EXHIBIT 10.1

Sun Healthcare Group, Inc.

SUBSCRIPTION AGREEMENT

February 13, 2004

TO EACH OF THE PURCHASERS NAMED ON THE SIGNATURE PAGES HEREOF

Ladies and Gentlemen:

Sun Healthcare Group, Inc., a Delaware corporation (the "Company"), hereby
confirms its agreement with each of you (each a "Purchaser" and, collectively,
the "Purchasers"), as set forth below.

The Units
. Subject to the terms and conditions herein contained, the Company agrees to
issue and sell to each Purchaser (i) a number of shares of its Common Stock, par
value $0.01 per share (the "
Common Stock
"), as equals the "Total Investment Amount" set forth on the signature page of
such Purchaser hereto divided by the per Unit purchase price set forth in this
Agreement (collectively, the "
Shares
"), and (ii) warrants to purchase the number of shares of Common Stock as equals
40% of the number of Shares referred to in Section 1(i), and in the form
attached hereto as
Exhibit A
(collectively, the "
Warrants
"). The Shares and Warrants shall be sold in Units. For purposes of this
Agreement, a "
Unit
" shall be comprised of one Share and a Warrant to purchase .4 shares of Common
Stock. The Shares, the Warrants and the shares of Common Stock issuable upon
exercise of the Warrants (the "
Warrant Shares
") are hereinafter referred to collectively as the "
Securities
".

The Units will be offered and sold to the Purchasers without such offers and
sales being registered under the Securities Act of 1933, as amended (together
with the rules and regulations of the Securities and Exchange Commission (the
"Commission") promulgated thereunder, the "Securities Act"), in reliance on
exemptions therefrom.

In connection with the sale of the Units, the Company has made available its
periodic reports filed with the Commission under the Securities Exchange Act of
1934, as amended (together with the rules and regulations of the Commission
promulgated thereunder, the "Exchange Act") since January 1, 2003 and prior to
the date hereof. These reports and filings are collectively referred to as the
"Disclosure Documents". All references in this Agreement to financial statements
and schedules and other information which is "contained," "included" or "stated"
in the Disclosure Documents (or other references of like import) shall be deemed
to mean and include all such financial statements and schedules and other
information, which is incorporated by reference in the Disclosure Documents.

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The Purchasers and their direct and indirect transferees of the Securities will
be entitled to the benefits of the Registration Rights Agreement, in the form of
Exhibit B hereto, to be dated as of the date hereof among the parties hereto
(the "Registration Rights Agreement") pursuant to which the Company has agreed,
among other things, to file a shelf registration statement (the "Shelf
Registration Statement") pursuant to Rule 415 under the Securities Act covering
the resale of the Shares and the Warrant Shares by holders thereof.

The Registration Rights Agreement, the Warrants and this Agreement are herein
collectively referred to as the "Basic Documents".
 

Representations and Warranties of the Company
. The Company represents and warrants to and agrees with each Purchaser that:

 
 a.  The Company has filed all reports required to be filed by it under the
     Securities Act and the Exchange Act, including pursuant to Section 13(a) or
     15(d) thereof, for the twelve months preceding the date hereof. The
     Disclosure Documents as of their respective dates did not, and any
     amendment or supplement thereto as of its date did not, contain any untrue
     statement of a material fact or omit to state a material fact necessary to
     make the statements therein, in the light of the circumstances under which
     they were made, not misleading. The Disclosure Documents, at the time they
     were filed with the Commission, complied in all material respects with the
     requirements of the Securities Act and/or the Exchange Act, as the case may
     be (collectively, the "Securities Acts"), as applicable.
      
 b.  Each of the Company and its subsidiaries (the "Subsidiaries") has been duly
     incorporated and each of the Company and the Subsidiaries is validly
     existing in good standing as a corporation under the laws of its
     jurisdiction of incorporation, with the requisite corporate power and
     authority to own its properties and conduct its business as now conducted
     as described in the Disclosure Documents and is duly qualified to do
     business as a foreign corporation in good standing in all other
     jurisdictions where the ownership or leasing of its properties or the
     conduct of its business requires such qualification, except where the
     failure to be so qualified would not have or be reasonably likely to result
     in (i) a material adverse effect on the business, condition (financial or
     otherwise), business prospects or results of operations of the Company and
     the Subsidiaries, taken as a whole, (ii) a material adverse effect on the
     legality, validity or enforceability of any Basic Document, or (iii) a
     material impairment to the Company's ability to perform on a timely basis
     its obligations under any Basic Document (any such event in (i), (ii) or
     (iii), a "Material Adverse Effect"). The Company has the authorized, issued
     and outstanding capitalization set forth in the Company's Quarterly Report
     on Form 10-Q for the quarter ended September 30, 2003; subject to (i) the
     issuance of up to 105,344 shares of Common Stock pursuant to the Company's
     Plan of Reorganization approved
     
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      by the United States Bankruptcy Court in and for the District of Delaware
     by order dated February 6, 2002 (the "Reorganization Plan"), (ii) the
     issuance of the Units pursuant to this Agreement, (iii) the issuance of
     Common Stock upon exercise of options outstanding under the Company's 2002
     Management Equity Incentive Plan, (iv) the issuance of Common Stock upon
     exercise of options outstanding under the Company's 2002 Non-Employee
     Director Equity Incentive Plan, as amended, (v) the issuance of Common
     Stock upon the exercise of warrants to purchase approximate 500,000 shares
     of Common Stock at an exercise price of $76 per share outstanding under the
     Reorganization Plan, and (vi) restricted stock awards for 90,000 shares of
     Common Stock made in January 2004 under the Company's Management Equity
     Incentive Plan, (vii) the issuance of Common Stock upon exercise of
     outstanding warrants or other rights to acquire shares described in the
     Disclosure Documents and (viii) the issuance of warrants to Roth Capital
     Partners, LLC in connection with the transactions contemplated by this
     Agreement (the "Roth Warrants"). All of the outstanding shares of capital
     stock of the Company and the Subsidiaries have been duly authorized and
     validly issued, are fully paid and nonassessable and were not issued in
     violation of any preemptive or similar rights. Except as set forth in the
     Disclosure Documents, all of the outstanding shares of capital stock of the
     Subsidiaries are owned, directly or indirectly, by the Company, except
     where the failure to own such capital stock would not have a material
     adverse impact upon the financial condition of the Company and its
     Subsidiaries. The shares of capital stock of the Company and the
     Subsidiaries that are reserved for issuance pursuant to stock option plans
     or other equity incentive plans is as set forth in the Disclosure
     Documents. Except for (i) up to 105,344 additional shares of Common Stock
     to be issued pursuant to the Reorganization Plan, (ii) the options
     outstanding under the Company's 2002 Management Equity Incentive Plan,
     (iii) the options outstanding under the Company's 2002 Non-Employee
     Director Equity Incentive Plan, as amended, (iv) the shares of Common Stock
     that may be issuable upon the conversion of certain deferred rent into
     Common Stock as contemplated in the non-binding term sheet executed by and
     between the Company and Omega Healthcare Investors, Inc. as described in
     the Disclosure Documents (the "Omega Term Sheet"), (v) warrants to purchase
     approximate 500,000 shares of Common Stock at an exercise price of $76 per
     share outstanding under the Reorganization Plan, (vi) the outstanding
     warrants or other rights to acquire shares described in the Disclosure
     Documents and (vii) the Roth Warrants, there are no outstanding options,
     warrants or other rights to purchase shares of capital stock of the Company
     or the Subsidiaries.
      

 c.  The Company has the requisite corporate power and authority to execute,
     deliver and perform its obligations under the Basic Documents. Each of the
     Basic Documents has been duly and validly authorized by the Company and,
     when executed and delivered by the Company, will constitute a valid and
     legally binding agreement of the Company, enforceable against the Company
     in accordance with its terms except as (i) the enforcement thereof may be
     limited by (A) bankruptcy, insolvency, reorganization, fraudulent
     conveyance, moratorium or other similar laws now or hereafter in effect
     relating to or affecting creditors' rights generally or (B) general
     principles of equity and the discretion of the court before which any
     proceeding therefore may be brought (regardless of whether such enforcement
     is considered in a proceeding at law or in equity) and (ii) any rights to
     indemnity, or contribution under the Registration Rights Agreement may be
     limited by federal and state securities laws and public policy
     considerations (collectively, the "Enforceability Exceptions").
     
