Exhibit 4.1


 


SECURITIES PURCHASE AGREEMENT


 


This
Securities Purchase Agreement (this “Agreement”)
dated March 21, 2006, among Valentis, Inc., a Delaware corporation (the “Company”), and the purchasers identified
on the signature pages and the Schedule of Purchasers attached hereto as Attachment
A (each, a “Purchaser” and
collectively, the “Purchasers”).


 


WHEREAS,
subject to the terms and conditions set forth in this Agreement and pursuant to
Section 4(2) of the Securities Act (as defined below) and Rule 506
promulgated thereunder, the Company desires to issue and sell to the
Purchasers, and the Purchasers, severally and not jointly, desire to purchase
from the Company certain securities of the Company, as more fully described in
this Agreement.


 


NOW,
THEREFORE, IN CONSIDERATION of the mutual covenants contained in this
Agreement, and for other good and valuable consideration the receipt and
adequacy of which are hereby acknowledged, the Company and the Purchasers agree
as follows:


 


ARTICLE I.


DEFINITIONS


 


1.1           Definitions. In addition to the terms defined
elsewhere in this Agreement, for all purposes of this Agreement, the following
terms shall have the meanings indicated in this Section 1.1:


 


“Action” means any action, suit, inquiry, notice of violation, proceeding
(including any partial proceeding such as a deposition) or investigation
pending or threatened in writing against or affecting the Company, any
Subsidiary or any of their respective properties before or by any court,
arbitrator, governmental or administrative agency, regulatory authority
(federal, state, county, local or foreign), stock market, stock exchange or
trading facility.


 


“Affiliate” means any Person that, directly or indirectly through one or more
intermediaries, controls or is controlled by or is under common control with a
Person, as such terms are used in and construed under Rule 144.


 


“Business Day” means any day except Saturday, Sunday and
any day which shall be a federal legal holiday or a day on which banking
institutions in the State of California are authorized or required by law or
other governmental action to close.


 


“Closing” means the closing of the purchase and sale of the Securities pursuant
to Article II.


 


“Commission” means the Securities and Exchange Commission.


 


“Common Stock” means the common stock of the Company, $.001
par value per share, and any securities into which such common stock may
hereafter be reclassified.


 


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“Common Stock Equivalents” means any securities of the Company or any
Subsidiary that entitle the holder thereof to acquire Common Stock at any time,
including without limitation, any debt, preferred stock, rights, options,
warrants or other instruments that are at any time convertible into or
exchangeable for, or that otherwise entitle the holder thereof to receive,
Common Stock or other securities that entitle the holder to receive, directly
or indirectly, Common Stock.


 


“Confidential Information” means the
Company’s or any Subsidiary’s trade secrets, confidential information and
know-how (including but not limited to confidential ideas, formulae,
compositions, processes, procedures and techniques, research and development
information, computer program code, performance specifications, support
documentation, drawings, specifications, designs, business and marketing plans,
and customer and supplier lists and related information).


 


“Disclosure Materials” has the meaning set forth in
Section 3.1(h).


 


“Effective Date” means the date that the Registration
Statement required by Section 2(a) of the Registration Rights Agreement is
first declared effective by the Commission.


 


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


 


“Intellectual Property” means all of the
following, to the extent that they are owned by the Company or any Subsidiary
or licensed by any of them and necessary for the conduct of their respective
businesses as currently conducted or currently proposed to be conducted: (i)
patents and patent applications; (ii) trademarks, service marks, trade dress,
trade names, corporate names, logos, slogans and Internet domain names,
together with all goodwill associated with each of the foregoing; (iii)
copyrights; (iv) registrations, applications and renewals for any of the
foregoing; and (v) proprietary computer software (including but not limited to
data, data bases and documentation).


 


“Investment Amount” means, with respect to each Purchaser, the
investment amount indicated below such Purchaser’s name on the signature page
of this Agreement, as also reflected on the Schedule of Purchasers
attached hereto as Attachment A.


 


“Lien” means any lien, charge, encumbrance, security interest, right of first
refusal or other restriction of any kind.


 


“Per Unit Purchase Price” means $2.50.


 


“Person” means an individual or corporation, partnership, trust, incorporated
or unincorporated association, joint venture, limited liability company, joint
stock company, government (or an agency or subdivision thereof) or other entity
of any kind.


 


“Proceeding” means an action, claim, suit, investigation or proceeding (including,
without limitation, an investigation or partial proceeding, such as a
deposition), whether commenced or threatened.


 


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“Registration Statement” means a registration statement meeting the
requirements set forth in the Registration Rights Agreement and covering the
resale by the Purchasers of the Registrable Securities (as defined in the
Registration Rights Agreement).


 


“Registration Rights Agreement” means the Registration Rights Agreement,
dated as of the date of this Agreement, among the Company and the Purchasers,
in the form of Exhibit B.


 


“Rule 144” means Rule 144 promulgated by the Commission pursuant to the
Securities Act, as such Rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission having substantially the
same effect as such Rule.


 


“Securities” means the Shares, Warrants and
the Warrant Shares.


 


“Securities Act” means the Securities Act of 1933, as
amended.


 


“Shares” means the shares of Common Stock issued to the Purchasers at the
Closing.


 


“Strategic Transaction” means a transaction or relationship in which
the Company issues shares of Common Stock or Common Stock Equivalents to a Person
that is, itself or through its subsidiaries, an operating company in a business
synergistic with the business of the Company and in which the Company receives
material benefits in addition to the investment or lending of funds, but shall
not include a transaction in which the Company is issuing securities primarily
for the purpose of raising capital or to a Person whose primary business is
investing in securities.


 


“Subsidiary” means any subsidiary of the Company that is required to be listed in Schedule 3.1(a).


 


“Trading Day” means (i) a day on which the Common Stock is traded on a Trading
Market, or (ii) if the Common Stock is not listed on a Trading Market, a day on
which the Common Stock is traded in the over-the-counter market, as reported by
the OTC Bulletin Board or the National Quotation Bureau Incorporated, or (iii)
if the Common Stock is not quoted on the OTC Bulletin Board, a day on which the
Common Stock is quoted in the over-the-counter market as reported by the
National Quotation Bureau Incorporated (or any similar organization or agency
succeeding to its functions of reporting prices); provided, that in the
event that the Common Stock is not listed or quoted as set forth in (i), (ii)
and (iii) hereof, then Trading Day shall mean a Business Day.


 


“Trading Market” means whichever of the New York Stock
Exchange, the American Stock Exchange, the NASDAQ National Market or the NASDAQ
Capital Market, on which the Common Stock is listed or quoted for trading on
the date in question.


 


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“Transaction Documents” means this Agreement, the Warrants, the
Registration Rights Agreement and any other documents or agreements executed in
connection with the transactions contemplated hereunder.


 


“Warrants” means the Common Stock purchase
warrants in the form of Exhibit A, which are issuable to the
Purchasers at the Closing.


 


“Warrant Shares” means the shares of Common
Stock issuable upon exercise of the Warrants.


 


ARTICLE II.


PURCHASE AND SALE


 


2.1           Closing. Subject to the terms and conditions set forth in
this Agreement, at the Closing the Company shall issue and sell to each
Purchaser, and each Purchaser shall, severally and not jointly, purchase from
the Company, the Shares and the Warrants representing such Purchaser’s
Investment Amount. The Closing shall take place at the offices of Latham &
Watkins LLP, 135 Commonwealth Drive, Menlo Park, California 94025-1105 or at
such other location as the parties may agree.


