# SECURITIES PURCHASE
AGREEMENT

This
Securities Purchase Agreement (this Agreement) is dated as of May 27,
2004, among Alliance Pharmaceutical Corp., a New York corporation (the
Company), and the investors identified on the signature pages hereto
(each, an Investor and collectively, the Investors).

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 each Investor, and each Investor, severally and not
jointly, desires 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 Investors 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 is a federal legal
holiday or a day on which banking institutions in the State of New York 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.

Closing
Date means the Business Day immediately following the date on which all of the
conditions set forth in Sections 5.1 and 5.2hereof are satisfied, or such other
date as the parties may agree.

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Commissionmeans
the Securities and Exchange Commission.

Common
Stock means the common stock of the Company, par value $.01 per share, and any
securities into which such common stock may hereafter be reclassified.

Common
Stock Equivalents means any securities of the Company or any Subsidiary which
entitle the holder thereof to acquire Common Stock at any time, including without
limitation, any debt, preferred stock, rights, options, warrants or other instrument that
is at any time convertible into or exchangeable for, or otherwise entitles the holder
thereof to receive, Common Stock or other securities that entitle the holder to receive,
directly or indirectly, Common Stock.

Company
Counsel means Foley & Lardner LLP.

Companys
Knowledge means the actual knowledge of Duane Roth.

Company
Deliverables has the meaning set forth in Section 2.4).

Confidential
Information means trade secrets, confidential information and know-how
(including but not limited to 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).

Escrow
Amount means that portion of the Purchase Price then held in escrow by Lead
Investor Counsel.

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.

GAAP means
U.S. generally accepted accounting principals.

Infringe has
the meaning set forth in Section 3.1(o).

Intellectual
Property means all of the following: (i) patents, patent applications, patent
disclosures and inventions (whether or not patentable and whether or not reduced to
practice); (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 and copyrightable works; (iv) registrations,
applications and renewals for any of the foregoing; (v) trade secrets, confidential
information and know-how (including but not limited to ideas, formulae, compositions,
manufacturing and production processes and techniques, research and development
information, drawings, specifications, designs, business and marketing plans, and
customer and supplier lists and related information); and (vi) proprietary computer
software (including but not limited to data, data bases and documentation.

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Investment
Amount means, with respect to each Investor, the Investment Amount indicated on
such Investors signature page to this Agreement.

Investor
Deliverables has the meaning set forth in Section 2.4(b).

License
Agreements has the meaning set forth in Section 3.1(o).

Lien means
any lien, charge, encumbrance, security interest, right of first refusal or other
restrictions of any kind.

Material
Adverse Effect means any of (i) a material and adverse effect on the legality,
validity or enforceability of any Transaction Document, (ii) a material and adverse
effect on the results of operations, assets, condition (financial or otherwise) or
business of the Company and the Subsidiaries, taken as a whole, or (iii) a material and
adverse impairment to the Companys ability to perform on a timely basis its
obligations under any Transaction Document.

New
York Courts means the state and federal courts sitting in the City of New York,
Borough of Manhattan.

Per
Unit Purchase Price equals $0.35.

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.

PPM has
the meaning set forth in Section 3.2(e).

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.

Purchase
Price means the total amount invested by all the Investors in the aggregate,
not to exceed US$11,000,000.00.

Registration
Statement means a registration statement meeting the requirements set forth in
the Registration Rights Agreement and covering the resale by the Investors of the Shares
and the Warrant Shares.

Registration
Rights Agreement means the Registration Rights Agreement, dated as of the date
of this Agreement, among the Company and the Investors, in the form of Exhibit Bhereto.

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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.

SEC
Reports has the meaning set forth in Section 3.1(h).

Securities means
the Shares, the Warrants and the Warrant Shares.

Securities
Act means the Securities Act of 1933, as amended.

Shares means
the shares of Common Stock issued or issuable to the Investors pursuant to this
Agreement.

Short
Sales include, without limitation, all short sales as defined in
Rule 3b-3 of the Exchange Act and include 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.

Subsidiary means
any significant subsidiary as defined in Rule 1-02(w) of the Regulation S-X
promulgated by the Commission under the Exchange Act.

Trading
Day means (i) a day on which the Common Stock is traded on a Trading Market
(other than the OTC Bulletin Board), or (ii) if the Common Stock is not listed on a
Trading Market (other than the OTC Bulletin Board), a day on which the Common Stock is
traded in the over-the-counter market, as reported by the OTC Bulletin Board, or (iii) if
the Common Stock is not quoted on any Trading Market, 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, the NASDAQ SmallCap Market or OTC Bulletin Board on
which the Common Stock is listed or quoted for trading on the date in question.

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 Investors at the Closing.

Warrant
Sharesmeans the shares of Common Stock issuable upon exercise of the Warrants.

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ARTICLE II.PURCHASE AND SALE

2.1    
Deposit of Purchase Price. Unless otherwise agreed to and set forth on an Investors
signature page hereto, within three (3) calendar days after the execution and delivery of
this Agreement by an Investor, such Investor shall promptly cause a wire transfer of
immediately available funds (U.S. dollars) in an amount representing such Investors
pro rata portion of the Purchase Price, determined by multiplying the number of Shares
being purchased by such Investor by the Per Unit Purchase Price, as set forth on the
signature pages to this Agreement to be paid to the non-interest bearing escrow account
of Lowenstein Sandler PC (Lead Investor Counsel), counsel for Xmark
Fund, L.P. and Xmark Fund, Ltd. (collectively, the Lead Investor), set
forth on Exhibit A affixed hereto. Lead Investor Counsel shall hold the Purchase Price in
escrow until (i) Lead Investor Counsel receives written instructions from the Lead
Investor authorizing the release of the Purchase Price in accordance with Section 2.3,
or (ii) Lead Investor Counsels receipt of written instructions from the Lead
Investor that the Agreement has been terminated in accordance with Section 5.3 in
which case Lead Investor Counsel shall return to each Investor the portion of the
Purchase Price each such Investor delivered to the Lead Investor Counsel; provided,
however, if an Investor terminates this Agreement solely with respect to such
Investor in accordance with Section 5.3, Lead Investor Counsel shall return to
such Investor the portion of the Purchase Price such Investor delivered to the Lead
Investor Counsel and the remaining Purchase Price shall continue to be held in escrow by
Lead Investor Counsel pending authorization to release such Purchase Price in accordance
with the terms set forth herein.