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 d.  The Shares have been duly authorized and, when issued upon payment thereof
     in accordance with this Agreement, will have been validly issued, fully
     paid and nonassessable and shall be free and clear of all encumbrances and
     restrictions (other than those created by the Purchasers), except for
     restrictions on transfer set forth in the Basic Documents or imposed by
     applicable securities laws. The Warrant Shares have been duly authorized
     and reserved and, when issued upon the due exercise of the Warrants, will
     be validly issued, fully paid and nonassessable and shall be free and clear
     of all encumbrances and restrictions (other than those created by the
     Purchasers), except for restrictions on transfer set forth in the Basic
     Documents or imposed by applicable securities laws. The capital stock of
     the Company, including the Common Stock, conforms to the description
     thereof contained in the Disclosure Documents. The stockholders of the
     Company have no preemptive or similar rights with respect to the Common
     Stock.
      
 e.  No consent, approval, authorization, license, qualification, exemption or
     order of any court or governmental agency or body or third party is
     required for the execution, delivery or performance of the Basic Documents
     by the Company or for the consummation by the Company of any of the
     transactions contemplated thereby, or the application of the proceeds of
     the issuance of the Units as described in Section 5(b), except for such
     consents, approvals, authorizations, licenses, qualifications, exemptions
     or orders (i) as will have been obtained on or prior to the Closing, (ii) 
     as are required from the Commission to cause the Shelf Registration
     Statement to be declared effective under the Securities Act, or (iii) the
     failure to obtain which would not, individually or in the aggregate, have
     or reasonably be expected to result in a Material Adverse Effect. All such
     consents, approvals, authorizations, licenses, qualifications, exemptions
     and orders set forth in the Disclosure Documents which are required to be
     obtained by the Closing Date will be in full force and effect as of the
     Closing Date and not the subject of any pending or, to the best knowledge
     of the Company, threatened attack by appeal or direct proceeding or
     otherwise. The issuance and sale of the Securities will not obligate the
     Company to issue shares of Common Stock or other securities to any other
     person (other than the Purchasers) and will not result in the adjustment of
     the exercise, conversion, exchange or reset price of any outstanding
     security. The Company has taken all action necessary to exempt (i) the
     issuance and sale of the Units, (ii) the issuance of the Warrant Shares
     upon due exercise of the Warrants, and (iii) the other transactions
     contemplated by the Basic Documents from the provisions of any shareholder
     rights plan or other "poison pill" arrangement, any anti-takeover, business
     combination or control share law or statute binding on the Company or to
     which the Company or any of its assets and properties may be subject and
     any provision of the Company's Certificate of Incorporation or By-laws that
     is or could reasonably be expected to become applicable to the Purchasers
     as a result of the transactions contemplated hereby, including without
     limitation, the issuance of the Securities and the ownership, disposition
     or voting of the Securities by the Purchasers or the exercise of any right
     granted to the Purchasers pursuant to this Agreement or the other Basic
     Documents.
     
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 f.  None of the Company or the Subsidiaries is (i) in violation of its
     certificate of incorporation or bylaws (or similar organizational
     document), (ii) in breach or violation of any statute, judgment, decree,
     order, rule or regulation applicable to it or any of its properties or
     assets, except as set forth in the Disclosure Documents, or (iii) in
     default (nor has any event occurred which with notice or passage of time,
     or both, would constitute a default) in the performance or observance of
     any obligation, agreement, covenant or condition contained in any contract,
     indenture, mortgage, deed of trust, loan agreement, note, lease, license,
     franchise agreement, permit, certificate or agreement, instrument or term
     sheet to which it is a party; which breach, violation, or default (with
     respect to any of clauses (ii) or (iii) of this Section 2(f)) would,
     individually or in the aggregate, have or reasonably be expected to result
     in a Material Adverse Effect.
      
 g.  The execution, delivery and performance by the Company of the Basic
     Documents and the consummation by the Company of the transactions
     contemplated thereby and the fulfillment of the terms thereof will not
     (a) violate, conflict with or constitute or result in a breach of or a
     default under (or an event that, with notice or lapse of time, or both,
     would constitute a breach of or a default under) any of (i) the terms or
     provisions of any contract, indenture, mortgage, deed of trust, loan
     agreement, note, lease, license, franchise agreement, permit, certificate
     or agreement or instrument to which any of the Company or the Subsidiaries
     is a party or to which any of their respective properties or assets are
     subject, (ii) the certificate of incorporation or bylaws of the Company,
     (iii) the certificate of incorporation or bylaws of any of the Subsidiaries
     (or similar organizational document) or (iv) any statute, judgment, decree,
     order, rule or regulation of any court, governmental agency, stock market
     or trading facility on which the Common Stock trades or on which the
     Company has applied for listing to trade or other body applicable to the
     Company or the Subsidiaries or any of their respective properties or assets
     or (b) result in the imposition of any lien upon or with respect to any of
     the properties or assets now owned or hereafter acquired by the Company or
     any of the Subsidiaries; which violation, conflict, breach, default or lien
     (with respect to any of clauses (a) or (b) of this Section 2(g) other than
     (a)(ii)) would, individually or in the aggregate, have or reasonably be
     expected to result in a Material Adverse Effect.
     
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 h.  The audited consolidated financial statements included in the Disclosure
     Documents present fairly the consolidated financial position, results of
     operations, cash flows and changes in stockholders' equity of the Company,
     at the dates and for the periods to which they relate and have been
     prepared in accordance with generally accepted accounting principles
     applied on a consistent basis. The interim unaudited consolidated financial
     statements included in the Disclosure Documents present fairly the
     consolidated financial position, results of operations and cash flows of
     the Company, at the dates and for the periods to which they relate, subject
     to year-end audit adjustments, and have been prepared in accordance with
     generally accepted accounting principles applied on a consistent basis with
     the audited consolidated financial statements included therein. The
     selected financial and statistical data included in the Disclosure
     Documents present fairly the information shown therein and have been
     prepared and compiled on a basis consistent with the audited financial
     statements included therein, except as otherwise stated therein (including
     the notes thereto). Ernst & Young LLP, which has examined certain of such
     financial statements as set forth in its report included in the Disclosure
     Documents, is an independent public accounting firm as required by the
     Securities Act for an offering registered thereunder.
      
 i.  Except as described in the Disclosure Documents, there is not pending or,
     to the best knowledge of the Company, threatened any action, suit,
     proceeding, inquiry or investigation, governmental or otherwise, to which
     any of the Company or the Subsidiaries is a party, or to which their
     respective properties or assets are subject, before or brought by any
     court, arbitrator or governmental agency or body, that, if determined
     adversely to the Company or any such Subsidiary, would, individually or in
     the aggregate, reasonably be expected to have or result in a Material
     Adverse Effect or that seeks to restrain, enjoin, prevent the consummation
     of or otherwise challenge the issuance or sale of the Units to be sold
     hereunder or the application of the proceeds therefrom or the other
     transactions described in the Disclosure Documents.
      
 j.  None of the Company or the Subsidiaries has, or, after giving effect to the
     issuance and sale of the Units, will have, any liability for any prohibited
     transaction (as defined in Section 406 of the Employee Retirement Income
     Security Act of 1974, as amended ("ERISA"), or Section 4975 of the Internal
     Revenue Code of 1986, as amended (the "Code")), accumulated funding
     deficiency (as defined in Section 302 of ERISA) or any complete or partial
     withdrawal from a multiemployer plan (as defined in Section 4001(a)(3) of
     ERISA), with respect to any plan (as defined in Section 3(3) of ERISA) as
     to which the Company or any of the Subsidiaries has any liability. With
     respect to such plans, the Company and the Subsidiaries are, and, after
     giving effect to the issuance and sale of the Units, will be, in compliance
     in all material respects with all applicable provisions of the Code and
     ERISA.
      
 k.  The Company and the Subsidiaries own or possess adequate licenses or other
     rights to use all patents, trademarks, service marks, trade names,
     copyrights and know-how that are necessary to conduct their businesses as
     described in the Disclosure Documents. None of the Company or the
     Subsidiaries has received any written notice of infringement of or conflict
     with (or knows of any such infringement of or conflict with) asserted
     rights of others with respect to any patents, trademarks, service marks,
     trade names, copyrights or know-how that, if such assertion of infringement
     or conflict were sustained, would, individually or in the aggregate, have
     or reasonably be expected to result in a Material Adverse Effect.
      
