EX-10.1






Exhibit 10.1




SECURITIES PURCHASE AGREEMENT




SECURITIES PURCHASE AGREEMENT (the “Agreement”), dated as of February 1, 2005, by and among
JMAR Technologies, Inc., a Delaware corporation, with headquarters located at 5800 Armada Drive,
Carlsbad, California 92008 (the “Company”), and the investors listed on the Schedule of Buyers
attached hereto (individually, a “Buyer” and collectively, the “Buyers”).




WHEREAS:



A. The Company and each Buyer is executing and delivering this Agreement in reliance
upon the exemption from securities registration afforded by Section 4(2) of the Securities Act of
1933, as amended (the “1933 Act”), and Rule 506 of Regulation D (“Regulation D”) as promulgated by
the United States Securities and Exchange Commission (the “SEC”) under the 1933 Act.



B. Each Buyer wishes to purchase, and the Company wishes to sell, upon the terms and
conditions stated in this Agreement, (i) that aggregate number of shares of the Common Stock, par
value $0.01 per share, of the Company (the “Common Stock”), set forth opposite such Buyer’s name in
column (3) on the Schedule of Buyers (which aggregate amount for all Buyers together shall be
3,225,807 shares of Common Stock and shall collectively be referred to herein as the “Common
Shares”) and (ii) a warrant to acquire up to that number of additional shares of Common Stock set
forth opposite such Buyer’s name in column (4) on the Schedule of Buyers (the “Warrants”), in
substantially the form attached hereto as Exhibit A (as exercised, collectively, the
"Warrant Shares”).



C. Contemporaneously with the execution and delivery of this Agreement, the parties
hereto are executing and delivering a Registration Rights Agreement, substantially in the form
attached hereto as Exhibit B (the “Registration Rights Agreement”) pursuant to which the
Company has agreed to provide certain registration rights with respect to the Common Shares, and
the Warrant Shares under the 1933 Act and the rules and regulations promulgated thereunder, and
applicable state securities laws.



D. The Common Shares, the Warrants and the Warrant Shares collectively are referred
to herein as the “Securities”.




NOW, THEREFORE, the Company and each Buyer hereby agree as follows:




1. PURCHASE AND SALE OF COMMON SHARES AND WARRANTS.




(a) Purchase of Common Shares and Warrants.



Subject to the satisfaction (or waiver) of the conditions set forth in Sections 6 and 7 below,
the Company shall issue and sell to each Buyer, and each Buyer severally, but not jointly, agrees
to purchase from the Company on the Closing Date (as defined below), the number of Common Shares as
is set forth opposite such Buyer’s name in column (3) on the Schedule of Buyers, along with the
Warrants to acquire up to that number of Warrant Shares as is set forth opposite such Buyer’s name
in column (4) on the Schedule of Buyers (the “Closing”). The Closing shall occur on the Closing
Date at the offices of Schulte Roth & Zabel LLP, 919 Third Avenue, New York, New York 10022.



(b) Purchase Price. The purchase price for the Common Shares and related Warrants to
be purchased by each Buyer at the Closing shall be the amount set forth opposite such Buyer’s name
in column (5) of the Schedule of Buyers (the “Purchase Price”).



(c) Closing Date. The date and time of the Closing (the “Closing Date”) shall be
10:00 a.m., New York City Time, on the date hereof (or such other date and time as is mutually
agreed to by the Company and each Buyer).



(d) Form of Payment. On the Closing Date, (i) each Buyer shall pay its respective
Purchase Price to the Company for the Common Shares and Warrants to be issued and sold to such
Buyer at the Closing, by wire transfer of immediately available funds in accordance with the
Company’s written wire instructions, and (ii) the Company shall deliver to each Buyer (A) one or
more stock certificates, free and clear of all restrictive and other legends (except as expressly
provided in Section 2(g) hereof), evidencing the number of Common Shares such Buyer is purchasing
as is set forth opposite such Buyer’s name in column (3) of the Schedule of Buyers and (B) a
Warrant pursuant to which such Buyer shall have the right to acquire such number of Warrant Shares
as is set forth opposite such Buyer’s name in column (4) of the Schedule of Buyers, in all cases
duly executed on behalf of the Company and registered in the name of such Buyer.




2. BUYER’S REPRESENTATIONS AND WARRANTIES.




Each Buyer represents and warrants with respect to only itself that:



(a) No Public Sale or Distribution. Such Buyer is (i) acquiring the Common Shares and
the Warrants and (ii) upon exercise of the Warrants will acquire the Warrant Shares issuable upon
exercise thereof, in the ordinary course of business for its own account and not with a view
towards, or for resale in connection with, the public sale or distribution thereof, except pursuant
to sales registered or exempted under the 1933 Act and such Buyer does not have a present
arrangement to effect any distribution of the Securities to or through any person or entity;
provided, however, that by making the representations herein, such Buyer does not
agree to hold any of the Securities for any minimum or other specific term and reserves the right
to dispose of the Securities at any time in accordance with or pursuant to a registration statement
or an exemption under the 1933 Act. Such Buyer is acquiring the Securities hereunder in the
ordinary course of its business. Such Buyer does not presently have any agreement or
understanding, directly or indirectly, with any Person to distribute any of the Securities.



(b) Accredited Investor Status. Such Buyer is an “accredited investor” as that term
is defined in Rule 501(a) of Regulation D.



(c) Reliance on Exemptions. Such Buyer understands that the Securities are being
offered and sold to it in reliance on specific exemptions from the registration requirements of
United States federal and state securities laws and that the Company is relying in part upon the
truth and accuracy of, and such Buyer’s compliance with, the representations, warranties,
agreements, acknowledgments and understandings of such Buyer set forth herein in order to determine
the availability of such exemptions and the eligibility of such Buyer to acquire the Securities.



(d) Information. Such Buyer and its advisors, if any, have been furnished with all
materials relating to the business, finances and operations of the Company and materials relating
to the offer and sale of the Securities which have been requested by such Buyer. Such Buyer and
its advisors, if any, have been afforded the opportunity to ask questions of the Company. Neither
such inquiries nor any other due diligence investigations conducted by such Buyer or its advisors,
if any, or its representatives shall modify, amend or affect such Buyer’s right to rely on the
Company’s representations and warranties contained herein. Such Buyer understands that its
investment in the Securities involves a high degree of risk and is able to afford a complete loss
of such investment. Such Buyer has sought such accounting, legal and tax advice as it has
considered necessary to make an informed investment decision with respect to its acquisition of the
Securities.



(e) No Governmental Review. Such Buyer understands that no United States federal or
state agency or any other government or governmental agency has passed on or made any
recommendation or endorsement of the Securities or the fairness or suitability of the investment in
the Securities nor have such authorities passed upon or endorsed the merits of the offering of the
Securities.



(f) Transfer or Resale. Such Buyer understands that except as provided in the
Registration Rights Agreement: (i) the Securities have not been and are not being registered under
the 1933 Act or any state securities laws, and may not be offered for sale, sold, assigned or
transferred unless (A) subsequently registered thereunder, (B) such Buyer shall have delivered to
the Company an opinion of counsel, in a form reasonably acceptable to the Company, to the effect
that such Securities to be sold, assigned or transferred may be sold, assigned or transferred
pursuant to an exemption from such registration, or (C) such Buyer provides the Company with
reasonable assurance that such Securities can be sold, assigned or transferred pursuant to Rule 144
or Rule 144A promulgated under the 1933 Act, as amended, (or a successor rule thereto)
(collectively, “Rule 144”); (ii) any sale of the Securities made in reliance on Rule 144 may be
made only in accordance with the terms of Rule 144 and further, if Rule 144 is not applicable, any
resale of the Securities under circumstances in which the seller (or the Person (as defined in
Section 3(r)) through whom the sale is made) may be deemed to be an underwriter (as that term is
defined in the 1933 Act) may require compliance with some other exemption under the 1933 Act or the
rules and regulations of the SEC thereunder; and (iii) neither the Company nor any other Person is
under any obligation to register the Securities under the 1933 Act or any state securities laws or
to comply with the terms and conditions of any exemption thereunder. Notwithstanding the
foregoing, the Securities may be pledged in connection with a bona fide margin account or other
loan secured by the Securities and such pledge of Securities shall not be deemed to be a transfer,
sale or assignment of the Securities hereunder, and no Buyer effecting a pledge of Securities shall
be required to provide the Company with any notice thereof or otherwise make any delivery to the
Company pursuant to this Agreement or any other Transaction Document, including, without
limitation, this Section 2(f); provided, that in order to make any sale, transfer or assignment of
Securities, such Buyer and its pledgee makes such disposition in accordance with or pursuant to a
registration statement or an exemption under the 1933 Act.



(g) Legends. Such Buyer understands that the certificates or other instruments
representing the Common Shares and the Warrants and, until such time as the resale of the Common
Shares and the Warrant Shares have been registered under the 1933 Act as contemplated by the
Registration Rights Agreement, the stock certificates representing the Warrant Shares, except as
set forth below, shall bear any legend as required by the “blue sky” laws of any state and a
restrictive legend in substantially the following form (and a stop-transfer order may be placed
against transfer of such stock certificates):



[NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR
THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN][THE SECURITIES
REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN] REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE
OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL, IN A FORM REASONABLY ACCEPTABLE TO
THE COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD
PURSUANT TO RULE 144 UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES
MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR
FINANCING ARRANGEMENT SECURED BY THE SECURITIES.



(h) Validity; Enforcement. This Agreement and the Registration Rights Agreement have
been duly and validly authorized, executed and delivered on behalf of such Buyer and shall
constitute the legal, valid and binding obligations of such Buyer enforceable against such Buyer in
accordance with their respective terms, except as such enforceability may be limited by general
principles of equity or to applicable bankruptcy, insolvency, reorganization, moratorium,
liquidation and other similar laws relating to, or affecting generally, the enforcement of
applicable creditors’ rights and remedies.



(i) No Conflicts. The execution, delivery and performance by such Buyer of this
Agreement and the Registration Rights Agreement and the consummation by such Buyer of the
transactions contemplated hereby and thereby will not (i) result in a violation of the
organizational documents of such Buyer or (ii) conflict with, or constitute a default (or an event
which with notice or lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or
instrument to which such Buyer is a party, or (iii) result in a violation of any law, rule,
regulation, order, judgment or decree (including federal and state securities laws) applicable to
such Buyer, except in the case of clauses (ii) and (iii) above, for such conflicts, defaults,
rights or violations which would not, individually or in the aggregate, reasonably be expected to
have a material adverse effect on the ability of such Buyer to perform its obligations hereunder.



(j) Residency. Such Buyer is a resident of that jurisdiction specified below its
address on the Schedule of Buyers.




3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.




The Company represents and warrants to each of the Buyers that:



(a) Organization and Qualification. Each of the Company and its “Subsidiaries” (which
for purposes of this Agreement means any entity in which the Company, directly or indirectly, owns
capital stock or holds an equity or similar interest) are corporations duly organized and validly
existing in good standing under the laws of the jurisdiction in which they are incorporated, and
have the requisite corporate power and authorization to own their properties and to carry on their
business as now being conducted. Each of the Company and its Subsidiaries is duly qualified as a
foreign corporation to do business and is in good standing in every jurisdiction in which its
ownership of property or the nature of the business conducted by it makes such qualification
necessary, except to the extent that the failure to be so qualified or be in good standing would
not have a Material Adverse Effect. As used in this Agreement, “Material Adverse Effect” means any
material adverse effect on the business, properties, assets, operations, results of operations,
condition (financial or otherwise) or prospects of the Company and its Subsidiaries, taken as a
whole, or on the transactions contemplated hereby and the other Transaction Documents or by the
agreements and instruments to be entered into in connection herewith or therewith, or on the
authority or ability of the Company to perform its obligations under the Transaction Documents (as
defined below). The Company has no Subsidiaries except as set forth on Schedule 3(a). The
only Subsidiaries which have any operations are the following: JMAR Research, Inc., JMAR/SAL
NanoLithography, Inc., and JSI Microelectronics, Inc.



