) as soon as practicable following the date of execution of
this Agreement but in no event more than two (2) Trading Days following the date
of execution of this Agreement. “Trading Day” means any day during which the
principal exchange on which the Common Stock is traded shall be open for
trading.
 
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Section 3.10  Disclosure of Material Information
 
. The Company covenants and agrees that neither it nor any other person acting
on its behalf has provided or will provide any Purchaser or its agents or
counsel with any information that the Company believes constitutes material
non-public information, unless prior thereto such Purchaser shall have executed
a written agreement regarding the confidentiality and use of such information. 
The Company understands and confirms that each Purchaser shall be relying on the
foregoing representations in effecting transactions in securities of the
Company.
 
Section 3.11  Amendments
 
. The Company shall not amend or waive any provision of the Certificate or
Bylaws of the Company in any way that would adversely affect exercise rights,
voting rights, conversion rights, prepayment rights or redemption rights of the
holder of the Notes.
 
Section 3.12  Reservation of Shares
 
. So long as any of the Notes or Warrants remain outstanding, the Company shall
take all action necessary to seek authorization at the next scheduled annual
meeting of its shareholders to increase the aggregate number of shares of Common
Stock needed to provide for the issuance of the Warrant Shares.
 
Section 3.13  Disposition of Assets
 
. So long as the Notes remain outstanding, neither the Company nor any
subsidiary shall sell, transfer or otherwise dispose of any of its properties,
assets and rights including, without limitation, its software and intellectual
property, to any person except for sales to customers in the ordinary course of
business or with the prior written consent of the holders of a majority of the
Notes then outstanding.
 
Section 3.14  Non-Shorting
 
. So long as the Notes or Warrants remain outstanding, each Purchaser covenants
and agrees that it will not engage in any short sales of the Company’s Common
Stock.
 
ARTICLE IV 
 
CONDITIONS
 
Section 4.1  Conditions Precedent to the Obligation of the Company to Close and
to Sell the Securities
 
. The obligation hereunder of the Company to close and issue and sell the
Securities to the Purchasers at the Closing is subject to the satisfaction or
waiver, at or before the Closing of the conditions set forth below. These
conditions are for the Company’s sole benefit and may be waived by the Company
at any time in its sole discretion.
 
(a)  Accuracy of the Purchasers’ Representations and Warranties. The
representations and warranties of each Purchaser shall be true and correct in
all material respects as of the date when made and as of the Closing Date as
though made at that time, except for representations and warranties that are
expressly made as of a particular date, which shall be true and correct in all
material respects as of such date.
 
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(b)  Performance by the Purchasers. Each Purchaser shall have performed,
satisfied and complied in all material respects with all covenants, agreements
and conditions required by this Agreement to be performed, satisfied or complied
with by the Purchasers at or prior to the Closing Date.
 
(c)  No Injunction. No statute, rule, regulation, executive order, decree,
ruling or injunction shall have been enacted, entered, promulgated or endorsed
by any court or governmental authority of competent jurisdiction which prohibits
the consummation of any of the transactions contemplated by this Agreement.
 
(d)  Delivery of Transaction Documents. The Transaction Documents shall have
been duly executed and delivered by the Purchasers to the Company.
 
Section 4.2  Conditions Precedent to the Obligation of the Purchasers to Close
and to Purchase the Securities
 
. The obligation hereunder of the Purchasers to purchase the Securities and
consummate the transactions contemplated by this Agreement is subject to the
satisfaction or waiver, at or before the Closing, of each of the conditions set
forth below. These conditions are for the Purchasers’ sole benefit and may be
waived by the Purchasers at any time in their sole discretion.
 
(a)  Accuracy of the Company’s Representations and Warranties. Each of the
representations and warranties of the Company in this Agreement and the
Registration Rights Agreement shall be true and correct in all material respects
as of the Closing Date, except for representations and warranties that speak as
of a particular date, which shall be true and correct in all material respects
as of such date.
 