 


2.2           Closing Deliveries. (a)  At the Closing, the Company
shall issue, deliver or cause to be delivered to each Purchaser the following:


 


(i)            a certificate evidencing the number of
Shares and the number of Warrants to purchase Warrant Shares as set forth
opposite such Purchaser’s name on the Schedule of Purchasers attached
hereto as Attachment A (the Shares and Warrants referred to collectively
herein as the “Units”) for the Per
Unit Purchase Price. For each two (2) Shares purchased by a Purchaser, such
Purchaser shall receive a Warrant, registered in the name of such Purchaser,
pursuant to which such Purchaser shall have the right to acquire one (1)
Warrant Share(s) at an exercise price of $3.00 per Warrant Share in the form
attached hereto as Exhibit A. The Company shall deliver or cause to be
delivered to the Purchasers the stock certificates representing the Shares
issued and Warrants issued as promptly as practicable following the Closing;


 


(ii)           the legal opinion of Latham & Watkins
LLP, counsel to the Company, in agreed form, addressed to the Purchasers; and


 


(iii)          the Registration Rights Agreement duly
executed by the Company.


 


(b)           At the Closing, each Purchaser shall
deliver or cause to be delivered to the Company the following:


 


(i)            the product of the Per Unit Purchase
Price and the number of Units as set forth opposite such Purchaser’s name on
the Schedule of Purchasers attached hereto, in United States dollars and
in immediately available funds, by wire transfer to an account designated in
writing by the Company for such purpose;


 


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(ii)           the Registration Rights Agreement duly
executed by such Purchaser; and


 


(iii)          a fully completed and duly executed
Purchaser and Selling Securityholder Questionnaire in the form attached hereto
as Exhibit C.


 


ARTICLE III.


REPRESENTATIONS AND
WARRANTIES


 


3.1           Representations and Warranties of the
Company. The
Company hereby makes the following representations and warranties to each
Purchaser and to the Placement Agents (as defined below):


 


(a)           Subsidiaries. The Company has no direct or indirect
Subsidiaries other than those listed in Schedule 3.1(a). The
Company owns, directly or indirectly, all of the capital stock of each
Subsidiary free and clear of any and all Liens, and all the issued and
outstanding shares of capital stock of each Subsidiary are validly issued and
are fully paid, non-assessable and free of preemptive and similar rights. Each
Subsidiary of the Company has ceased all operations (including, without
limitation, all business, accounting and financial operations) and, as such,
such Subsidiary is not required to comply with the provisions of the
Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley
Act”).


 


(b)           Organization and Qualification. Each of the Company and each Subsidiary
is an entity duly incorporated or otherwise organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation or
organization (as applicable), with the requisite power and authority to own and
use its properties and assets and to carry on its business as currently
conducted. Neither the Company nor any Subsidiary is in violation of any of the
provisions of its respective certificate or articles of incorporation, bylaws
or other organizational or charter documents. Each of the Company and each
Subsidiary is duly qualified to conduct business and is in good standing as a
foreign corporation or other entity in each jurisdiction in which the nature of
the business conducted or property owned by it makes such qualification
necessary or appropriate, except where the failure to be so qualified or in
good standing, as the case may be, could not, individually or in the aggregate,
have or reasonably be expected to result in (i) an adverse effect on the
legality, validity or enforceability of any Transaction Document, (ii) a
material and adverse effect on the results of operations, assets, prospects,
business or condition (financial or otherwise) of the Company and the
Subsidiaries, taken as a whole, or (iii) an adverse impairment to the Company’s
ability to perform on a timely basis its obligations under any Transaction
Document (any of (i), (ii) or (iii), a “Material
Adverse Effect”).


 


(c)           Authorization; Enforcement. The Company has the requisite corporate
power and authority to enter into and to consummate the transactions
contemplated by each of the Transaction Documents and otherwise to carry out
its obligations thereunder.  The execution and delivery of each of the
Transaction Documents by the Company and the consummation by it of the
transactions contemplated thereby have been duly authorized by all necessary
corporate 


 


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action
on the part of the Company and no further corporate action is required by the
Company or its stockholders in connection therewith.  Each Transaction
Document has been (or upon delivery will have been) duly executed by the
Company and, when delivered in accordance with the terms hereof, will
constitute the valid and binding obligation of the Company enforceable against
the Company in accordance with its terms, except as rights to indemnity and
contribution may be limited by state or federal securities laws or the public
policy underlying such laws, except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting creditors’ and contracting parties’ rights generally and except as
enforceability may be subject to general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at law).


 


(d)           No Conflicts. The execution and delivery of the
Transaction Documents by the Company and the consummation and performance by
the Company of the transactions contemplated thereby do not and will not (i)
conflict with or violate any provision of the Company’s or any Subsidiary’s
certificate or articles of incorporation, bylaws or other organizational or
charter documents, (ii) conflict with, or constitute a default (or an event
that 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 (with or without notice, lapse of time or both) of, any agreement,
credit facility, debt or other instrument (evidencing a Company or Subsidiary
debt or otherwise) or other understanding to which the Company or any
Subsidiary is a party or by which any property or asset of the Company or any
Subsidiary is bound or affected, or (iii) result in a violation of any law,
rule, regulation, order, judgment, injunction, decree or other restriction of
any court or governmental authority to which the Company or a Subsidiary is
subject (including federal and state securities laws and regulations), or by
which any property or asset of the Company or a Subsidiary is bound or
affected; except in the case of each of clauses (ii) and (iii), such as could
not, individually or in the aggregate, have or reasonably be expected to result
in a Material Adverse Effect.


 


(e)           Filings, Consents and Approvals. The Company is not required to obtain
any consent, waiver, authorization or order of, give any notice to, or make any
filing or registration with, any court or other federal, state, local or other
governmental authority or other Person in connection with the execution,
delivery and performance by the Company of the Transaction Documents, other
than: (i) the filing with the Commission of one or more Registration Statements
in accordance with the requirements of the Registration Rights Agreement, (ii)
the filings required by federal and state securities laws, (iii) the filings
required in accordance with Sections 4.4 and 4.9, and (iv) those that have been
made or obtained prior to the date of this Agreement.


 


(f)            Issuance of the Securities. The Securities shall have been duly
authorized and, when issued and paid for in accordance with the Transaction
Documents, will be duly and validly issued, fully paid and nonassessable, free
and clear of all Liens.  Assuming the accuracy of the representations and
warranties of the Purchasers, the Shares and the Warrant Shares will be issued
in compliance with all applicable federal and state securities laws. The
Company shall have reserved from its duly authorized capital stock the maximum
number of shares of Common Stock issuable pursuant to this Agreement and the Warrants
in order to issue the Shares and the Warrant Shares.


 


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(g)           Capitalization. The number of shares and type of all
authorized, issued and outstanding capital stock of the Company as of November
11, 2005 is as described in the Company’s Quarterly Report on Form 10-Q for the
Quarter ended September 30, 2005.  No securities of the Company are
entitled to preemptive or similar rights, and no Person has any right of first
refusal, preemptive right, right of participation or any similar right to
participate in the transactions contemplated by the Transaction
Documents.  All of the outstanding shares of capital stock of the Company
are duly authorized, validly issued, fully paid and non-assessable, have been
issued in compliance in all material respects with all applicable federal and
state securities laws, and none of such outstanding shares was issued in
violation of any preemptive rights or similar rights to subscribe for or
purchase any capital stock of the Company. Except as a result of the purchase
and sale of the Securities and except as disclosed in Schedule 3.1(g),
there are no outstanding options, warrants, scrip rights to subscribe to, calls
or commitments of any character whatsoever relating to, or securities, rights
or obligations convertible into or exchangeable for, or giving any Person any
right to subscribe for or acquire, any shares of Common Stock, or contracts,
commitments, understandings or arrangements by which the Company or any
Subsidiary is or may become bound to issue additional shares of Common Stock,
or securities or rights convertible or exchangeable into shares of Common
Stock.  Except under the Transaction Documents, the issue and sale of the
Securities will not, immediately or with the passage of time, obligate the
Company to issue shares of Common Stock or other securities to any Person
(other than the Purchasers) and will not result in a right of any holder of
Company securities to adjust the exercise, conversion, exchange or reset price
under such securities.