(b) Authorization; Enforcement; Validity. The Company has the requisite corporate
power and authority to enter into and perform its obligations under this Agreement, the
Registration Rights Agreement, the Irrevocable Transfer Agent Instructions (as defined in Section
5), the Warrants and each of the other agreements entered into by the parties hereto in connection
with the transactions contemplated by this Agreement (collectively, the “Transaction Documents”)
and to issue the Securities in accordance with the terms hereof and thereof. The execution and
delivery of the Transaction Documents by the Company and the consummation by the Company of the
transactions contemplated hereby and thereby, including, without limitation, the issuance of the
Common Shares and the Warrants and the reservation for issuance and the issuance of the Warrant
Shares issuable upon exercise of the Warrant have been duly authorized by the Company’s Board of
Directors and no further consent or authorization is required by the Company, its Board of
Directors or its stockholders. This Agreement and the other Transaction Documents have been duly
executed and delivered by the Company, and constitute the legal, valid and binding obligations of
the Company, enforceable against the Company in accordance with their respective terms, except as
such enforceability may be limited by general principles of equity or applicable bankruptcy,
insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting
generally, the enforcement of applicable creditors’ rights and remedies.



(c) Issuance of Securities. The Common Shares and the Warrants are duly authorized
and, upon issuance in accordance with the terms hereof, shall be validly issued and free from all
taxes, liens and charges with respect to the issue thereof and the Common Shares shall be fully
paid and nonassessable with the holders being entitled to all rights accorded to a holder of Common
Stock. As of the Closing Date, the Company shall have duly authorized and reserved for issuance a
number of shares of Common Stock which equals the number of Warrant Shares. The Company shall, so
long as any of the Warrants are outstanding, take all action necessary to reserve and keep
available out of its authorized and unissued Capital Stock, solely for the purpose of effecting the
exercise of the Warrants, 100% of the number of shares of Common Stock issuable upon exercise of
the Warrants. Upon exercise in accordance with the Warrants, the Warrant Shares will be validly
issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the
issue thereof, with the holders being entitled to all rights accorded to a holder of Common Stock.
The issuance by the Company of the Securities is exempt from registration under the 1933 Act.



(d) No Conflicts. The execution, delivery and performance of the Transaction
Documents by the Company and the consummation by the Company of the transactions contemplated
hereby and thereby (including, without limitation, the issuance of the Common Shares and Warrants
and reservation for issuance and issuance of the Warrant Shares) will not (i) result in a violation
of the Certificate of Incorporation (as defined below) or Bylaws (as defined below) of the Company
or any of its Subsidiaries or (ii) conflict with, or constitute a default (or an event which with
notice or lapse of time or both would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation of, any material agreement, indenture or
instrument to which the Company or any of its Subsidiaries is a party, or (iii) result in a
violation of any law, rule, regulation, order, judgment or decree (including federal and state
securities laws and regulations and the rules and regulations of the Principal Market) applicable
to the Company or any of its Subsidiaries or by which any property or asset of the Company or any
of its Subsidiaries is bound or affected.



(e) Consents. Except for the filing of a Notice of Additional Listing with NASDAQ,
the Company is not required to obtain any consent, authorization or order of, or make any filing or
registration with, any court, governmental agency or any regulatory or self-regulatory agency or
any other Person in order for it to execute, deliver or perform any of its obligations under or
contemplated by the Transaction Documents, in each case in accordance with the terms hereof or
thereof. All consents, authorizations, orders, filings and registrations which the Company is
required to obtain pursuant to the preceding sentence have been obtained or effected on or prior to
the Closing Date. The Company and its Subsidiaries are unaware of any facts or circumstances that
might prevent the Company from obtaining or effecting any of the registration, application or
filings pursuant to the preceding sentence. The Company is not in violation of the listing
requirements of the Principal Market and has no knowledge of any facts that would reasonably lead
to delisting or suspension of the Common Stock in the foreseeable future.



(f) Acknowledgment Regarding Buyer’s Purchase of Securities. The Company acknowledges
and agrees that each Buyer is acting solely in the capacity of arm’s length purchaser with respect
to the Transaction Documents and the transactions contemplated hereby and thereby and that no Buyer
is (i) an officer or director of the Company, (ii) an “affiliate” of the Company (as defined in
Rule 144) or (iii) to the knowledge of the Company, a “beneficial owner” of more than 10% of the
Common Stock (as defined for purposes of Rule 13d-3 of the Securities Exchange Act of 1934, as
amended (the “1934 Act”)). The Company further acknowledges that no Buyer is acting as a financial
advisor or fiduciary of the Company (or in any similar capacity) with respect to the Transaction
Documents and the transactions contemplated hereby and thereby, and any advice given by a Buyer or
any of its representatives or agents in connection with the Transaction Documents and the
transactions contemplated hereby and thereby is merely incidental to such Buyer’s purchase of the
Securities. The Company further represents to each Buyer that the Company’s decision to enter into
the Transaction Documents has been based solely on the independent evaluation by the Company and
its representatives.



(g) No General Solicitation; Placement Agent’s Fees. 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) in connection with the
offer or sale of the Securities. The Company shall be responsible for the payment of any placement
agent’s fees, financial advisory fees, or brokers’ commissions (other than for persons engaged by
any Buyer or its investment advisor) relating to or arising out of the transactions contemplated
hereby. The Company shall pay, and hold each Buyer harmless against, any liability, loss or
expense (including, without limitation, attorney’s fees and out-of-pocket expenses) arising in
connection with any such claim. The Company acknowledges that it has engaged Source Capital Group,
Inc. as placement agent (the “Agent”) in connection with the sale of the Securities. Other than
the Agent, the Company has not engaged any placement agent or other agent in connection with the
sale of the Securities.



(h) No Integrated Offering. None of the Company, its Subsidiaries, any of their
affiliates, and any Person acting on 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
require registration of any of the Securities under the 1933 Act or cause this offering of the
Securities to be integrated with prior offerings by the Company for purposes of the 1933 Act or any
applicable stockholder approval provisions, including, without limitation, under the rules and
regulations of any exchange or automated quotation system on which any of the securities of the
Company are listed or designated. None of the Company, its Subsidiaries, their affiliates and any
Person acting on their behalf will take any action or steps referred to in the preceding sentence
that would require registration of any of the Securities under the 1933 Act or cause the offering
of the Securities to be integrated with other offerings.



(i) Application of Takeover Protections; Rights Agreement. The Company and its board
of directors have taken all necessary action, if any, in order to render inapplicable any control
share acquisition, business combination, poison pill (including any distribution under a rights
agreement) or other similar anti-takeover provision under the Certificate of Incorporation or the
laws of the State of Delaware which is or could become applicable to any Buyer as a result of the
transactions contemplated by this Agreement, including, without limitation, the Company’s issuance
of the Securities and any Buyer’s ownership of the Securities.



(j) SEC Documents; Financial Statements. During the two years prior to the date
hereof, the Company has timely filed all reports, schedules, forms, statements and other documents
required to be filed by it with the SEC pursuant to the reporting requirements of the 1934 Act (all
of the foregoing filed prior to the date hereof or prior to the date of the Closing, and all
exhibits included therein and financial statements and schedules thereto and documents incorporated
by reference therein being hereinafter referred to as the “SEC Documents”). The Company has
delivered to the Buyers or their respective representatives true, correct and complete copies of
the SEC Documents not available on the EDGAR system. As of their respective dates, the SEC
Documents complied in all material respects with the requirements of the 1934 Act and the rules and
regulations of the SEC promulgated thereunder applicable to the SEC Documents, and none of the SEC
Documents, at the time they were filed with the SEC, contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or necessary in order to
make the statements therein, in the light of the circumstances under which they were made, not
misleading. As of their respective dates, the financial statements of the Company included in the
SEC Documents complied as to form in all material respects with applicable accounting requirements
and the published rules and regulations of the SEC with respect thereto. Such financial statements
have been prepared in accordance with generally accepted accounting principles, consistently
applied, during the periods involved (except (i) as may be otherwise indicated in such financial
statements or the notes thereto, or (ii) in the case of unaudited interim statements, to the extent
they may exclude footnotes or may be condensed or summary statements) and fairly present in all
material respects the financial position of the Company as of the dates thereof and the results of
its operations and cash flows for the periods then ended (subject, in the case of unaudited
statements, to normal year-end audit adjustments). No other information provided by or on behalf
of the Company to the Buyers which is not included in the SEC Documents, including, without
limitation, information referred to in Section 2(d) of this Agreement, contains any untrue
statement of a material fact or omits to state any material fact necessary in order to make the
statements therein, in the light of the circumstance under which they are or were made, not
misleading.



(k) Absence of Certain Changes. Except as disclosed in Schedule 3(k), since
December 31, 2003, there has been no material adverse change and no material adverse development in
the business, properties, operations, condition (financial or otherwise), results of operations or
prospects of the Company or its Subsidiaries. Except as disclosed in Schedule 3(k), since
December 31, 2003, the Company has not (i) declared or paid any dividends, (ii) sold any assets,
individually or in the aggregate, in excess of $500,000 outside of the ordinary course of business
or (iii) had capital expenditures, individually or in the aggregate, in excess of $500,000. The
Company has not taken any steps to seek protection pursuant to any bankruptcy law nor does the
Company have any knowledge or reason to believe that its creditors intend to initiate involuntary
bankruptcy proceedings or any actual knowledge of any fact which would reasonably lead a creditor
to do so. The Company is not as of the date hereof, and after giving effect to the transactions
contemplated hereby to occur at the Closing, will not be Insolvent (as defined below). For
purposes of this Section 3(k), “Insolvent” means (i) the present fair saleable value of the
Company’s assets is less than the amount required to pay the Company’s total Indebtedness (as
defined in Section 3(r)), (ii) the Company is unable to pay its debts and liabilities,
subordinated, contingent or otherwise, as such debts and liabilities become absolute and matured,
(iii) the Company intends to incur or believes that it will incur debts that would be beyond its
ability to pay as such debts mature or (iv) the Company has unreasonably small capital with which
to conduct the business in which it is engaged as such business is now conducted or is about to be
conducted.



(l) No Undisclosed Events, Liabilities, Developments or Circumstances. Except for the
amendments described in Section 7(x) below, no event, liability, development or circumstance has
occurred or exists, or is contemplated to occur, with respect to the Company or its Subsidiaries or
their respective business, properties, prospects, operations or financial condition, that would be
required to be disclosed by the Company under applicable securities laws on a registration
statement on Form S-1 filed with the SEC relating to an issuance and sale by the Company of its
Common Stock and which has not been publicly announced.



(m) Conduct of Business; Regulatory Permits. Neither the Company nor its Subsidiaries
is in violation of any term of or in default under the Certificate of Incorporation or Bylaws or
their organizational charter or bylaws, respectively. Neither the Company nor any Subsidiary is in
violation of any judgment, decree or order or any statute, ordinance, rule or regulation applicable
to the Company or its Subsidiaries, and neither the Company nor any of its Subsidiaries will
conduct its business in violation of any of the foregoing, except for possible violations which
would not, individually or in the aggregate, have a Material Adverse Effect. Without limiting the
generality of the foregoing, the Company is not in violation of any of the rules, regulations or
requirements of the Principal Market and has no knowledge of any facts or circumstances that would
reasonably lead to delisting or suspension of the Common Stock by the Principal Market in the
foreseeable future. Since December 31, 2003, (i) the Common Stock has been designated for
quotation or listed on the Principal Market, (ii) trading in the Common Stock has not been
suspended by the SEC or the Principal Market and (iii) the Company has received no communication,
written or oral, from the SEC or the Principal Market regarding the suspension or delisting of the
Common Stock from the Principal Market. The Company and its Subsidiaries possess all certificates,
authorizations and permits issued by the appropriate federal, state or foreign regulatory
authorities necessary to conduct their respective businesses, except where the failure to possess
such certificates, authorizations or permits would not have, individually or in the aggregate, a
Material Adverse Effect, and neither the Company nor any such Subsidiary has received any notice of
proceedings relating to the revocation or modification of any such certificate, authorization or
permit.