(b)  Performance by the Company. The Company shall have performed, satisfied and
complied in all material respects with all covenants, agreements and conditions
required by this Agreement to be performed, satisfied or complied with by the
Company at or prior to the Closing Date.
 
(c)  No Injunction. No statute, rule, regulation, executive order, decree,
ruling or injunction shall have been enacted, entered, promulgated or endorsed
by any court or governmental authority of competent jurisdiction which prohibits
the consummation of any of the transactions contemplated by this Agreement.
 
(d)  No Proceedings or Litigation. No action, suit or proceeding before any
arbitrator or any governmental authority shall have been commenced, and no
investigation by any governmental authority shall have been threatened, against
the Company or any Subsidiary, or any of the officers, directors or affiliates
of the Company or any Subsidiary seeking to restrain, prevent or change the
transactions contemplated by this Agreement, or seeking damages in connection
with such transactions.
 
(e)  Secretary’s Certificate. The Company shall have delivered to the Purchasers
a secretary’s certificate, dated as of the Closing Date, as to (i) the
resolutions adopted by the Board of Directors approving the transactions
contemplated hereby, (ii) the Certificate, (iii) the Bylaws, each as in effect
at the Closing, and (iv) the authority and incumbency of the officers of the
Company executing the Transaction Documents and any other documents required to
be executed or delivered in connection therewith.
 
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(f)  Officer’s Certificate. On the Closing Date, the Company shall have
delivered to the Purchasers a certificate signed by an executive officer on
behalf of the Company, dated as of the Closing Date, confirming the accuracy of
the Company’s representations, warranties and covenants as of the Closing Date
and confirming the compliance by the Company with the conditions precedent set
forth in paragraphs (b)-(d) of this Section 4.2 as of the Closing Date (provided
that, with respect to the matters in paragraph (d) of this Section 4.2, such
confirmation shall be based on the knowledge of the executive officer after due
inquiry).
 
(g)  Registration Rights Agreement. As of the Closing Date, the parties shall
have entered into the Registration Rights Agreement.
 
(h)  Material Adverse Effect. No Material Adverse Effect shall have occurred at
or before the Closing Date.
 
ARTICLE V 
 
CERTIFICATE LEGEND
 
Section 5.1  Legend
 
. Each certificate representing the Securities shall be stamped or otherwise
imprinted with a legend substantially in the following form (in addition to any
legend required by applicable state securities or “blue sky” laws):
 
THE SECURITIES REPRESENTED BY THIS CERTIFICATE (THE “SECURITIES”) HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”)
OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF UNLESS REGISTERED UNDER THE SECURITIES ACT AND UNDER APPLICABLE
STATE SECURITIES LAWS OR COMMUNICATION INTELLIGENCE CORPORATION SHALL HAVE
RECEIVED AN OPINION OF COUNSEL THAT REGISTRATION OF SUCH SECURITIES UNDER THE
SECURITIES ACT AND UNDER THE PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS
NOT REQUIRED.
 