 


(h)           SEC Reports; Financial Statements. The Company has filed all reports
required to be filed by it under the Securities Act and the Exchange Act,
including pursuant to Section 13(a) or 15(d) thereof, for the twelve
months preceding the date hereof (or such shorter period as the Company was
required by law to file such reports) (the foregoing materials including all
exhibits and schedules thereto, being collectively referred to herein as the “SEC Reports” and, together with the
Schedules to this Agreement, the “Disclosure
Materials”) on a timely basis or has timely filed a valid extension
of such time of filing and has filed any such SEC Reports prior to the
expiration of any such extension.  As of their respective dates, the SEC
Reports complied in all material respects with the requirements of the
Securities Act and the Exchange Act and the rules and regulations of the
Commission promulgated thereunder, and none of the SEC Reports, when filed,
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.  The financial statements of the Company included in the
SEC Reports comply in all material respects with applicable accounting
requirements and the rules and regulations of the Commission with respect
thereto as in effect at the time of filing.  Such financial statements
have been prepared in accordance with U.S. generally accepted accounting
principles applied on a consistent basis during the periods involved (“GAAP”), except as may be otherwise
specified in such financial statements or the notes thereto, and fairly present
in all material respects the financial position of the Company and its
consolidated Subsidiaries as of and for the dates thereof and the results of
operations and cash flows for the periods then ended, subject, in the 


 


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case of
unaudited statements, to normal, immaterial, year-end audit adjustments or as
otherwise disclosed in the SEC Reports.


 


(i)            Changes. Since the date of the latest audited financial
statements included within the SEC Reports, except as specifically disclosed in
the SEC Reports, (i) there has been no event, occurrence or development that
has had or is reasonably likely to result in a Material Adverse Effect, (ii)
the Company has not incurred any liabilities (contingent or otherwise) other
than (A) trade payables and accrued expenses incurred in the ordinary course of
business consistent with past practice and (B) liabilities not required to be
reflected in the Company’s financial statements pursuant to GAAP or required to
be disclosed in filings made with the Commission, (iii) the Company has not
altered its method of accounting or the identity of its auditors, (iv) the
Company has not declared or made any dividend or distribution of cash or other
property to its stockholders or purchased, redeemed or made any agreements to
purchase or redeem any shares of its capital stock, and (v) the Company has not
issued any equity securities to any officer, director or Affiliate, except
pursuant to existing Company stock option or stock purchase plans disclosed in
the SEC Reports.  Except as specified in the SEC Reports, the Company does
not have pending before the Commission any request for confidential treatment
of information.


 


(j)            Litigation. Except as disclosed in the SEC Reports, there is no
Action which (i) adversely affects or challenges the legality, validity or
enforceability of any of the Transaction Documents or the Securities or (ii)
could, if there were an unfavorable decision, individually or in the aggregate,
have or reasonably be expected to result in a Material Adverse Effect. 
Neither the Company nor any Subsidiary, nor any director or officer thereof, is
or has been the subject of any material Action involving a claim of violation
of or liability under federal or state securities laws or a claim of breach of
fiduciary duty.  There has not been, and to the knowledge of the Company,
there is not pending or contemplated, any material investigation by the
Commission involving the Company or any current or former director or officer
of the Company.  The Commission has not issued any stop order or other
order suspending the effectiveness of any registration statement filed by the
Company or any Subsidiary under the Exchange Act or the Securities Act.


 


(k)           Labor Relations. No material labor dispute exists or, to
the knowledge of the Company, is imminent with respect to any of the employees
of the Company.


 


(l)            Compliance. Neither the Company nor any Subsidiary (i) is in
default under or in violation of (and no event has occurred that has not been
waived that, with notice or lapse of time or both, would result in a default by
the Company or any Subsidiary under), nor has the Company or any Subsidiary
received notice of a claim that it is in default under or that it is in
violation of, any indenture, loan or credit agreement or any other agreement or
instrument to which it is a party or by which it or any of its properties is
bound (whether or not such default or violation has been waived), (ii) is
in violation of any order of any court, arbitrator or governmental body, or (iii)
is or has been in violation of any statute, rule or regulation of any
governmental authority, including without limitation all foreign, federal,
state and local laws relating to taxes, environmental protection, occupational
health and safety, product quality and safety and employment, labor matters and
gaming matters, except in each case as could not, 


 


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individually
or in the aggregate, have or reasonably be expected to result in a Material
Adverse Effect.  The Company is in compliance with the applicable
requirements of the Sarbanes-Oxley Act of 2002 and the rules and regulations
thereunder promulgated by the Commission, except where such noncompliance could
not have or reasonably be expected to result in a Material Adverse Effect.


 


(m)          Regulatory Permits. The Company and the Subsidiaries
possess all certificates, authorizations and permits issued by the appropriate
federal, state, local or foreign regulatory authorities necessary to conduct
their respective businesses as described in the SEC Reports, except where the
failure to possess such permits would not, individually or in the aggregate,
have or reasonably be expected to result in a Material Adverse Effect (“Material Permits”), and neither the Company
nor any Subsidiary has received any notice of proceedings relating to the
revocation or modification of any Material Permit.


 


(n)           Title to Assets. The Company and the Subsidiaries have
good and marketable title in all personal property owned by them that is
material to their respective businesses, in each case free and clear of all
Liens, except for Liens as do not materially affect the value of such property
and do not materially interfere with the use made and proposed to be made of
such property by the Company and the Subsidiaries.  Any real property and
facilities held under lease by the Company and the Subsidiaries are held by
them under valid, subsisting and, to the Company’s knowledge, enforceable
leases of which the Company and the Subsidiaries are in compliance, except as
could not, individually or in the aggregate, have or reasonably be expected to
result in a Material Adverse Effect.


 


(o)           Intellectual Property. Except as described in Schedule 3.1(o):


 


(i)            All Intellectual Property is currently in
compliance with all necessary legal requirements (including timely filings,
proofs and payments of fees) and, to the Company’s knowledge, are valid and
enforceable, subject, in the case of any patent application, to any
modification or other action that may be taken by the relevant patent and
trademark office. No Intellectual Property has been or is now involved in any
cancellation, dispute or litigation, and, to the Company’s knowledge, no such
action is threatened. No patent of the Company or any Subsidiary has been or is
now involved in any interference, reissue, re-examination or opposition
proceeding.


 


(ii)           All of the licenses and sublicenses and
consent, royalty or other agreements concerning Intellectual Property to which
the Company or any Subsidiary is a party or by which any of their assets are
bound (other than generally commercially available, non-custom, off-the-shelf
software application programs having a retail acquisition price of less than
$10,000 per license) (collectively, “License
Agreements”) are valid and binding obligations of the Company or its
Subsidiaries that are parties thereto and, to the Company’s knowledge, the
other parties thereto, enforceable in accordance with their terms, except to
the extent that enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance or other similar laws
affecting the enforcement of creditors’ rights generally, and, to the Company’s
knowledge, there exists no event or condition which will 


 


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result in a material violation or breach of
or constitute (with or without due notice or lapse of time or both) a default
by the Company or any Subsidiary under any such License Agreement.


 


(iii)          To the Company’s knowledge, the Company and
any Subsidiary own or have the valid right to use all of the Intellectual
Property free and clear of all liens, encumbrances, adverse claims or
obligations to license such Intellectual Property, other than licenses entered
into in the ordinary course of the Company’s or any Subsidiary’s business.


 


(iv)          To the Company’s knowledge, the conduct of
the Company’s or Subsidiary’s business as currently conducted does not infringe
or otherwise impair or conflict with (collectively, “Infringe”) any Intellectual Property rights of any third
party, or violate any confidentiality obligation owed by the Company to a third
party. To the Company’s knowledge, the Intellectual Property is not being
Infringed by any third party. There is no litigation or order pending or
outstanding or, to the Company’s knowledge, threatened, that seeks to limit or
challenge or that concerns the ownership, use, validity or enforceability of
any Intellectual Property or Confidential Information, and, to the Company’s
knowledge, there is no valid basis for the same.


 


(v)           The consummation of the transactions
contemplated by the Transaction Documents will not result in the alteration,
loss, impairment of or restriction on the Company’s or any Subsidiary’s
ownership or right to use any of the Intellectual Property.