(n) Foreign Corrupt Practices. Neither the Company, nor any of its Subsidiaries, nor
any director, officer, agent, employee or other Person acting on behalf of the Company or any of
its Subsidiaries has, in the course of its actions for, or on behalf of, the Company (i) used any
corporate funds for any unlawful contribution, gift, entertainment or other unlawful expenses
relating to political activity; (ii) made any direct or indirect unlawful payment to any foreign or
domestic government official or employee from corporate funds; (iii) violated or is in violation of
any provision of the U.S. Foreign Corrupt Practices Act of 1977, as amended; or (iv) made any
unlawful bribe, rebate, payoff, influence payment, kickback or other unlawful payment to any
foreign or domestic government official or employee.



(o) Sarbanes-Oxley Act. The Company is in compliance with any and all applicable
requirements of the Sarbanes-Oxley Act of 2002 that are effective as of the date hereof, and any
and all applicable rules and regulations promulgated by the SEC thereunder that are effective as of
the date hereof, except where such noncompliance would not have, individually or in the aggregate,
a Material Adverse Effect.



(p) Transactions With Affiliates. Except as set forth in the Company’s Annual Report
on Form 10-K for the year ended December 31, 2003, none of the officers, directors or employees of
the Company is presently a party to any transaction with the Company or any of its Subsidiaries
(other than for ordinary course services as employees, officers or directors), including any
contract, agreement or other arrangement providing for the furnishing of services to or by,
providing for rental of real or personal property to or from, or otherwise requiring payments to or
from any such officer, director or employee or, to the knowledge of the Company, any corporation,
partnership, trust or other entity in which any such officer, director, or employee has a
substantial interest or is an officer, director, trustee or partner.



(q) Equity Capitalization. As of the date hereof, the authorized capital stock of the
Company consists of (x) 80,000,000 shares of Common Stock, of which as of the date hereof,
31,896,735 shares are issued and outstanding, 5,186,768 shares are reserved for issuance pursuant
to the Company’s employee incentive plan and other options and warrants outstanding and 4,425,000
shares are reserved for issuance pursuant to securities (other than the Warrants) exercisable or
exchangeable for, or convertible into, shares of Common Stock (assuming the amendments described in
Section 7(x) have been filed as of the date hereof), and (y) 5,000,000 shares of convertible
preferred stock, of which as of the date hereof, 0, 0, 0, 0, 100,000, 196,250, 196,250 and 392,500
shares of Series A, B, C, D, E, F, G and H convertible preferred stock, respectively, are issued
and outstanding. All of such outstanding shares have been, or upon issuance will be, validly
issued and are fully paid and nonassessable. Except as set forth above in this Section 3(q) or on
Schedule 3(q): (i) no shares of the Company’s capital stock are subject to preemptive
rights or any other similar rights or any liens or encumbrances suffered or permitted by the
Company; (ii) there are no outstanding options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights convertible into, or
exercisable or exchangeable for, any shares of capital stock of the Company or any of its
Subsidiaries, or contracts, commitments, understandings or arrangements by which the Company or any
of its Subsidiaries is or may become bound to issue additional shares of capital stock of the
Company or any of its Subsidiaries or options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights convertible into, or
exercisable or exchangeable for, any shares of capital stock of the Company or any of its
Subsidiaries; (iii) there are no outstanding debt securities, notes, credit agreements, credit
facilities or other agreements, documents or instruments evidencing Indebtedness (as defined in
Section 3(r)) of the Company or any of its Subsidiaries or by which the Company or any of its
Subsidiaries is or may become bound; (iv) there are no financing statements securing obligations in
any material amounts, either singly or in the aggregate, filed in connection with the Company; (v)
there are no agreements or arrangements under which the Company or any of its Subsidiaries is
obligated to register the sale of any of their securities under the 1933 Act (except the
Registration Rights Agreement); (vi) there are no outstanding securities or instruments of the
Company or any of its Subsidiaries which contain any redemption or similar provisions, and there
are no contracts, commitments, understandings or arrangements by which the Company or any of its
Subsidiaries is or may become bound to redeem a security of the Company or any of its Subsidiaries;
(vii) there are no securities or instruments containing anti-dilution or similar provisions that
will be triggered by the issuance of the Securities; (viii) the Company does not have any stock
appreciation rights or “phantom stock” plans or agreements or any similar plan or agreement; and
(ix) the Company and its Subsidiaries have no liabilities or obligations required to be disclosed
in the SEC Documents (as defined herein) but not so disclosed in the SEC Documents, other than
those incurred in the ordinary course of the Company’s or any Subsidiary’s respective businesses
and which, individually or in the aggregate, do not or would not have a Material Adverse Effect.
The Company has furnished or made available to the Buyer upon such Buyer’s request, true, correct
and complete copies of the Company’s Certificate of Incorporation, as amended and as in effect on
the date hereof (the “Certificate of Incorporation”), and the Company’s Bylaws, as amended and as
in effect on the date hereof (the “Bylaws”), and the terms of all securities convertible into, or
exercisable or exchangeable for, Common Stock and the material rights of the holders thereof in
respect thereto. Schedule 3(q) sets forth the shares of Common Stock owned beneficially or
of record and Common Stock Equivalents (as defined below) held by each director and executive
officer.



(r) Indebtedness and Other Contracts. Except as disclosed in Schedule 3(r),
neither the Company nor any of its Subsidiaries (i) has any outstanding Indebtedness (as defined
below), (ii) is a party to any contract, agreement or instrument, the violation of which, or
default under which, by the other party(ies) to such contract, agreement or instrument would result
in a Material Adverse Effect, (iii) is in violation of any term of or in default under any
contract, agreement or instrument relating to any Indebtedness, except where such violations and
defaults would not result, individually or in the aggregate, in a Material Adverse Effect, or (iv)
is a party to any contract, agreement or instrument relating to any Indebtedness, the performance
of which, in the judgment of the Company’s officers, has or is expected to have a Material Adverse
Effect. Except for Indebtedness not exceeding $3,000,000 owing from time-to-time to Laurus under
that certain Convertible Note, dated March 21, 2003, no outstanding Indebtedness is secured. For
purposes of this Agreement: (x) “Indebtedness” of any Person means, without duplication (A) all
indebtedness for borrowed money, (B) all obligations issued, undertaken or assumed as the deferred
purchase price of property or services (other than trade payables entered into in the ordinary
course of business), (C) all reimbursement or payment obligations with respect to letters of
credit, surety bonds and other similar instruments, (D) all obligations evidenced by notes, bonds,
debentures or similar instruments, including obligations so evidenced incurred in connection with
the acquisition of property, assets or businesses, (E) all indebtedness created or arising under
any conditional sale or other title retention agreement, or incurred as financing, in either case
with respect to any property or assets acquired with the proceeds of such indebtedness (even though
the rights and remedies of the seller or bank under such agreement in the event of default are
limited to repossession or sale of such property), (F) all monetary obligations under any leasing
or similar arrangement which, in connection with generally accepted accounting principles,
consistently applied for the periods covered thereby, is classified as a capital lease, (G) all
indebtedness referred to in clauses (A) through (F) above secured by (or for which the holder of
such Indebtedness has an existing right, contingent or otherwise, to be secured by) any mortgage,
lien, pledge, charge, security interest or other encumbrance upon or in any property or assets
(including accounts and contract rights) owned by any Person, even though the Person which owns
such assets or property has not assumed or become liable for the payment of such indebtedness, and
(H) all Contingent Obligations in respect of indebtedness or obligations of others of the kinds
referred to in clauses (A) through (G) above; (y) “Contingent Obligation” means, as to any Person,
any direct or indirect liability, contingent or otherwise, of that Person with respect to any
indebtedness, lease, dividend or other obligation of another Person if the primary purpose or
intent of the Person incurring such liability, or the primary effect thereof, is to provide
assurance to the obligee of such liability that such liability will be paid or discharged, or that
any agreements relating thereto will be complied with, or that the holders of such liability will
be protected (in whole or in part) against loss with respect thereto; and (z) “Person” means an
individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an
unincorporated organization and a government or any department or agency thereof.



(s) Absence of Litigation. Except as set forth on Schedule 3(s), there is no
action, suit, proceeding, inquiry or investigation before or by the Principal Market, any court,
public board, government agency, self-regulatory organization or body pending or, to the knowledge
of the Company, threatened against or affecting the Company, the Common Stock or any of its
Subsidiaries or any of the Company’s or the Company’s Subsidiary’s officers or directors, whether
of a civil or criminal nature or otherwise. The matters set forth on Schedule 3(s) would
not have a Material Adverse Effect.



(t) Insurance. The Company and each of its Subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in such amounts as management
of the Company believes to be prudent and customary in the businesses in which the Company and its
Subsidiaries are engaged. Except as set forth on Schedule 3(t), neither the Company nor
any Subsidiary has been refused any insurance coverage sought or applied for. Neither the Company
nor any Subsidiary has any reason to believe that it will not be able to renew its existing
insurance coverage as and when such coverage expires or to obtain similar coverage from similar
insurers as may be necessary to continue its business at a cost that would not have a Material
Adverse Effect.



(u) Employee Relations. (i) Neither the Company nor any of its Subsidiaries is a
party to any collective bargaining agreement or employs any member of a union. The Company and its
Subsidiaries believe that their relations with their employees are good. No executive officer of
the Company (as defined in Rule 501(f) of the 1933 Act) has notified the Company that such officer
intends to leave the Company or otherwise terminate such officer’s employment with the Company. No
executive officer of the Company, to the knowledge of the Company, is, or is now expected to be, in
violation of any material term of any employment contract, confidentiality, disclosure or
proprietary information agreement, non-competition agreement, or any other contract or agreement or
any restrictive covenant, and the continued employment of each such executive officer does not
subject the Company or any of its Subsidiaries to any liability with respect to any of the
foregoing matters.



(ii) The Company and its Subsidiaries are in compliance with all federal, state, local and
foreign laws and regulations respecting employment and employment practices, terms and conditions
of employment and wages and hours, except where failure to be in compliance would not, either
individually or in the aggregate, reasonably be expected to result in a Material Adverse Effect.



(v) Title. The Company and its Subsidiaries have good and marketable title in fee
simple to all real property and good and marketable title to all personal property owned by them
which is material to the business of the Company and its Subsidiaries, in each case free and clear
of all liens, encumbrances and defects except for a security interest in substantially all of the
Company’s assets held by Laurus and except such as do not materially affect the value of such
property and do not interfere with the use made and proposed to be made of such property by the
Company and any of its Subsidiaries. Any real property and facilities held under lease by the
Company and any of its Subsidiaries are held by them under valid, subsisting and enforceable leases
with such exceptions as are not material and do not interfere with the use made and proposed to be
made of such property and buildings by the Company and its Subsidiaries.



