Exhibit
10.1


 


NOTE AND
WARRANT PURCHASE


 


AGREEMENT


 


 


Dated as
of October 28, 2004


 


 


by and
among


 


 


COMMUNICATION
INTELLIGENCE CORPORATION


 


 


and


 


 


THE
PURCHASERS LISTED ON EXHIBIT A


 





















 


TABLE OF
CONTENTS


 


	
  ARTICLE I

  	
  Purchase
  and Sale of Notes and Warrants

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Section
  1.1

  	
  Purchase
  and Sale of Notes and Warrants.

  	
   

  
	
   

  	
  Section 1.2

  	
  Purchase Price and Closing

  	
   

  
	
   

  	
  Section 1.3

  	
  Conversion Shares / Warrant Shares

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE II

  	
  Representations
  and Warranties

  	
   

  
	
   

  	
  Section 2.1

  	
  Representations and Warranties of the
  Company

  	
   

  
	
   

  	
  Section 2.2

  	
  Representations and Warranties of the
  Purchasers

  	
   

  
	
   

  	
  Section 2.3

  	
  Representations and Warranties of Offshore
  Purchaser

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE III

  	
  Covenants

  	
   

  
	
   

  	
  Section 3.1

  	
  Securities Compliance

  	
   

  
	
   

  	
  Section 3.2

  	
  Registration and Listing

  	
   

  
	
   

  	
  Section 3.3

  	
  Inspection Rights

  	
   

  
	
   

  	
  Section 3.4

  	
  Compliance with Laws

  	
   

  
	
   

  	
  Section 3.5

  	
  Keeping of Records and Books of Account

  	
   

  
	
   

  	
  Section 3.6

  	
  Reporting Requirements

  	
   

  
	
   

  	
  Section 3.7

  	
  Other Agreements

  	
   

  
	
   

  	
  Section 3.8

  	
  Subsequent Financings;
  Right of First Refusal

  	
   

  
	
   

  	
  Section 3.9

  	
  Use of Proceeds

  	
   

  
	
   

  	
  Section 3.10

  	
  Reporting Status

  	
   

  
	
   

  	
  Section 3.11

  	
  Disclosure of Transaction

  	
   

  
	
   

  	
  Section 3.12

  	
  Disclosure of Material Information

  	
   

  
	
   

  	
  Section 3.13

  	
  Pledge of Securities

  	
   

  
	
   

  	
  Section
  3.14

  	
  Registration
  Statements

  	
   

  
	
   

  	
  Section
  3.15

  	
  Amendments

  	
   

  
	
   

  	
  Section
  3.16

  	
  Distributions

  	
   

  
	
   

  	
  Section
  3.17

  	
  Reservation
  of Shares

  	
   

  
	
   

  	
  Section
  3.18

  	
  Transfer
  Agent Instructions

  	
   

  
	
   

  	
  Section
  3.19

  	
  Disposition
  of Assets

  	
   

  
	
   

  	
  Section
  3.20

  	
  Cornell
  Capital Partners, L.P. Indebtedness

  	
   

  
	
   

  	
  Section
  3.21

  	
  Regulation
  S

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE
  IV

  	
  Conditions

  	
   

  
	
   

  	
  Section
  4.1

  	
  Conditions
  Precedent to the Obligation of the Company to Close and to Sell the
  Securities

  	
   

  
	
   

  	
  Section
  4.2

  	
  Conditions
  Precedent to the Obligation of the Purchasers to Close and to Purchase the
  Securities

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE V

  	
  Certificate Legend

  	
   

  
	
   

  	
  Section
  5.1

  	
  Legend

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  ARTICLE
  VI

  	
  Indemnification

  	
   

  
	
   

  	
  Section
  6.1

  	
  General
  Indemnity

  	
   

  
	
   

  	
  Section
  6.2

  	
  Indemnification
  Procedure

  	
   

  
					



 





















 


	
  ARTICLE
  VII

  	
  Miscellaneous

  	
   

  
	
   

  	
  Section
  7.1

  	
  Fees
  and Expenses

  	
   

  
	
   

  	
  Section
  7.2

  	
  Specific
  Performance; Consent to Jurisdiction; Venue.

  	
   

  
	
   

  	
  Section
  7.3

  	
  Entire
  Agreement; Amendment

  	
   

  
	
   

  	
  Section
  7.4

  	
  Notices

  	
   

  
	
   

  	
  Section
  7.5

  	
  Waivers

  	
   

  
	
   

  	
  Section
  7.6

  	
  Headings

  	
   

  
	
   

  	
  Section
  7.7

  	
  Successors
  and Assigns

  	
   

  
	
   

  	
  Section
  7.8

  	
  No
  Third Party Beneficiaries

  	
   

  
	
   

  	
  Section
  7.9

  	
  Governing
  Law

  	
   

  
	
   

  	
  Section
  7.10

  	
  Survival

  	
   

  
	
   

  	
  Section
  7.11

  	
  Counterparts

  	
   

  
	
   

  	
  Section
  7.12

  	
  Publicity

  	
   

  
	
   

  	
  Section
  7.13

  	
  Severability

  	
   

  
	
   

  	
  Section
  7.14

  	
  Further
  Assurances

  	
   

  
					



 





















 


NOTE AND WARRANT PURCHASE AGREEMENT


 


This NOTE AND WARRANT PURCHASE AGREEMENT dated as of October
28, 2004 (this “Agreement”) by and between Communication Intelligence
Corporation, a Delaware corporation (the “Company”), and each of the
purchasers of the convertible promissory notes of the Company whose names are
set forth on Exhibit A attached hereto (each a “Purchaser” and
collectively, the “Purchasers”).


 


The parties hereto agree as follows:


 


ARTICLE I


 


PURCHASE AND SALE OF NOTES AND WARRANTS


 


Section 1.1             Purchase
and Sale of Notes and Warrants.