 


(vi)          The Company and each Subsidiary has taken
reasonable steps to protect the Company’s or Subsidiary’s rights in their
Intellectual Property and Confidential Information. Except under
confidentiality obligations, there has been no material disclosure of any
Confidential Information to any third party.


 


(p)           Insurance. The Company and the Subsidiaries are insured by
insurers of recognized financial responsibility against such losses and risks
and in such amounts as are prudent and customary in the businesses in which the
Company and the Subsidiaries are engaged.  The Company believes that it
will 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 without a material increase in cost.


 


(q)           Transactions With Affiliates and
Employees. Except
as set forth in the SEC Reports, none of the officers or directors of the
Company and, to the knowledge of the Company, none of the employees of the
Company is presently a party to any transaction with the Company or any
Subsidiary (other than for services as employees, officers and 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 officer,
director or such employee or, to the knowledge of the Company, any entity in
which any officer, director, or any such employee has a substantial interest or
is an officer, director, trustee or partner.


 


(r)            Internal Accounting Controls. The Company is in material compliance
with all provisions of the Sarbanes-Oxley Act that are applicable to the Company
as of the 


 


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Closing.
The Company maintains 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
accountability, (iii) access to assets is permitted only in accordance with
management’s general or specific authorization, and (iv) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences. The
Company has established disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and designed such
disclosure controls and procedures to ensure that material information relating
to the Company, including its Subsidiaries, required to be disclosed by the
Company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the certifying officers by others within those
entities, particularly during the period in which the Company’s most recently
filed periodic report under the Exchange Act, as the case may be, is being
prepared. The Company’s certifying officers have evaluated the effectiveness of
the Company’s controls and procedures as of the end of the period covered by the
most recently filed periodic report under the Exchange Act (such date, the “Evaluation Date”). The Company presented in
its most recently filed periodic report under the Exchange Act the conclusions
of the certifying officers about the effectiveness of the disclosure controls
and procedures based on their evaluations as of the Evaluation Date. Since the
Evaluation Date, there has not been any material reduction in the Company’s
internal controls over financial reporting . Ernst & Young LLP, which expressed
its opinion with respect to the consolidated financial statements to be
incorporated by reference to the Company’s Annual Report on Form 10-K for the
year ended June 30, 2005 into the Registration Statement, have advised the
Company that they are, and to the knowledge of the Company they are,
independent accountants as required by the Securities Act and the rules and
regulations promulgated thereunder.


 


(s)           Solvency. Based on the financial condition of the Company as
of the Closing (and assuming that the Closing shall have occurred): (i) the
Company’s fair saleable value of its assets exceeds the amount that will be
required to be paid on or in respect of the Company’s existing debts and other
liabilities (including known contingent liabilities) as they mature; (ii) the
Company’s assets do not constitute unreasonably small capital to carry on its
business for the current fiscal year as now conducted and as proposed to be
conducted including its capital needs taking into account the particular
capital requirements of the business conducted by the Company, and projected
capital requirements and capital availability thereof; and (iii) the current
cash flow of the Company, together with the proceeds the Company would receive,
were it to liquidate all of its assets, after taking into account all
anticipated uses of the cash, would be sufficient to pay all amounts on or in
respect of its debt when such amounts are required to be paid.  The
Company does not intend to incur debts beyond its ability to pay such debts as
they mature (taking into account the timing and amounts of cash to be payable
on or in respect of its debt).


 


(t)            Certain Fees. Except for dealings with the Placement
Agents (defined below), no brokerage or finder’s fees or commissions are or
will be payable by the Company to any broker, financial advisor or consultant,
finder, placement agent, investment banker, bank or other Person with respect
to the transactions contemplated by the Transaction Documents. The 


 


11

















 


Purchasers
shall have no obligation with respect to any fees or with respect to any claims
(other than such fees or commissions owed by a Purchaser pursuant to written
agreements executed by such Purchaser which fees or commissions shall be the
sole responsibility of such Purchaser) made by or on behalf of other Persons
for fees of a type contemplated in this Section that may be due in
connection with the transactions contemplated by the Transaction Documents.


 


(u)           Certain Registration Matters. Assuming the accuracy of the
Purchasers’ representations and warranties set forth in Section 3.2(b) to
(e), no registration under the Securities Act is required for the offer and
sale of the Securities by the Company to the Purchasers under the Transaction
Documents.  The Company is eligible to register the resale of its Common
Stock for resale by the Purchasers under Form S-3 promulgated under the
Securities Act.  Except as set forth in Schedule 3.1(u), the
Company has not granted or agreed to grant to any Person any rights (including
“piggy-back” registration rights) to have any securities of the Company
registered with the Commission or any other governmental authority that have
not been satisfied.


 


(v)           Listing and Maintenance Requirements. Except as specified in the SEC Reports,
the Company has not, in the two years preceding the date hereof, received
notice from any Trading Market on which the Common Stock is or has been listed
or quoted for trading to the effect that the Company is not in compliance with
the listing or maintenance requirements thereof.  Except as specified in
the SEC Reports, the Company is, and has no reason to believe that it will not
in the foreseeable future continue to be, in compliance with the listing and
maintenance requirements for continued listing of the Common Stock on the
NASDAQ Capital Market. The issuance and sale of the Securities under the
Transaction Documents does not contravene the rules and regulations of the
Trading Market on which the Common Stock is currently listed or quoted, and no
approval of the stockholders of the Company thereunder is required for the
Company to issue and deliver to the Purchasers the maximum number of Securities
contemplated by Transaction Documents, including such as may be required pursuant
to the Nasdaq Stock Market, Inc. Marketplace Rules and NASDAQ Staff
Interpretative Letters thereunder concerning stockholder approval requirements
with regard to discounted private placements equal to 20% or more of the common
stock or 20% or more of the voting power outstanding before such issuance.


 


(w)          Investment Company. The Company is not, and is not an
Affiliate of, an “investment company” within the meaning of the Investment
Company Act of 1940, as amended (the “Investment
Company Act”). After giving effect to the transactions contemplated
by this Agreement, the Company will not be, and will not be an Affiliate of, an
“investment company” within the meaning of the Investment Company Act.


 


(x)            Application of Takeover Protections. The Company has taken all necessary
action, if any, in order to render inapplicable any control share acquisition,
business combination, poison pill (including any distribution under a rights
agreement) or other similar anti-takeover provision under the Company’s
certificate of incorporation (or similar charter documents), the Company’s
by-laws (as amended and in effect) or the laws of its state of incorporation
that is or could reasonably be expected to become applicable to the Purchasers
as a result of the Purchasers and the Company fulfilling their obligations or
exercising their rights 


 


12

















 


under
the Transaction Documents, including without limitation the Company’s issuance
of the Securities and the Purchasers’ ownership of the Securities.


 


(y)           No Additional Agreements. The Company does not have any agreement
or understanding with any Purchaser with respect to the transactions
contemplated by the Transaction Documents other than as specified in the
Transaction Documents.


 


(z)            Foreign Corrupt Practices. Neither the Company nor, to the
knowledge of the Company, any agent or other Person acting on its behalf has
(i) directly or indirectly used any corporate funds for unlawful contributions,
gifts, entertainment or other unlawful expenses related to foreign or domestic
political activity, (ii) made any unlawful payment to foreign or domestic
government officials or employees or to any foreign or domestic political
parties or campaigns from corporate funds, (iii) failed to disclose fully any
contribution made by the Company (or made by any Person acting on its behalf of
which the Company is aware) that is in violation of law, or (iv) violated in
any material respect any provision of the Foreign Corrupt Practices Act of
1977, as amended.