2.2    
Lead Investor Counsels Duties and Obligations. The Company and the Investors
acknowledge and agree for the benefit of Lead Investor Counsel (which shall be deemed to
be a third party beneficiary of this Article 2) as follows:

| | (a)              Lead
Investor Counsel (i) is not responsible for the performance by the Company           or
the Investors of this Agreement or any of the other Transaction Documents or
          for determining or compelling compliance therewith, (ii) is only responsible
for           (A) holding the Purchase Price in escrow pending release of the Purchase
Price           in accordance with the terms set forth herein and (B) disbursing the
Purchase           Price in accordance with written instructions from the Lead Investor
in           accordance with Section 2.3 or as set forth in Section 2.1 above
          (collectively, the Lead Investor Counsel Duties), (iii)
shall           not be obligated to take any legal or other action hereunder which might
in its           judgment involve or cause it to incur any expense or liability unless it
shall           have been furnished with indemnification acceptable to it, in its sole
          discretion, (iv) may rely on and shall be protected in acting or refraining
from           acting upon any written notice, instruction (including, without
limitation, wire           transfer instructions, whether incorporated herein or provided
in a separate           written instruction), instrument, statement, certificate, request
or other           document furnished to it hereunder and believed by it to be genuine
and to have           been signed or presented by the proper Person, and shall have no
responsibility           for making inquiry as to, or for determining, the genuineness,
accuracy or           validity thereof, or of the authority of the Person signing or
presenting the           same, and (v) shall be authorized to distribute, at the Closing,
to Lead           Investor Counsel the fees of Lead Investor Counsel in connection with
the           negotiation and preparation of the Transaction Documents.
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| | (b)              Lead
Investor Counsel shall not be liable to anyone for any action taken or           omitted
to be taken by it hereunder, except in the case of Lead Investor           Counsels
gross negligence or willful misconduct in breach of the Lead           Investor Counsel
Duties. IN NO EVENT SHALL LEAD INVESTOR COUNSEL BE LIABLE FOR           INDIRECT,
PUNITIVE, SPECIAL OR CONSEQUENTIAL DAMAGE OR LOSS (INCLUDING BUT NOT           LIMITED TO
LOST PROFITS) WHATSOEVER, EVEN IF LEAD INVESTOR COUNSEL HAS BEEN           INFORMED OF
THE LIKELIHOOD OF SUCH LOSS OR DAMAGE AND REGARDLESS OF THE FORM OF           ACTION.
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| | (c)              The
Company and the Investors hereby indemnify and hold harmless Lead Investor
          Counsel from and against, any and all loss, liability, cost, damage and
expense,           including, without limitation, reasonable counsel fees and expenses,
which Lead           Investor Counsel may suffer or incur by reason of any action, claim
or           proceeding brought against Lead Investor Counsel arising out of or relating
to           the performance of the Lead Investor Counsel Duties, unless such action,
claim           or proceeding is the result of the willful misconduct, bad faith or gross
          negligence of Lead Investor Counsel.
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| | (d)              Lead
Investor Counsel has acted as legal counsel to the Lead Investor in           connection
with this Agreement and the other Transaction Documents, is merely           acting as a
stakeholder under this Agreement and is, therefore, hereby           authorized to
continue acting as legal counsel to Lead Investor including,           without
limitation, with regard to any dispute arising out of this Agreement,           the other
Transaction Documents, the Escrow Amount or any other matter. Each of           the
Company and the Investors hereby expressly consents to permit Lead Investor
          Counsel to represent the Lead Investor in connection with all matters relating
          to this Agreement, including, without limitation, with regard to any dispute
          arising out of this Agreement, the other Transaction Documents, the Escrow
          Amount or any other matter, and hereby waives any conflict of interest or
          appearance of conflict or impropriety with respect to such representation. Each
          of the Company and the Investors has consulted with its own counsel
specifically           about this Section 2 to the extent they deemed necessary,
and has entered           into this Agreement after being satisfied with such advice.
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| | (e)              Lead
Investor Counsel shall have the right at any time to resign for any reason           and
be discharged of its duties as escrow agent hereunder (including without
          limitation the Lead Investor Counsel Duties) by giving written notice of its
          resignation to the Company and the Lead Investor at least five (5) calendar
days           prior to the specified effective date of such resignation. All obligations
of           the Lead Investor Counsel hereunder shall cease and terminate on the
effective           date of its resignation and its sole responsibility thereafter shall
be to hold           the Escrow Amount, for a period of five (5) calendar days following
the           effective date of resignation, at which time,
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| | (i)                      Lead
Investor Counsel shall be entitled to receive from the Escrow Amount the
               Lead Investor Counsel Fees through and including the effective date of
               resignation; and
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| | (ii)                      if
a successor escrow agent shall have been appointed and have accepted such
               appointment in a writing to both the Company and the Lead Investor, then
upon                written notice thereof given to each of the Investors, the Lead
Investor Counsel                shall deliver the Escrow Amount to the successor escrow
agent, and upon such                delivery, Lead Investor Counsel shall have no further
liability or obligation;                or
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| | (iii)                      if
a successor escrow agent shall not have been appointed, for any reason
               whatsoever, Lead Investor Counsel shall at its option in its sole
discretion,                either (A) deliver the Escrow Amount to a court of competent
jurisdiction                selected by Lead Investor Counsel and give written notice
thereof to the Company                and the Investors, or (B) continue to hold Escrow
Amount in escrow pending                written direction from the Company and the Lead
Investor in form and formality                satisfactory to Lead Investor Counsel.
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| | (f)              In
the event that the Lead Investor Counsel shall be uncertain as to its duties           or
rights hereunder or shall receive instructions with respect to the Escrow
          Amount or any portion thereunder which, in its sole discretion, are in conflict
          either with other instructions received by it or with any provision of this
          Agreement, Lead Investor Counsel shall have the absolute right to suspend all
          further performance under this Agreement (except for the safekeeping of such
          Escrow Amount) until such uncertainty or conflicting instructions have been
          resolved to the Lead Investor Counsels sole satisfaction by final
judgment           of a court of competent jurisdiction, joint written instructions from
the           Company and the Lead Investor, or otherwise. In the event that any
controversy           arises between the Company and one or more of the Investors or any
other party           with respect to this Agreement or the Escrow Amount, the Lead
Investor Counsel           shall not be required to determine the proper resolution of
such controversy or           the proper disposition of the Escrow Amount, and shall have
the absolute right,           in its sole discretion, to deposit the Escrow Amount with
the clerk of a court           selected by the Lead Investor Counsel and file a suit in
interpleader in that           court and obtain an order from that court requiring all
parties involved to           litigate in that court their respective claims arising out
of or in connection           with the Escrow Amount. Upon the deposit by the Lead
Investor Counsel of the           Escrow Amount with the clerk of such court in
accordance with this provision,           the Lead Investor Counsel shall thereupon be
relieved of all further obligations           and released from all liability hereunder.
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| | (g)              The
provisions of this Section 2.2 shall survive any termination of this
          Agreement.
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2.3    
Closing. Upon confirmation that the conditions to closing specified herein have
been satisfied or duly waived by the Investors, (i) the Company shall deliver to Lead
Investor Counsel, in trust, certificates, registered in such name or names as the
Investors may designate, representing the Shares and certificates representing the
Warrants, with instructions that such Shares and certificates are to be held for release
to the Investors only upon payment in full of the Purchase Price to the Company by the
Investors and (ii) following receipt of such certificates, the Lead Investor shall
instruct Lead Investor Counsel to release the Purchase Price to the Company. On the date
(the Closing Date) the Company receives the Purchase Price, the
certificates representing the Shares and the Warrants shall be released to the Investors
(the Closing). The Closing of the purchase and sale of the Shares and
Warrants shall take place at the offices of Lowenstein Sandler PC, 1251 Avenue of the
Americas, 18th Floor, New York, New York, or at such other location and on such other
date as the Company and the Lead Investor shall mutually agree.