The Company agrees to reissue certificates representing any of the Warrant
Shares, without the legend set forth above if at such time, prior to making any
transfer of any such Warrant Shares, such holder thereof shall give written
notice to the Company describing the manner and terms of such transfer and
removal as the Company may reasonably request. Such proposed transfer and
removal will not be effected until: (a) either (i) the Company has received an
opinion of counsel reasonably satisfactory to the Company, to the effect that
the registration of the Warrant Shares under the Securities Act is not required
in connection with such proposed transfer, (ii) a registration statement under
the Securities Act covering such proposed disposition has been filed by the
Company with the Commission and has become effective under the Securities Act,
(iii) the Company has received other evidence reasonably satisfactory to the
Company that such registration and qualification under the Securities Act and
state securities laws are not required, or (iv) the holder provides the Company
with reasonable assurances that such security can be sold pursuant to Rule 144
under the Securities Act; and (b) either (i) the Company has received an opinion
of counsel reasonably satisfactory to the Company, to the effect that
registration or qualification under the securities or “blue sky” laws of any
state is not required in connection with such proposed disposition, (ii)
compliance with applicable state securities or “blue sky” laws has been
effected, or (iii) the holder provides the Company with reasonable assurances
that a valid exemption exists with respect thereto. The Company will respond to
any such notice from a holder within five (5) business days. In the case of any
proposed transfer under this Section 5.1, the Company will use reasonable
efforts to comply with any such applicable state securities or “blue sky” laws,
but shall in no event be required, (x) to qualify to do business in any state
where it is not then qualified, (y) to take any action that would subject it to
tax or to the general service of process in any state where it is not then
subject, or (z) to comply with state securities or “blue sky” laws of any state
for which registration by coordination is unavailable to the Company. The
restrictions on transfer contained in this Section 5.1 shall be in addition to,
and not by way of limitation of, any other restrictions on transfer contained in
any other section of this Agreement. Whenever a certificate representing the
Warrant Shares is required to be issued to a Purchaser without a legend, in lieu
of delivering physical certificates representing the Warrant Shares, provided
the Company’s transfer agent is participating in the Depository Trust Company
(“DTC”) Fast Automated Securities Transfer program, the Company shall use its
reasonable best efforts to cause its transfer agent to electronically transmit
the Warrant Shares to a Purchaser by crediting the account of such Purchaser’s
Prime Broker with DTC through its Deposit Withdrawal Agent Commission (“DWAC”)
system (to the extent not inconsistent with any provisions of this Agreement).
 
18

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ARTICLE VI 
 
INDEMNIFICATION
 
Section 6.1  General Indemnity
 
. The Company agrees to indemnify and hold harmless the Purchasers (and their
respective directors, officers, affiliates, agents, successors and assigns) from
and against any and all losses, liabilities, deficiencies, costs, damages and
expenses (including, without limitation, reasonable attorneys’ fees, charges and
disbursements) incurred by the Purchasers as a result of any inaccuracy in or
breach of the representations, warranties or covenants made by the Company
herein. Each Purchaser severally but not jointly agrees to indemnify and hold
harmless the Company and its directors, officers, affiliates, agents, successors
and assigns from and against any and all losses, liabilities, deficiencies,
costs, damages and expenses (including, without limitation, reasonable
attorneys’ fees, charges and disbursements) incurred by the Company as result of
any inaccuracy in or breach of the representations, warranties or covenants made
by such Purchaser herein. The maximum aggregate liability of each Purchaser
pursuant to its indemnification obligations under this Article VI shall not
exceed the portion of the Purchase Price paid by such Purchaser hereunder. The
maximum aggregate liability of the Company pursuant to its indemnification
obligations under this Article VI shall not exceed the aggregate Purchase Price,
including any actual moneys paid by the Purchasers for the Warrant Shares.
 
19

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Section 6.2  Indemnification Procedure
 