     
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 l.  Each of the Company and the Subsidiaries possesses all licenses, permits,
     certificates, consents, orders, approvals and other authorizations from,
     and has made all declarations and filings with, all federal, state, local
     and other governmental authorities, all self-regulatory organizations and
     all courts and other tribunals presently required or necessary to own or
     lease, as the case may be, and to operate its respective properties and to
     carry on its respective businesses as now or proposed to be conducted as
     set forth in the Disclosure Documents ("Permits"), except where the failure
     to obtain such Permits would not, individually or in the aggregate, have or
     reasonably be expected to result in a Material Adverse Effect. Each of the
     Company and the Subsidiaries has fulfilled and performed all of its
     obligations with respect to such Permits and no event has occurred which
     allows, or after notice or lapse of time would allow, revocation or
     termination thereof or results in any other impairment of the rights of the
     holder of any such Permit, except where such revocation, termination or
     impairment would not individually or in the aggregate, have or reasonably
     be expected to result in a Material Adverse Effect. None of the Company or
     the Subsidiaries has received any written notice of any proceeding relating
     to revocation or modification of any such Permit, except as described in
     the Disclosure Documents and except where such revocation or modification
     would not, individually or in the aggregate, have or reasonably be expected
     to result in a Material Adverse Effect.
      
 m.  Subsequent to the respective dates as of which information is given in the
     Disclosure Documents and except as described therein or in this Agreement,
     (i) the Company and the Subsidiaries have not incurred any material
     liabilities or obligations, direct or contingent, or entered into any
     material transactions other than in the ordinary course of business,
     (ii) the Company and the Subsidiaries have not purchased any of their
     respective outstanding capital stock, or declared, paid or otherwise made
     any dividend or distribution of any kind on any of their respective capital
     stock or otherwise (other than, with respect to any of such Subsidiaries,
     the purchase of, or a dividend or distribution on, capital stock owned
     directly or indirectly by the Company), (iii) there has not been any
     material change in the capital stock or any increase in the long-term
     indebtedness of the Company or any of the Subsidiaries, (iv) there has not
     occurred any event or condition, individually or in the aggregate, that has
     had or reasonably would be expected to result in a Material Adverse Effect
     and (v) the Company and the Subsidiaries have not sustained any material
     loss or interference with respect to their respective businesses or
     properties from fire, flood, hurricane, earthquake, accident or other
     calamity, whether or not covered by insurance, or from any labor dispute or
     any legal or governmental proceeding.
     
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 n.  There are no legal or governmental proceedings nor are there any contracts
     or other documents required by the Securities Act to be described in a
     prospectus that are not described in the Disclosure Documents. Except as
     described in the Disclosure Documents, none of the Company or the
     Subsidiaries is in default under any of the contracts described in the
     Disclosure Documents, has received a notice or claim of any such default or
     has knowledge of any breach of such contracts by the other party or parties
     thereto, except such defaults or breaches as would not, individually or in
     the aggregate, have or reasonably be expected to result in a Material
     Adverse Effect.
      
 o.  Each of the Company and the Subsidiaries has good title to all real
     property described in the Disclosure Documents as being owned by it and
     valid and enforceable leases for all real property described therein as
     being leased by it, free and clear of all liens, charges, encumbrances or
     restrictions, except, in each case, as described in the Disclosure
     Documents or such as would not, individually or in the aggregate, have or
     reasonably be expected to result in a Material Adverse Effect. All leases,
     contracts and agreements, including those referred to in the Disclosure
     Documents, to which the Company or any of the Subsidiaries is a party or by
     which any of them is bound are, to the knowledge of the Company, valid and
     enforceable against the other party or parties thereto, except where the
     invalidity or unenforceability would not, individually or in the aggregate,
     have or reasonably be expected to result in a Material Adverse Effect.
      
 p.  Each of the Company and the Subsidiaries has filed all necessary federal,
     state and foreign income and franchise tax returns, except where the
     failure to so file such returns would not, individually or in the
     aggregate, have a Material Adverse Effect, and has paid or accrued all
     taxes shown as due thereon; and other than tax deficiencies which the
     Company or any Subsidiary is contesting in good faith and for which
     adequate reserves have been provided in accordance with generally accepted
     accounting principles, there is no tax deficiency that has been asserted
     against the Company or any Subsidiary, that would, individually or in the
     aggregate, have a Material Adverse Effect,.
      
 q.  For purposes of this Agreement, the following terms shall have the
     following meanings: "Environmental Law" means any federal, state, local or
     municipal statute, law, rule, regulation, ordinance, code, policy or rule
     of common law and any judicial or administrative interpretation thereof,
     including any judicial or administrative order, consent decree or judgment
     binding on any of the Company or the Subsidiaries, relating to pollution or
     protection of the environment, natural resources or health or safety
     including, without limitation, any relating to the release or threatened
     release of any pollutant, contaminated substance, material, waste, chemical
     or contaminant subject to regulation thereunder. Except as disclosed in the
     Disclosure Documents and except as would not, individually or in the
     aggregate, have or reasonably be expected to result in a Material Adverse
     Effect, (A) each of the Company and the Subsidiaries is in compliance with
     all, and is not subject to liability (including,
     
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     without limitation, fines or penalties) under any, applicable Environmental
     Laws, (B) each of the Company and the Subsidiaries has made all filings and
     provided all notices required under any applicable Environmental Law, and
     has all permits, authorizations and approvals required under any applicable
     Environmental Laws and is in compliance with their requirements, (C) there
     is no civil, criminal or administrative action, suit, demand, claim,
     hearing, notice of violation, investigation, proceeding, notice or demand
     letter or request for information pending or, to the best knowledge of the
     Company, threatened against the Company or any of the Subsidiaries under
     any Environmental Law, (D) no lien, charge, encumbrance or restriction has
     been recorded under any Environmental Law with respect to any assets,
     facility or property owned, operated, leased or controlled by the Company
     or any of the Subsidiaries, (E) neither the Company nor any of the
     Subsidiaries is subject to any order, decree or agreement requiring, or is
     otherwise obligated or required to perform any response or corrective
     action relating to any hazardous material, (F) neither the Company nor any
     of the Subsidiaries has received written notice that it has been identified
     as a potentially responsible party under the Comprehensive Environmental
     Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), or
     any comparable state law, (G) no property or facility of the Company or any
     of the Subsidiaries is (i) listed or proposed for listing on the National
     Priorities List under CERCLA or (ii) listed in the Comprehensive
     Environmental Response, Compensation and Liability Information System List
     promulgated pursuant to CERCLA, or on any comparable list maintained by any
     state or local governmental authority and (H) there are no past or present
     actions, events, operations or activities which could reasonably be
     expected to prevent or interfere with compliance by the Company or any
     Subsidiary with any applicable Environmental Law or to result in liability
     (including, without limitation, fines or penalties) under any applicable
     Environmental Law.
      

 r.  None of the Company or the Subsidiaries is, or immediately after the
     Closing Date will be, required to register as an "investment company" or a
     company "controlled by" an "investment company" within the meaning of the
     Investment Company Act of 1940, as amended (the "Investment Company Act").
      
 s.  None of the Company or the Subsidiaries or any of such entities' directors,
     officers, employees, agents or controlling persons has taken, directly or
     indirectly, any action designed, or that might reasonably be expected, to
     cause or result, under the Securities Acts or otherwise, in, or that has
     constituted, stabilization or manipulation of the price of the Units.
      
 t.  None of the Company, the Subsidiaries or any of their respective Affiliates
     (as defined in Rule 501(b) of Regulation D under the Securities Act) has
     directly, or through any agent, (i) sold, offered for sale, solicited
     offers to buy or otherwise negotiated in respect of any "security" (as
     defined in the Securities Act) which is or could be integrated with the
     sale of the Units in a manner that would require the registration under the
     Securities Act of the issuance of the Units pursuant to the Basic Documents
     or (ii) engaged in any form of general solicitation or general advertising
     (as those terms are used in Regulation D under the Securities Act) in
     connection with the offering of the Units or in any manner involving a
     public offering within the meaning of Section 4(2) of the Securities Act.
     Assuming the accuracy of the representations and warranties of the
     Purchasers in Section 8 hereof, it is not necessary in connection with the
     offer, sale and delivery of the Units to the Purchasers in the manner
     contemplated by this Agreement to register any of the Units under the
     Securities Act.
     