2.4    
Closing Deliveries.

| | (a)              At
the Closing, the Company shall deliver or cause to be delivered to each
          Investor the following (the Company Deliverables):
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| | (i)              a
certificate evidencing a number of Shares equal to such Investors
          Investment Amount divided by the Per Unit Purchase Price, registered in the
name           of such Investor;
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| | (ii)              a
Warrant, registered in the name of such Investor, pursuant to which such
          Investor shall have the right to acquire the number of shares of Common Stock
          equal to 75% of the number of Shares issuable to such Investor pursuant to Section
2.4(a)(i);
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| | (iii)              the
legal opinion of Company Counsel, in agreed form, addressed to the           Investors;
and
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| | (iv)              the
Registration Rights Agreement, duly executed by the Company.
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| | (b)              At
the Closing, each Investor shall deliver or cause to be delivered to the
          Company the following (the Investor Deliverables):
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| | (i)              its
Investment Amount, in United States dollars and in immediately available           funds,
by wire transfer to an account designated in writing by the Company for           such
purpose; and
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| | (ii)              the
Registration Rights Agreement, duly executed by such Investor.
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ARTICLE III.REPRESENTATIONS AND
WARRANTIES

3.1    
Representations and Warranties of the Company. The Company hereby makes the
following representations and warranties to each Investor as of the date of this
Agreement:

| | (a)    Subsidiaries.
The Company has no direct or indirect Subsidiaries other           than as specified in
the SEC Reports. Except as disclosed 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.           Neither the Company
nor any Subsidiary is party to any joint venture, nor has           any ownership
interest in any other entity other than as disclosed in the SEC           Reports under
the heading Collaborative Relationships.
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| | (b)    Organization
and Qualification. The Company and each Subsidiary are 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. The Company and each Subsidiary are duly           qualified to
conduct its respective businesses and are 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,
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 a Material Adverse Effect.
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| | (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 action on the part of the Company, it
          officers, directors and stockholders and no further action is required by the
          Company 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 such enforceability may be limited by applicable
bankruptcy,           insolvency, reorganization, moratorium, liquidation or similar laws
relating to,           or affecting generally the enforcement of, creditors rights
and remedies           or by other equitable principles of general application,
including, without           limitation, limitations on rights to indemnity and rights to
a jury trial.
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| | (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 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, or (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) to the Companys Knowledge,
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.
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| | (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 Registration Rights Agreement, (ii) filings
          required by state securities laws, (iii) the filing of a Notice of Sale of
          Securities on Form D with the Commission under Regulation D of the Securities
          Act, and (iv) those that have been made or obtained prior to the date of this
          Agreement.
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| | (f)    Issuance
of the Securities. The Securities 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.
The Company has reserved from its duly authorized capital stock the           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, and all shares of Common Stock           reserved for issuance
under the Companys various option and incentive           plans, is specified in
the SEC Reports. Except as specified in the SEC Reports           or Schedule 3.1(g), 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. Except as specified in the SEC
          Reports, 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.           All of the issued and outstanding shares of the Companys
capital stock           have been duly authorized and validly issued and are fully paid,
nonassessable           and were issued in full compliance with applicable state and
federal securities           law and any rights of third parties. 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           Investors) 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.
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| | (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 being collectively referred           to herein as
the SEC Reports and, together with the Schedules           to this
Agreement (if any), 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 GAAP applied on a consistent basis during
the           periods involved, 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 case of unaudited statements, to normal,
          immaterial, year-end audit adjustments.
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| | (i)    Material
Changes. Since the date of the latest audited financial           statements included
within the SEC Reports, except as specifically disclosed in           the SEC Reports and
except as set forth on Schedule 3.1(i), (i) there has           been no event,
occurrence or development that has had or that could reasonably           be expected to
result in a Material Adverse Effect, (ii) the Company has not           incurred any
liabilities (contingent or otherwise) other than (A) trade           payables, accrued
expenses and other liabilities 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 plans. The Company does not have
          pending before the Commission any request for confidential treatment of
          information.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11

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| | (j)    Litigation.
Except as set forth on Schedule 3.1(j), 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)           except as specifically
disclosed in the SEC Reports, could, if there were an           unfavorable decision,
individually or in the aggregate, have or reasonably be           expected to result in a
Material Adverse Effect; and to the Companys           Knowledge, no such Action is
threatened or contemplated. Neither the Company nor           any Subsidiary, nor any
director or officer thereof (in his or her capacity as           such), is or has been
the subject of any Action involving a claim of violation           of or liability under
federal or state securities laws or a claim of breach of           fiduciary duty, except
as specifically disclosed in the SEC Reports. There has           not been, and to the
Companys Knowledge, there is not pending any           investigation by the
Commission involving the Company or any current or former           director or officer
of the Company (in his or her capacity as such). 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           Companys
Knowledge, 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) to the Companys           Knowledge, is
in violation of any order of any court, arbitrator or governmental           body, or
(iii) to the Companys Knowledge, 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 and labor matters, except in each case as could not,
          individually or in the aggregate, 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 could not, individually or in the aggregate, have or           reasonably be
expected to result in a Material Adverse Effect, and neither the           Company nor
any Subsidiary has received any notice of proceedings relating to           the
revocation or modification of any such permits.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12

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| | (n)    Title
to Assets. The Company and the Subsidiaries have good and           marketable title
in fee simple to all real property owned by them that is           material to their
respective businesses and 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 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.
| | -----------------------------

| | (i)              Except
as set forth in Schedule 3.1(o), Company has not transferred any           rights
or interest in, or granted any exclusive license with respect to, any of           its
Intellectual Property, to any third party.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (ii)              All
Intellectual Property of the Company and its Subsidiaries is currently in
          compliance with all legal requirements (including timely filings, proofs and
          payments of fees) and is valid and enforceable. No Intellectual Property of the
          Company or its Subsidiaries which is necessary for the conduct of Companys
          and each of its Subsidiaries respective businesses as currently conducted
          or as currently proposed to be conducted 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 its Subsidiaries has
been           or is now involved in any interference, reissue, re-examination or
opposition           proceeding.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (iii)              All
of the licenses and sublicenses and consent, royalty or other agreements
          concerning Intellectual Property (including those entered into in connection
          with a Collaborative Relationship described in the SEC Reports) used in the
          conduct of Companys and each of its Subsidiaries respective businesses as
          currently conducted or as currently proposed to be conducted to which the
          Company or any subsidiary is a party or by which any of its 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 which 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, neither the Company nor
any other party thereto is in           material violation or breach of any such License
Agreement, and no action or           failure to act by the Company or any Subsidiary
constitutes (with or without due           notice or lapse of time or both) a material
default by the Company thereunder.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