(w) Intellectual Property Rights. The Company and its Subsidiaries own or possess
adequate rights or licenses to use all trademarks, trade names, service marks, service mark
registrations, service names, patents, patent rights, copyrights, inventions, licenses, approvals,
governmental authorizations, trade secrets and other intellectual property rights (“Intellectual
Property Rights”) necessary to conduct their respective businesses as now conducted. None of the
Company’s Intellectual Property Rights have expired or terminated, or are expected to expire or
terminate within three years from the date of this Agreement. The Company does not have any
knowledge of any infringement by the Company or its Subsidiaries of Intellectual Property Rights of
others. There is no claim, action or proceeding being made or brought, or to the knowledge of the
Company, being threatened, against the Company or any of its Subsidiaries regarding its
Intellectual Property Rights. The Company is unaware of any facts or circumstances which might
give rise to any of the foregoing infringements or claims, actions or proceedings. The Company and
its Subsidiaries have taken reasonable security measures to protect the secrecy, confidentiality
and value of all of their Intellectual Property Rights.



(x) Environmental Laws. The Company and its Subsidiaries (i) are in compliance with
any and all Environmental Laws (as hereinafter defined), (ii) have received all permits, licenses
or other approvals required of them under applicable Environmental Laws to conduct their respective
businesses and (iii) are in compliance with all terms and conditions of any such permit, license or
approval where, in each of the foregoing clauses (i), (ii) and (iii), the failure to so comply
could be reasonably expected to have, individually or in the aggregate, a Material Adverse Effect.
The term “Environmental Laws” means all federal, state, local or foreign laws relating to pollution
or protection of human health or the environment (including, without limitation, ambient air,
surface water, groundwater, land surface or subsurface strata), including, without limitation, laws
relating to emissions, discharges, releases or threatened releases of chemicals, pollutants,
contaminants, or toxic or hazardous substances or wastes (collectively, “Hazardous Materials”) into
the environment, or otherwise relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling of Hazardous Materials, as well as all
authorizations, codes, decrees, demands or demand letters, injunctions, judgments, licenses,
notices or notice letters, orders, permits, plans or regulations issued, entered, promulgated or
approved thereunder.



(y) Tax Status. The Company and each of its Subsidiaries (i) has made or filed all
federal and state income and all other tax returns, reports and declarations required by any
jurisdiction to which it is subject, (ii) has paid all taxes and other governmental assessments and
charges that are material in amount, shown or determined to be due on such returns, reports and
declarations, except those being contested in good faith and (iii) has set aside on its books
provision reasonably adequate for the payment of all taxes for periods subsequent to the periods to
which such returns, reports or declarations apply. There are no unpaid taxes in any material
amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the
Company know of no basis for any such claim.



(z) Internal Accounting and Disclosure Controls. The Company and each of its
Subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable
assurance that (i) transactions are executed in accordance with management’s general or specific
authorizations, (ii) transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to maintain asset and
liability accountability, (iii) access to assets or incurrence of liabilities is permitted only in
accordance with management’s general or specific authorization and (iv) the recorded accountability
for assets and liabilities is compared with the existing assets and liabilities at reasonable
intervals and appropriate action is taken with respect to any difference. The Company maintains
disclosure controls and procedures (as such term is defined in Rule 13a-14 under the 1934 Act) that
are effective in ensuring that information required to be disclosed by the Company in the reports
that it files or submits under the 1934 Act is recorded, processed, summarized and reported, within
the time periods specified in the rules and forms of the SEC, including, without limitation,
controls and procedures designed in to ensure that information required to be disclosed by the
Company in the reports that it files or submits under the 1934 Act is accumulated and communicated
to the Company’s management, including its principal executive officer or officers and its
principal financial officer or officers, as appropriate, to allow timely decisions regarding
required disclosure.



(aa) Form S-3 Eligibility. The Company is eligible to register the Common Shares and
the Warrant Shares for resale by the Buyers using Form S-3 promulgated under the 1933 Act.



(bb) Off Balance Sheet Arrangements. There is no transaction, arrangement, or other
relationship between the Company and an unconsolidated or other off balance sheet entity that is
required to be disclosed by the Company in its Exchange Act filings and is not so disclosed or that
otherwise would be reasonably likely to have a Material Adverse Effect.



(cc) Manipulation of Price. The Company has not, and to its knowledge no one acting
on its behalf has, (i) taken, directly or indirectly, any action designed to cause or to result in
the stabilization or manipulation of the price of any security of the Company to facilitate the
sale or resale of any of the Securities, (ii) sold, bid for, purchased, or paid any compensation
for soliciting purchases of, any of the Securities, other than the Agent’s placement of the
Securities, or (iii) paid or agreed to pay to any person any compensation for soliciting another to
purchase any other securities of the Company.



(dd) Transfer Taxes. On the Closing Date, all stock transfer or other taxes (other
than income or similar taxes) which are required to be paid in connection with the sale and
transfer of the Securities to be sold to each Buyer hereunder will be, or will have been, fully
paid or provided for by the Company, and all laws imposing such taxes will be or will have been
complied with.



(ee) Disclosure. The Company confirms that neither it nor any other Person acting on
its behalf has provided any of the Buyers or their respective agents or counsel with any
information that constitutes or could reasonably be expected to constitute material, nonpublic
information. The Company understands and confirms that each of the Buyers will rely on the
foregoing representations in effecting transactions in securities of the Company. All disclosure
provided to the Buyers regarding the Company, its business and the transactions contemplated
hereby, including the Schedules to this Agreement, furnished by or on behalf of the Company are
true and correct and do not contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements made therein, in the light of the
circumstances under which they were made, not misleading. Each press release issued by the Company
during the twelve (12) months preceding the date of this Agreement did not at the time of release
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 the light of the
circumstances under which they are made, not misleading. No event or circumstance has occurred or
information exists with respect to the Company or any Subsidiary or either of its or their
respective business, properties, prospects, operations or financial conditions, which, under
applicable law, rule or regulation, requires public disclosure or announcement by the Company but
which has not been so publicly announced or disclosed (assuming for this purpose that the Company’s
reports filed under the Exchange Act of 1934, as amended, are being incorporated into an effective
registration statement filed by the Company under the 1933 Act). The Company acknowledges and
agrees that no Buyer makes or has made any representations or warranties with respect to the
transactions contemplated hereby other than those specifically set forth in Section 2.




4. COVENANTS.



(a) Best Efforts. Each party shall use its best efforts timely to satisfy each of the
covenants and the conditions to be satisfied by it as provided in Sections 5, 6 and 7 of this
Agreement.



(b) Form D and Blue Sky. The Company agrees to file a Form D with respect to the
Securities as required under Regulation D and to provide a copy thereof to each Buyer promptly
after such filing. The Company, on or before the Closing Date, shall take such action as the
Company shall reasonably determine is necessary in order to obtain an exemption for or to qualify
the Securities for sale to the Buyers at the Closing pursuant to this Agreement under applicable
securities or “Blue Sky” laws of the states of the United States (or to obtain an exemption from
such qualification), and shall provide evidence of any such action so taken to the Buyers on or
prior to the Closing Date. The Company shall make all filings and reports relating to the offer
and sale of the Securities required under applicable securities or “Blue Sky” laws of the states of
the United States following the Closing Date.



(c) Reporting Status. Until the date on which the Investors (as defined in the
Registration Rights Agreement) shall have sold all the Common Shares and Warrant Shares and none of
the Warrants is outstanding (the “Reporting Period”), the Company shall timely file all reports
required to be filed with the SEC pursuant to the 1934 Act, and the Company shall not terminate its
status as an issuer required to file reports under the 1934 Act even if the 1934 Act or the rules
and regulations thereunder would otherwise permit such termination.



(d) Use of Proceeds. The Company will use the proceeds from the sale of the
Securities for general corporate purposes, including general and administrative expenses and not
for (i) the repayment of any outstanding Indebtedness of the Company or any of its Subsidiaries or
(ii) redemption or repurchase of any of its equity securities.



(e) Financial Information. The Company agrees to send the following to each Investor
during the Reporting Period (i) unless the following are filed with the SEC through EDGAR and are
available to the public through the EDGAR system, within one (1) Business Day after the filing
thereof with the SEC, a copy of its Annual Reports on Form 10-K, its Quarterly Reports on Form
10-Q, any Current Reports on Form 8-K and any registration statements (other than on Form S-8) or
amendments filed pursuant to the 1933 Act, (ii) on the same day as the release thereof, facsimile
copies of all press releases issued by the Company or any of its Subsidiaries, and (iii) copies of
any notices and other information made available or given to the stockholders of the Company
generally, contemporaneously with the making available or giving thereof to the stockholders. As
used herein, “Business Day” means any day other than Saturday, Sunday or other day on which
commercial banks in The City of New York are authorized or required by law to remain closed.



(f) Listing. The Company shall promptly secure the listing of all of the Registrable
Securities (as defined in the Registration Rights Agreement) upon each national securities exchange
and automated quotation system, if any, upon which shares of Common Stock are then listed (subject
to official notice of issuance) and shall maintain, so long as any other shares of Common Stock
shall be so listed, such listing of all Registrable Securities from time to time issuable under the
terms of the Transaction Documents. The Company shall maintain the Common Stock’s authorization
for listing on the Principal Market. Neither the Company nor any of its Subsidiaries shall take
any action which would be reasonably expected to result in the delisting or suspension of the
Common Stock on the Principal Market. The Company shall pay all fees and expenses in connection
with satisfying its obligations under this Section 4(f).



(g) Fees. Subject to Section 8 below, at the Closing and subject to providing
supporting documentation, the Company shall reimburse up to $30,000 of the fees and expenses in
connection with the preparation, execution and performance of this Agreement and the transactions
contemplated hereunder, of Portside Growth & Opportunity Fund (a Buyer) or its designee(s) (in
addition to any other expense amounts paid to any Buyer prior to the date of this Agreement), which
amount shall be withheld by such Buyer from its Purchase Price at the Closing. The Company shall
be responsible for the payment of any placement agent’s fees, financial advisory fees, or broker’s
commissions (other than for Persons engaged by any Buyer) relating to or arising out of the
transactions contemplated hereby, including, without limitation, any fees or commissions payable to
the Agent. The Company shall pay, and hold each Buyer harmless against, any liability, loss or
expense (including, without limitation, reasonable attorney’s fees and out-of-pocket expenses)
arising in connection with any claim relating to any such payment. Except as otherwise set forth
in the Transaction Documents, each party to this Agreement shall bear its own expenses in
connection with the sale of the Securities to the Buyers.



(h) Pledge of Securities. The Company acknowledges and agrees that the Securities may
be pledged by an Investor (as defined in the Registration Rights Agreement) in connection with a
bona fide margin agreement or other loan or financing arrangement that is secured by the
Securities. The pledge of Securities shall not be deemed to be a transfer, sale or assignment of
the Securities hereunder, and no Investor effecting a pledge of Securities shall be required to
provide the Company with any notice thereof or otherwise make any delivery to the Company pursuant
to this Agreement or any other Transaction Document, including, without limitation, Section 2(f) of
this Agreement; provided that an Investor and its pledgee shall be required to comply with the
provisions of Section 2(f) of this Agreement in order to effect a sale, transfer or assignment of
Securities to such pledgee. The Company hereby agrees to execute and deliver such documentation as
a pledgee of the Securities may reasonably request in connection with a pledge of the Securities to
such pledgee by an Investor.