 


(a)           Upon
the following terms and conditions, the Company shall issue and sell to the
Purchasers, and the Purchasers shall purchase from the Company, convertible
promissory notes in the aggregate principal amount of up to Four Million Six
Hundred Twenty Thousand Dollars ($4,620,000) bearing interest at the rate of
seven percent (7%) per annum, convertible into shares of the Company’s common
stock, par value $0.01 per share (the “Common Stock”), in substantially
the form attached hereto as Exhibit B (the “Notes”).  The Company and the Purchasers are executing
and delivering this Agreement in accordance with and in reliance upon the
exemption from securities registration afforded by Section 4(2) of the U.S.
Securities Act of 1933, as amended, and the rules and regulations promulgated
thereunder (the “Securities Act”), including Regulation D (“Regulation
D”) and Regulation S (“Regulation S”), and/or upon such other
exemption from the registration requirements of the Securities Act as may be
available with respect to any or all of the investments to be made hereunder.


 


(b)           Upon
the following terms and conditions, each of the Purchasers shall be issued
Warrants, in substantially the form attached hereto as Exhibit C (the “Warrants”),
to purchase the number of shares of Common Stock set forth opposite such
Purchaser’s name on Exhibit A attached hereto.  The Warrants shall have an exercise price
equal to the Warrant Price (as defined in the Warrants) and shall be
exercisable as stated therein.  The
Warrants shall expire five (5) years from the Closing Date (as defined below).


 


Section 1.2             Purchase Price and Closing.  Subject to the terms and conditions hereof,
the Company agrees to issue and sell to the Purchasers and, in consideration of
and in express reliance upon the representations, warranties, covenants, terms
and conditions of this Agreement, the Purchasers, severally but not jointly,
agree to purchase the Notes and Warrants for an aggregate purchase price of up
to Four Million Six Hundred Twenty Thousand Dollars ($4,620,000) (the “Purchase
Price”).  The closing of the purchase
and sale of the Notes and Warrants to be acquired by the Purchasers from the
Company under this Agreement shall take place at the offices of Jenkens &
Gilchrist Parker Chapin LLP, The Chrysler Building, 405 Lexington Avenue, New
York, New York 10174 (the “Closing”) at 10:00 a.m., New York time (i) on
or before October 28, 2004; provided, that all of the conditions set
forth in Article IV


 


1





















 


hereof and applicable to the Closing shall have been
fulfilled or waived in accordance herewith, or (ii) at such other time and
place or on such date as the Purchasers and the Company may agree upon (the “Closing
Date”).  Subject to the terms and
conditions of this Agreement, at the Closing the Company shall deliver or cause
to be delivered to each Purchaser (x) its Note for the principal amount set
forth opposite the name of such Purchaser on Exhibit A hereto and (y) a
Warrant to purchase such number of shares of Common Stock as is set forth
opposite the name of such Purchaser on Exhibit A attached hereto.  At the Closing, each Purchaser shall deliver
its Purchase Price by wire transfer to an account designated by the Company.


 


Section 1.3             Conversion Shares / Warrant
Shares.  The Company has authorized
and has reserved and covenants to continue to reserve, free of preemptive
rights and other similar contractual rights of stockholders, a number of its
authorized but unissued shares of Common Stock equal to the aggregate number of
shares of Common Stock to effect the conversion of the Notes and any interest
accrued and outstanding thereon and exercise of the Warrants.  Any shares of Common Stock issuable upon
conversion of the Notes and any interest accrued and outstanding thereon and
exercise of the Warrants (and such shares when issued) are herein referred to
as the “Conversion Shares” and the “Warrant Shares,”
respectively.  The Notes, the Warrants,
the Conversion Shares and the Warrant Shares are sometimes collectively
referred to herein as the “Securities”.


 


ARTICLE II


 


REPRESENTATIONS AND WARRANTIES


 


Section 2.1             Representations and Warranties
of the Company.  The Company hereby
represents and warrants to the Purchasers, as of the date hereof and the
Closing Date (except as set forth on the Schedule of Exceptions attached hereto
with each numbered Schedule corresponding to the section number herein), as
follows:


 


(a)           Organization,
Good Standing and Power.  The Company
is a corporation duly incorporated, validly existing and in good standing under
the laws of the State of Delaware and has the requisite corporate power to own,
lease and operate its properties and assets and to conduct its business as it
is now being conducted.  The Company does
not have any Subsidiaries (as defined in Section 2.1(g)) or own securities of
any kind in any other entity except as set forth on Schedule 2.1(g)
hereto.  The Company and each such
Subsidiary (as defined in Section 2.1(g)) is duly qualified as a foreign
corporation to do business and is in good standing in every jurisdiction in
which the nature of the business conducted or property owned by it makes such
qualification necessary except for any jurisdiction(s) (alone or in the aggregate)
in which the failure to be so qualified will not have a Material Adverse
Effect.  For the purposes of this
Agreement, “Material Adverse Effect” means any effect on the business
(including a material change in management), results of operations, prospects, properties,
assets or condition (financial or otherwise) of the Company that is material
and adverse to the Company and its subsidiaries, taken as a whole, and/or any
condition, circumstance, factor or situation (including, without limitation, an
investigation by the Securities and Exchange Commission (the “Commission”))
that would prohibit or otherwise materially interfere with the ability of the
Company from


 


2





















 


entering into and performing any of its obligations
under the Transaction Documents (as defined below) in any material respect.


 


(b)           Authorization;
Enforcement.  The Company has the
requisite corporate power and authority to enter into and perform this
Agreement, the Notes, the Warrants, the Registration Rights Agreement by and
among the Company and the Purchasers, dated as of the date hereof,
substantially in the form of Exhibit D attached hereto (the “Registration
Rights Agreement”) and the Irrevocable Transfer Agent Instructions  (as defined in Section 3.18 hereof)
(collectively, the “Transaction Documents”) and to issue and sell the Securities
in accordance with the terms hereof.  The
execution, delivery and performance of the Transaction Documents by the Company
and the consummation by it of the transactions contemplated thereby have been
duly and validly authorized by all necessary corporate action, and, except as
set forth on Schedule 2.1(b), no further consent or authorization of the
Company, its Board of Directors or stockholders is required.  When executed and delivered by the Company,
each of the Transaction Documents shall constitute a valid and binding
obligation of the Company enforceable against the Company in accordance with
its terms, except as such enforceability may be limited by applicable
bankruptcy, reorganization, moratorium, liquidation, conservatorship,
receivership or similar laws relating to, or affecting generally the
enforcement of, creditor’s rights and remedies or by other equitable principles
of general application.