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 u.  Except as set forth in the Disclosure Documents, there is no strike, labor
     dispute, slowdown or work stoppage with the employees of the Company or any
     of the Subsidiaries which is pending or, to the best knowledge of the
     Company, threatened.
      
 v.  Except as set forth in the Disclosure Documents, each of the Company and
     the Subsidiaries carries insurance (including self-insurance) in such
     amounts and covering such risks as in its reasonable determination is
     adequate for the conduct of its business and the value of its properties.
      
 w.  The Company (i) makes and keeps accurate books and records and
     (ii) maintains internal accounting controls which provide reasonable
     assurance that (A) transactions are executed in accordance with
     management's authorization, (B) transactions are recorded as necessary to
     permit preparation of its financial statements in conformity with generally
     accepted accounting principles and to maintain accountability for its
     assets, (C) access to its assets is permitted only in accordance with
     management's authorization and (D) the reported accountability for its
     assets is compared with existing assets at reasonable intervals and
     appropriate action is taken with respect to any differences. The Company
     has established disclosure controls and procedures (as defined in Exchange
     Act Rules 13a-14 and 15d-14) for the Company and designed such disclosure
     controls and proce-dures to ensure that material information relating to
     the Company, including the Subsidiaries, is made known to the certifying
     officers by others within those entities, particularly during the period in
     which the Company's most recently filed period report under the Exchange
     Act, as the case may be, is being prepared. The Company's certifying
     officers have evaluated the effectiveness of the Company's controls and
     procedures as of a date within 90 days prior to the filing date of the most
     recently filed periodic report under the Exchange Act (such date, the
     "Evaluation Date"). The Company presented in its most recently filed
     periodic report under the Exchange Act the conclusions of the certifying
     officers about the effectiveness of the disclosure controls and procedures
     based on their evaluations as of the Evaluation Date. Since the Evaluation
     Date, there have been no significant changes in the Company's internal
     controls (as such term is defined in Item 307(b) of Regulation S-K) or, to
     the Company's knowledge, in other factors that could significantly affect
     the Company's internal controls.
      
 x.  Except pursuant to the registration rights granted pursuant to that certain
     Registration Rights Agreement, dated as of February 28, 2002, between the
     Company and the shareholders identified on Schedule I thereto (the
     "Existing Registration Rights Agreement"), as contemplated by the Omega
     Term Sheet with respect to the registration of up to approximately 800,000
     shares of Common Stock that may be issued upon the conversion of certain
     deferred rent into Common Stock and pursuant to registration rights
     expected to be granted as part of the Roth Warrants, no holder of
     securities of the Company or any Subsidiary will be entitled to have such
     securities (excluding the Shares and the Warrant Shares) registered under
     the Shelf Registration Statement.
     
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 y.  Except as described in the engagement letter dated December 18, 2003 with
     Roth Capital Partners, LLC, no brokerage or finder's fees or commissions
     are or will be payable by the Company to any broker, financial advisor or
     consultant, finder, placement agent, investment banker, bank or other third
     person with respect to the transactions contemplated by this Agreement. The
     Purchasers shall have no obligation with respect to any fees or with
     respect to any claims (other than such fees or commissions owed by a
     Purchaser pursuant to written agreements executed by such Purchaser which
     fees or commissions shall be the sole responsibility of such Purchaser)
     made by or on behalf of other persons for fees of a type contemplated in
     this Section that may be due in connection with the transactions
     contemplated by this Agreement.
      
 z.  The Company has applied for listing of its Common Stock on the Nasdaq
     National Market (the "Trading Market"). The Company meets the quantitative
     criteria for listing its Common Stock on the Trading Market. Assuming the
     accuracy of the representations made by the Purchasers in Section 8, no
     approval of the shareholders of the Company thereunder is required for the
     Company to issue and deliver the Securities to the Investors as
     contemplated by the Basic Documents, including such as may be required
     pursuant to Trading Market Rule 4350(i).
      
 aa. The Company is eligible to use Form S-1 for the resale of the Shares and
     Warrant Shares by Purchasers or their transferees. Any certificate signed
     by any officer of the Company or any Subsidiary and delivered pursuant to
     this Agreement shall be deemed a joint and several representation and
     warranty by the Company to each Purchaser as to the matters covered thereby
      
 ab. None of the Company, any of its Subsidiaries, or to the Company's
     knowledge, any of its directors or officers (or any person acting on behalf
     of the Company's directors or officers), has (i) made, paid or received any
     unlawful bribes, kickbacks, stolen property or other similar payments to or
     from any person or governmental authority, or (ii) made any improper
     foreign payment (as defined in the Foreign Corrupt Practices Act)
      
 ac. Except as disclosed in Disclosure Documents, none of the officers,
     directors, or, to the knowledge of the Company's officers, the employees of
     the Company or any Subsidiary is presently a party to any transaction with
     the Company or a Subsidiary or to a presently contemplated transaction
     (other than for services as employees, officers and directors) that would
     be required to be disclosed pursuant to Item 404 of Regulation S-K
     promulgated under the Securities Act.
     
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 ad. The Company does not have any agreement or understanding with any Purchaser
     with respect to the transactions contemplated by the Basic Documents other
     than as specified in the Basic Documents.
      
 ae. The Company confirms that neither it nor any person acting on its behalf
     has provided any of the Purchasers or their agents or counsel with any
     information that the Company believes constitutes material, non-public
     information. The Company understands and confirms that the Purchasers will
     rely on the foregoing representations in effecting transactions in
     securities of the Company.
      

Agreement to Sell and Purchase the Units
.

 
 a. Subject to the terms of this Agreement, at the Closing (as defined in
    Section 4(a)), the Company agrees to sell to each Purchaser, and each
    Purchaser agrees to purchase from the Company, the number of Units set forth
    next to such Purchaser's signature on the counterpart execution page hereof,
    at a purchase price of $12.70 per Unit, of which $12.65 represents the
    purchase price for the Shares included in the Unit and $.05 represents the
    purchase price for the Warrants included in the Unit.
     
 b. Each Purchaser shall severally, and not jointly, be liable for only the
    purchase of the number of Units that appears next to such Purchaser's
    signature on the counterpart execution page hereof. The Company's agreement
    with each of the Purchasers is a separate agreement, and the sale of Units
    to each of the Purchasers is a separate sale and except as otherwise
    provided in Section 7(b) the Company's obligation to sell the Units to one
    Purchaser is not conditioned on the performance of this Agreement by any
    other Pur-chaser. Except as provided in Section 6(f), the obligations of
    each Purchaser hereunder are expressly not conditioned on the purchase by
    any or all of the other Purchasers of the Units such other Purchasers have
    agreed to purchase.
     
 c. Each Purchaser understands and agrees that the Company, in its sole
    discretion, reserves the right to accept or reject, in whole or in part, any
    proposed purchase of Units. The Company shall have no obligation hereunder
    with respect to any Purchaser until the Company shall execute and deliver to
    such Purchaser an executed copy of this Agreement. If this Agreement is not
    executed and delivered by the Company or the offering is terminated, this
    Agreement shall be of no further force and effect.
     
 d. The obligations of each Purchaser under any Basic Document 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 any Basic Document. The decision of each Purchaser
    to purchase Units pursuant to the Basic Documents has been made by such
    Purchaser independently of any other Purchaser. Nothing contained herein or
    in any Basic Document, and no action taken by any Purchaser pursuant
    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 Basic Document. Each Purchaser acknowledges that no other Purchaser has
    acted as agent for such Purchaser in connection with making its investment
    hereunder and that no Purchaser will be acting as agent of such Purchaser in
    connection with monitoring its investment in the Units or enforcing its
    rights under the Basic Documents. Each Purchaser shall be entitled to
    independently protect and enforce its rights, including without limitation
    the rights arising out of this Agreement or out of the other Basic
    Documents, and it shall not be necessary for any other Purchaser to be
    joined as an additional party in any proceeding for such purpose.
    