. Any party entitled to indemnification under this Article VI (an “indemnified
party”) will give written notice to the indemnifying party of any matter giving
rise to a claim for indemnification; provided, that the failure of any party
entitled to indemnification hereunder to give notice as provided herein shall
not relieve the indemnifying party of its obligations under this Article VI
except to the extent that the indemnifying party is actually prejudiced by such
failure to give notice. In case any such action, proceeding or claim is brought
against an indemnified party in respect of which indemnification is sought
hereunder, the indemnifying party shall be entitled to participate in and,
unless in the reasonable judgment of the indemnifying party a conflict of
interest between it and the indemnified party exists with respect to such
action, proceeding or claim (in which case the indemnifying party shall be
responsible for the reasonable fees and expenses of one separate counsel for the
indemnified parties), to assume the defense thereof with counsel reasonably
satisfactory to the indemnified party. In the event that the indemnifying party
advises an indemnified party that it will not contest such a claim for
indemnification hereunder, or fails, within thirty (30) days of receipt of any
indemnification notice to notify, in writing, such person of its election to
defend, settle or compromise, at its sole cost and expense, any action,
proceeding or claim (or discontinues its defense at any time after it commences
such defense), then the indemnified party may, at its option, defend, settle or
otherwise compromise or pay such action or claim. In any event, unless and until
the indemnifying party elects in writing to assume and does so assume the
defense of any such claim, proceeding or action, the indemnified party’s costs
and expenses arising out of the defense, settlement or compromise of any such
action, claim or proceeding shall be losses subject to indemnification
hereunder. The indemnified party shall cooperate fully with the indemnifying
party in connection with any negotiation or defense of any such action or claim
by the indemnifying party and shall furnish to the indemnifying party all
information reasonably available to the indemnified party which relates to such
action or claim. The indemnifying party shall keep the indemnified party fully
apprised at all times as to the status of the defense or any settlement
negotiations with respect thereto. If the indemnifying party elects to defend
any such action or claim, then the indemnified party shall be entitled to
participate in such defense with counsel of its choice at its sole cost and
expense. The indemnifying party shall not be liable for any settlement of any
action, claim or proceeding effected without its prior written consent.
Notwithstanding anything in this Article VI to the contrary, the indemnifying
party shall not, without the indemnified party’s prior written consent, settle
or compromise any claim or consent to entry of any judgment in respect thereof
which imposes any future obligation on the indemnified party or which does not
include, as an unconditional term thereof, the giving by the claimant or the
plaintiff to the indemnified party of a release from all liability in respect of
such claim. The indemnification obligations to defend the indemnified party
required by this Article VI shall be made by periodic payments of the amount
thereof during the course of investigation or defense, as and when bills are
received or expense, loss, damage or liability is incurred, so long as the
indemnified party shall refund such moneys if it is ultimately determined by a
court of competent jurisdiction that such party was not entitled to
indemnification. The indemnity agreements contained herein shall be in addition
to (a) any cause of action or similar rights of the indemnified party against
the indemnifying party or others, and (b) any liabilities the indemnifying party
may be subject to pursuant to the law. No indemnifying party will be liable to
the indemnified party under this Agreement to the extent, but only to the extent
that a loss, claim, damage or liability is attributable to the indemnified
party’s breach of any of the representations, warranties or covenants made by
such party in this Agreement or in the other Transaction Documents.
 
20

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ARTICLE VII 
 
MISCELLANEOUS
 
Section 7.1  Fees and Expenses
 
. Each party shall pay the fees and expenses of its advisors, counsel,
accountants and other experts, if any, and all other expenses, incurred by such
party incident to the negotiation, preparation, execution, delivery and
performance of this Agreement.
 
Section 7.2  Specific Performance; Consent to Jurisdiction; Venue.
 
(a)  The Company and the Purchasers acknowledge and agree that irreparable
damage would occur in the event that any of the provisions of this Agreement or
the other Transaction Documents were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly agreed that the
parties shall be entitled to an injunction or injunctions to prevent or cure
breaches of the provisions of this Agreement or the other Transaction Documents
and to enforce specifically the terms and provisions hereof or thereof, this
being in addition to any other remedy to which any of them may be entitled by
law or equity.
 
(b)  The parties agree that venue for any dispute arising under this Agreement
will lie exclusively in the state or federal courts located in California and
the parties irrevocably waive any right to raise forum non conveniens or any
other argument that California is not the proper venue. The parties irrevocably
consent to personal jurisdiction in the state and federal courts of the state of
California. The Company and each Purchaser consent to process being served in
any such suit, action or proceeding by mailing a copy thereof to such party at
the address in effect for notices to it under this Agreement and agrees that
such service shall constitute good and sufficient service of process and notice
thereof. Nothing in this Section 7.2 shall affect or limit any right to serve
process in any other manner permitted by law. The Company and the Purchasers
hereby agree that the prevailing party in any suit, action or proceeding arising
out of or relating to the Securities, this Agreement or the Registration Rights
Agreement, shall be entitled to reimbursement for reasonable legal fees from the
non-prevailing party.
 