 


(c)           Capitalization.  The authorized capital stock of the Company
as of October 28, 2004 is set forth on Schedule 2.1(c) hereto.  All of the outstanding shares of the Common
Stock and any other outstanding security of the Company have been duly and
validly authorized.  Except as set forth
in this Agreement and as set forth on Schedule 2.1(c) hereto, no shares
of Common Stock or any other security of the Company are entitled to preemptive
rights or registration rights and there are no outstanding options, warrants,
scrip, rights to subscribe to, call or commitments of any character whatsoever
relating to, or securities or rights convertible into, any shares of capital
stock of the Company.  Furthermore,
except as set forth in this Agreement and as set forth on Schedule 2.1(c)
hereto, there are no contracts, commitments, understandings, or arrangements by
which the Company is or may become bound to issue additional shares of the
capital stock of the Company or options, securities or rights convertible into
shares of capital stock of the Company. 
Except for customary transfer restrictions contained in agreements
entered into by the Company in order to sell restricted securities or as
provided on Schedule 2.1(c) hereto, the Company is not a party to or
bound by any agreement or understanding granting registration or anti-dilution
rights to any person with respect to any of its equity or debt securities.  Except as set forth on Schedule 2.1(c),
the Company is not a party to, and it has no knowledge of, any agreement or
understanding restricting the voting or transfer of any shares of the capital
stock of the Company.


 


(d)           Issuance
of Securities.  The Notes and the
Warrants to be issued at the Closing have been duly authorized by all necessary
corporate action and, when paid for or issued in accordance with the terms
hereof, the Notes shall be validly issued and outstanding, free and clear of
all liens, encumbrances and rights of refusal of any kind, except for
restrictions on transferability contained in applicable federal or state
securities laws.  When the Conversion
Shares and Warrant Shares are issued and paid for in accordance with the terms
of this Agreement and as set forth in the Notes and Warrants, such shares will
be duly authorized by all necessary corporate action and validly issued and
outstanding, fully paid and nonassessable, free


 


3





















 


and clear of all liens, encumbrances and rights of
refusal of any kind and the holders shall be entitled to all rights accorded to
a holder of Common Stock, except for restrictions on transferability contained
in applicable federal or state securities laws.


 


(e)           No
Conflicts.  The execution, delivery
and performance of the Transaction Documents by the Company, the performance by
the Company of its obligations under the Notes and the consummation by the
Company of the transactions contemplated hereby and thereby, and the issuance
of the Securities as contemplated hereby, do not and will not (i) violate or
conflict with any provision of the Company’s Certificate of Incorporation (the “Certificate”)
or Bylaws (the “Bylaws”), each as amended to date, or any Subsidiary’s
comparable charter documents, (ii) conflict with, or constitute a default (or
an event which with notice or lapse of time or both would become a default)
under, or give to others any rights of termination, amendment, acceleration or
cancellation of, any agreement, mortgage, deed of trust, indenture, note, bond,
license, lease agreement, instrument or obligation to which the Company or any
of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries’ respective properties or assets are bound, or (iii) result in a
violation of any federal, state, local or foreign statute, rule, regulation,
order, judgment or decree (including federal and state securities laws and
regulations) applicable to the Company or any of its Subsidiaries or by which
any property or asset of the Company or any of its Subsidiaries are bound or
affected, except, in all cases, for such conflicts, defaults, terminations,
amendments, acceleration, cancellations and violations as would not,
individually or in the aggregate, have a Material Adverse Effect (other than
violations pursuant to clauses (i) or (iii) (with respect to federal and state
securities laws)).  Neither the Company
nor any of its Subsidiaries is required under federal, state, foreign or local
law, rule or regulation to obtain any consent, authorization or order of, or
make any filing or registration with, any court or governmental agency in order
for it to execute, deliver or perform any of its obligations under the
Transaction Documents or issue and sell the Securities in accordance with the
terms hereof (other than any filings, consents and approvals which may be
required to be made by the Company under applicable state and federal
securities laws, rules or regulations or any registration provisions provided
in the Registration Rights Agreement).


 


(f)            Commission
Documents, Financial Statements.  The
Common Stock of the Company is registered pursuant to Section 12(b) or 12(g) of
the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
and the Company has timely filed all reports, schedules, forms, statements and
other documents required to be filed by it with the Commission pursuant to the
reporting requirements of the Exchange Act (all of the foregoing including
filings incorporated by reference therein being referred to herein as the “Commission
Documents”).  At the times of their
respective filings, the Form 10-Q for the fiscal quarters ended March 31, 2004
and June 30, 2004 (collectively, the “Form 10-Q”) and the Form 10-K for
the fiscal year ended December 31, 2003, as amended on April 29, 2004 by the
filing of Amendment No. 1 to Form 10-K (collectively, the “Form 10-K”)
complied in all material respects with the requirements of the Exchange Act and
the rules and regulations of the Commission promulgated thereunder and other
federal, state and local laws, rules and regulations applicable to such
documents, and the Form 10-Q and Form 10-K did not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading; provided, however,
that with respect to the Form 10-K, the foregoing representation shall be true
only as of the date of the filing of Amendment No. 1 to Form 10-K.  As of their respective dates (or in the


 


4





















 


case of the Form 10-K, as of the date of Amendment No.
1 to Form 10-K), the financial statements of the Company included in the
Commission Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the Commission or other applicable rules and regulations with respect
thereto.  Such financial statements have
been prepared in accordance with generally accepted accounting principles (“GAAP”)
applied on a consistent basis during the periods involved (except (i) as may be
otherwise indicated in such financial statements or the notes thereto or (ii)
in the case of unaudited interim statements, to the extent they may not include
footnotes or may be condensed or summary statements), and fairly present in all
material respects the financial position of the Company and its Subsidiaries as
of the dates thereof and the results of operations and cash flows for the
periods then ended (subject, in the case of unaudited statements, to normal
year-end audit adjustments).