13

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| | (iv)              The
Company and its Subsidiaries own or have the valid right to use all of the
          Intellectual Property that is necessary for the conduct of the Companys
          and each of its Subsidiaries respective businesses as currently conducted
          or as currently proposed to be conducted and for the ownership, maintenance and
          operation of the Companys and its Subsidiaries properties and
          assets, free and clear of all liens, encumbrances, adverse claims or
obligations           to license all such owned Intellectual Property and Confidential
Information,           other than licenses entered into in the ordinary course of the
Companys           and its Subsidiaries businesses. The Company and its
Subsidiaries have a           valid and enforceable right to use all third party
Intellectual Property and           Confidential Information used or held for use in the
respective businesses of           the Company and its Subsidiaries.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (v)              The
conduct of the Companys and its Subsidiaries businesses as
          currently conducted does not infringe or otherwise impair or conflict with
          (collectively, Infringe) any Intellectual Property rights of any
          third party or any confidentiality obligation owed to a third party, and, to
the           Companys Knowledge, the Intellectual Property and Confidential
Information           of the Company and its Subsidiaries which are necessary for the
conduct of           Companys and each of its Subsidiaries respective
businesses as           currently conducted or as currently proposed to be conducted are
not being           Infringed by any third party. There is no litigation or order pending
or           outstanding or, to the Companys Knowledge, threatened or imminent,
that           seeks to limit or challenge or that concerns the ownership, use, validity
or           enforceability of any Intellectual Property or Confidential Information of
the           Company and its Subsidiaries and the Companys and its Subsidiaries          use
of any Intellectual Property or Confidential Information owned by a third
          party, and, to the Companys Knowledge, there is no valid basis for the
          same.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (vi)              The
consummation of the transactions contemplated hereby and by the other
          Transaction Documents will not result in the alteration, loss, impairment of or
          restriction on the Companys or any of its Subsidiaries ownership or
          right to use any of the Intellectual Property or Confidential Information which
          is necessary for the conduct of Companys and each of its
          Subsidiaries respective businesses as currently conducted or as currently
          proposed to be conducted.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (vii)              The
Company and its Subsidiaries have taken reasonable steps to protect the           Companys
and its Subsidiaries rights in their Intellectual Property           and
Confidential Information. Each employee, consultant and contractor who has           had
access to Confidential Information which is necessary for the conduct of           Companys
and each of its Subsidiaries respective businesses as           currently conducted
or as currently proposed to be conducted has executed an           agreement to maintain
the confidentiality of such Confidential Information and           has executed
appropriate agreements that are substantially consistent with the           Companys
standard forms thereof. Except under confidentiality obligations,           there has
been no material disclosure of any of the Companys or its           Subsidiaries Confidential
Information to any third party.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (p)    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           Companys
Knowledge, 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           Companys
Knowledge, any entity in which any officer, director, or any such           employee has
a substantial interest or is an officer, director, trustee or           partner.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

14

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| | (q)    Certain
Fees. Except as described in Schedule 3.1(q), 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           this
Agreement. The Investors shall have no obligation with respect to any fees           or
with respect to any claims (other than such fees or commissions owed by an
          Investor pursuant to written agreements executed by such Investor which fees or
          commissions shall be the sole responsibility of such Investor) made by or on
          behalf of other Persons for fees of a type contemplated in this Section that
may           be due in connection with the transactions contemplated by this Agreement.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (r)    Investment
Company. The Company is not, and is not an Affiliate of, and           immediately
following the Closing will not have become, an investment           company within
the meaning of the Investment Company Act of 1940, as           amended.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (s)    Certain
Registration Matters. Assuming the accuracy of the           Investors representations
and warranties set forth in Section           3.2(b)-(e), no registration under
the Securities Act is required for the           offer and sale of the Shares and Warrant
Shares by the Company to the Investors           under the Transaction Documents. The
Company is eligible to register the resale           of its Common Stock for resale by
the Investors under Form SB-2 promulgated           under the Securities Act. Except as
specified in Schedule 3.1(s), 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (t)    Listing
and Maintenance Requirements. Except as specified in the SEC           Reports or
Schedule 3.1(t), the Company has not, in the two years preceding the           date
hereof, received notice from any Trading Market to the effect that the           Company
is not in compliance with the listing or maintenance requirements           thereof. 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           Trading Market on
which the Common Stock is currently listed or quoted. 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 shareholders of the           Company thereunder
is required for the Company to issue and deliver to the           Investors the
Securities contemplated by Transaction Documents.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

15

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| | (u)    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) or the laws of its           state of
incorporation that is or could become applicable to the Investors as a           result
of the Investors and the Company fulfilling their obligations or           exercising
their rights under the Transaction Documents, including without           limitation the
Companys issuance of the Securities and the Investors          ownership of
the Securities.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | (w)    No
Directed Selling Efforts or General Solicitation. Neither the Company           nor
any Person acting on its behalf has conducted any general solicitation or
          general advertising (as those terms are used in Regulation D) in connection
with           the offer or sale of any of the Securities.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (x)    No
Integrated Offering. Neither the Company nor any of its Affiliates,           nor any
Person acting on its or their behalf has, directly or indirectly, made           any
offers or sales of any Company security or solicited any offers to buy any
          security, under circumstances that would adversely affect reliance by the
          Company on Section 4(2) for the exemption from registration for the
transactions           contemplated hereby or would require registration of the
Securities under the           Securities Act.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (y)    Questionable
Payments.Neither the Company           nor any of its
Subsidiaries nor, to the Companys Knowledge, any of their           respective
current or former stockholders, directors, officers, employees,           agents or other
Persons acting on behalf of the Company or any Subsidiary, has           on behalf of the
Company or any Subsidiary or in connection with their           respective businesses:
(i) used any corporate funds for unlawful contributions,           gifts, entertainment
or other unlawful expenses relating to political activity;           (ii) made any direct
or indirect unlawful payments to any governmental officials           or employees from
corporate funds; (iii) established or maintained any unlawful           or unrecorded
fund of corporate monies or other assets; (iv) made any false or           fictitious
entries on the books and records of the Company or any Subsidiary; or           (v) made
any unlawful bribe, rebate, payoff, influence payment, kickback or           other
unlawful payment of any nature.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