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Closing; Delivery of Units at Closing
.

 
 a. The closing of the purchase and sale of the Units pursuant to this Agreement
    (the "Closing") shall be held at 10:00 a.m. (Pacific Time) on the Business
    Day following the date (the "Closing Date") that all of the conditions to
    closing set forth in Section 6 and Section 7 have been satisfied or waived
    by the party in whose favor such conditions run, at the offices of O'Melveny
    & Myers LLP, located at 114 Pacifica, Suite 100, Irvine, California, or on
    such other date and place as may be agreed to by the Company and the
    Purchasers.
     
 b. At the Closing, (1) the Company shall deliver to each Purchaser (i) stock
    certificates representing the Shares and Warrants registered in the name of
    such Purchaser, or in such nominee name(s) as designated by such Purchaser,
    representing the Units to be purchased by such Purchaser at the Closing, and
    (ii) the documents specified in Sections 6(c), (d) and (e), and (2) the
    Purchasers shall deliver to the Company (i) the purchase price under the
    heading "Total Investment" under such Purchaser's signature to this
    Agreement by wire transfer of immediately available funds to the account of
    the Company designated to it by the Company in writing, and (ii) an executed
    Registration Rights Agreement. The name(s) in which the stock certificates
    and warrants are to be issued to each Purchaser as well as the number and
    type of Units to be purchased by each Purchaser are set forth in the
    Purchaser's counterpart execution page hereto, as completed by each
    Purchaser.
     

Certain Covenants
. The Company covenants and agrees with each Purchaser that:

 
 a. None of the Company or any of its Affiliates will sell, offer for sale or
    solicit offers to buy or otherwise negotiate in respect of any "security"
    (as defined in the Securities Act) which would be integrated with the sale
    of the Units in a manner which would require the registration under the
    Securities Act of any of the Securities or the approval of the stockholders
    of the Company under the rules and regulations of the Trading Market.
    
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 b. The Company will apply the net proceeds from the sale of the Units for
    general corporate purposes.
     
 c. Except in connection with the filing of the Shelf Registration Statement,
    the Company will not, and will not permit any of the Subsidiaries to, engage
    in any form of general solicitation or general advertising (as those terms
    are used in Regulation D under the Securities Act) in connection with the
    offering of the Units or in any manner involving a public offering within
    the meaning of Section 4(2) of the Securities Act.
     
 d. The Company will not become, at any time prior to the expiration of three
    years after the Closing Date, an open-end investment company, unit
    investment trust, closed-end investment company or face-amount certificate
    company that is or is required to be registered under Section 8 of the
    Investment Company Act.
     
 e. The Company will use its commercially reasonable efforts to list its Common
    Stock with the Nasdaq National Market. At such time as the Common Stock is
    listed for trading on the Nasdaq National Market, the Shares and Warrant
    Shares will also be so listed.
     
 f. The Company will use its commercially reasonable efforts to do and perform
    all things required to be done and performed by it under this Agreement and
    the other Basic Documents prior to or after the Closing Date and to satisfy
    all conditions precedent on its part to the obligations of the Purchasers to
    purchase and accept delivery of the Units.
     
 g. The Company covenants and agrees that neither it nor any other person acting
    on its behalf 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 covenants in effecting transactions in securities of the
    Company.
     
 h. Other than pursuant to the Shelf Registration Statement, prior to the date
    that the Shelf Registration Statement is first declared effective by the
    Commission, the Company may not file any registration statement (other than
    on Form S-8) with the Commission with respect to any securities of the
    Company.
     
 i. By 8:30 a.m. (New York City time) on the trading day immediately following
    the date of this Agreement, the Company will issue a press release
    disclosing the execution of this Agreement. On the trading day immediately
    following the date of this Agreement, the Company will file a Current Report
    on Form 8-K attaching the press release described in the foregoing sentence.
    On the Closing Date, the Company will issue a press release and file a
    Current Report on Form 8-K (attaching thereto the press release and the
    Basic Documents) disclosing the closing of the transactions contemplated
    hereby. In addition, the Company will make such other filings and notices in
    the manner and time required by the Commission and the trading market on
    which the Common Stock is listed. Notwithstanding the foregoing, the Company
    shall not publicly disclose the name of any Purchaser, or include the name
    of any Purchaser in any filing with the Commission (other than the Shelf
    Registration Statement and any exhibits to filings made in respect of this
    transaction in accordance with periodic filing requirements under the
    Exchange Act) or any regulatory agency or Trading Market, without the prior
    written consent of such Purchaser, except to the extent such disclosure is
    required by law or trading market regulations, in which case the Company
    shall provide the Purchasers with prior notice of such disclosure.
    
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Conditions of the Purchasers' Obligations
. The obligation of each Purchaser to purchase and pay for the Units is subject
to the following conditions unless waived in writing by the relevant Purchaser:

 
 a. The representations and warranties of the Company contained in this
    Agreement shall be true and correct in all material respects (other than
    representations and warranties with a Material Adverse Effect qualifier,
    which shall be true and correct as written) on and as of the Closing Date;
    the Company shall have complied in all material respects with all agreements
    and satisfied in all material respects all conditions on its part to be
    performed or satisfied hereunder at or prior to the Closing Date.
     
 b. None of the issuance and sale of the Units pursuant to this Agreement or any
    of the transactions contemplated by any of the other Basic Documents shall
    be enjoined (temporarily or permanently) and no restraining order or other
    injunctive order shall have been issued in respect thereof; and there shall
    not have been any legal action, order, decree or other administrative
    proceeding instituted or, to the Company's knowledge, threatened against the
    Company or against any Purchaser relating to the issuance of the Units or
    any Purchaser's activities in connection therewith or any other transactions
    contemplated by this Agreement or the other Basic Documents.
     
 c. The Purchasers shall have received certificates, dated the Closing Date and
    signed by the chief financial officer of the Company, to the effect of
    Sections 6(a) and (b).
     
 d. On or before the Closing Date, the Purchasers shall have received the
    Registration Rights Agreement executed by the Company and such agreement
    shall be in full force and effect at all times from and after the Closing
    Date, subject to the Enforceability Exceptions.
     
 e. The Purchasers shall have received an opinion of O'Melveny & Myers LLP,
    counsel to the Company, with respect to the authorization of the Units and
    other customary matters in the form, with respect to the opinions to be
    given, attached hereto as Exhibit B.
    
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Conditions of the Company's Obligations
. The obligation of the Company to issue the Units is subject to the following
condition unless waived in writing by the Company:

 
 a. None of the issuance and sale of the Units pursuant to this Agreement or any
    of the transactions contemplated by any of the other Basic Documents shall
    be enjoined (temporarily or permanently) and no restraining order or other
    injunctive order shall have been issued in respect thereof; and there shall
    not have been any legal action, order, decree or other administrative
    proceeding instituted or, to the Company's knowledge, threatened against the
    Company or against any Purchaser relating to the issuance of the Units.
     

Representations and Warranties of the Purchasers
. Each Purchaser hereby, for itself and for no other Purchaser, represents and
warrants to the Company as follows

 
 a. The Securities to be acquired by it hereunder are being acquired for its own
    account for investment (and/or on behalf of managed accounts who are
    purchasing solely for their own accounts for investment) and with no
    intention of distributing or reselling such Securities or any part thereof
    or interest therein in any transaction which would be in violation of the
    securities laws of the United States of America or any State, without
    prejudice, however, to such Purchaser's right, subject to the provisions of
    this Agreement and the Registration Rights Agreement, at all times to sell
    or otherwise dispose of all or any part of the Securities, including the
    Shares or Warrant Shares under an effective registration statement under the
    Securities Act and in compliance with applicable state securities laws or
    under an exemption from such registration, and subject, nevertheless, to the
    disposition of a Purchaser's property being at all times within its control.
     
 b. Such Purchaser understands that the Securities have not been registered
    under the Securities Act and may not be offered, resold, pledged or
    otherwise transferred except (a) pursuant to an exemption from registration
    under the Securities Act (and, if requested by the Company, based upon an
    opinion of counsel acceptable to the Company) or pursuant to an effective
    registration statement under the Securities Act and (b) in accordance with
    all applicable securities laws of the states of the United States.