 


(g)           Subsidiaries.
Schedule 2.1(g) hereto sets forth each Subsidiary of the Company,
showing the jurisdiction of its incorporation or organization and showing the
percentage of each person’s ownership of the outstanding stock or other
interests of such Subsidiary.  For the
purposes of this Agreement, “Subsidiary” shall mean any corporation or
other entity of which at least a majority of the securities or other ownership
interest having ordinary voting power (absolutely or contingently) for the
election of directors or other persons performing similar functions are at the
time owned directly or indirectly by the Company and/or any of its other
Subsidiaries.  All of the outstanding
shares of capital stock of each Subsidiary have been duly authorized and
validly issued, and are fully paid and nonassessable.  There are no outstanding preemptive,
conversion or other rights, options, warrants or agreements granted or issued
by or binding upon any Subsidiary for the purchase or acquisition of any shares
of capital stock of any Subsidiary or any other securities convertible into,
exchangeable for or evidencing the rights to subscribe for any shares of such
capital stock.  Neither the Company nor
any Subsidiary is subject to any obligation (contingent or otherwise) to
repurchase or otherwise acquire or retire any shares of the capital stock of
any Subsidiary or any convertible securities, rights, warrants or options of
the type described in the preceding sentence except as set forth on Schedule
2.1(g) hereto.  Neither the Company
nor any Subsidiary is party to, nor has any knowledge of, any agreement
restricting the voting or transfer of any shares of the capital stock of any
Subsidiary.


 


(h)           No
Material Adverse Change.  Since June
30, 2004, the Company has not experienced or suffered any Material Adverse
Effect, except as disclosed on Schedule 2.1(h) hereto.


 


(i)            No
Undisclosed Liabilities.  Except as
disclosed on Schedule 2.1(i) hereto, neither the Company nor any of its
Subsidiaries has incurred any liabilities, obligations, claims or losses
(whether liquidated or unliquidated, secured or unsecured, absolute, accrued,
contingent or otherwise) other than those set forth in the financial statements
included as part of the Form 10-Q for the quarter ended June 30, 2004, or
subsequently incurred in the ordinary course of the Company’s or its
Subsidiaries respective businesses or which, individually or in the aggregate,
are not reasonably likely to have a Material Adverse Effect.


 


(j)            No
Undisclosed Events or Circumstances. 
Since June 30, 2004, except as disclosed on Schedule 2.1(j)
hereto, or as otherwise contained in the Commission Documents, no


 


5





















 


event or circumstance has occurred or exists with
respect to the Company or its Subsidiaries or their respective businesses,
properties, prospects, operations or financial condition, which, under
applicable law, rule or regulation, requires public disclosure or announcement
by the Company but which has not been so publicly announced or disclosed.


 


(k)           Indebtedness.  Schedule 2.1(k) hereto sets forth as
of the date hereof all outstanding secured and unsecured Indebtedness of the
Company or any Subsidiary, or for which the Company or any Subsidiary has
commitments and which has not been previously disclosed in the Commission
Documents.  For the purposes of this
Agreement, “Indebtedness” shall mean (a) any liabilities for borrowed money or
amounts owed in excess of $300,000 (other than trade accounts payable incurred
in the ordinary course of business), (b) all guaranties, endorsements and other
contingent obligations in respect of Indebtedness of others, whether or not the
same are or should be reflected in the Company’s balance sheet (or the notes
thereto), except guaranties by endorsement of negotiable instruments for
deposit or collection or similar transactions in the ordinary course of
business; and (c) the present value of any lease payments in excess of $25,000
due under leases required to be capitalized in accordance with GAAP.  Neither the Company nor any Subsidiary is in
default with respect to any Indebtedness.


 


(l)            Title
to Assets.  Each of the Company and
the Subsidiaries has good and valid title to all of its real and personal property
reflected in the Commission Documents, free and clear of any mortgages,
pledges, charges, liens, security interests or other encumbrances, except for
those indicated in the Commission Documents or incurred subsequent to such
filing and set forth on Schedule 2.1(l) hereto or such that,
individually or in the aggregate, do not cause a Material Adverse Effect.  All said leases of the Company and each of
its Subsidiaries are valid and subsisting and in full force and effect.


 


(m)          Actions
Pending.  There is no action, suit,
claim, investigation, arbitration, alternate dispute resolution proceeding or
other proceeding pending or, to the knowledge of the Company, threatened
against the Company or any Subsidiary which questions the validity of this
Agreement or any of the other Transaction Documents or any of the transactions
contemplated hereby or thereby or any action taken or to be taken pursuant
hereto or thereto.  Except as set forth
on Schedule 2.1(m) hereto or in the Commission Documents, there is no
action, suit, claim, investigation, arbitration, alternate dispute resolution
proceeding or other proceeding pending or, to the knowledge of the Company,
threatened against or involving the Company, any Subsidiary or any of their
respective properties or assets, which individually or in the aggregate, would
reasonably be expected, if adversely determined, to have a Material Adverse
Effect.  There are no outstanding orders,
judgments, injunctions, awards or decrees of any court, arbitrator or
governmental or regulatory body against the Company or any Subsidiary or any
officers or directors of the Company or Subsidiary in their capacities as such,
which individually or in the aggregate, could reasonably be expected to have a
Material Adverse Effect.