 


(aa)         Acknowledgement Regarding Purchasers’
Purchase of Securities. The Company acknowledges and agrees that the Company is capable of
evaluating and understanding and understands and accepts the terms, risks and
conditions of the transactions contemplated by the Transaction Documents, and
that each of the Purchasers is acting solely in the capacity of an arm’s length
purchaser with respect to the Transaction Documents and the transactions
contemplated thereby. The Company further acknowledges and agrees that (i) no
Purchaser is acting as a financial advisor or fiduciary (or in any similar
capacity) of the Company or its Affiliates, stockholders, creditors, employees
or any other party with respect to the Transaction Documents and the
transactions contemplated thereby; (ii) the Purchasers have not provided any
legal, accounting, regulatory or tax advice with respect to the Transaction
Documents and the transactions contemplated thereby, and the Company has
consulted its own legal, accounting, regulatory and tax advisors to the extent
it deemed appropriate; (iii) any advice given by any Purchaser or any of their
respective representatives or agents in connection with the Transaction
Documents and the transactions contemplated thereby is merely incidental to the
Purchasers’ purchase of the Securities; (iv) the Purchasers and their
respective Affiliates may be engaged in a broad range of transactions that
involve interests that differ from those of the Company and that the Purchasers
have no obligation to disclose any of such interests by virtue of any fiduciary
or advisory relationship as no such relationship exists in connection with the
transactions contemplated by the Transaction Documents. The Company further
represents to each Purchaser 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 of the Transaction Documents and the
transactions contemplated thereby.


 


(bb)         Disclosure; Price Manipulation. The Company confirms that neither it,
nor to its knowledge, any other Person acting on its behalf has provided any of
the Purchasers or their agents or counsel with any information that the Company
believes constitutes material, non-public information.  The Company
understands and confirms that the Purchasers will rely on the foregoing
representations and covenants in effecting transactions in securities of the
Company.  All disclosure provided to the Purchasers regarding the Company,
its business and 


 


13

















 


the
transactions contemplated hereby, furnished by or on behalf of the Company
(including the Company’s representations and warranties set forth in this
Agreement) are true and correct in all material respects 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 light of the
circumstances under which they were made, not misleading. The Company has not
taken and will not take any action designed to or that might reasonably be
expected to cause or result in an unlawful manipulation of the price of the
Common Stock to facilitate the sale or resale of the Securities.


 


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


 


(a)           Organization; Authority. Such Purchaser is an entity duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization with the requisite corporate or partnership
power and authority to enter into and to consummate the transactions
contemplated by the applicable Transaction Documents and otherwise to carry out
its obligations thereunder. The execution, delivery and performance by such
Purchaser of the transactions contemplated by this Agreement have been duly
authorized by all necessary corporate or, if such Purchaser is not a
corporation, such partnership, limited liability company or other applicable
like action, on the part of such Purchaser.  Each of this Agreement and
the Registration Rights Agreement has been duly executed by such Purchaser, and
when delivered by such Purchaser in accordance with the terms hereof, will constitute
the valid and legally binding obligation of such Purchaser, enforceable against
it in accordance with its terms, except as rights to indemnity and contribution
may be limited by state or federal securities laws or the public policy
underlying such laws, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
creditors’ and contracting parties’ rights generally and except as
enforceability may be subject to general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at law).


 


(b)           Investment Intent. Such Purchaser is acquiring the
Securities as principal for its own account for investment purposes only and
not with a view to or for distributing or reselling such Securities or any part
thereof, without prejudice, however, to such Purchaser’s right, subject to the
provisions of this Agreement and the Registration Rights Agreement, at all
times to sell or otherwise dispose of all or any part of such Securities
pursuant to an effective registration statement under the Securities Act or
under an exemption from such registration and in compliance with applicable
federal and state securities laws.  Subject to the immediately preceding
sentence, nothing contained herein shall be deemed a representation or warranty
by such Purchaser to hold the Securities for any period of time.  Such
Purchaser is acquiring the Securities hereunder in the ordinary course of its
business.  Such Purchaser does not have any agreement, plan or
understanding, directly or indirectly, with any Person to distribute any of the
Securities.


 


(c)           Purchaser Status. At the time such Purchaser was offered
the Securities, it was, and at the date hereof it is, and on each date on which
it exercises the Warrants it will be, an 


 


14

















 


“accredited
investor” as defined in Rule 501(a) under the Securities Act.  Such
Purchaser is not a registered broker-dealer under Section 15 of the
Exchange Act.


 


(d)           Experience of such Purchaser. Such Purchaser, either alone or
together with its representatives, has such knowledge, sophistication and
experience in business and financial matters so as to be capable of evaluating
the merits and risks of the prospective investment in the Securities, and has
so evaluated the merits and risks of such investment.  Such Purchaser is
able to bear the economic risk of an investment in the Securities and, at the
present time, is able to afford a complete loss of such investment.


 


(e)           General Solicitation. No Securities were offered or sold to
such Purchaser by means of any form of general solicitation or general
advertising, and in connection therewith such Purchaser did not: (A) receive or
review any advertisement, article, notice or other communication published in a
newspaper or magazine or similar media or broadcast over television or radio,
whether closed circuit or generally available; or (B) attend any seminar
meeting or industry investor conference whose attendees were invited by any
general solicitation or general advertising.


 


(f)            Access to Information. Such Purchaser acknowledges that it has
reviewed the Disclosure Materials and has been afforded: (i) the opportunity to
ask such questions as it has deemed necessary of, and to receive answers from,
representatives of the Company concerning the terms and conditions of the
offering of the Securities and the merits and risks of investing in the
Securities; (ii) access to information about the Company and the Subsidiaries
and their respective financial condition, results of operations, business,
properties, management and prospects sufficient to enable it to evaluate its
investment; and (iii) the opportunity to obtain such additional information
that the Company possesses or can acquire without unreasonable effort or
expense that is necessary to make an informed investment decision with respect
to the investment.  Neither such inquiries nor any other investigation
conducted by or on behalf of such Purchaser or its representatives or counsel
shall modify, amend or affect such Purchaser’s right to rely on the truth,
accuracy and completeness of the Disclosure Materials and the Company’s
representations and warranties contained in the Transaction Documents.


 


(g)           Reliance. Such Purchaser understands and acknowledges that:
(i) the Securities are being offered and sold to it without registration under
the Securities Act in a private placement that is exempt from the registration
provisions of the Securities Act and (ii) the availability of such exemption
depends in part on, and the Company will rely upon the accuracy and
truthfulness of, the foregoing representations and such Purchaser hereby
consents to such reliance.


 


(h)           Residency. Such Purchaser has, if an entity, its principal
place of business or, if an individual, its primary residence in the
jurisdiction set forth immediately below such Purchaser’s name on the signature
pages hereto.


 


(i)            Certain Trading Activities. Such Purchaser has not, directly or
indirectly, nor has any Person acting on behalf of or pursuant to any
understanding with such Purchaser, engaged in (i) any Short Sales (defined
below) involving the Company’s securities during the 30 


 


15

















 


Trading Days
immediately preceding the date hereof or (ii) any transactions in any
securities of the Company following the date on which such Purchaser was aware
of this Transaction (other than this Transaction); provided, however,
that the restrictions contained in this Section 3.2(i) shall not apply after
the date that the Company files a Current Report on Form 8-K disclosing
the consummation of the transactions contemplated by this Agreement.  For
purposes of this Section, “Short Sales”
include, without limitation, all types of direct and indirect stock pledges,
forward sale contracts, options, puts, calls, short sales, swaps and similar
arrangements (including on a total return basis), and sales and other
transactions through non-US broker dealers or foreign regulated brokers having
the effect of hedging the securities or investment made under this Agreement.


 


(j)            Acknowledgements Regarding Placement
Agents. Such
Purchaser acknowledges that Canaccord Adams Inc., broker-dealer and member
NASD/SIPC, and Griffin Securities, Inc., broker-dealer and member NASD/SIPC
(the “Placement Agents”), are
acting as the Company’s placement agents for the sale of the securities being
offered hereby and will be compensated solely by the Company in such capacity.


 


The Company acknowledges and agrees that each
Purchaser does not make or has not made any representations or warranties with
respect to the transactions contemplated hereby other than those specifically
set forth in this Section 3.2.