    Each Purchaser agrees to the imprinting, so long as required under this
    Section, of the following legend on the Shares and Warrant Shares, in
    addition to the legend on the Warrants:

    16

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    The shares of common stock evidenced by this certificate have not been
    registered under the U.S. Securities Act of 1933, as amended, and may not be
    offered, sold, pledged or otherwise transferred ("transferred") in the
    absence of such registration or an applicable exemption therefrom. In the
    absence of such registration, such shares may not be transferred unless (i)
    such transfer complies with the requirements of rule 144(k) or (ii), if the
    Company requests, the Company has received a written opinion from counsel in
    form and substance satisfactory to the Company stating that such transfer is
    being made in compliance with all applicable federal and state securities
    laws. Notwithstanding the foregoing, the shares of common stock evidenced by
    this certificate may be pledged in connection with a bona fide margin
    account secured by such shares.

    The legend set forth above will be removed if and when (i) the Shares and/or
    Warrant Shares, as applicable, are disposed of pursuant to an effective
    registration statement under the Securities Act, (ii) a registration
    statement registering the resale of the Shares and/or Warrant Shares, as
    applicable, under the Securities Act has been declared effective by the
    Commission, (iii) the Shares and/or Warrant Shares, as applicable, become
    available for resale under Rule 144(k) under the Securities Act, or (iv) in
    the opinion of counsel to the Company experienced in the area of United
    States Federal securities laws such legends are no longer required under
    applicable requirements of the Securities Act. The Company agrees that it
    will provide each Purchaser, within three business days of a request
    therefor, with a substitute Share or Warrant Share certificate, as
    applicable, not bearing such legend at such time as such legend is no longer
    required under this Section. Each Purchaser for itself and no other
    Purchaser agrees that, in connection with any transfer of Shares and/or
    Warrant Shares by it pursuant to an effective registration statement under
    the Securities Act, such Purchaser will comply with the prospectus
    requirements under the Securities Act applicable to such transfer The
    Company makes no representation, warranty or agreement as to the
    availability of any exemption from registration under the Securities Act
    with respect to any resale of Shares and/or Warrant Shares.

    The Company acknowledges and agrees that a Purchaser may from time to time
    pledge, and/or grant a security interest in some or all of the Units
    pursuant to a bona fide margin agreement in connection with a bona fide
    margin account and, if required under the terms of such agreement or
    account, such Purchaser may transfer pledged or secured Shares or Warrant
    Shares to the pledgees or secured parties. Such a pledge or transfer would
    not be subject to approval or consent of the Company and no legal opinion of
    legal counsel to the pledgee, secured party or pledgor shall be required in
    connection with the pledge, but such legal opinion may be required in
    connection with a subsequent transfer following default by the Purchaser
    transferee of the pledge. No notice shall be required of such pledge. At the
    appropriate Purchaser's expense, the Company will execute and deliver such
    reasonable documentation as a pledgee or secured party of Securities may
    reasonably request in connection with a pledge or transfer of such
    securities.

    17

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 c. Such Purchaser is an institutional investor that is an accredited investor
    within the meaning of Rule 501(a)(1), (2), (3) or (7) of Regulation D under
    the Securities Act. Such Purchaser is not a registered broker-dealer under
    Section 15 of the Exchange Act. Such Purchaser is acquiring the Securities
    in the ordinary course of its business. Such Purchaser does not have any
    agreement or understanding, directly or indirectly, with any person to
    distribute any of the Shares, Warrant Shares or Units.
     
 d. Such Purchaser has such knowledge, sophistication and experience in business
    and financial matters so as to be capable of evaluating the merits and risks
    of the prospective investment in the Units, such Purchaser having been
    represented by counsel, and has so evaluated the merits and risks of such
    investment and is able to bear the economic risk of such investment and, at
    the present time, is able to afford a complete loss of such investment.
     
 e. The purchase of the Units to be purchased by it has been duly authorized by
    such Purchaser and each of this Agreement and Registration Rights Agreement
    has been duly executed and delivered by it or on its behalf and constitutes
    the valid and legally binding obligation of such Purchaser, enforceable
    against the Purchaser in accordance with its terms, subject to the
    Enforceability Exceptions.
     
 f. Each Purchaser, severally and not jointly and as to itself only, represents
    and warrants to the Company that neither it nor any of its directors,
    officers, employees, agents, or controlling persons has taken, directly or
    indirectly, any actions designed, or might reasonably be expected to cause
    or result, under the Securities Acts or otherwise, in, or that has
    constituted, stabilization, or manipulation of the price of the Shares.
     
 g. Each Purchaser acknowledges that it has had an opportunity to review the
    Disclosure Documents and further acknowledges that it has been afforded (i)
    the opportunity to ask such questions as it has deemed necessary of, and to
    receive answers from, representatives of the Company concerning the terms
    and conditions of the offering of the Units and the merits and risks of
    investing in the Units; (ii) access to information about the Company and the
    Company's financial condition, results of operations, business, properties,
    management and prospects sufficient to enable it to evaluate its investment
    in the Units; and (iii) the opportunity to obtain such additional
    information which the Company possesses or can acquire without unreasonable
    effort or expense that is necessary to verify the accuracy and completeness
    of the information contained in the Disclosure Documents. The foregoing
    shall not limit such Purchaser's right to rely on the Company's
    representations and warranties contained in the Basic Documents.
     
 h. Such Purchaser understands and acknowledges that (i) the Securities are
    offered and sold without registration under the Securities Act in a private
    placement that is exempt from the registration provisions of the Securities
    Act and (ii) the availability of such exemption depends in part on, and that
    the Company, its counsel and Roth Capital Partners, LLC will rely upon, the
    accuracy and truthfulness of the foregoing representations and such
    Purchaser hereby consents to such reliance.
    
    18
    
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 i. The purchase by such Purchaser of the Units issuable to it at the Closing
    will not result in such Purchaser (individually or together with other
    person with whom such Purchaser has identified, or will have identified,
    itself as part of a "group" in a public filing made with the Commission
    involving the Company's securities) acquiring, or obtaining the right to
    acquire, in excess of 19.999% of the Common Stock or the voting power of the
    Company on a post transaction basis that assumes that the Closing shall have
    occurred. Such Purchaser does not presently intend to, alone or together
    with others, make a public filing with the Commission to disclose that it
    has (or that it together with such other persons have) acquired, or obtained
    the right to acquire, as a result of the Closing (when added to any other
    securities of the Company that it or they then own or have the right to
    acquire), in excess of 19.999% of the Common Stock or the voting power of
    the Company on a post transaction basis that assumes that the Closing shall
    have occurred.
     
 j. Such Purchaser has independently evaluated the merits of its decision to
    purchase Units pursuant to this Agreement, such decision has been
    independently made by such Purchaser and such Purchaser confirms that it has
    only relied on the advice of its own business and/or legal counsel and not
    on the advice of any other Purchaser's business and/or legal counsel, or the
    Company's or Roth Capital Partners, LLC's legal counsel, in making such
    decision. Such Purchaser has not relied on the truth, accuracy or
    completeness of the statements contained in any research report concerning
    the Company that was prepared by an investment banking firm.
     

Survival Clause

. The respective representations, warranties, agreements and covenants of the
Company and the Purchasers set forth in this Agreement shall remain in full
force and effect, regardless of (i) any investigation made by or on behalf of
the Company, any of its officers or directors, or any Purchaser and
(ii) delivery of, payment for or disposition of the Units, and shall be binding
upon and shall inure to the benefit of any permitted successors, assigns, heirs
or personal representatives of the Company and the Purchasers, as applicable.

 

Termination

.

 

 a. Unless the Closing has first occurred, this Agreement shall terminate on
    February 27, 2004. Except as provided in Section 10(d), upon termination of
    this Agreement pursuant to this Section 10(a), neither the Company nor any
    of the Purchasers shall have any obligation to the other under this
    Agreement.
     
 b. This Agreement may be terminated in the sole discretion of the Company by
    notice to each Purchaser severally and not jointly if at the Closing Date:
     i.  the representations and warranties made by such Purchaser in Section 8
         are not true and correct in all material respects; or
     ii. as to the Company, the sale of the Units hereunder is prohibited or
         enjoined by any applicable law or governmental regulation.
         