 


(n)           Compliance
with Law.  The business of the
Company and the Subsidiaries has been and is presently being conducted in
accordance with all applicable federal, state and local governmental laws,
rules, regulations and ordinances, except as set forth in the Commission Documents
or on Schedule 2.1(n) hereto or such that, individually or in the
aggregate, the noncompliance therewith could not reasonably be expected to have
a Material Adverse Effect.  The Company
and each of its Subsidiaries have all franchises, permits, licenses, consents
and


 


6





















 


other governmental or regulatory authorizations and
approvals necessary for the conduct of its business as now being conducted by
it unless the failure to possess such franchises, permits, licenses, consents
and other governmental or regulatory authorizations and approvals, individually
or in the aggregate, could not reasonably be expected to have a Material
Adverse Effect.


 


(o)           Taxes.  The Company and each of the Subsidiaries has
accurately prepared and filed all federal, state and other tax returns required
by law to be filed by it, has paid or made provisions for the payment of all
taxes shown to be due and all additional assessments, and adequate provisions
have been and are reflected in the financial statements of the Company and the
Subsidiaries for all current taxes and other charges to which the Company or
any Subsidiary is subject and which are not currently due and payable.  Except as disclosed in the Commission
Documents or on Schedule 2.1(o) hereto, none of the federal income tax
returns of the Company or any Subsidiary have been audited by the Internal
Revenue Service.  The Company has no
knowledge of any additional assessments, adjustments or contingent tax
liability (whether federal or state) of any nature whatsoever, whether pending
or threatened against the Company or any Subsidiary for any period, nor of any
basis for any such assessment, adjustment or contingency.


 


(p)           Certain
Fees.  Except as set forth on Schedule
2.1(p) hereto, the Company has not employed any broker or finder or
incurred any liability for any brokerage or investment banking fees,
commissions, finders’ structuring fees, financial advisory fees or other
similar fees in connection with the Transaction Documents.


 


(q)           Disclosure.  To the best of the Company’s knowledge,
neither this Agreement or the Schedules hereto nor any other documents,
certificates or instruments furnished to the Purchasers by or on behalf of the
Company or any Subsidiary in connection with the transactions contemplated by
this Agreement contain any untrue statement of a material fact or omit to state
a material fact necessary in order to make the statements made herein or
therein, in the light of the circumstances under which they were made herein or
therein, not misleading.


 


(r)            Operation
of Business.  Except as set forth in
the Commission Documents or on Schedule 2.1(r) hereto, the Company and
each of the Subsidiaries owns or possesses the rights to all patents,
trademarks, domain names (whether or not registered) and any patentable
improvements or copyrightable derivative works thereof, websites and
intellectual property rights relating thereto, service marks, trade names,
copyrights, licenses and authorizations which are necessary for the conduct of
its business as now conducted without any conflict with the rights of others.


 


(s)           Environmental
Compliance.  The Company and each of
its Subsidiaries have obtained all material approvals, authorization,
certificates, consents, licenses, orders and permits or other similar
authorizations of all governmental authorities, or from any other person, that
are required under any Environmental Laws. 
“Environmental Laws” shall mean all applicable laws relating to the
protection of the environment including, without limitation, all requirements
pertaining to reporting, licensing, permitting, controlling, investigating or
remediating emissions, discharges, releases or threatened releases of hazardous
substances, chemical substances, pollutants, contaminants or toxic substances,
materials or wastes, whether solid, liquid or gaseous in nature, into the air,
surface water, groundwater or land, or relating to


 


7





















 


the manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling of hazardous substances,
chemical substances, pollutants, contaminants or toxic substances, material or
wastes, whether solid, liquid or gaseous in nature.  To the best of the Company’s knowledge, the Company
has all necessary governmental approvals required under all Environmental Laws
as necessary for the Company’s business or the business of any of its
subsidiaries.  To the best of the Company’s
knowledge, the Company and each of its subsidiaries are also in compliance with
all other limitations, restrictions, conditions, standards, requirements,
schedules and timetables required or imposed under all Environmental Laws.  Except for such instances as would not individually
or in the aggregate have a Material Adverse Effect, there are no past or
present events, conditions, circumstances, incidents, actions or omissions
relating to or in any way affecting the Company or its subsidiaries that
violate or may violate any Environmental Law after the Closing Date or that may
give rise to any environmental liability, or otherwise form the basis of any
claim, action, demand, suit, proceeding, hearing, study or investigation (i)
under any Environmental Law, or (ii) based on or related to the manufacture,
processing, distribution, use, treatment, storage (including without limitation
underground storage tanks), disposal, transport or handling, or the emission,
discharge, release or threatened release of any hazardous substance.


 


(t)            Books
and Records; Internal Accounting Controls. 
The records and documents of the Company and its Subsidiaries accurately
reflect in all material respects the information relating to the business of
the Company and the Subsidiaries, the location and collection of their assets,
and the nature of all transactions giving rise to the obligations or accounts
receivable of the Company or any Subsidiary. 
The Company and each of its Subsidiaries maintain a system of internal
accounting controls sufficient, in the judgment of the Company’s board of
directors, to provide reasonable assurance that (i) transactions are executed
in accordance with management’s general or specific authorizations, (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain asset accountability, (iii) access to assets is permitted only in
accordance with management’s general or specific authorization and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate actions are taken with respect to any
differences.


 


(u)           Material
Agreements.  Except for the
Transaction Documents (with respect to clause (i) only), as disclosed in the
Commission Documents or as set forth on Schedule 2.1(u) hereto, or as
would not be reasonably likely to have a Material Adverse Effect, (i) the
Company and each of its Subsidiaries have performed all obligations required to
be performed by them to date under any written or oral contract, instrument,
agreement, commitment, obligation, plan or arrangement, filed or required to be
filed with the Commission (the “Material Agreements”), (ii) neither the
Company nor any of its Subsidiaries has received any notice of default under
any Material Agreement and, (iii) to the best of the Company’s knowledge,
neither the Company nor any of its Subsidiaries is in default under any
Material Agreement now in effect.