 


ARTICLE IV.


 


OTHER AGREEMENTS OF THE
PARTIES


 


4.1           (a)           The Securities may only be disposed of
pursuant to an effective registration statement under the Securities Act, to
the Company or pursuant to an available exemption from, or in a transaction not
subject to, the registration requirements of the Securities Act, and in
compliance with any applicable state securities laws.  In connection with
any transfer of the Securities other than pursuant to an effective registration
statement, to the Company, to an Affiliate of a Purchaser or in connection with
a pledge as contemplated in Section 4.1(b), the Company may require the
transferor thereof to provide to the Company an opinion of counsel selected by
the transferor, the form and substance of which opinion shall be reasonably
satisfactory to the Company, to the effect that such transfer does not require
registration of such transferred Securities under the Securities Act.


 


(b)           Certificates evidencing the Securities
will contain the following legend, so long as is required by this
Section 4.1(b) or Section 4.1(c):


 


[NEITHER
THESE SECURITIES NOR THE SECURITIES ISSUABLE UPON EXERCISE OF THESE SECURITIES
HAVE BEEN REGISTERED][THESE SECURITIES HAVE NOT BEEN REGISTERED] WITH THE
SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN
RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD
EXCEPT 


 


16

















 


PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO
AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO
THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY
ACCEPTABLE TO THE COMPANY.  [THESE SECURITIES AND THE SECURITIES ISSUABLE
UPON EXERCISE OF THESE SECURITIES][THESE SECURITIES] MAY BE PLEDGED IN
CONNECTION WITH A BONA FIDE MARGIN ACCOUNT SECURED BY SUCH SECURITIES.


 


The Company acknowledges
and agrees that a Purchaser may from time to time pledge and/or grant a
security interest in some or all of the Securities, in accordance with
applicable securities laws, pursuant to a bona fide margin agreement in
connection with a bona fide margin account and, if required under the terms of
such agreement or account, such Purchaser may transfer pledged or secured
Securities to the pledgees or secured parties.  Such a pledge or transfer
would not be subject to approval or consent of the Company and no legal opinion
of legal counsel to the pledgee, secured party or pledgor shall be required in
connection with the pledge, but such legal opinion may be required in
connection with a subsequent transfer following default by the Purchaser
transferee of the pledge.  No notice shall be required of such
pledge.  At the appropriate Purchaser’s expense, the Company will execute
and deliver such reasonable documentation as a pledgee or secured party of
Securities may reasonably request in connection with a pledge or transfer of
the Securities including the preparation and filing of any required prospectus
supplement under Rule 424(b)(3) of the Securities Act or other applicable
provision of the Securities Act to appropriately amend the list of Selling
Stockholders thereunder.


 


(c)           Certificates evidencing the Shares and
Warrant Shares shall not contain any legend (including the legend set forth in
Section 4.1(b)): (i) following any sale of such Shares or Warrant Shares
pursuant to a registration statement (including the Registration Statement)
covering the resale of such Shares and Warrant Shares that is effective under
the Securities Act, or (ii) following any sale of such Shares or Warrant Shares
pursuant to Rule 144, or (iii) while such Shares or Warrant Shares are eligible
for sale under Rule 144(k), or (iv) if such legend is not required under
applicable requirements of the Securities Act (including judicial
interpretations and pronouncements issued by the Staff of the
Commission).  The Company shall cause its counsel to issue any legal
opinion or instruction required by the Company’s transfer agent to comply with
the requirements set forth in this Section. If all or any portion of a Warrant
is exercised at any time when there is an effective registration statement to
cover the resale of the Warrant Shares, such Warrant Shares shall be issued
free of all legends. Following the occurrence of (i), (ii) or (iii) or at such
earlier time as a legend is no longer required for the Shares and Warrant
Shares under this Section 4.1(c), the Company will, no later than three
(3) Trading Days following the delivery by a Purchaser to the Company or the
Company’s transfer agent of a certificate representing Shares or Warrant Shares
containing a restrictive legend (such third Trading Day, the “Legend Removal
Date”), deliver or cause to be delivered to such Purchaser or its
transferee a certificate representing such Shares or Warrant 


 


17

















 


Shares
that is free from all restrictive and other legends.  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 this Section except
as it may reasonably determine are necessary or appropriate to comply or to
ensure compliance with those applicable laws that are enacted or modified after
the Closing.


 


(d)           In addition to such Purchaser’s other
available remedies, the Company shall pay to a Purchaser, in cash, as partial
liquidated damages and not as a penalty, for each $1,000 of Shares or Warrant
Shares (based on the Closing Price of the Common Stock on the date such
Securities are submitted to the Company’s transfer agent) delivered for removal
of the restrictive legend and subject to Section 4.1(c), $10 per Trading Day
for each Trading Day commencing two (2) Business Days after the Legend Removal
Date (increasing to $20 per Trading Day after the first five (5) Trading Days for
which such damages have begun to accrue) for each Trading Day after the two (2)
Business Days following the Legend Removal Date until such certificate is
delivered without a legend (“Liquidated Damages”); provided, however,
with respect to the Warrant Shares only, in the event the Liquidated Damages
clause in this section 4.1(d) will cause the warrants issued by the Company in
this transaction to be a liability on the Company’s balance sheet pursuant to
Rule EITF 00-19 as interpreted by the Financial Accounting Standards Board or
the accounting staff of the SEC, then and only then, the Liquidated Damages
applicable to Warrant Shares delivered by any investor for removal of the
restrictive legend shall be capped at $120 for each $1,000 of Warrant Shares delivered.
Nothing herein shall limit such Purchaser’s right to pursue actual damages for
the Company’s failure to deliver certificates representing any Securities as
required by the Transaction Documents, and such Purchaser shall have the right
to pursue all remedies available to it at law or in equity including, without
limitation, a decree of specific performance and/or injunctive relief.


 


4.2           Furnishing of Information. As long as any Purchaser owns the
Securities, the Company covenants to timely file (or obtain extensions in
respect thereof and file within the applicable grace period) all reports
required to be filed by the Company after the date hereof pursuant to the
Exchange Act.  As long as any Purchaser owns the Securities, if the
Company is not required to file reports pursuant to such laws, it will prepare
and furnish to the Purchasers and make publicly available in accordance with
Rule 144(c) such information as is required for the Purchasers to sell the
Shares and Warrant Shares under Rule 144. The Company further covenants that it
will take such further action as any holder of Securities may reasonably
request, all to the extent required from time to time to enable such Person to
sell such Shares and Warrant Shares without registration under the Securities
Act within the limitation of the exemptions provided by Rule 144.


 


4.3           Integration. The Company shall not, and shall use
its best efforts to ensure that no Affiliate of the Company shall, sell, offer
for sale or solicit offers to buy or otherwise negotiate in respect of any
security (as defined in Section 2 of the Securities Act) that will be
integrated with the offer or sale of the Securities in a manner that would
require the registration under the Securities Act of the sale of the Securities
to the Purchasers, or that will be integrated with the offer or sale of the
Securities for purposes of the rules and regulations of any Trading Market.


 


18

















 


4.4           Securities Laws Disclosure; Publicity. By no later than 9:15 a.m. (New York
time) on the date of execution of this Agreement or 9:15 a.m. (New York time)
on the Trading Day following the execution of this Agreement, the Company shall
issue a press release disclosing the consummation of the transactions contemplated
hereby and file a Current Report on Form 8-K disclosing the consummation
and material terms of the transactions contemplated hereby.  In addition,
the Company will make such other filings and notices in the manner and time
required by the Commission and the Trading Market on which the Common Stock is
listed.  Notwithstanding the foregoing, the Company shall not publicly
disclose the name of any Purchaser, or include the name of any Purchaser in any
filing with the Commission (other than the Registration Statement and any
exhibits to filings made in respect of this transaction in accordance with
periodic filing requirements under the Exchange Act) or any regulatory agency
or Trading Market, without the prior written consent of such Purchaser, except
to the extent such disclosure is required by law or Trading Market regulations,
in which case the Company shall provide the Purchasers with prior notice of
such disclosure.