16

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| | (z)    Internal
Controls. The Company is in material compliance with the           provisions of the
Sarbanes-Oxley Act of 2002 currently applicable to the           Company. The Company and
the 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 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-14 and 15d-14) for           the Company and designed
such disclosure controls and procedures to ensure that           material information
relating to the Company, including the Subsidiaries, is           made known to the
certifying officers by others within those entities,           particularly during the
period in which the Companys most recently filed           period report under the
Exchange Act, as the case may be, is being prepared. The           Companys
certifying officers have evaluated the effectiveness of the           Companys
controls and procedures as of a date within 90 days prior to the           filing date of
the most recently filed periodic report under the Exchange Act           (such date, the
Evaluation Date). The Company presented in           its most recently
filed periodic report under the Exchange Act the conclusions           of the certifying
officers about the effectiveness of the disclosure controls           and procedures
based on their evaluations as of the Evaluation Date. Since the           Evaluation
Date, there have been no significant changes in the Companys           internal
controls (as such term is defined in Item 308(c) of Regulation S-K) or,           to the
Companys Knowledge, in other factors that could significantly           affect the
Companys internal controls. The Company maintains and will           continue to
maintain a standard system of accounting established and           administered in
accordance with GAAP and the applicable requirements of the           Exchange Act.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (aa)    Environmental
Matters. To the Companys Knowledge, neither the           Company nor any
Subsidiary is in violation of any statute, rule, regulation,           decision or order
of any governmental agency or body or any court, domestic or           foreign, relating
to the use, disposal or release of hazardous or toxic           substances or relating to
the protection or restoration of the environment or           human exposure to hazardous
or toxic substances (collectively, Environmental Laws). Neither the
Company nor any Subsidiary           owns or operates any real property contaminated with
any substance that is           subject to any Environmental Laws, is liable for any
off-site disposal or           contamination pursuant to any Environmental Laws, and is
subject to any claim           relating to any Environmental Laws, which violation,
contamination, liability or           claim has had or could reasonably be expected to
have a Material Adverse Effect,           individually or in the aggregate; and there is
no pending or, to the           Companys Knowledge, threatened investigation that
might lead to such a           claim.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (bb)    Tax
Matters. The Company and each Subsidiary has filed for an extension           of the
time to file its 2002 income tax returns and has not filed its 2003           income tax
returns. The charges, accruals and reserves on the books of the           Company in
respect of taxes for all fiscal periods are adequate in all material           respects,
and there are no material unpaid assessments against the Company or           any
Subsidiary nor, to the Companys Knowledge, any basis for the           assessment
of any additional taxes, penalties or interest for any fiscal period           or audits
by any federal, state or local taxing authority except for any           assessment which
is not material to the Company and its Subsidiaries, taken as a           whole. All
taxes and other assessments and levies that the Company or any           Subsidiary is
required to withhold or to collect for payment have been duly           withheld and
collected and paid to the proper governmental entity or third party           when due.
There are no tax liens or claims pending or, to the Companys           Knowledge,
threatened against the Company or any Subsidiary or any of their           respective
assets or property. There are no outstanding tax sharing agreements           or other
such arrangements between the Company and any Subsidiary or other           corporation
or entity.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

17

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| | (cc)    Insurance
Coverage. The Company and each Subsidiary maintains in full           force and
effect insurance coverage that is customary for comparably situated           companies
for the business being conducted and properties owned or leased by the           Company
and each Subsidiary, and the Company reasonably believes such insurance
          coverage to be adequate against all liabilities, claims and risks against which
          it is customary for comparably situated companies to insure.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (dd)    Disclosures.
The Company and each Person acting on its behalf has           identified for each
Investor any information that constitutes or might           constitute material,
non-public information that has been disclosed to such           Investor in connection
with this transaction and that such information must           remain confidential until
such time as the Company publicly discloses it. The           written materials delivered
to the Investors in connection with the transactions           contemplated by the
Transaction Documents do not contain any untrue statement of           a material fact or
omit to state a material fact necessary in order to make the           statements
contained therein, in light of the circumstances under which they           were made,
not misleading.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

3.2    
Representations and Warranties of the Investors. Each Investor hereby, for itself
and for no other Investor, represents and warrants to the Company as follows:

| | (a)    Organization;
Authority. Such Investor 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 Investor of the transactions           contemplated by
this Agreement has been duly authorized by all necessary           corporate or, if such
Investor is not a corporation, such partnership, limited           liability company or
other applicable like action, on the part of such Investor.           Each of this
Agreement and the Registration Rights Agreement has been duly           executed by such
Investor, and when delivered by such Investor in accordance           with terms hereof,
will constitute the valid and legally binding obligation of           such Investor,
enforceable against it in accordance with its terms, except as           such
enforceability may be limited by applicable bankruptcy, insolvency,
          reorganization, moratorium, liquidation or similar laws relating to, or
          affecting generally the enforcement of, creditors rights and remedies or
          by other equitable principles of general application, including, without
          limitation, limitations on rights to indemnity or rights to a jury trial.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b)    Investment
Intent. Such Investor 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 Investors right at all times to sell or           otherwise dispose of all
or any part of such Securities 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 Investor
to hold the Securities for any period of time. Such           Investor is acquiring the
Securities hereunder in the ordinary course of its           business. Such Investor does
not have any agreement or understanding, directly           or indirectly, with any
Person to distribute any of the Securities.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

18

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| | (c)    Investor
Status. At the time such Investor was offered the Securities, it           was, and
at the date hereof it is, and on each date on which it exercises           Warrants it
will be, an accredited investor as defined in Rule           501(a) under the
Securities Act. Such Investor is not a registered broker-dealer           under Section
15 of the Exchange Act.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (d)    General
Solicitation. Such Investor is not purchasing the Securities as a           result of
any advertisement, article, notice or other communication regarding           the
Securities published in any newspaper, magazine or similar media or           broadcast
over television or radio or presented at any seminar or any other           general
solicitation or general advertisement.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (e)    Access
to Information. Such Investor acknowledges that it has reviewed           the
Disclosure Materials and the Private Placement Memorandum of the Company,           dated
May 6, 2004 (the PPM), 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 Shares 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 Investor or its representatives
or counsel shall modify, amend           or affect such Investors right to rely on
the truth, accuracy and           completeness of the Disclosure Materials, the PPM and
the Companys           representations and warranties contained in the Transaction
Documents. Such           Investor acknowledges that it has been advised that Duane J.
Roth, the           Companys Chief Executive Officer, is the brother of Byron C.
Roth of Roth           Capital Partners, LLC, the placement agent for this transaction
who will receive           a fee in connection with its services in connection with this
transaction, and           that Theodore D. Roth, a director of the Company, is an
employee of Roth Capital           Partners, LLC.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (f)              Certain
Trading Activities. Such Investor has not directly or indirectly, nor           has any
Person acting on behalf of or pursuant to any understanding with such           Investor,
engaged in any transactions in the securities of the Company           (including,
without limitation, any Short Sales involving the Companys           securities)
since the earlier to occur of (1) the time that such Investor was           contacted by
the Company or any other Person regarding an investment in the           Company and (2)
the twenty-fifth (25th) day prior to the date of this           Agreement.
Such Investor covenants that neither it nor any Person acting on its           behalf or
pursuant to any understanding with it will engage in any transactions           in the
securities of the Company (including Short Sales) prior to the time that           the
transactions contemplated by this Agreement are publicly disclosed.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (g)    Independent
Investment Decision. Such Investor has independently           evaluated the merits
of its decision to purchase Securities pursuant to the           Transaction Documents,
and such Investor confirms that it has not relied on the           advice of any other
Investors business and/or legal counsel in making such           decision. Such
Investor has not relied on the business or legal advice of Roth           Capital
Partners, LLC or any of its agents, counsel or Affiliates in making its
          investment decision hereunder, and confirms that none of such Persons has made
          any representations or warranties to such Investor in connection with the
          transactions contemplated by the Transaction Documents.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