(i) Disclosure of Transactions and Other Material Information. The Company shall, on
or before 8:30 a.m., New York City Time, on the first Business Day after the date of this
Agreement, issue a press release (the “Press Release”) reasonably acceptable to the Buyers
disclosing all material terms of the transactions contemplated hereby. On or before 8:30 a.m., New
York City Time, on the third Business Day following the Closing Date, the Company shall file a
Current Report on Form 8-K describing the terms of the transactions contemplated by the Transaction
Documents in the form required by the 1934 Act, and attaching the material Transaction Documents
(including, without limitation, this Agreement (and all schedules to this Agreement), the form of
Warrant and the Registration Rights Agreement) as exhibits to such filing (including all
attachments, the “8-K Filing”). From and after the issuance of the Press Release, no Buyer shall
be in possession of any material, nonpublic information received from the Company, any of its
Subsidiaries or any of its respective officers, directors, employees or agents, that is not
disclosed in the Press Release. The Company shall not, and shall cause each of its Subsidiaries
and each of their respective officers, directors, employees and agents, not to, provide any Buyer
with any material, nonpublic information regarding the Company or any of its Subsidiaries from and
after the filing of the Press Release without the express written consent of such Buyer. In the
event of a breach of the foregoing covenant by the Company, any Subsidiary, or its each of
respective officers, directors, employees and agents, in addition to any other remedy provided
herein or in the Transaction Documents, a Buyer shall have the right to make a public disclosure,
in the form of a press release, public advertisement or otherwise, of such material, nonpublic
information without the prior approval by the Company, its Subsidiaries, or any of its or their
respective officers, directors, employees or agents. No Buyer shall have any liability to the
Company, its Subsidiaries, or any of its or their respective officers, directors, employees,
shareholders or agents for any such disclosure. Subject to the foregoing, neither the Company nor
any Buyer shall issue any press releases or any other public statements with respect to the
transactions contemplated hereby; provided, however, that the Company shall be
entitled, without the prior approval of any Buyer, to make any press release or other public
disclosure with respect to such transactions (i) in substantial conformity with the 8-K Filing and
contemporaneously therewith and (ii) as is required by applicable law and regulations, including
the applicable rules and regulations of the Principal Market (provided that in the case of clause
(i) each Buyer shall be consulted by the Company in connection with any such press release or other
public disclosure prior to its release).



(j) Additional Registration Statements. Until the date that the Registration
Statement (as defined in the Registration Rights Agreement) is first declared effective by the SEC
(the “Effective Date”), the Company will not file a registration statement under the 1933 Act
relating to securities that are not the Securities, provided, however, that the Company shall be
permitted to register on the Registration Statement the resale of 520,000 shares of Common Stock
and 333,333 warrant shares and any additional shares that may be issued in the future pursuant to a
purchase right held by PointSource pursuant to the Company’s Registration Rights Agreement with
PointSource Technologies, LLC.



(k) Corporate Existence. So long as any Buyer beneficially owns any Warrants, the
Company shall maintain its corporate existence and shall not sell all or substantially all of the
Company’s assets, except in the event of a merger or consolidation or sale of all or substantially
all of the Company’s assets, where the surviving or successor entity in such transaction (i)
assumes the Company’s obligations hereunder and under the agreements and instruments entered into
in connection herewith and (ii) is a publicly traded corporation whose common stock is quoted on or
listed for trading on the Principal Market, The Nasdaq National Market, the New York Stock Exchange
or the American Stock Exchange.



(l) Reservation of Shares. The Company shall take all action necessary to at all
times have authorized, and reserved for the purpose of issuance, from and after the Closing Date,
the number of shares of Common Stock issuable upon exercise of the Warrants being issued at the
Closing in conformity with Section 3(c).




(m) Additional Issuances of Securities.




(i) For purposes of this Section 4(m), the following definitions shall apply.




(1) “Common Stock Equivalents” means, collectively, Options and Convertible Securities.




(2) “Convertible Securities” means any stock or securities (other than Options)
convertible into or exercisable or exchangeable for Common Stock.




(3) “Options” means any rights, warrants or options to subscribe for or purchase Common
Stock or Convertible Securities.




(4) “Trading Day” means any day on which the Common Stock is traded on the Principal
Market, or, if the Principal Market is not the principal trading market for the Common
Stock, then on the principal securities exchange or securities market on which the Common
Stock is then traded; provided that “Trading Day” shall not include any day on which the
Common Stock is scheduled to trade on such exchange or market for less than 4.5 hours or any
day that the Common Stock is suspended from trading during the final hour of trading on such
exchange or market (or if such exchange or market does not designate in advance the closing
time of trading on such exchange or market, then during the hour ending at 4:00 p.m., New
York City Time).



(ii) From the date hereof until the date that is 20 Trading Days following the Effective Date
(the “Trigger Date”), the Company will not, directly or indirectly, offer, sell, grant any option
to purchase, or otherwise dispose of (or announce any offer, sale, grant or any option to purchase
or other disposition of) any of its or its Subsidiaries’ equity or equity equivalent securities,
including without limitation any debt, preferred stock or other instrument or security that is, at
any time during its life and under any circumstances, convertible into or exchangeable or
exercisable for Common Stock or Common Stock Equivalents (any such offer, sale, grant, disposition
or announcement being referred to as a “Subsequent Placement”).



(iii) From the Trigger Date until the date that is the two year anniversary of the Closing
Date, the Company will not, directly or indirectly, directly or indirectly, effect any Subsequent
Placement unless the Company shall have first complied with this Section 4(m)(iii).



(1) The Company shall deliver to each Buyer a written notice (the “Offer Notice”) of any
proposed or intended issuance or sale or exchange (the “Offer”) of the securities being offered
(the “Offered Securities”) in a Subsequent Placement, which Offer Notice shall (w) identify and
describe the Offered Securities, (x) describe the price and other terms upon which they are to be
issued, sold or exchanged, and the number or amount of the Offered Securities to be issued, sold or
exchanged, (y) identify the persons or entities (if known) to which or with which the Offered
Securities are to be offered, issued, sold or exchanged and (z) offer to issue and sell to or
exchange with such Buyers a pro rata portion of 30% of the Offered Securities, allocated among such
Buyers (a) based on such Buyer’s pro rata portion of the aggregate shares of Common Stock purchased
hereunder (the “Basic Amount”), and (b) with respect to each Buyer that elects to purchase its
Basic Amount, any additional portion of the Offered Securities attributable to the Basic Amounts of
other Buyers as such Buyer shall indicate it will purchase or acquire should the other Buyers
subscribe for less than their Basic Amounts (the “Undersubscription Amount”).



(2) To accept an Offer, in whole or in part, such Buyer must deliver a written notice to the
Company prior to the end of the seventh (7th) Business Day after such Buyer’s receipt of
the Offer Notice (the “Offer Period”), setting forth the portion of such Buyer’s Basic Amount that
such Buyer elects to purchase and, if such Buyer shall elect to purchase all of its Basic Amount,
the Undersubscription Amount, if any, that such Buyer elects to purchase (in either case, the
"Notice of Acceptance”). If the Basic Amounts subscribed for by all Buyers are less than the total
of all of the Basic Amounts, then each Buyer who has set forth an Undersubscription Amount in its
Notice of Acceptance shall be entitled to purchase, in addition to the Basic Amounts subscribed
for, the Undersubscription Amount it has subscribed for; provided, however, that if
the Undersubscription Amounts subscribed for exceed the difference between the total of all the
Basic Amounts and the Basic Amounts subscribed for (the “Available Undersubscription Amount”), each
Buyer who has subscribed for any Undersubscription Amount shall be entitled to purchase only that
portion of the Available Undersubscription Amount as the Basic Amount of such Buyer bears to the
total Basic Amounts of all Buyers that have subscribed for Undersubscription Amounts, subject to
rounding by the Company to the extent its deems reasonably necessary.



(3) The Company shall have twenty (20) Business Days from the expiration of the Offer Period
above to offer, issue, sell or exchange all or any part of such Offered Securities as to which a
Notice of Acceptance has not been given by the Buyers (the “Refused Securities”), but only to the
offerees described in the Offer Notice (if so described therein) and only upon terms and conditions
(including, without limitation, unit prices and interest rates) that are not more favorable to the
acquiring person or persons or less favorable to the Company than those set forth in the Offer
Notice.



(4) In the event the Company shall propose to sell less than all the Refused Securities (any
such sale to be in the manner and on the terms specified in Section 4(m)(iii)(3) above), then each
Buyer may, at its sole option and in its sole discretion, reduce the number or amount of the
Offered Securities specified in its Notice of Acceptance to an amount that shall be not less than
the number or amount of the Offered Securities that such Buyer elected to purchase pursuant to
Section 4(m)(iii)(2) above multiplied by a fraction, (i) the numerator of which shall be the number
or amount of Offered Securities the Company actually proposes to issue, sell or exchange (including
Offered Securities to be issued or sold to Buyers pursuant to Section 4(m)(iii)(3) above prior to
such reduction) and (ii) the denominator of which shall be the original amount of the Offered
Securities. In the event that any Buyer so elects to reduce the number or amount of Offered
Securities specified in its Notice of Acceptance, the Company may not issue, sell or exchange more
than the reduced number or amount of the Offered Securities unless and until such securities have
again been offered to the Buyers in accordance with Section 4(m)(iii)(1) above.



(5) Upon the closing of the issuance, sale or exchange of all or less than all of the Refused
Securities, the Buyers shall acquire from the Company, and the Company shall issue to the Buyers,
the number or amount of Offered Securities specified in the Notices of Acceptance, as reduced
pursuant to Section 4(m)(iii)(3) above if the Buyers have so elected, upon the terms and conditions
specified in the Offer. The purchase by the Buyers of any Offered Securities is subject in all
cases to the preparation, execution and delivery by the Company and the Buyers of a purchase
agreement relating to such Offered Securities reasonably satisfactory in form and substance to the
Buyers and their respective counsel.



(6) Any Offered Securities not acquired by the Buyers or other persons in accordance with
Section 4(m)(iii)(3) above may not be issued, sold or exchanged until they are again offered to the
Buyers under the procedures specified in this Agreement.



(iv) The restrictions contained in subsection (ii) and (iii) of this Section 4(m) shall not
apply (1) in connection with any employee benefit plan which has been approved by the Board of
Directors of the Company, pursuant to which the Company’s securities may be issued to any employee,
officer, director or consultant for services provided to the Company or any of its Subsidiaries, or
pursuant to the exercise of any securities of the Company issued thereunder; (2) pursuant to a bona
fide firm commitment underwritten public offering with a nationally recognized underwriter which
generates gross proceeds to the Company in excess of $20,000,000 (other than an “at-the-market
offering” as defined in Rule 415(a)(4) under the 1933 Act and “equity lines”); (3) upon exercise of
the Warrants; (4) upon conversion of any Options or Convertible Securities that are outstanding on
the day immediately preceding the Closing Date (including, without limitation, any shares issued
upon conversion of the Convertible Note issued to Laurus related to any borrowings under the
Convertible Note on or after the date hereof), provided, that the price and number of
shares issuable under such Options or Convertible Securities are not amended, modified or changed
on or after the Closing Date and the Indebtedness represented by the Convertible Note does not
exceed $3,000,000; (5) in connection with redemptions of any outstanding Convertible Preferred
Stock in cash or stock in accordance with the terms thereof, as amended pursuant to Section 7(x) of
this Agreement, and provided, that, such terms are not amended, modified or changed on or after the
Closing Date; (6) in connection with any bona fide strategic transaction or acquisition by the
Company, whether through an acquisition for stock or a merger, of any business, assets or
technologies the primary purpose of which is not to raise equity capital; or (7) in connection with
the right to purchase approximately 1.5% of future offerings contained in that certain Securities
Purchase Agreement, executed on January 26, 2005, between the Company and PointSource Technologies,
LLC.