 


(v)           Transactions
with Affiliates.  Except as set forth
on Schedule 2.1(v) hereto and in the Commission Documents, there are no
loans, leases, agreements, contracts, royalty agreements, management contracts
or arrangements or other continuing transactions between (a) the Company, any
Subsidiary or any of their respective customers or suppliers on the one hand,


 


8





















 


and (b) on the other hand, any officer, employee,
consultant or director of the Company, or any of its Subsidiaries, or, to the
Company’s knowledge, any person owning at least 5% of the outstanding capital
stock of the Company or any Subsidiary, or any member of the immediate family
of such officer, employee, consultant, director or stockholder or any
corporation or other entity controlled by such officer, employee, consultant,
director or stockholder, or a member of the immediate family of such officer,
employee, consultant, director or stockholder which, in each case, is required
to be disclosed in the Commission Documents or in the Company’s most recently
filed definitive proxy statement on Schedule 14A, that is not so disclosed in
the Commission Documents or in such proxy statement.


 


(w)          Securities
Act of 1933.  Based in material part
upon the representations herein of the Purchasers, (i) the Company has complied
and will comply with all applicable federal and state securities laws in
connection with the offer, issuance and sale of the Securities hereunder, (ii)  neither the Company nor anyone acting on its
behalf, directly or indirectly, has or will sell, offer to sell or solicit
offers to buy any of the Securities or similar securities to, or solicit offers
with respect thereto from, or enter into any negotiations relating thereto
with, any person, or has taken or will take any action so as to require the
issuance and sale of any of the Securities under the registration provisions of
the Securities Act and applicable state securities laws, and (iii) neither the
Company nor any of its affiliates, nor any person acting on its or their
behalf, has engaged in any form of general solicitation or general advertising
(within the meaning of Regulation D under the Securities Act) in connection
with the offer or sale of any of the Securities.


 


(x)            Employees.  Neither the Company nor any Subsidiary has
any collective bargaining arrangements or agreements covering any of its
employees, except as set forth in the Commission Documents or on Schedule
2.1(x) hereto.  Except as set forth
in the Commission Documents or on Schedule 2.1(x) hereto, neither the
Company nor any Subsidiary has any employment contract, agreement regarding
proprietary information, non-competition agreement, non-solicitation agreement,
confidentiality agreement, or any other similar contract or restrictive
covenant, relating to the right of any officer, employee or consultant to be employed
or engaged by the Company or such Subsidiary required to be disclosed in the
Commission Documents that is not so disclosed. 
No officer, consultant or key employee of the Company or any Subsidiary
whose termination, either individually or in the aggregate, would be reasonably
likely to have a Material Adverse Effect, has terminated or, to the knowledge
of the Company, has any present intention of terminating his or her employment
or engagement with the Company or any Subsidiary.


 


(y)           Absence
of Certain Developments.  Except as
provided in the Commission Documents or on Schedule 2.1(y) hereto, since
June 30, 2004, neither the Company nor any Subsidiary has:


 


(i)            issued any stock, bonds or other
corporate securities or any right, options or warrants with respect thereto;


 


(ii)           borrowed any amount in excess of
$300,000 or incurred or become subject to any other liabilities in excess of
$100,000 (absolute or contingent) except current liabilities incurred in the
ordinary course of business which are comparable in nature and amount


 


9





















 


to the current
liabilities incurred in the ordinary course of business during the comparable
portion of its prior fiscal year, as adjusted to reflect the current nature and
volume of the business of the Company and its Subsidiaries;


 


(iii)          discharged or satisfied any lien or
encumbrance in excess of $250,000 or paid any obligation or liability (absolute
or contingent) in excess of $250,000, other than current liabilities paid in
the ordinary course of business;


 


(iv)          declared or made any payment or
distribution of cash or other property to stockholders with respect to its
stock, or purchased or redeemed, or made any agreements so to purchase or
redeem, any shares of its capital stock, in each case in excess of $50,000
individually or $100,000 in the aggregate;


 


(v)           sold, assigned or transferred any
other tangible assets, or canceled any debts or claims, in each case in excess
of $250,000, except in the ordinary course of business;


 


(vi)          sold, assigned or transferred any
patent rights, trademarks, trade names, copyrights, trade secrets or other
intangible assets or intellectual property rights in excess of $250,000, or
disclosed any proprietary confidential information to any person except to
customers in the ordinary course of business or to the Purchasers or their
representatives;


 


(vii)         suffered any material losses or waived
any rights of material value, whether or not in the ordinary course of
business, or suffered the loss of any material amount of prospective business;


 


(viii)        made any changes in employee
compensation except in the ordinary course of business and consistent with past
practices;


 


(ix)           made capital expenditures or
commitments therefor that aggregate in excess of $500,000;


 


(x)            entered into any material
transaction, whether or not in the ordinary course of business;


 


(xi)           made charitable contributions or
pledges in excess of $25,000;


 


(xii)          suffered any material damage,
destruction or casualty loss, whether or not covered by insurance;


 


(xiii)         experienced any material problems with
labor or management in connection with the terms and conditions of their
employment; or


 


(xiv)        entered into an agreement, written or
otherwise, to take any of the foregoing actions.


 


10





















 


(z)            Public
Utility Holding Company Act and Investment Company Act Status.  The Company is not a “holding company” or a “public
utility company” as such terms are defined in the Public Utility Holding
Company Act of 1935, as amended.  The
Company is not, and as a result of and immediately upon the Closing will not
be, an “investment company” or a company “controlled” by an “investment
company,” within the meaning of the Investment Company Act of 1940, as amended.