19

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The Company acknowledges and agrees
that no Investor has made or makes 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)    Securities may only be disposed of in compliance with state and federal 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 an Investor 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, until           such time as
they are not required under Section 4.1(c):
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (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           a sale
or transfer of such Securities pursuant to an effective registration           statement
(including the Registration Statement), or (ii) following a sale or           transfer of
such Shares or Warrant Shares pursuant to Rule 144 (assuming the           transferor is
not an Affiliate of the Company), or (iii) while such Shares or           Warrant Shares
are eligible for sale under Rule 144(k). 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

20

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4.2    
Furnishing of Information. As long as any Investor owns Securities, the Company
covenants to use reasonable best efforts 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 Investor
owns Securities, if the Company is not required to file reports pursuant to such laws, it
will use reasonable best efforts to prepare and furnish to the Investors and make
publicly available in accordance with Rule 144(c) such information as is required for the
Investors 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 the 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 would 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 Investors, or that would be integrated with the offer or sale of the Securities for
purposes of the rules and regulations of any Trading Market in a manner that would
require stockholder approval of the sale of the securities to the Investors.

4.4    
Subsequent Registrations. Other than pursuant to the Registration Statement, prior
to the Effective Date, the Company may not file any registration statement (other than on
Form S-8) with the Commission with respect to any securities of the Company.

4.5    
Limitation on Issuance of Future Priced Securities. During the six months
following the Closing Date, the Company shall not issue any Future Priced Securities as
such term is described by NASD IM-4350-1.

4.6    
Non-Public Information. Each Investor covenants and agrees that until such time as
the Company publicly discloses any information provided to such Investor in connection
with this transaction which the Company identified as material, non-public information at
the time of disclosure, such Investor will maintain the confidentiality of such
information. Information provided to Investors subsequent to the Closing shall be
governed by Section 5(a) of the Registration Rights Agreement.

4.7    
Listing of Securities. The Company agrees, (i) if the Company applies to have the
Common Stock traded on any other Trading Market, it will include in such application the
Shares and Warrant Shares, and will take such other action as is necessary or desirable
to cause the Shares and Warrant Shares to be listed on such other Trading Market as
promptly as possible, and (ii) it will take all action reasonably necessary to continue
the listing and trading of its Common Stock on a Trading Market and will comply in all
material respects with the Companys reporting, filing and other obligations under
the bylaws or rules of the Trading Market.

21

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4.8    
Use of Proceeds. The Company will use the net proceeds from the sale of the
Securities hereunder to satisfy manufacturing expenses, general and administrative
expenses, research and development, general working capital purposes and to satisfy
existing payables.

4.9    
No Conflicting Agreements. The Company will not take any action, enter into any
agreement or make any commitment that would conflict or interfere in any material respect
with the Companys obligations to the Investors under the Transaction Documents.

4.10    
    Insurance.  The Company shall not materially reduce the insurance coverages described
in Section 3.1(cc).

4.11    
Compliance with Laws. The Company will comply in all material respects with all
applicable laws, rules, regulations, orders and decrees of all governmental authorities.

ARTICLE V.CONDITIONS PRECEDENT TO
CLOSING; TERMINATION

5.1    
Conditions Precedent to the Obligations of the Investors to Purchase Securities.
The obligation of each Investor to acquire Securities at the Closing is subject to the
satisfaction or waiver by such Investor (solely for such Investor), at or before the
Closing, of each of the following conditions:

| | (a)    Representations
and Warranties. The representations and warranties made           by the Company in
ARTICLE IIIhereof qualified as to materiality shall be           true and correct
at all times prior to and on the Closing Date, except to the           extent any such
representation or warranty expressly speaks as of an earlier           date, in which
case such representation or warranty shall be true and correct as           of such
earlier date, and, the representations and warranties made by the           Company in
Section 3 hereof not qualified as to materiality shall be true and           correct in
all material respects at all times prior to and on the Closing Date,           except to
the extent any such representation or warranty expressly speaks as of           an
earlier date, in which case such representation or warranty shall be true and
          correct in all material respects as of such earlier date. The Company shall
have           performed in all material respects all obligations and conditions herein
          required to be performed or observed by it on or prior to the Closing Date;
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b)    Consents.
The Company shall have obtained any and all consents, permits,           approvals,
registrations and waivers necessary or appropriate for consummation           of the
purchase and sale of the Securities and the consummation of the other
          transactions contemplated by the Transaction Documents, all of which shall be
in           full force and effect;
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c)    Performance.
The Company shall have performed, satisfied and complied in           all material
respects with all covenants, agreements and conditions required by           the
Transaction Documents to be performed, satisfied or complied with by it at           or
prior to the Closing;
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

22

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| | (d)    No
Injunction. No statute, rule, regulation, executive order, decree,           ruling
or injunction shall have been enacted, entered, promulgated or endorsed           by any
court or governmental authority of competent jurisdiction that prohibits           the
consummation of any of the transactions contemplated by the Transaction
          Documents;
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (e)    No
Suspensions of Trading in Common Stock; Listing. Trading in the Common
          Stock shall not have been suspended by the Commission or any Trading Market
          (except for any suspensions of trading of not more than one Trading Day solely
          to permit dissemination of material information regarding the Company) at any
          time since the date of execution of this Agreement, and the Common Stock shall
          have been at all times since such date listed for trading on a Trading Market;
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (f)    Closing
Certificate. The Company shall have delivered a certificate,           executed on
behalf of the Company by its Chief Executive Officer or its Chief           Financial
Officer, dated as of the Closing Date, certifying to the fulfillment           of the
conditions specified in subsections (a), (b), (c), (d), and (e) of this Section 5.1;
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (g)              The
Company shall have delivered a Certificate, executed on behalf of the           Company
by its Secretary, dated as of the Closing Date, certifying the           resolutions
adopted by the Board of Directors of the Company approving the           transactions
contemplated by this Agreement and the other Transaction Documents           and the
issuance of the Securities, certifying the current versions of the           Certificate
of Incorporation and Bylaws of the Company and certifying as to the           signatures
and authority of persons signing the Transaction Documents and           related
documents on behalf of the Company;
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (h)    Company
Deliverables. The Company shall have delivered the Company           Deliverables in
accordance with Section 2.4(a); and
| | ---------------------------------------------------------------------------------------------------------------------------------------

| | (i)    Timing.
The Closing shall have occurred no later than June 30, 2004.
| | ---------------------------------------------------------------------------