5. TRANSFER RESTRICTIONS; TRANSFER AGENT INSTRUCTIONS.



(a) Transfer Restrictions. The legend set forth in Section 2(g) shall be removed and
the Company shall issue a certificate without such legend or any other legend to the holder of the
applicable Securities upon which it is stamped, if (i) such Securities are registered for resale
under the 1933 Act, (ii) in connection with a sale, assignment or other transfer, such holder
provides the Company with an opinion of counsel, in a generally acceptable form, to the effect that
such sale, assignment or transfer of such Securities may be made without registration under the
applicable requirements of the 1933 Act, or (iii) such holder provides the Company with reasonable
assurance that such Securities can be sold, assigned or transferred pursuant to Rule 144. The
Company shall cause General Counsel (as defined below) to issue the legal opinion included in the
Irrevocable Transfer Agent Instructions to the Company’s transfer agent on the Effective Date.
Following the Effective Date or at such earlier time as a legend is no longer required for certain
Securities, the Company will no later than three Business Days following the delivery by a Buyer to
the Company or the Company’s transfer agent of a legended certificate representing such Securities,
deliver or cause to be delivered to such Buyer a certificate representing such Securities that is
free from all restrictive and other legends. Following the Effective Date and upon the delivery to
any Buyer of any certificate representing Securities that is free from all restrictive and other
legends, such Buyer agrees that any sale of such Securities shall be made pursuant to the
Registration Statement and in accordance with the plan of distribution described therein or
pursuant to an available exemption from the registration requirements of the 1933 Act. The Company
may not make any notation on its records or give instructions to any transfer agent of the Company
that enlarge the restrictions on transfer set forth in Section 2(g). The Company will not effect
or publicly announce its intention to effect any exchange, recapitalization or other transaction
that effectively requires or rewards physical delivery of certificates evidencing the Common Stock.



(b) Transfer Agent Instructions. The Company shall issue irrevocable instructions to
its transfer agent, and any subsequent transfer agent, to issue certificates or credit shares to
the applicable balance accounts at The Depository Trust Company (“DTC”), registered in the name of
each Buyer or its respective nominee(s), for the Warrant Shares in such amounts as specified from
time to time by each Buyer to the Company upon exercise of the Warrants in the form of Exhibit
C attached hereto (the “Irrevocable Transfer Agent Instructions”). The Company represents and
warrants that no instruction other than the Irrevocable Transfer Agent Instructions referred to in
this Section 5, and stop transfer instructions to give effect to Section 2(f) hereof, will be given
by the Company to its transfer agent with respect to the Securities, and that the Securities shall
otherwise be freely transferable on the books and records of the Company as and to the extent
provided in this Agreement and the other Transaction Documents.



(c) Breach. The Company acknowledges that a breach by it of its obligations hereunder
will cause irreparable harm to a Buyer. Accordingly, the Company acknowledges that the remedy at
law for a breach of its obligations under this Section 5 will be inadequate and agrees, in the
event of a breach or threatened breach by the Company of the provisions of this Section 5, that a
Buyer shall be entitled, in addition to all other available remedies, to an order and/or injunction
restraining any breach and requiring immediate issuance and transfer, without the necessity of
showing economic loss and without any bond or other security being required.



(d) Additional Relief. If the Company shall fail for any reason or for no reason to
issue to such holder unlegended certificates within three (3) Business Days of receipt of documents
necessary for the removal of legend set forth above (the “Deadline Date”), then, in addition to all
other remedies available to the holder, if on or after the Trading Day (as defined in Section 4(m))
immediately following such three Business Day period, the holder purchases (in an open market
transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the holder
of shares of Common Stock that the holder anticipated receiving from the Company (a “Buy-In"), then
the Company shall, within three Business Days after the holder’s request and in the holder’s
discretion, either (i) pay cash to the holder in an amount equal to the holder’s total purchase
price (including brokerage commissions, if any) for the shares of Common Stock so purchased (the
“Buy-In Price"), at which point the Company’s obligation to deliver such certificate (and to issue
such shares of Common Stock) shall terminate, or (ii) promptly honor its obligation to deliver to
the holder a certificate or certificates representing such shares of Common Stock and pay cash to
the holder in an amount equal to the excess (if any) of the Buy-In Price over the product of (A)
such number of shares of Common Stock, times (B) the Closing Bid Price on the Deadline Date.
"Closing Bid Price” means, for any security as of any date, the last closing price for such
security on The NASDAQ SmallCap Market (the “Principal Market”), as reported by Bloomberg, or, if
the Principal Market begins to operate on an extended hours basis and does not designate the
closing bid price then the last bid price of such security prior to 4:00:00 p.m., New York Time, as
reported by Bloomberg, or, if the Principal Market is not the principal securities exchange or
trading market for such security, the last closing price of such security on the principal
securities exchange or trading market where such security is listed or traded as reported by
Bloomberg, or if the foregoing do not apply, the last closing price of such security in the
over-the-counter market on the electronic bulletin board for such security as reported by
Bloomberg, or, if no closing bid price is reported for such security by Bloomberg, the average of
the bid prices of any market makers for such security as reported in the “pink sheets” by Pink
Sheets LLC (formerly the National Quotation Bureau, Inc.). If the Closing Bid Price cannot be
calculated for a security on a particular date on any of the foregoing bases, the Closing Bid Price
of such security on such date shall be the fair market value as mutually determined by the Company
and the holder. If the Company and the holder are unable to agree upon the fair market value of
such security, then such dispute shall be resolved pursuant to Section 12 of the Warrants. All
such determinations to be appropriately adjusted for any stock dividend, stock split, stock
combination or other similar transaction during the applicable calculation period.




6. CONDITIONS TO THE COMPANY’S OBLIGATION TO SELL.



The obligation of the Company hereunder to issue and sell the Common Shares and the related
Warrants to each Buyer at the Closing is subject to the satisfaction, at or before the Closing
Date, of each of the following conditions, provided that these conditions are for the Company’s
sole benefit and may be waived by the Company at any time in its sole discretion by providing each
Buyer with prior written notice thereof:



(i) Such Buyer shall have executed each of the Transaction Documents to which it is a party
and delivered the same to the Company.



(ii) Such Buyer shall have delivered to the Company the Purchase Price (less, in the case of
Portside Growth & Opportunity Fund, the amounts withheld pursuant to Section 4(g)) for the Common
Shares and the related Warrants being purchased by such Buyer and each other Buyer at the Closing
by wire transfer of immediately available funds pursuant to the wire instructions provided by the
Company.



(iii) The representations and warranties of such Buyer shall be true and correct in all
material respects as of the date when made and as of the Closing Date as though made at that time
(except for representations and warranties that speak as of a specific date), and such Buyer shall
have performed, satisfied and complied in all material respects with the covenants, agreements and
conditions required by this Agreement to be performed, satisfied or complied with by such Buyer at
or prior to the Closing Date.




7. CONDITIONS TO EACH BUYER’S OBLIGATION TO PURCHASE.



The obligation of each Buyer hereunder to purchase the Common Shares and the related Warrants
at the Closing is subject to the satisfaction, at or before the Closing Date, of each of the
following conditions, provided that these conditions are for each Buyer’s sole benefit and may be
waived by such Buyer at any time in its sole discretion by providing the Company with prior written
notice thereof:



(i) The Company shall have executed and delivered to such Buyer (i) each of the Transaction
Documents and (ii) the Common Shares (in such amounts as such Buyer shall request) and the related
Warrants (in such amounts as such Buyer shall request) being purchased by such Buyer at the Closing
pursuant to this Agreement.



(ii) Such Buyer shall have received the opinion of Joseph G. Martinez, the Company’s General
Counsel (“General Counsel”), dated as of the Closing Date, in substantially the form of Exhibit
D-1 attached hereto.



(iii) Such Buyer shall have received the opinion of Latham & Watkins, LLP, the Company’s
outside counsel (“Company Counsel”), dated as of the Closing Date, in substantially the form of
Exhibit D-2 attached hereto.



(iv) The Company shall have delivered to such Buyer a copy of the Irrevocable Transfer Agent
Instructions, in the form of Exhibit C attached hereto, which instructions shall have been
delivered to and acknowledged in writing by the Company’s transfer agent.



(v) The Company shall have delivered to such Buyer a certificate evidencing the incorporation
and good standing of the Company and each of its operating Subsidiaries in such corporation’s state
of incorporation issued by the Secretary of State of such state of incorporation as of a date
within 10 days of the Closing Date.



(vi) The Common Stock (I) shall be listed on the Principal Market and (II) shall not have been
suspended, as of the Closing Date, by the SEC or the Principal Market from trading on the Principal
Market nor shall suspension by the SEC or the Principal Market have been threatened, as of the
Closing Date, either (A) in writing by the SEC or the Principal Market or (B) by falling below the
minimum listing maintenance requirements of the Principal Market.



(vii) The Company shall have delivered to such Buyer a certified copy of the Certificate of
Incorporation as certified by the Secretary of State of the State of Delaware within 10 days of the
Closing Date.



(viii) The Company shall have delivered to such Buyer a certificate, executed by the Secretary
of the Company and dated as of the Closing Date, as to (i) the resolutions consistent with Section
3(b) as adopted by the Company’s Board of Directors in a form reasonably acceptable to such Buyer,
(ii) the Certificate of Incorporation and (iii) the Bylaws, each as in effect at the Closing, in
the form attached hereto as Exhibit E.



(ix) The representations and warranties of the Company shall be true and correct as of the
date when made and as of the Closing Date as though made at that time (except for representations
and warranties that speak as of a specific date) and the Company shall have performed, satisfied
and complied in all respects with the covenants, agreements and conditions required by the
Transaction Documents to be performed, satisfied or complied with by the Company at or prior to the
Closing Date. Such Buyer shall have received a certificate, executed by the Chief Executive
Officer of the Company, dated as of the Closing Date, to the foregoing effect and as to such other
matters as may be reasonably requested by such Buyer in the form attached hereto as Exhibit
F.



(x) The Company shall have delivered to such Buyer a letter from the Company’s transfer agent
certifying the number of shares of Common Stock outstanding as of a date within five days of the
Closing Date.



(xi) The Company shall have filed amendments to the Certificates of Designations for each of
the Series E, F, G and H Preferred Stock in the form attached hereto as Exhibit G.



(xii) The Company shall have obtained all governmental, regulatory or third party consents and
approvals, if any, necessary for the sale of the Common Shares and the Warrants.



(xiii) The Company shall have delivered to such Buyer such other documents relating to the
transactions contemplated by this Agreement as such Buyer or its counsel may reasonably request.



8. TERMINATION. In the event that the Closing shall not have occurred with respect to
a Buyer on or before five (5) days from the date hereof due to the Company’s or such Buyer’s
failure to satisfy the conditions set forth in Sections 6 and 7 above (and the nonbreaching party’s
failure to waive such unsatisfied condition(s)), the nonbreaching party shall have the option to
terminate this Agreement with respect to such breaching party at the close of business on such date
without liability of any party to any other party.




9. MISCELLANEOUS.



(a) Governing Law; Jurisdiction; Jury Trial. All questions concerning the
construction, validity, enforcement and interpretation of this Agreement shall be governed by the
internal laws of the State of New York, without giving effect to any choice of law or conflict of
law provision or rule (whether of the State of New York or any other jurisdictions) that would
cause the application of the laws of any jurisdictions other than the State of New York. Each
party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts
sitting in The City of New York, Borough of Manhattan for the adjudication of any dispute hereunder
or in connection herewith or with any transaction contemplated hereby or discussed herein, and
hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that such suit, action or
proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding
is improper. Each party hereby irrevocably waives personal service of process and consents to
process being served in any such suit, action or proceeding by mailing a copy thereof to such party
at the address for such notices to it under this Agreement and agrees that such service shall
constitute good and sufficient service of process and notice thereof. Nothing contained herein
shall be deemed to limit in any way any right to serve process in any manner permitted by law.
EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL
FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF THIS
AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.



(b) Counterparts. This Agreement may be executed in two or more identical
counterparts, all of which shall be considered one and the same agreement and shall become
effective when counterparts have been signed by each party and delivered to the other party;
provided that a facsimile signature shall be considered due execution and shall be binding upon the
signatory thereto with the same force and effect as if the signature were an original, not a
facsimile signature.