Section 7.3  Entire Agreement; Amendment
 
. This Agreement and the Transaction Documents contain the entire understanding
and agreement of the parties with respect to the matters covered hereby and,
except as specifically set forth herein or in the other Transaction Documents,
neither the Company nor any Purchaser make any representation, warranty,
covenant or undertaking with respect to such matters, and they supersede all
prior understandings and agreements with respect to said subject matter, all of
which are merged herein. No provision of this Agreement may be waived or amended
other than by a written instrument signed by the Company and the Purchasers
holding at least a majority of the principal amount of the Notes then held by
the Purchasers. Any amendment or waiver effected in accordance with this Section
7.3 shall be binding upon each Purchaser (and their permitted assigns) and the
Company.
 
21

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Section 7.4  Notices
 
. Any notice, demand, request, waiver or other communication required or
permitted to be given hereunder shall be in writing and shall be effective (a)
upon hand delivery by telecopy or facsimile at the address or number designated
below (if delivered on a business day during normal business hours where such
notice is to be received), or the first business day following such delivery (if
delivered other than on a business day during normal business hours where such
notice is to be received) or (b) on the second business day following the date
of mailing by express courier service, fully prepaid, addressed to such address,
or upon actual receipt of such mailing, whichever shall first occur. The
addresses for such communications shall be:
 
If to the Company:  Communication Intelligence Corporation
275 Shoreline Drive, Suite 500
Redwood Shores, California 94065
Attention: Frank Dane
Tel. No.: (650) 802-7888
Fax No.: (650) 802-7777
 
with copies (which copies
shall not constitute notice
to the Company) to:  Davis Wright Tremaine LLP
1300 S.W. Fifth Ave., 23rd Floor
Portland, Oregon 97201
Attention: Michael C. Phillips, Esq.
Tel. No. (503) 241-2300
Fax No.: (503) 778-5299
 
If to any Purchaser: At the address of such Purchaser set forth on Exhibit A to
this Agreement, with copies to Purchaser’s counsel as set forth on Exhibit A. 
 
Any party hereto may from time to time change its address for notices by giving
written notice of such changed address to the other party hereto.
 
Section 7.5  Waivers
 
. No waiver by either party of any default with respect to any provision,
condition or requirement of this Agreement shall be deemed to be a continuing
waiver in the future or a waiver of any other provision, condition or
requirement hereof, nor shall any delay or omission of any party to exercise any
right hereunder in any manner impair the exercise of any such right accruing to
it thereafter.
 
Section 7.6  Headings
 
. The article, section and subsection headings in this Agreement are for
convenience only and shall not constitute a part of this Agreement for any other
purpose and shall not be deemed to limit or affect any of the provisions hereof.
 
Section 7.7  Successors and Assigns
 
. This Agreement shall be binding upon and inure to the benefit of the parties
and their successors and assigns. After the Closing, the assignment by a party
to this Agreement of any rights hereunder shall not affect the obligations of
such party under this Agreement. Subject to Section 5.1 hereof, the Purchasers
may assign the Securities and its rights under this Agreement and the other
Transaction Documents and any other rights hereto and thereto without the
consent of the Company.
 
22

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Section 7.8  No Third Party Beneficiaries
 
. This Agreement is intended for the benefit of the parties hereto and their
respective permitted successors and assigns and is not for the benefit of, nor
may any provision hereof be enforced by, any other person.
 
Section 7.9  Governing Law
 
. This Agreement shall be governed by and construed in accordance with the
internal laws of the State of California, without giving effect to any of the
conflicts of law principles which would result in the application of the
substantive law of another jurisdiction. This Agreement shall not be interpreted
or construed with any presumption against the party causing this Agreement to be
drafted.
 
Section 7.10  Survival
 
. The representations and warranties of the Company and the Purchasers shall
survive the execution and delivery hereof and the Closing until the first
anniversary of the Closing Date, except the agreements and covenants set forth
in Articles I, III, V, VI and VII of this Agreement shall survive the execution
and delivery hereof and the Closing hereunder.
 
Section 7.11  Counterparts
 
. This Agreement may be executed in any number of counterparts, all of which
taken together shall constitute one and the same instrument and shall become
effective when counterparts have been signed by each party and delivered to the
other parties hereto, it being understood that all parties need not sign the
same counterpart.
 