5.2    
Conditions Precedent to the Obligations of the Company to sell Securities. The
obligation of the Company to sell Securities at the Closing is subject to the
satisfaction or waiver by the Company, at or before the Closing, of each of the following
conditions:

| | (a)    Representations
and Warranties. The representations and warranties of           each Investor
contained herein shall be true and correct in all material           respects as of the
date when made and as of the Closing Date as though made on           and as of such
date;
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b)    Performance.
Each Investor shall have performed, satisfied and complied           in all material
respects with all covenants, agreements and conditions required           by the
Transaction Documents to be performed, satisfied or complied with by such
          Investor at or prior to the Closing;
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c)    No
Injunction. No statute, rule, regulation, executive order, decree,           ruling
or injunction shall have been enacted, entered, promulgated or endorsed           by any
court or governmental authority of competent jurisdiction that prohibits           the
consummation of any of the transactions contemplated by the Transaction
          Documents;
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

23

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| | (d)    Investors
Deliverables. Each Investor shall have delivered its Investors           Deliverables
in accordance with Section 2.4(b); and
| | ---------------------------------------------------------------------------------------------------------------------------------------------

| | (e)    Timing.
The Closing shall have occurred no later than May [ ], 2004.
| | ---------------------------------------------------------------------------

5.3    
Termination of Obligations to Effect Closing; Effects.

| | (a)              The
obligations of the Company, on the one hand, and the Investors, on the other
          hand, to effect the Closing shall terminate as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (i)              Upon
the mutual written consent of the Company and the Investors;
| | ----------------------------------------------------------------------------------

| | (ii)              By
the Company if any of the conditions set forth in Section 5.2 shall           have
become incapable of fulfillment, and shall not have been waived by the           Company;
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (iii)              By
an Investor (with respect to itself only) if any of the conditions set forth           in
Section 5.1 shall have become incapable of fulfillment, and shall not
          have been waived by the Investor; or
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (iv)              By
either the Company or any Investor (with respect to itself only) if the           Closing
has not occurred on or prior to June 30, 2004;
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| | provided,
however, that, except in the case of clause (i) above, the party seeking to
terminate its obligation to effect the Closing shall not then be in breach of any of its
representations, warranties, covenants or agreements contained in this Agreement or the
other Transaction Documents if such breach has resulted in the circumstances giving rise
to such partys seeking to terminate its obligation to effect the Closing.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b)    In
the event of termination by the Company or any Investor of its obligations to
          effect the Closing pursuant to this Section 5.3, written notice thereof
          shall forthwith be given to the Lead Investor and the Lead Investor shall have
          the right to terminate the obligations of the Investors to effect the Closing
          upon written notice to the Company and the other Investors. Nothing in this Section
5.3 shall be deemed to release any party from any liability for           any breach
by such party of the terms and provisions of this Agreement or the           other
Transaction Documents or to impair the right of any party to compel           specific
performance by any other party of its obligations under this Agreement           or the
other Transaction Documents.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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ARTICLE VI.SURVIVAL AND
INDEMNIFICATION.

6.1    
Survival. The representations, warranties, covenants and agreements contained in
this Agreement shall survive the Closing of the transactions contemplated by this
Agreement.

6.2    
Indemnification. The Company agrees to indemnify and hold harmless each Investor
and its Affiliates and their respective directors, officers, employees and agents from
and against any and all losses, claims, damages, liabilities and expenses (including
without limitation reasonable attorney fees and disbursements and other expenses incurred
in connection with investigating, preparing or defending any action, claim or proceeding,
pending or threatened and the costs of enforcement thereof) (collectively, Losses)
to which such Person may become subject as a result of any breach of representation,
warranty, covenant or agreement made by or to be performed on the part of the Company
under the Transaction Documents, and will reimburse any such Person for all such amounts
as they are incurred by such Person; provided, however, that no Indemnified Person shall
be entitled to bring a claim or claims for indemnification hereunder unless and until the
aggregate amount of such claim or claims equals or exceeds $50,000.

6.3    
Conduct of Indemnification Proceedings.Promptly after
receipt by any Person (the Indemnified Person) of notice of any
demand, claim or circumstances which would or might give rise to a claim or the
commencement of any action, proceeding or investigation in respect of which indemnity may
be sought pursuant to Section 6.2, such Indemnified Person shall promptly notify
the Company in writing and the Company shall assume the defense thereof, including the
employment of counsel reasonably satisfactory to such Indemnified Person, and shall
assume the payment of all fees and expenses; provided, however,that
the failure of any Indemnified Person so to notify the Company shall not relieve the
Company of its obligations hereunder except to the extent that the Company is materially
prejudiced by such failure to notify. In any such proceeding, any Indemnified Person
shall have the right to retain its own counsel, but the fees and expenses of such counsel
shall be at the expense of such Indemnified Person unless: (i) the Company and the
Indemnified Person shall have mutually agreed to the retention of such counsel; or (ii)
in the reasonable judgment of counsel to such Indemnified Person (A) representation of
both parties by the same counsel would be inappropriate due to actual or potential
differing interests between them, or (B) one or more defenses is/are available to such
Indemnified Person that is/are not available to the Company. The Company shall not be
liable for any settlement of any proceeding effected without its written consent, which
consent shall not be unreasonably withheld, delayed or conditioned, but if settled with
such consent, or if there be a final judgment for the plaintiff, the Company shall
indemnify and hold harmless such Indemnified Person from and against any loss or
liability (to the extent stated above) by reason of such settlement or judgment. Without
the prior written consent of the Indemnified Person, which consent shall not be
unreasonably withheld, the Company shall not effect any settlement of any pending or
threatened proceeding in respect of which any Indemnified Person is or could have been a
party and indemnity could have been sought hereunder by such Indemnified Party, unless
such settlement includes an unconditional release of such Indemnified Person from all
liability arising out of such proceeding.