(c) Headings. The headings of this Agreement are for convenience of reference and
shall not form part of, or affect the interpretation of, this Agreement.



(d) Severability. If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the
validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity
or enforceability of any provision of this Agreement in any other jurisdiction.



(e) Entire Agreement; Amendments. This Agreement supersedes all other prior oral or
written agreements between the Buyers, the Company, their affiliates and Persons acting on their
behalf with respect to the matters discussed herein, and this Agreement and the instruments
referenced herein contain the entire understanding of the parties with respect to the matters
covered herein and therein and, except as specifically set forth herein or therein, neither the
Company nor any Buyer makes any representation, warranty, covenant or undertaking with respect to
such matters. No provision of this Agreement may be amended other than by an instrument in writing
signed by the Company and the holders of Common Shares representing at least a majority of the
amount of the Common Shares, or, if prior to the Closing Date, the Buyers listed on the Schedule of
Buyers as being obligated to purchase at least a majority of the amount of the Common Shares. No
provision hereof may be waived other than by an instrument in writing signed by the party against
whom enforcement is sought. No such amendment shall be effective to the extent that it applies to
less than all of the holders of the Common Shares then outstanding. No consideration shall be
offered or paid to any Person to amend or consent to a waiver or modification of any provision of
any of the Transaction Documents unless the same consideration also is offered to all of the
parties to the Transaction Documents, holders of Common Shares or holders of the Warrants, as the
case may be. The Company has not, directly or indirectly, made any agreements with any Buyers
relating to the terms or conditions of the transactions contemplated by the Transaction Documents
except as set forth in the Transaction Documents.



(f) Notices. Any notices, consents, waivers or other communications required or
permitted to be given under the terms of this Agreement must be in writing and will be deemed to
have been delivered: (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by
facsimile (provided confirmation of transmission is mechanically or electronically generated and
kept on file by the sending party); or (iii) one Business Day after deposit with an overnight
courier service, in each case properly addressed to the party to receive the same. The addresses
and facsimile numbers for such communications shall be:



	 	 	 
	If to the Company:

	 	

	JMAR Technologies, Inc.

5800 Armada Drive

Carlsbad, California 92008

Telephone:

Facsimile:

Attention:

	 	





(760) 602-3292

(760) 602-3299

General Counsel







	 	 	 
	If to the Transfer Agent:

	 	

	 
	 	 
	Computershare Trust Company

	 
	 	 
	350 Indiana Street

Golden, CO 80401

Telephone:

Facsimile:

Attention:

	 	



(303) 262-0600

(303) 262-0603

Janine DeMark







If to a Buyer, to its address and facsimile number set forth on the Schedule of Buyers, with copies
to such Buyer’s representatives as set forth on the Schedule of Buyers,



	 	 	 	 	 
	with a copy (for informational purposes only) to:

	Schulte Roth & Zabel LLP
919 Third Avenue
New York, New York 10022
Telephone:
	 	 	(212) 756-2000	 
	Facsimile:
	 	 	(212) 593-5955	 
	Attention:
	 	Eleazer N. Klein, Esq.








or to such other address and/or facsimile number and/or to the attention of such other Person as
the recipient party has specified by written notice given to each other party five (5) days prior
to the effectiveness of such change. Written confirmation of receipt (A) given by the recipient of
such notice, consent, waiver or other communication, (B) mechanically or electronically generated
by the sender’s facsimile machine containing the time, date, recipient facsimile number and an
image of the first page of such transmission or (C) provided by an overnight courier service shall
be rebuttable evidence of personal service, receipt by facsimile or receipt from an overnight
courier service in accordance with clause (i), (ii) or (iii) above, respectively.



(g) Successors and Assigns. This Agreement shall be binding upon and inure to the
benefit of the parties and their respective successors and assigns, including any purchasers of the
Common Shares or the Warrants. The Company shall not assign this Agreement or any rights or
obligations hereunder without the prior written consent of the holders of Common Shares
representing at least a majority of the number of the Common Shares, including by merger or
consolidation. A Buyer may assign some or all of its rights hereunder without the consent of the
Company, in which event such assignee shall be deemed to be a Buyer hereunder with respect to such
assigned rights.



(h) No Third Party Beneficiaries. This Agreement is intended for the benefit of the
parties hereto and their respective permitted successors and assigns, and is not for the benefit
of, nor may any provision hereof be enforced by, any other Person.



(i) Survival. Unless this Agreement is terminated under Section 8, the
representations and warranties of the Company and the Buyers contained in Sections 2 and 3, the
agreements and covenants set forth in Sections 4, 5 and 9 shall survive the Closing and the
delivery and exercise of Securities, as applicable. Each Buyer shall be responsible only for its
own representations, warranties, agreements and covenants hereunder.



(j) Further Assurances. Each party shall do and perform, or cause to be done and
performed, all such further acts and things, and shall execute and deliver all such other
agreements, certificates, instruments and documents, as any other party may reasonably request in
order to carry out the intent and accomplish the purposes of this Agreement and the consummation of
the transactions contemplated hereby.



(k) Indemnification. In consideration of each Buyer’s execution and delivery of the
Transaction Documents and acquiring the Securities thereunder and in addition to all of the
Company’s other obligations under the Transaction Documents, the Company shall defend, protect,
indemnify and hold harmless each Buyer and each other holder of the Securities and all of their
stockholders, partners, members, officers, directors, employees and direct or indirect investors
and any of the foregoing Persons’ agents or other representatives (including, without limitation,
those retained in connection with the transactions contemplated by this Agreement) (collectively,
the “Indemnitees”) from and against any and all actions, causes of action, suits, claims, losses,
costs, penalties, fees, liabilities and damages, and expenses in connection therewith (irrespective
of whether any such Indemnitee is a party to the action for which indemnification hereunder is
sought), and including reasonable attorneys’ fees and disbursements (the “Indemnified
Liabilities”), incurred by any Indemnitee as a result of, or arising out of, or relating to (a) any
misrepresentation or breach of any representation or warranty made by the Company in the
Transaction Documents or any other certificate, instrument or document contemplated hereby or
thereby, (b) any breach of any covenant, agreement or obligation of the Company contained in the
Transaction Documents or any other certificate, instrument or document contemplated hereby or
thereby or (c) any cause of action, suit or claim brought or made against such Indemnitee by a
third party (including for these purposes a derivative action brought on behalf of the Company) and
arising out of or resulting from (i) the execution, delivery, performance or enforcement of the
Transaction Documents or any other certificate, instrument or document contemplated hereby or
thereby, (ii) any transaction financed or to be financed in whole or in part, directly or
indirectly, with the proceeds of the issuance of the Securities, or (iii) the status of such Buyer
or holder of the Securities as an investor in the Company. To the extent that the foregoing
undertaking by the Company may be unenforceable for any reason, the Company shall make the maximum
contribution to the payment and satisfaction of each of the Indemnified Liabilities which is
permissible under applicable law. Except as otherwise set forth herein, the mechanics and
procedures with respect to the rights and obligations under this Section 9(k) shall be the same as
those set forth in Section 6 of the Registration Rights Agreement.



(l) No Strict Construction. The language used in this Agreement will be deemed to be
the language chosen by the parties to express their mutual intent, and no rules of strict
construction will be applied against any party.



(m) Remedies. Each Buyer and each holder of the Securities shall have all rights and
remedies set forth in the Transaction Documents and all rights and remedies which such holders have
been granted at any time under any other agreement or contract and all of the rights which such
holders have under any law. Any Person having any rights under any provision of this Agreement
shall be entitled to enforce such rights specifically (without posting a bond or other security),
to recover damages by reason of any breach of any provision of this Agreement and to exercise all
other rights granted by law. Furthermore, the Company recognizes that in the event that it fails
to perform, observe, or discharge any or all of its obligations under the Transaction Documents,
any remedy at law may prove to be inadequate relief to the Buyers. The Company therefore agrees
that the Buyers shall be entitled to seek temporary and permanent injunctive relief in any such
case without the necessity of proving actual damages and without posting a bond or other security.



(n) Rescission and Withdrawal Right. Notwithstanding anything to the contrary
contained in (and without limiting any similar provisions of) the Transaction Documents, whenever
any Buyer exercises a right, election, demand or option under a Transaction Document and the
Company does not timely perform its related obligations within the periods therein provided, then
such Buyer may rescind or withdraw, in its sole discretion from time to time upon written notice to
the Company, any relevant notice, demand or election in whole or in part without prejudice to its
future actions and rights



(o) Payment Set Aside. To the extent that the Company makes a payment or payments to
the Buyers hereunder or pursuant to any of the other Transaction Documents or the Buyers enforce or
exercise their rights hereunder or thereunder, and such payment or payments or the proceeds of such
enforcement or exercise or any part thereof are subsequently invalidated, declared to be fraudulent
or preferential, set aside, recovered from, disgorged by or are required to be refunded, repaid or
otherwise restored to the Company, a trustee, receiver or any other Person under any law
(including, without limitation, any bankruptcy law, state or federal law, common law or equitable
cause of action), then to the extent of any such restoration the obligation or part thereof
originally intended to be satisfied shall be revived and continued in full force and effect as if
such payment had not been made or such enforcement or setoff had not occurred.



(p) Independent Nature of Buyers’ Obligations and Rights. The obligations of each
Buyer under any Transaction Document are several and not joint with the obligations of any other
Buyer, and no Buyer shall be responsible in any way for the performance of the obligations of any
other Buyer under any Transaction Document. Nothing contained herein or in any other Transaction
Document, and no action taken by any Buyer pursuant hereto or thereto, shall be deemed to
constitute the Buyers as a partnership, an association, a joint venture or any other kind of
entity, or create a presumption that the Buyers are in any way acting in concert or as a group with
respect to such obligations or the transactions contemplated by the Transaction Documents and the
Company acknowledges that the Buyers are not acting in concert or as a group with respect to such
obligations or the transactions contemplated by the Transaction Documents. Each Buyer confirms
that it has independently participated in the negotiation of the transaction contemplated hereby
with the advice of its own counsel and advisors. Each Buyer shall be entitled to independently
protect and enforce its rights, including, without limitation, the rights arising out of this
Agreement or out of any other Transaction Documents, and it shall not be necessary for any other
Buyer to be joined as an additional party in any proceeding for such purpose.



[Signature Page Follows]






1






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



JMAR TECHNOLOGIES, INC.



By: Ronald A. Walrod




Name: Ronald A. Walrod




Title: Chief Executive Officer



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



BUYERS:



PORTSIDE GROWTH & OPPORTUNITY FUND



By: Jeff Smith     



	 	 	 
	Name: Jeff Smith

Title:

	 	

Authorized Signatory







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



BUYERS:



BLUEGRASS GROWTH FUND, LP



By: BLUEGRASS GROWTH FUND PARTNERS LLC,


its General Partner



	 	 	 
	By:

	 	Brian Shatz     
	
 
	 	 
	
 
	 	Name: Brian Shatz

Title: Managing Member







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



BLUEGRASS GROWTH FUND, LTD



By: Brian Shatz     




Name: Brian Shatz


Title: Director



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



LAURUS MASTER FUND, LTD.