Section 7.12  Publicity
 
. The Company agrees that it will not disclose, and will not include in any
public announcement, the names of the Purchasers without the consent of the
Purchasers, which consent shall not be unreasonably withheld or delayed, or
unless and until such disclosure is required by law, rule or applicable
regulation, including without limitation any disclosure pursuant to a
registration statement registering the Warrant Shares, and then only to the
extent of such requirement.
 
Section 7.13  Severability
 
. The provisions of this Agreement are severable and, in the event that any
court of competent jurisdiction shall determine that any one or more of the
provisions or part of the provisions contained in this Agreement shall, for any
reason, be held to be invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other provision
or part of a provision of this Agreement and this Agreement shall be reformed
and construed as if such invalid or illegal or unenforceable provision, or part
of such provision, had never been contained herein, so that such provisions
would be valid, legal and enforceable to the maximum extent possible.
 
Section 7.14  Further Assurances
 
. From and after the date of this Agreement, upon the request of the Purchasers
or the Company, the Company and each Purchaser shall execute and deliver such
instruments, documents and other writings as may be reasonably necessary or
desirable to confirm and carry out and to effectuate fully the intent and
purposes of this Agreement and the other transaction Documents.
 
[SIGNATURE PAGE FOLLOWS]

23
2007.06.12 Note & Warrant Purchase Agreement

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IN WITNESS WHEREOF, the parties hereto have caused this Note and Warrant
Purchase Agreement to be duly executed by their respective authorized officers
as of the date first above written.
 
COMMUNICATION INTELLIGENCE CORPORATION
 
By:  /s/ Frank Dane                                                            
 Name: Frank Dane
Title: Chief Financial and Legal Officer
 
                      PURCHASER:
 
By:  /s/ Michael Engmann                                                 
Name:  Michael Engmann
Title:
 

2007.06.12 Note & Warrant Purchase Agreement

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

EXHIBIT A
LIST OF PURCHASERS
 
Names and Addresses      Investment Amount and Number of
of Purchasers       Warrants Purchased
 

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

EXHIBIT B
FORM OF NOTE

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

EXHIBIT C
FORM OF WARRANT

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

EXHIBIT D
FORM OF REGISTRATION RIGHTS AGREEMENT

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

SCHEDULE 2.1(b)

None.

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

SCHEDULE 2.1(c)
CAPITALIZATION

Preferred Shares Authorized: 10,000,000

Common Shares Authorized: 125,000,000

No exceptions from public filings

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

SCHEDULE 2.1(g)
SUBSIDIARIES

CICI Limited, Incorporated in Bermuda, 100% owned by CIC

Communication Intelligence Computer Corporation, Ltd., Joint Venture in China,
90% owned by CIC, 10% owned by Jiangsu Hongtu Electronics Company, Ltd.

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

SCHEDULE 2.1(h)

None.

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

SCHEDULE 2.1(i)

None.

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

SCHEDULE 2.1(j)

None.

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

SCHEDULE 2.1(k)

$1,382,692 in Convertible debt to nine (9) investors. If not converted the debt
is payable in October 2007.

$600,000 in conventional notes to two (2) investors. The notes are due in May of
2008.

$720,000 in conventional notes to seven (7) investors. The notes are due in
August of 2008

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

SCHEDULE 2.1(l)

None.

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

SCHEDULE 2.1(m)

None.

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

SCHEDULE 2.1(n)

None.

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

SCHEDULE 2.1(o)

None.

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

SCHEDULE 2.1(p)

None.

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

SCHEDULE 2.1(r)

None.

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

SCHEDULE 2.1(u)

None.

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

SCHEDULE 2.1(v)

None.

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

SCHEDULE 2.1(x)

None.

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

SCHEDULE 2.1(y)

A total of 125,000 options were issued to two employees subsequent to March 31,
2007.

·  
SCHEDULE 2.1(cc)

None.