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 c. This Agreement may be terminated in the sole discretion of any Purchaser by
    notice to the Company given in the event that the Company shall have failed,
    refused or been unable to satisfy all conditions on its part to be performed
    or satisfied hereunder on or prior to the Closing Date or if after the
    execution and delivery of this Agreement and prior to the Closing Date:
     i.   trading in securities of the Company on the OTCBB shall have been
          suspended;
     ii.  a banking moratorium shall have been declared by New York or United
          States authorities; or
     iii. there shall have been (A) an outbreak or escalation of hostilities
          between the United States and any foreign power, (B) an outbreak or
          escalation of any other insurrection or armed conflict involving the
          United States or any other national or international calamity or
          emergency, or (C) any material change in the financial markets of the
          United States that, in the case of (A), (B) or (C) above, in the sole
          judgment of any Purchaser, makes it impracticable or inadvisable to
          proceed with the delivery of the Units as contemplated by this
          Agreement.

    The Company shall promptly notify the Purchasers of any termination of this
    Agreement by a Purchaser.
     

 d. Nothing in this Section 10 shall be deemed to release any party from any
    liability for any breach (prior to termination of this Agreement) by such
    party of the terms and provisions of this Agreement.
     

Notices
. All communications hereunder shall be in writing and, (i) if sent to a
Purchaser, shall be hand delivered, mailed by first-class mail, couriered by
next-day air courier or sent by facsimile to their address and/or facsimile
number on their signature page hereof and (ii) if sent to the Company, shall be
hand delivered, mailed by first-class mail, couriered by next-day air courier or
sent by facsimile to Sun Healthcare Group, Inc., 18831 Von Karman, Suite 400,
Irvine, CA 92612, Attention: General Counsel, facsimile number: (949) 255-7056.

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All such notices and communications shall be deemed to have been duly given:
when delivered by hand, if personally delivered; three days after being
deposited in the mail, postage prepaid, if mailed; one business day after being
timely delivered to a national recognized overnight courier; and upon receipt of
a mechanically generated answer-back if sent by facsimile.
 

Successors
. This Agreement shall inure to the benefit of and be binding upon each
Purchaser and the Company and their respective permitted successors and legal
representatives, and nothing expressed or mentioned in this Agreement is
intended or shall be construed to give any other person any legal or equitable
right, remedy or claim under or in respect of this Agreement, or any provisions
herein contained. This Agreement and all conditions and provisions hereof being
intended to be and being for the sole and exclusive benefit of such persons and
for the benefit of no other person, except that Roth Capital Partners, LLC is an
intended beneficiary of the representations and warranties made by the parties
hereunder. The Company may not assign this Agreement or any rights or
obligations hereunder without the prior written consent of the Purchasers. Any
Purchaser may assign any or all of its rights under this Agreement to any person
to whom such Purchaser assigns or transfers any Units (or portion thereof),
provided
such transfer is made in compliance with applicable securities laws and such
transferee agrees in writing to be bound, with respect to the transferred
securities, by the provisions hereof that apply to the "Purchasers."

 No Waiver; Modifications in Writing
. No failure or delay on the part of the Company or any Purchaser in exercising
any right, power or remedy hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any such right, power or remedy preclude
any other or further exercise thereof or the exercise of any other right, power
or remedy. The remedies provided for herein are cumulative and are not exclusive
of any remedies that may be available to the Company or any Purchaser at law or
in equity or otherwise. No waiver of or consent to any departure by the Company
or any Purchaser from any provision of this Agreement shall be effective unless
signed in writing by the party entitled to the benefit thereof, provided
that notice of any such waiver shall be given to each party hereto as set forth
below. No provision of this Agreement may be amended except in a written
instrument signed by the Company and the Purchasers holding a majority of the
Shares. Any amendment, supplement or modification of or to any provision of this
Agreement, any waiver of any provision of this Agreement, and any consent to any
departure by the Company or any Purchaser from the terms of any provision of
this Agreement shall be effective only in the specific instance and for the
specific purpose for which made or given. Except where notice is specifically
required by this Agreement, no notice to or demand on the Company in any case
shall entitle the Company to any other or further notice or demand in similar or
other circumstances.

21

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Certain Legal Fees. Each Purchaser and the Company shall pay the fees and
expenses of its own respective advisers, 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 the Basic
Documents. The Company has agreed to pay $25,000 for legal fees and expenses
incurred by Roth Capital Partners, LLC at the Closing which fees will be paid to
Bryan Cave LLP, who has acted as counsel for Roth Capital Partners, LLC and no
other person in connection with the transactions contemplated by this Agreement.
The Company shall pay all stamp and other taxes and duties levied in connection
with the sale of the Securities.
 Entire Agreement. This Agreement, along with the other Basic Documents
constitutes the entire agreement among the parties hereto and supersedes all
prior agreements, understandings and arrangements, oral or written, among the
parties hereto with respect to the subject matter hereof.
  APPLICABLE LAW. THE VALIDITY AND INTERPRETATION OF THIS AGREEMENT, AND THE
TERMS AND CONDITIONS SET FORTH HEREIN SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO
PROVISIONS RELATING TO CONFLICTS OF LAW TO THE EXTENT THE APPLICATION OF THE
LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY. IF A PURCHASER SHALL
COMMENCE A PROCEEDING AGAINST THE COMPANY, OR IF THE COMPANY SHALL COMMENCE A
PROCEEDING AGAINST A PURCHASER, TO ENFORCE ANY PROVISIONS OF A BASIC DOCUMENT,
THEN THE PREVAILING PARTY IN SUCH PROCEEDING SHALL BE REIMBURSED BY THE OTHER
PARTY FOR ITS ATTORNEY'S FEES AND OTHER COSTS AND EXPENSES INCURRED WITH THE
INVESTIGATION, PREPARATION AND PROSECUTION OF SUCH PROCEEDING.
 Consent to Jurisdiction; Waiver of Jury Trial. Each of the parties hereto
irrevocably submits to the exclusive jurisdiction of the courts of the State of
New York located in New York County and the United States District Court for the
Southern District of New York for the purpose of any suit, action, proceeding or
judgment relating to or arising out of this Agreement and the transactions
contemplated hereby. Service of process in con-nection with any such suit,
action or proceeding may be served on each party hereto anywhere in the world by
the same methods as are specified for the giving of notices under this
Agree-ment. Each of the parties hereto irrevocably consents to the jurisdiction
of any such court in any such suit, action or proceeding and to the laying of
venue in such court. Each party hereto irrevocably waives any objection to the
laying of venue of any such suit, action or pro-ceeding brought in such courts
and irrevocably waives any claim that any such suit, action or proceeding
brought in any such court has been brought in an inconvenient forum. EACH OF THE
PARTIES HERETO WAIVES ANY RIGHT TO REQUEST A TRIAL BY JURY IN ANY LITIGATION
WITH RESPECT TO THIS AGREEMENT AND REPRESENTS THAT COUNSEL HAS BEEN CONSULTED
SPECIFICALLY AS TO THIS WAIVER.

22

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Counterparts. This Agreement may be executed in two or more counterparts, each
of which shall be deemed an original, but all of which together shall constitute
one and the same instrument.

[Remainder of Page Intentionally Left Blank]

23

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If the foregoing correctly sets forth our understanding, please indicate your
acceptance thereof in the space provided below for that purpose, whereupon this
Agreement shall constitute a binding agreement among the Company and each
Purchaser.

Very truly yours,

SUN HEALTHCARE GROUP, INC.