By: Eugene Grin     




Name: Eugene Grin


Title: Director



2




SCHEDULE OF BUYERS




	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Buyer	 	Number of Common	 	 	 	 	 	Number of Warrant	 	Purchase
	 	 	Shares	 	Shares	 	 	 	 	 	Price
	Portside Growth & Opportunity Fund
	 		806,452		 		302,420		 	 	 	 	 	$	1,000,000	
	Smithfield Fiduciary LLC
	 		403,226		 		151,210		 	 	 	 	 	$	500,000	
	Bluegrass Growth Fund, LP
	 		322,581		 		120,968		 	 	 	 	 	$	400,000	
	Bluegrass Growth Fund, Ltd.
	 		80,645		 		30,242		 	 	 	 	 	$	100,000	
	Laurus Master Fund, Ltd.
	 		1,612,903		 		604,839		 	 	 	 	 	$	2,000,000	







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EXHIBITS




	 	 	 
	Exhibit A

Exhibit B

Exhibit C

Exhibit D

Exhibit E

Exhibit F

Exhibit F

	 	Form of Warrants

Form of Registration Rights Agreement

Form of Irrevocable Transfer Agent Instructions

Form of Company Counsel Opinion

Form of Secretary’s Certificate

Form of Officer’s Certificate

Form of Amendment to Certificate of Designations
	 
	 	 







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SCHEDULES




Schedule 3(a) — List of Subsidiaries


Schedule 3(k) — Absence of Certain Changes


Schedule 3(q) — Equity Capitalization


Schedule 3(r) — Indebtedness and Other Contracts


Schedule 3(s) — Absence of Litigation


Schedule 3(t) — Insurance



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Schedule 3(a) — List of Subsidiaries




JMAR Research, Inc.


JMAR/SAL NanoLithography, Inc.


JSI Microelectronics, Inc.


Teralite, Inc.


JMAR Semiconductor, Inc.


Benchmark Industries, Inc.


Continuum Engineering, Inc.



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Schedule 3(k) — Absence of Certain Changes





	 	•	 	As reported in the Forms 10-Q for the quarters ended March
31, 2004, June 30, 2004 and September 30, 2004, the
Company’s revenues for each quarter in 2004 were less than
the revenues for the comparable quarters in 2003 and the net
losses for each such quarter were greater than the net
losses for the comparable quarters in 2003. The
“Consolidated Liquidity” section of the “Management’s
Discussion and Analysis” in each of the foregoing reports
states that the Company will continue to use cash in 2004
and into 2005 for, among other things, product research and
development efforts, funding delays under Government
Contracts, corporate costs, preferred stock redemptions and
dividends, and other working capital needs. This section
also states that the Company has determined that it will
require additional financing to complete or accelerate
development of it new products and for working capital
requirements.






	 	•	 	As reported in the SEC Documents, during 2004 the Company
shifted the emphasis of its product development activities
from its Collimated Plasma Lithography (CPL) program to
three new product development efforts (BioSentry, X-Ray
Microscope and X-Ray Nano Probe). As reported, each of
these efforts requires the expenditure of significant
development funds to bring these products to market.






	 	•	 	The Company sold $9.5 million of its Series E, F, G and H
Convertible Preferred Stock to Laurus. After December 31,
2003, the Company has paid cash dividends to Laurus related
to the outstanding Series C-H Preferred Stock. In August,
2004, the Company commenced payment of $85,000 in monthly
redemption payments on the Series E Preferred Stock. In
January, 2005, the Company commenced payment of $150,000 in
monthly redemption payments on Series F-H Preferred Stock.
The amendments entered into with Laurus on or before the
Closing Date will defer the remaining $1,000,000 in
redemption payments on the Series E Preferred Stock to July,
2006 and the next 18 months of redemption payments on the
Series F-H Preferred Stock to February, 2007.






	 	•	 	After December 31, 2003, Laurus converted the outstanding
Series C and D Preferred Stock into shares of the Company’s
Common Stock.






	 	•	 	During 2004, the Company entered into an Alliance Agreement
and an Agreement for the Purchase and Sale of Assets to
acquire certain technology related to the BioSentry product
development effort. Pursuant to those agreements, the
Company agreed to invest up to $1 million in this product
development effort. In January, 2005, the Company reported
that it was discussing purchase price reductions with the
sellers and subsequently has reached an agreement in
principle with the sellers for a reduced purchase price for
their technology.






	 	•	 	In its Form 10-Q for the Quarter ended June 30, 2004, the
Company reported that no further funding of its DARPA
contract was included in the U.S. Government’s fiscal year
2005 budget and that the Company did not expect additional
such funding for CPL in the future after receipt of the
funds already appropriated in connection with the 2004
budget.






	 	•	 	In January, 2005, the Company entered into a License
Agreement and Securities Purchase Agreement providing for
the license of certain technology related to its BioSentry
product in consideration for 1) the issuance of 520,000
shares of Common Stock and Warrants for 333,333 shares, and
2) a royalty of 2% of the sales from the BioSentry products
over a six year period.






	 	•	 	In June, 2004, the Company’s shareholders approved an
amendment to the Company’s Certificate of Incorporation to
increase the number of authorized shares of Common Stock
from 40,000,000 shares to 80,000,000 shares.






	 	•	 	In February, 2004, the Company repaid $1.2 million in
convertible notes, plus accrued interest, to the former
investors in SAL, Inc. by paying 118,121 shares of the
Company’s Common Stock and $835,761 in principal and $6,961
in interest in cash.






	 	•	 	In August, 2004, holders of more than 99% of an earn-out
rights issued in connection with the Company’s acquisition
of SAL in 2001 were paid a total of $625,000 in the shares
of the Company’s Common Stock in full satisfaction of those
earn-out rights.









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Schedule 3(l) – No Undisclosed Events





	 	•	 	In a Form 8-K filed with the SEC on January 13, 2005, the
Company disclosed the material terms of a letter agreement
that it executed with PointSource Technologies, LLC on
January 7, 2005. The letter agreement provided for the
negotiation and execution of a definitive License Agreement,
a Securities Purchase Agreement and related documents. On
January 26, 2005, the Company and PointSource executed a
License Agreement and a Securities Purchase Agreement and
the Company issued to PointSource 520,000 shares of Company
Common Stock and a Warrant to purchase 333,333 shares of
Common Stock, with an exercise price of $1.38 per share.
The License Agreement grants the Company an exclusive
license for six years for the use of certain technology
related to the use of scattered-light-based systems for the
detection and identification of microorganisms in water.
The License Agreement provides for payment of a 2% royalty
on sales of BioSentry products for a six year period (with a
provision to reduce the royalty after four years under
certain circumstances. Pursuant to this transaction, the
Company also acquired laboratory and engineering room
equipment used by PointSource in its business.






	 	•	 	In September, 2004, the Company entered into an Agreement
for the Purchase and Sale of Assets with Gregory Quist and
David Drake, dba The LXT Group, for the purchase of certain
technology related to the Company’s BioSentry product
development activity. This agreement required the Company
to invest up to $1 million in the product development effort
and conditioned the closing of the acquisition in January,
2005 on the achievement of stated milestones. The Company
reported in the above-reference Form 8-K that the closing
has not occurred and that the parties were discussing
modifications to the agreement. The parties have now
reached an agreement in principle to amend the purchase
agreement to reduce the purchase price and to convert the
agreement to provide for three year employment agreements to
a one-year commitment to provide consulting services for a
stated number of hours.









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Schedule 3(q) — Equity Capitalization




(a) Director and Executive Officer Common Stock Beneficially Owned or of Record, and Common Stock
Equivalents




[Tables inserted]



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Schedule 3(q) — Equity Capitalization

(Continued)





	 	•	 	Pursuant to the Securities Purchase Agreement, executed on January 26, 2005, between the Company and PointSource
Technologies, LLC, the Company granted PointSource the right to purchase approximately 1.5% of any future
offerings of the Company’s securities for a period of 18 months.






	 	•	 	Convertible Note, dated March 21, 2003, issued to Laurus related to the Company’s receivables-based line of
credit, providing for borrowings of up to $3 million, as to which no amounts are currently outstanding.






	 	•	 	UCC Financing Statement covering substantially all of the Company’s assets filed in California by Laurus to
secure payment of the Convertible Note






	 	•	 	Registration Rights Agreement with PointSource, executed on January 26, 2005.






	 	•	 	Registration Rights Agreements with Laurus covering the shares of Common Stock issuable under its outstanding
Series E, F, G and H Preferred Stock and Warrants issued in connection with the several financing transactions
completed with Laurus (to the extent that the several currently effective registration statements do not register
sufficient shares of Common Stock as a result of the amendments to the Preferred Stock filed on or before the
date hereof).






	 	•	 	The outstanding Series E, F, G and H Convertible Preferred Stock all contain provisions requiring the monthly
redemption of a portion of the remaining stated amount. The Laurus amendment filed on or before the date hereof
operates to defer the remaining monthly redemption payments for the Series E Preferred Stock to July, 2006 and to
defer the next 18 months of redemptions payments under the Series F, G and H to February, 2007.






	 	•	 	Attached is a list of the beneficial ownership by the Company’s directors and executive officers of shares of
Common Stock and Common Stock Equivalents.









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Schedule 3(r) — Indebtedness and Other Contracts




3(r)(i) Indebtedness:




	 	•	 	The Company’s Series E-H Convertible Preferred Stock require monthly redemption payments
if not previously converted. As amended by the amendments filed on or before the date
hereof, the entire remaining outstanding amount of the Series E Preferred Stock is due in
July, 2006 and the next 18 months of redemption payments for the Series F-H Preferred Stock
have been deferred to February, 2007. For the six months starting in August, 2006, monthly
redemption payments under the Series F-H Preferred Stock will recommence, with all amounts
remaining outstanding under the Series F-H Preferred Stock due and payable in February,
2007.






	 	•	 	Indebtedness of $40,833.51 owing to Comerica Bank in connection with the purchase of
software.






	 	•	 	Miscellaneous office equipment leases that may be considered capital leases under GAAP.






	 	•	 	Borrowings from time-to-time under the Laurus Convertible Note, secured by a blanket
lien in substantially all of the Company’s assets.





3(r)(ii): Material Contracts:




	 	•	 	The Company’s several Government Contracts are subject to cancellation by the government
for a variety of reasons, including the convenience of the Government and due to changes in
funding priorities. These contracts are multi-year contracts that are funded on an annual
basis in connection with the U.S. Government’s budget cycle. The Company’s research
contract with the Defense Advanced Research Projects Agency (DARPA) authorizes the Company
to continue to perform services under the contract prior to the receipt of its annual
funding. Upon receipt of the funding, then the Company is authorized to bill the customer
for payment. If the contract is cancelled or if the expected funding is reprogrammed or
otherwise reduced or cancelled, the Company would not received reimbursement for services
already performed. However, to the knowledge of the Company, no events have occurred to
suggest that such funding will not be received.




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Schedule 3(s) — Absence of Litigation




In December, 2004, the Company filed a Complaint against All American Semiconductor, Inc. to seek
recovery of approximately $43,000 of JMAR’s funds that remain subject to an attachment lien imposed
in connection with a prior lawsuit that was settled and dismissed in October, 2003. In January,
2005, All American filed a Complaint against the Company seeing a declaration as to the rights of
the parties regarding these funds. The Company believes that these funds belong to it and if it
prevails will seek reimbursement of its legal fees from All American.



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Schedule 3(t) — Insurance




The Company currently has sufficient insurance coverage for the businesses in which it is now
engaged. The Company’s current commercial liability package is provided by St. Paul Insurance and
the policies run until October, 2005. The Company has discussed with St. Paul expanding its
current products liability insurance to the Company’s BioSentry product at such time as the product
is sold on a commercial basis (not expected until the second half of 2005). St. Paul has chosen
not to extend the current products liability coverage to the BioSentry product at such time. As a
result, the Company is planning to place its entire commercial liability package with another
carrier. The Company has received a quotation from Chubb to take over its entire commercial
liability package, including products liability coverage specifically covering the BioSentry
product. Although this coverage is not needed at present, Chubb has concluded that the Company
meets its underwriting criteria and the Company is planning to transition its entire from St. Paul
to Chubb in February, 2005.




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