 


(aa)         ERISA.  No liability to the Pension Benefit Guaranty
Corporation has been incurred with respect to any Plan by the Company or any of
its Subsidiaries which is or would be materially adverse to the Company and its
Subsidiaries.  The execution and delivery
of this Agreement and the issuance and sale of the Securities will not involve
any transaction which is subject to the prohibitions of Section 406 of the
Employee Retirement Income Security Act of 1974, as amended (“ERISA”) or in
connection with which a tax could be imposed pursuant to Section 4975 of the
Internal Revenue Code of 1986, as amended, provided that, if any of the
Purchasers, or any person or entity that owns a beneficial interest in any of
the Purchasers, is an “employee pension benefit plan” (within the meaning of
Section 3(2) of ERISA) with respect to which the Company is a “party in
interest” (within the meaning of Section 3(14) of ERISA), the requirements of
Sections 407(d)(5) and 408(e) of ERISA, if applicable, are met.  As used in this Section 2.1(aa), the term “Plan”
shall mean an “employee pension benefit plan” (as defined in Section 3 of
ERISA) which is or has been established or maintained, or to which
contributions are or have been made, by the Company or any Subsidiary or by any
trade or business, whether or not incorporated, which, together with the
Company or any Subsidiary, is under common control, as described in Section 414(b)
or (c) of the Code.


 


(bb)         Independent
Nature of Purchasers.  The Company
acknowledges that the obligations of each Purchaser under the Transaction
Documents are several and not joint with the obligations of any other
Purchaser, and no Purchaser shall be responsible in any way for the performance
of the obligations of any other Purchaser under the Transaction Documents.  The Company acknowledges that the decision of
each Purchaser to purchase Securities pursuant to this Agreement has been made
by such Purchaser independently of any other purchase and independently of any
information, materials, statements or opinions as to the business, affairs,
operations, assets, properties, liabilities, results of operations, condition
(financial or otherwise) or prospects of the Company or of its Subsidiaries
which may have made or given by any other Purchaser or by any agent or employee
of any other Purchaser, and no Purchaser or any of its agents or employees
shall have any liability to any Purchaser (or any other person) relating to or
arising from any such information, materials, statements or opinions.  The Company acknowledges that nothing
contained herein, or in any Transaction Document, and no action taken by any
Purchaser pursuant hereto or thereto, shall be deemed to constitute the
Purchasers as a partnership, an association, a joint venture or any other kind of
entity, or create a presumption that the Purchasers are in any way acting in
concert or as a group with respect to such obligations or the transactions
contemplated by the Transaction Documents. 
The Company acknowledges that for reasons of administrative convenience
only, the Transaction Documents have been prepared by counsel for one of the
Purchasers and such counsel does not represent all of the Purchasers but only
such Purchaser and the other Purchasers have retained their own individual
counsel with respect to the transactions contemplated hereby.  The Company
acknowledges that it has elected to provide all Purchasers with the same terms
and Transaction


 


11





















 


Documents for the convenience of the Company and not
because it was required or requested to do so by the Purchasers.  The Company acknowledges that such procedure
with respect to the Transaction Documents in no way creates a presumption that
the Purchasers are in any way acting in concert or as a group with respect to
the Transaction Documents or the transactions contemplated hereby or thereby.


 


(cc)         No
Integrated Offering.  Neither the
Company, nor any of its affiliates, nor any person acting on its or their
behalf, has directly or indirectly made any offers or sales of any security or
solicited any offers to buy any security under circumstances that would cause
the offering of the Securities pursuant to this Agreement to be integrated with
prior offerings by the Company for purposes of the Securities Act which would
prevent the Company from selling the Securities pursuant to Regulation D and
Rule 506 thereof under the Securities Act, or any applicable exchange-related
stockholder approval provisions, nor will the Company or any of its affiliates
or subsidiaries take any action or steps that would cause the offering of the Securities
to be integrated with other offerings. 
The Company does not have any registration statement pending before the
Commission or currently under the Commission’s review and except as set forth
on Schedule 2.1(cc) hereto, since April 1, 2004, the Company has not
offered or sold any of its equity securities or debt securities convertible
into shares of Common Stock.


 


(dd)         Sarbanes-Oxley
Act.  The Company is in substantial compliance with the applicable
provisions of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”),
and the rules and regulations promulgated thereunder, that are effective and
intends to comply substantially with other applicable provisions of the
Sarbanes-Oxley Act, and the rules and regulations promulgated thereunder, upon
the effectiveness of such provisions.


 


(ee)         Dilutive Effect.  The Company understands and acknowledges that
the number of Conversion Shares issuable upon conversion of the Notes and the
Warrant Shares issuable upon exercise of the Warrants will increase in certain
circumstances.  The Company further
acknowledges that its obligation to issue Conversion Shares upon conversion of
the Notes in accordance with this Agreement and the Notes and its obligations
to issue the Warrant Shares upon the exercise of the Warrants in accordance
with this Agreement and the Warrants, is, in each case, absolute and
unconditional regardless of the dilutive effect that such issuance may have on
the ownership interest of other stockholders of the Company.


 


Section 2.2             Representations and Warranties
of the Purchasers.  Each of the
Purchasers hereby represents and warrants to the Company with respect solely to
itself and not with respect to any other Purchaser as follows as of the date
hereof and as of the Closing Date:


 


(a)           Organization and Standing of the Purchasers.  If the
Purchaser is an entity, such Purchaser is a corporation, limited liability
company or partnership duly incorporated or organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation or
organization.


 


(b)           Authorization
and Power.  Each Purchaser has the
requisite power and authority to enter into and perform the Transaction
Documents and to purchase the Securities being sold to it hereunder.  The execution, delivery and performance of
the Transaction Documents by each Purchaser and the consummation by it of the
transactions contemplated


 


12





















 


hereby have been duly authorized by all necessary
corporate, membership or partnership action, and no further consent or
authorization of such Purchaser or its Board of Directors, stockholders,
members or partners, as the case may be, is required.  When executed and delivered by the
Purchasers, the other Transaction Documents shall constitute valid and binding
obligations of each Purchaser enforceable against such Purchaser in accordance
with their terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation,
conservatorship, receivership or similar laws relating to, or affecting
generally the enforcement of, creditor’s rights and remedies or by other
equitable principles of general application.