By:                                                     
      Name:
      Title:

 

24

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SUBSCRIPTION AGREEMENT SIGNATURE PAGE

Accepted and Agreed:

                                                                             Total
Investment Amount:$_____________
Name of Purchaser (Print)

By:                                                                
      Name:
      Title:

Date: ______________________________

Address:_____________________________
             _____________________________
             _____________________________
 

Telephone:___________________________

Facsimile:____________________________

 

Please register Shares and Warrants as follows:

Name: ______________________________
           ______________________________
           ______________________________

Tax I.D. Number of Person in whose name the Shares and Warrants are to be
registered:

                                                                       

25

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Exhibit A

Form of Warrant

[Attached Hereto]

 

 

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Exhibit B

Form of Registration Rights Agreement

[Attached Hereto]

 

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Exhibit C

_________________________

 a. The Company is validly existing in good standing under the laws of the State
    of Delaware, with corporate power to own its properties and assets and to
    carry on its business as described in the Disclosure Documents.
     
 b. The authorized capital stock of the Company consists of 50,000,000 shares of
    common stock, $0.01 par value per share, and 10,000,000 shares of preferred
    stock, $0.01 par value per share. To our knowledge, except as set forth in
    the Existing Registration Rights Agreement and the Registration Rights
    Agreement, no holder of securities of the Company is entitled to have such
    securities registered under the Shelf Registration Statement.
     
 c. The Shares have been duly authorized under the Company's Certificate of
    Incorporation and By-laws and by all necessary corporate action on the part
    of the Company and, upon payment for and delivery of the Shares in
    accordance with the Subscription Agreement and the countersigning of the
    certificate or certificates representing the Shares by a duly authorized
    signatory of the registrar for the Company's Common Stock, the Shares will
    be validly issued, fully paid and non-assessable, and will not be issued in
    violation of any preemptive rights pursuant to any Material Agreement. The
    Warrant Shares have been duly authorized under the Company's Certificate of
    Incorporation and By-laws and by all necessary corporate action on the part
    of the Company and have been duly reserved for issuance and, upon payment
    for and delivery of the Warrant Shares upon the due exercise of the Warrants
    in accordance with their terms and the countersigning of the certificate or
    certificates representing the Warrant Shares by a duly authorized signatory
    of the registrar for the Company's Common Stock, the Warrant Shares will be
    validly issued, fully paid and non-assessable, and will not be issued in
    violation of any preemptive rights pursuant to any Material Agreement.
    Holders of the capital stock of the Company are not entitled to any
    preemptive right to subscribe to any additional shares of the Company's
    capital stock under the Company's Certificate of Incorporation or By-laws or
    the corporate law of the state of incorporation of the Company. The term
    "Material Agreements" shall mean those agreements, contracts, arrangements
    and understandings identified as material agreements of the Company in the
    officer's certificate attached hereto (the "Company Certificate").
     
 d. The execution, delivery and performance of the Transaction Documents, the
    issuance and sale of the Units and the Warrant Shares and the performance by
    the Company of its obligations under the Transaction Documents have been
    duly authorized by all necessary corporate action on the part of the
    Company, and the Transaction Documents have been duly executed and delivered
    by the Company. The Subscription Agreement, the Engagement Letter, Warrants
    and the Registration Rights Agreement are herein collectively referred to as
    the "Transaction Documents."
     
 e. Each of the Transaction Documents constitutes a valid and legally binding
    obligation of the Company, enforceable against the Company in accordance
    with their terms, except as may be limited by bankruptcy, insolvency,
    reorganization, moratorium or similar laws relating to or affecting
    creditors' rights generally (including, without limitation, fraudulent
    conveyance laws) and by general principles of equity, including, without
    limitation, concepts of materiality, reasonableness, good faith and fair
    dealing and the possible unavailability of specific performance or
    injunctive relief, regardless of whether considered in a proceeding in
    equity or at law.
    
     
    
    --------------------------------------------------------------------------------
    
     

 f. No order, consent, permit or approval of any California or federal
    governmental authority that we have, in the exercise of customary
    professional diligence, recognized as applicable to the Company or to
    transactions of the type contemplated by the Transaction Documents is
    required on the part of the Company for the execution and delivery of the
    Transaction Documents, the issuance and sale of the Units and the Warrant
    Shares and the performance by the Company of its obligations under the
    Transaction Documents, except such consents, approvals, authorizations,
    licenses, qualifications, exemptions or orders as may be required under (i)
    the Securities Act of 1933, as amended (the "Securities Act"), and state
    securities or Blue Sky laws in connection with registration, pursuant to the
    Registration Rights Agreement, of the resale of the Shares and the Warrant
    Shares, and (ii) federal or state securities or Blue Sky laws in connection
    with the issuance and sale of the Units pursuant to the Subscription
    Agreement.
     
 g. The execution and delivery of the Transaction Documents, the issuance and
    sale of the Units and the Warrant Shares and the performance by the Company
    of its obligations under the Transaction Documents do not and will not, (i)
    violate the Company's Certificate of Incorporation or By-laws, (ii) violate,
    breach, or result in a default under, any existing obligation of or
    restriction on the Company under any Material Agreement, or (iii) breach or
    otherwise violate any existing obligation of or restriction on the Company
    under any order, judgment or decree of any California or federal court or
    governmental authority binding on the Company identified in the Company
    Certificate. We express no opinion as to the effect of the Company's
    performance of its obligations in the Transaction Documents on the Company's
    compliance with financial covenants in the Material Agreements.
     
 h. To our knowledge, except as described in the Disclosure Documents, there is
    not pending or threatened any action, suit, proceeding, inquiry or
    investigation, governmental or otherwise, that (i) seeks to restrain,
    enjoin, prevent the consummation of or otherwise challenge the issuance or
    sale of the Units or the application of the proceeds therefrom by the
    Company in the manner described in the Subscription Agreement or (ii) if
    determined adversely to the Company, is reasonably likely to have a Material
    Adverse Effect.
    
    
     

    Assuming the accuracy of your representations in Section 8 of the
    Subscription Agreement, it is not necessary in connection with the offer or
    sale of the Units under the circumstances contemplated by the Subscription
    Agreement to register the Units under the Securities Act, it being
    understood that no opinion is expressed as to any subsequent resale of any
    of the Units. We express no opinion as to the securities laws of any
    jurisdiction.

     

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SUN HEALTHCARE GROUP, INC.

Subscription Agreement

List of Purchasers

 

Name of Stockholder

Total Investment Amount

 

Advantage Advisers Augusta Fund, L.L.C.

1,079,500.00

 

Ahab Partners, L.P.

1,905,000.00

 

Ardsley Offshore Fund, Ltd.

4,373,905.40

 

Ardsley Partners Fund II, L.P.

3,048,000.00

 

Ardsley Partners Institutional Fund, L.P.

1,498,600.00

 

Atlas Equity I, Ltd.

2,999,994.00

 

Blackmore Offshore Fund, Ltd.

273,367.50

 

Blackmore Partners, LP

106,362.50

 

Blackmore Wallace Partners, LP

255,270.00

 

Bristol Investment Fund, Ltd.

698,500.00

 

Cerberus Partners, L.P.

10,000,005.40

 

Chad Cooper

25,400.00

 

Crescent International Ltd.

317,500.00

 

Crestview Capital Master, L.L.C.

999,998.00

 

Dunlap Capital Partners, L.P.

499,999.00

 

Geduld Capital Partners, LLC

190,500.00

 

Heimdall Investments Ltd.

2,000,000.00

 

Itros I, L.P.

26,225.50

 

Itros II QP, L.P.

245,427.50

 

Itros Offshore, Ltd.

363,347.00

 

JMB Capital Partners, L.P.

500,000.00

 

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Langley Partners, L.P.

499,999.00

 

Mexana Ltd.

1,270,000.00

 

North Sound Legacy Fund LLC

120,002.30

 

North Sound Legacy Institutional Fund LLC

1,319,999.90

 

North Sound Legacy International Ltd.

2,560,002.50

 

Omicron Master Trust

1,499,997.00

 

Portside Growth and Opportunity Fund

999,998.00

 

Scottwood Fund Ltd.

1,800,000.00

 

Scottwood Partners, LP

1,200,000.00

 

SDS Capital Group SPC, Ltd.

999,998.00

 

Spectra Capital Management, LLC

400,000.00

 

Straus Partners LP

749,998.50

 

Straus-Gept Partners LP

499,999.00

 

Triage Capital Management B, L.P.

800,000.00

 

Triage Capital Management, L.P.

400,000.00

 

Triage Offshore Fund, Ltd.

3,800,000.00

 

Valor Capital Management, LP

399,999.20

 

WPG - Farber Fund, L.P.

2,005,495.10

 

WPG - Farber Institutional Fund, L.P.

633,501.40

 

WPG - Farber Overseas, L.P.

132,994.40

 

WPG - Farber QP Fund, L.P.

728,002.10

 

Fuller & Thaler Behavioral Finance Fund, Ltd.*

1,999,998.00

* All Purchasers purchased for a price per Unit equal to $12.70, with the
exception of the Units purchased by Fuller & Thaler Behavioral Finance Fund,
Ltd., which were purchased for a price per Unit equal to $12.87.

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