 


4.5           Non-Public Information. The Company covenants and agrees that
neither it nor any other Person acting on its behalf will provide any Purchaser
or its agents or counsel with any information that the Company believes
constitutes material non-public information, unless prior thereto such
Purchaser shall have executed a written agreement regarding the confidentiality
and use of such information.  The Company understands and confirms that
each Purchaser shall be relying on the foregoing representations in effecting
transactions in securities of the Company.


 


4.6           Indemnification of Purchasers. In addition to the indemnity provided
in the Registration Rights Agreement, the Company will (i) indemnify and hold
each Purchaser and its directors, officers, stockholders, partners, employees
and agents (each, a “Purchaser Party”)
harmless from any and all losses, liabilities, obligations, claims,
contingencies, damages, costs and expenses, including all judgments, amounts
paid in settlements, court costs and reasonable attorney’s fees and costs of
investigation (collectively, “Losses”)
that any such Purchaser Party may suffer or incur as a result of or relating to
any misrepresentation, breach or inaccuracy of any representation, warranty,
covenant or agreement made by the Company in any Transaction Document and (ii)
reimburse each such Purchaser Party for its reasonable legal and other expenses
(including the cost of any investigation, preparation and travel) incurred in
connection therewith, as such expense are incurred.


 


4.7           Use of Proceeds. The Company shall use the net proceeds
from the sale of the Securities hereunder for working capital purposes and not
for the satisfaction of any portion of the Company’s debt (other than payment
of trade payables and accrued expenses in the ordinary course of the Company’s
business and prior practices), to redeem any capital stock of the Company or to
settle any outstanding Action.


 


4.8           Limitations on Issuance of Future Priced
Securities and Issuance of Securities. During the one year period following the Closing,
the Company shall not issue any “Future Priced Securities” as such term is
described by NASD IM 4350-1. From the date hereof until ninety (90) days after
the Effective Date, neither the Company nor any Subsidiary shall, without the
prior written consent of the Purchasers holding at least two-thirds of the
Shares issued under this Agreement, issue shares of Common Stock or Common
Stock Equivalents, other than (i) the 


 


19

















 


issuance
of the Securities, (ii) the issuance of securities upon the exercise or conversion
of any Common Stock or Common Stock Equivalents issued by the Company prior to
the date hereof (not including any amendments, modifications and reissuances
thereof), (iii) the grants of options or warrants, or the issuance of
additional securities under any duly authorized Company stock option,
restricted stock or stock purchase plan in effect as of the date hereof (not
including any amendments, modifications and reissuances thereof), (iv) the
issuance of securities pursuant to one or more Strategic Transactions and (v)
the issuance of securities constituting less than one percent (1%) of the
number of shares of Common Stock, outstanding on the date hereof; provided,
however, that such ninety (90) day period following the Effective Date
set forth in this Section 4.9 shall be extended for the number of Trading Days
during such period in which (i) trading in the Common Stock is suspended
by any Trading Market or (ii) a Registration Statement is not effective or the
prospectus included in such Registration Statement may not be used by the
Purchasers for the resale of the Shares and Warrant Shares. For purposes of
this Section 4.9, the number of shares of Common Stock outstanding refers to
the actual number of shares of Common Stock outstanding and does not include
any outstanding Common Stock Equivalents.


 


4.9           Listing of Securities. The Company shall: (i) in the time and
manner required by each Trading Market on which the Common Stock is listed,
prepare and file with such Trading Market an additional shares listing
application covering the Shares and Warrant Shares, (ii) take all steps
necessary to cause such shares to be approved for listing on each Trading
Market on which the Common Stock is listed as soon as possible thereafter,
(iii) provide to each Purchaser evidence of such listing, and (iv) maintain the
listing of such Shares on each such Trading Market or another eligible
securities market.


 


ARTICLE V.


 


MISCELLANEOUS


 


5.1           Fees and Expenses. At the Closing, the Company shall
reimburse the fees and expenses of Lowenstein Sandler, PC, counsel for the
Xmark funds, in the amount of $8,250 in connection with the negotiation of the
Transaction Documents, it being understood that Lowenstein Sandler, PC has not
rendered any legal advice to the Company in connection with the transactions
contemplated hereby and that the Company has relied for such matters on the
advice of its own counsel. Except as specified in the Registration Rights
Agreement, each party shall pay the fees and expenses of its advisers, counsel,
accountants and other experts, if any, and all other expenses incurred by such
party incident to the negotiation, preparation, execution, delivery and
performance of the Transaction Documents.  The Company shall pay all stamp
and other taxes and duties levied in connection with the sale of the
Securities.


 


5.2           Entire Agreement. The Transaction Documents, together
with the Exhibits and Schedules thereto, contain the entire understanding of
the parties with respect to the subject matter hereof and supersede all prior
agreements and understandings, oral or written, with respect to such matters,
which the parties acknowledge have been merged into such documents, exhibits
and schedules.


 


20

















 


5.3           Notices. Any and all notices or other communications or
deliveries required or permitted to be provided hereunder shall be in writing
and shall be deemed given and effective on the earliest of (a) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile number specified in this Section prior to 5:00 p.m. (California
time) on a Business Day, (b) the next Business Day after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile number specified in this Section on a day that is not a Business
Day or later than 5:00 p.m. (California time) on any date and earlier than
11:59 p.m. (California time) on such date, (c) the Business Day following the
date of mailing, if sent by U.S. nationally recognized overnight courier
service, or (d) upon actual receipt by the party to whom such notice is
required to be given.  The address for such notices and communications
shall be as follows:


 


 


	
  If
  to the Company:

  	
  Valentis,
  Inc.

  
	
   

  	
  863A
  Mitten Road

  
	
   

  	
  Burlingame,
  CA 94010

  
	
   

  	
  Attn: 
  Benjamin F. McGraw III, Pharm. D.

  
	
   

  	
   

  
	
  With
  a copy to:

  	
  Patrick
  A. Pohlen

  
	
   

  	
  Latham
  & Watkins LLP

  
	
   

  	
  135
  Commonwealth Drive

  
	
   

  	
  Menlo
  Park, CA 94025

  
	
   

  	
   

  
	
  If
  to a Purchaser:

  	
  To
  the address set forth under such Purchaser’s name on the signature pages
  hereof;

  



 


or
such other address as may be designated in writing hereafter, in the same
manner, by such Person.


 


5.4           Amendments; Waivers. No provision of this Agreement may be
waived or amended except in a written instrument signed by the Company and Purchasers
holding no less than two-thirds of the Shares issued or issuable under this
Agreement.  The Company shall provide prior notice to all Purchasers of
any proposed waiver or amendment.  No waiver of any default with respect
to any provision, condition or requirement of this Agreement shall be deemed to
be a continuing waiver in the future or a waiver of any subsequent default or a
waiver of any other provision, condition or requirement hereof, nor shall any
delay or omission of either party to exercise any right hereunder in any manner
impair the exercise of any such right.


 


5.5           Construction. The headings herein are for convenience
only, do not constitute a part of this Agreement and shall not be deemed to
limit or affect any of the provisions hereof.  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.  This Agreement shall be construed as if drafted
jointly by the parties, and no 


 


21

















 


presumption
or burden of proof shall arise favoring or disfavoring any party by virtue of
the authorship of any provisions of this Agreement or any of the Transaction
Documents.


 


5.6           Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of the parties and their successors and permitted
assigns.  The Company may not assign this Agreement or any rights or
obligations hereunder without the prior written consent of the Purchasers
holding no less than two-thirds of the Shares issued or issuable under this
Agreement. Any Purchaser may assign any or all of its rights under this
Agreement to any Person to whom such Purchaser assigns or transfers any
Securities, provided such transferee agrees in writing to be bound, with
respect to the transferred Securities, by the provisions hereof that apply to
the “Purchasers.”