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ARTICLE VII.MISCELLANEOUS

7.1    
Fees and Expenses. The parties hereto shall pay their own costs and expenses in
connection herewith, except that the Company shall pay the reasonable fees and expenses
of Lead Investor Counsel, not to exceed twenty thousand dollars ($20,000). Such expenses
shall be paid not later than the Closing or the termination of this Agreement. The
Company shall reimburse the Investors upon demand for all reasonable out-of-pocket
expenses incurred by the Investors, including without limitation reimbursement of
attorneys fees and disbursements, in connection with any amendment, modification or
waiver of this Agreement or the other Transaction Documents, not to exceed ten thousand
dollars ($10,000). In the event that legal proceedings are commenced by any party to this
Agreement against another party to this Agreement in connection with this Agreement or
the other Transaction Documents, the party or parties which do not prevail in such
proceedings shall severally, but not jointly, pay their pro rata share of the reasonable
attorneys fees and other reasonable out-of-pocket costs and expenses incurred by
the prevailing party in such proceedings. The Company shall pay all stamp and other taxes
and duties levied in connection with the sale of the Shares.

7.2    
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 and contemporaneous agreements,
understandings, discussions and representations, oral or written, with respect to such
matters, which the parties acknowledge have been merged into such documents, exhibits and
schedules.

7.3    
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 (provided the sender receives a
machine-generated confirmation of successful transmission) at the facsimile number
specified in this Section prior to 6:30 p.m. (New York City time) on a Trading Day, (b)
the next Trading 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 Trading Day or later than 6:30 p.m. (New York City time) on any Trading Day, (c)
the Trading 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: | Alliance Pharmaceutical Corp.     
|                   | 6175 Lusk Boulevard               
|                   | San Diego, California 92121       
|                   | Facsimile No.: (858) 410-5201     
|                   | Telephone No.: (858) 410-5200     
|                   | Attention: Chief Financial Officer

26

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|                   |                                                    
|------------------ | ---------------------------------------------------
|With a copy to:    | Foley & Lardner LLP                                
|                   | 402 W. Broadway                                    
|                   | San Diego, CA 92101                                
|                   | Facsimile No.: (619) 234-3510                      
|                   | Attention: Kenneth D. Polin, Esq.                  
|If to an Investor: | To the address set forth under such Investor's name
|                   | on the signature pages hereof;                     
|With a copy to:    | Lowenstein Sandler PC                              
|                   | 1251 Avenue of the Americas, 18th Floor            
|                   | New York, New York 10020                           
|                   | Attn: Steven E. Siesser, Esq.                      
|                   | Fax: (973) 597-2507                                

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

7.4    
Amendments; Waivers; No Additional Consideration. No provision of this Agreement
may be waived or amended except in a written instrument signed by the Company and the
Investors holding a majority of the Shares. 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. No consideration shall be offered or paid to any Investor to amend or consent to a
waiver or modification of any provision of any Transaction Document unless the same
consideration is also offered to all Investors who then hold Shares.

7.5    
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 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.

7.6    
Successors and Assigns. This Agreement shall be binding upon and inure to the
benefit of the parties and their successors and permitted assigns. Any Investor may
assign any or all of its rights under this Agreement to any Person to whom such Investor
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 Investors.

27

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7.7    
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, and except for Lead Investor
Counsel, which is an express intended third party beneficiary of this Agreement.

7.8    
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 New York, 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) shall be commenced exclusively in the New
York Courts. Each party hereto hereby irrevocably submits to the exclusive jurisdiction
of the New York 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 New York 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 attorneys fees and other costs and expenses incurred with the
investigation, preparation and prosecution of such Proceeding.

7.9    
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.

7.10    
Severability. If any provision of this Agreement is held to be invalid, illegal 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, legal and enforceable provision that is a
reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute
provision in this Agreement.

28

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7.11    
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.

7.12    
Remedies. In addition to being entitled to exercise all rights provided herein or
granted by law, including recovery of damages, each of the Investors 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.

7.13    
Independent Nature of Investors Obligations and Rights. The obligations of
each Investor under any Transaction Document are several and not joint with the
obligations of any other Investor, and no Investor shall be responsible in any way for
the performance of the obligations of any other Investor under any Transaction Document.
The decision of each Investor to purchase Securities pursuant to the Transaction
Documents has been made by such Investor independently of any other Investor. Nothing
contained herein or in any Transaction Document, and no action taken by any Investor
pursuant thereto, shall be deemed to constitute the Investors as a partnership, an
association, a joint venture or any other kind of entity, or create a presumption that
the Investors are in any way acting in concert or as a group with respect to such
obligations or the transactions contemplated by the Transaction Documents. Each Investor
acknowledges that no other Investor has acted as agent for such Investor in connection
with making its investment hereunder and that no Investor will be acting as agent of such
Investor in connection with monitoring its investment in the Securities or enforcing its
rights under the Transaction Documents. Each Investor 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 Investor to be joined as an additional party in any proceeding for such
purpose. The Company acknowledges that each of the Investors has been provided with the
same Transaction Documents for the purpose of closing a transaction with multiple
Investors and not because it was required or requested to do so by any Investor.

29

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7.14    
Limitation of Liability. Notwithstanding anything herein to the contrary, the
Company acknowledges and agrees that the liability of an Investor arising directly or
indirectly, under any Transaction Document of any and every nature whatsoever shall be
satisfied solely out of the assets of such Investor, and that no trustee, officer, other
investment vehicle or any other Affiliate of such Investor or any investor, shareholder
or holder of shares of beneficial interest of such a Investor shall be personally liable
for any liabilities of such Investor.

[REMAINDER OF PAGE
INTENTIONALLY LEFT BLANKSIGNATURE PAGES FOLLOW]

30

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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.

| | ALLIANCE PHARMACEUTICAL CORP.
| | -----------------------------
| | By:                          
| |                              
| |                              

[REMAINDER OF PAGE
INTENTIONALLY LEFT BLANKSIGNATURE PAGES FOR
INVESTORS FOLLOW]

31

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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.

| | NAME OF INVESTOR
| | ----------------
| |                 

| | AUTHORIZED SIGNATORY
| | --------------------
| |                     
| | By:                 
| |                     
| |                     

| |                      
| | ---------------------
| |                      
| | Investment Amount:  $

| | ADDRESS FOR NOTICE
| | ------------------
| |                   
| | c/o:              
| | Street:           
| | City/State/Zip:   
| | Attention:        
| | Tel:              
| | Fax:              

| | DELIVERY INSTRUCTIONS
| | ---------------------
| |                      
| | c/o:                 
| | Street:              
| | City/State/Zip:      
| | Attention:           
| | Tel:                 
| | Fax:                 

32

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# EXHIBIT A

Lead Investor Counsel
Wire InstructionsFor Purchase Price

Wire Room of: PNC Bank New Jersey

ABA # 031207607

|For credit to: | Lowenstein
Sandler PCAttorney Trust Account
|-------------- | -------------------------------------------

Account # 8100612350

For International wires please use
SWIFT Code: PNCCUS33

Description:  Client Number  14987/4
(Alliance Pharmaceuticals)

33