 


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


 


5.8           Governing Law. All questions concerning the
construction, validity, enforcement and interpretation of this Agreement shall
be governed by and construed and enforced in accordance with the internal laws
of the State of California, without regard to the principles of conflicts of
law thereof.  Each party agrees that all Proceedings concerning the interpretations,
enforcement and defense of the transactions contemplated by this Agreement and
any other Transaction Documents (whether brought against a party hereto or its
respective Affiliates, employees or agents) may be commenced in the state and
federal courts sitting in the City of San Francisco (the “California Courts”).  Each party
hereto hereby irrevocably submits to the non-exclusive jurisdiction of the
California Courts for the adjudication of any dispute hereunder or in
connection herewith or with any transaction contemplated hereby or discussed
herein (including with respect to the enforcement of the any of the Transaction
Documents), and hereby irrevocably waives, and agrees not to assert in any
Proceeding, any claim that it is not personally subject to the jurisdiction of
any such California Court, or that such Proceeding has been commenced in an
improper or inconvenient forum.  Each party hereto hereby irrevocably
waives personal service of process and consents to process being served in any
such Proceeding by mailing a copy thereof via registered or certified mail or
overnight delivery (with evidence of delivery) to such party at the address in
effect for notices to it under this Agreement and agrees that such service
shall constitute good and sufficient service of process and notice
thereof.  Nothing contained herein shall be deemed to limit in any way any
right to serve process in any manner permitted by law.  Each party hereto
hereby irrevocably waives, to the fullest extent permitted by applicable law,
any and all right to trial by jury in any legal proceeding arising out of or
relating to this Agreement or the transactions contemplated hereby.  If
either party shall commence a Proceeding to enforce any provisions of a
Transaction Document, then the prevailing party in such Proceeding shall be
reimbursed by the other party for its reasonable attorney’s fees and other
costs and expenses incurred with the investigation, preparation and prosecution
of such Proceeding.


 


5.9           Survival. The representations, warranties, agreements and
covenants contained herein shall survive the Closing and the delivery of the
Shares and Warrants.


 


22

















 


5.10         Execution. This Agreement may be executed in two or more
counterparts, all of which when taken together 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, it being understood that both
parties need not sign the same counterpart.  In the event that any
signature is delivered by facsimile transmission, such signature shall create a
valid and binding obligation of the party executing (or on whose behalf such
signature is executed) with the same force and effect as if such facsimile
signature page were an original thereof.


 


5.11         Severability. If any provision of this Agreement is
held to be invalid or unenforceable in any respect, the validity and
enforceability of the remaining terms and provisions of this Agreement shall
not in any way be affected or impaired thereby and the parties will attempt to
agree upon a valid and enforceable provision that is a reasonable substitute
therefor, and upon so agreeing, shall incorporate such substitute provision in
this Agreement.


 


5.12         Replacement of Securities. If any certificate or instrument
evidencing any Securities is mutilated, lost, stolen or destroyed, the Company
shall issue or cause to be issued in exchange and substitution for and upon
cancellation thereof, or in lieu of and substitution therefor, a new
certificate or instrument, but only upon receipt of evidence reasonably
satisfactory to the Company of such loss, theft or destruction and customary
and reasonable indemnity, if requested.  The applicants for a new
certificate or instrument under such circumstances shall also pay any
reasonable third-party costs associated with the issuance of such replacement
Securities.  If a replacement certificate or instrument evidencing any
Securities is requested due to a mutilation thereof, the Company may require
delivery of such mutilated certificate or instrument as a condition precedent
to any issuance of a replacement.


 


5.13         Remedies. In addition to being entitled to exercise all rights
provided herein or granted by law, including recovery of damages, each of the
Purchasers and the Company will be entitled to specific performance under the
Transaction Documents.  The parties agree that monetary damages may not be
adequate compensation for any loss incurred by reason of any breach of obligations
described in the foregoing sentence and hereby agrees to waive in any action
for specific performance of any such obligation the defense that a remedy at
law would be adequate.


 


5.14         Payment Set Aside. To the extent that the Company makes a
payment or payments to any Purchaser pursuant to any Transaction Document or a
Purchaser enforces or exercises its rights 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.


 


5.15         Independent Nature of Purchasers’
Obligations and Rights. The obligations of each Purchaser under any Transaction Document are
several and not joint with the obligations of 


 


23

















 


any
other Purchaser, and no Purchaser shall be responsible in any way for the
performance of the obligations of any other Purchaser under any Transaction
Document.  The decision of each Purchaser to purchase Securities pursuant
to the Transaction Documents has been made by such Purchaser independently of
any other Purchaser.  Nothing contained herein or in any Transaction
Document, and no action taken by any Purchaser pursuant thereto, shall be
deemed to constitute the Purchasers as a partnership, an association, a joint
venture or any other kind of entity, or create a presumption that the
Purchasers are in any way acting in concert or as a group with respect to such
obligations or the transactions contemplated by the Transaction Document. 
Each Purchaser acknowledges that no other Purchaser has acted as agent for such
Purchaser in connection with making its investment hereunder and that no
Purchaser will be acting as agent of such Purchaser in connection with monitoring
its investment in the Securities or enforcing its rights under the Transaction
Documents.  Each Purchaser shall be entitled to independently protect and
enforce its rights, including without limitation the rights arising out of this
Agreement or out of the other Transaction Documents, and it shall not be
necessary for any other Purchaser to be joined as an additional party in any
proceeding for such purpose.


 


5.16         Obligations of Purchasers. The Company acknowledges that the
obligations of each Purchaser under this Agreement are several and not joint
with the obligations of any other Purchaser, and no Purchaser shall be
responsible in any way for the performance of the obligations of any other
Purchaser under this Agreement. The decision of each Purchaser to enter into to
this Agreement has been made by such Purchaser independently of any other
Purchaser. The Company further acknowledges that nothing contained in this
Agreement, and no action taken by any Purchaser pursuant hereto, shall be
deemed to constitute the Purchasers as a partnership, an association, a joint
venture or any other kind of entity, or create a presumption that the
Purchasers are in any way acting in concert or as a group with respect to such
obligations or the transactions contemplated hereby. Each Purchaser shall be
entitled to independently protect and enforce its rights, including without
limitation, the rights arising out of this Agreement, and it shall not be
necessary for any other Purchaser to be joined as an additional party in any
proceeding for such purpose.


 


5.17         Legal Counsel. Each Purchaser has been represented by
its own separate legal counsel in their review and negotiation of this
Agreement and with respect to the transactions contemplated hereby. The Company
has elected to provide all Purchasers with the same terms and Agreement for the
convenience of the Company and not because it was required or requested to do
so by the Purchasers. The Company acknowledges that such procedure with respect
to this Agreement in no way creates a presumption that the Purchasers are in
any way acting in concert or as a group with respect to this Agreement or the
transactions contemplated hereby or thereby.


 


[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]


[SIGNATURE PAGES FOLLOW]


 


24

















 


IN WITNESS WHEREOF, the
parties hereto have caused this Securities Purchase Agreement to be duly
executed by their respective authorized signatories as of the date first
indicated above.


 


	
   

  	
  VALENTIS INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
  Benjamin
  F. McGraw, III, Pharm.D.

  
	
   

  	
  Title:

  	
  President
  and Chief Executive Officer

  
				



 

















 


IN
WITNESS WHEREOF, the parties have executed this Securities Purchase Agreement
as of the date first written above.


 


	
   

  	
  PURCHASER

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

  
	
   

  	
   

  
	
   

  	
  Address
  for Notice:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Facsimile
  No.:

  	
   

  	
   

  
	
   

  	
  Attn.:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  With
  a copy to:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Facsimile
  No.:

  	
   

  	
   

  
	
   

  	
  Attn:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Jurisdiction:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Investment
  Amount:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Requested
  Warrant Provisions (check all that apply):

  
	
   

  	
   

  
	
   

  	
  [    ]
  Section 11(i)

  
	
   

  	
  [    ]
  Section 11(ii)