 


(c)           No
Conflict.  The execution, delivery
and performance of the Transaction Documents by the Purchaser and the
consummation by the Purchaser of the transactions contemplated thereby and
hereby do not and will not (i) violate any provision of the Purchaser’s charter
or organizational documents, in each case as amended to date, (ii) conflict
with, or constitute a default (or an event which with notice or lapse of time
or both would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation of, any agreement,
mortgage, deed of trust, indenture, note, bond, license, lease agreement,
instrument or obligation to which the Purchaser is a party or by which the
Purchaser’s respective properties or assets are bound, or (iii) result in a
violation of any federal, state, local or foreign statute, rule, regulation,
order, judgment or decree (including federal and state securities laws and
regulations) applicable to the Purchaser or by which any property or asset of
the Purchaser are bound or affected, except, in all cases, other than
violations pursuant to clauses (i) or (iii) (with respect to federal and state
securities laws) above, except, for such conflicts, defaults, terminations,
amendments, acceleration, cancellations and violations as would not,
individually or in the aggregate, materially and adversely affect the Purchaser’s
ability to perform its obligations under the Transaction Documents.


 


(d)           Acquisition
for Investment.  Each Purchaser is
purchasing the Securities solely for its own account for the purpose of
investment and not with a view to or for sale in connection with
distribution.  Each Purchaser does not
have a present intention to sell any of the Securities, nor a present
arrangement (whether or not legally binding) or intention to effect any
distribution of any of the Securities to or through any person or entity; provided,
however, that by making the representations herein, such Purchaser does
not agree to hold the Securities for any minimum or other specific term and
reserves the right to dispose of the Securities at any time in accordance with
federal and state securities laws applicable to such disposition.  Each Purchaser acknowledges that it (i) has
such knowledge and experience in financial and business matters such that
Purchaser is capable of evaluating the merits and risks of Purchaser’s
investment in the Company, (ii) is able to bear the financial risks associated
with an investment in the Securities and (iii) has been given full access to
such records of the Company and the Subsidiaries and to the officers of the
Company and the Subsidiaries as it has deemed necessary or appropriate to
conduct its due diligence investigation.


 


(e)           Rule
144.  Each Purchaser understands that
the Securities must be held indefinitely unless such Securities are registered
under the Securities Act or an exemption from registration is available.  Each Purchaser acknowledges that such person
is familiar with Rule 144 of the rules and regulations of the Commission, as
amended, promulgated pursuant to the Securities Act (“Rule 144”), and
that such Purchaser has been advised that Rule 144 permits


 


13





















 


resales only under certain circumstances.  Each Purchaser understands that to the extent
that Rule 144 is not available, such Purchaser will be unable to sell any Securities
without either registration under the Securities Act or the existence of
another exemption from such registration requirement.


 


(f)            General.  Each Purchaser understands that the Securities
are being offered and sold in reliance on a transactional exemption from the
registration requirements of federal and state securities laws and the Company
is relying upon the truth and accuracy of the representations, warranties, agreements,
acknowledgments and understandings of such Purchaser set forth herein in order
to determine the applicability of such exemptions and the suitability of such
Purchaser to acquire the Securities. 
Each Purchaser understands that no United States federal or state agency
or any government or governmental agency has passed upon or made any
recommendation or endorsement of the Securities.  None of the Purchasers has engaged in any
short sale of the Company’s Common Stock prior to the consummation of the
transaction contemplated by this Agreement.


 


(g)           No
General Solicitation.  Each Purchaser
acknowledges that the Securities were not offered to such Purchaser by means of
any form of general or public solicitation or general advertising, or publicly
disseminated advertisements or sales literature, including (i) any
advertisement, article, notice or other communication published in any
newspaper, magazine, or similar media, or broadcast over television or radio,
or (ii) any seminar or meeting to which such Purchaser was invited by any of
the foregoing means of communications. 
Each Purchaser, in making the decision to purchase the Securities, has
relied upon independent investigation made by it and has not relied on any
information or representations made by third parties.


 


(h)           Accredited
Investor.  Each Purchaser is an “accredited
investor” (as defined in Rule 501 of Regulation D), and such Purchaser has such
experience in business and financial matters that it is capable of evaluating
the merits and risks of an investment in the Securities.  Such Purchaser is not required to be
registered as a broker-dealer under Section 15 of the Exchange Act and such
Purchaser is not a broker-dealer.  Each
Purchaser acknowledges that an investment in the Securities is speculative and
involves a high degree of risk.


 


(i)            Certain
Fees.  The Purchasers have not
employed any broker or finder or incurred any liability for any brokerage or
investment banking fees, commissions, finders’ structuring fees, financial
advisory fees or other similar fees in connection with the Transaction
Documents.


 


(j)            Independent
Investment.  No Purchaser has agreed
to act with any other Purchaser for the purpose of acquiring, holding, voting
or disposing of the Securities purchased hereunder for purposes of Section 13(d)
under the Exchange Act, and each Purchaser is acting independently with respect
to its investment in the Securities.


 


(i)            Non-Shorting.  Each Purchaser represents and warrants that
it has not engaged in any short sales of the Common Stock and covenants that it
will not engage in any short sales of the Common Stock prior to the earlier of
(A) the filing of the Form 8-K (as defined in Section 3.11 hereof) or (B) the
issuance of the Press Release (as defined in Section 3.11 hereof).


 


14





















 


Section 2.3             Representations and Warranties
of the Offshore Purchaser.  The
Purchaser listed on Schedule I hereto (the “Offshore Purchaser”)
hereby represents and warrants to the Company with respect solely to itself and
not with respect to any other Purchaser as follows as of the date hereof and as
of the Closing Date:


 


(a)           Foreign
Purchaser.  The Offshore Purchaser is
not a “U.S. person” as defined under Rule 902(o) of Regulation S under the Securities
Act.  The Offshore Purchaser is not
acquiring the Securities for the account or benefit of any U.S. person.


 


(b)           Offshore
Transaction.  The document effecting
this purchase and sale has been executed by the Offshore Purchaser outside the “United
States” (as defined in Rule 902(p) of Regulation S).  The Buyer is acquiring the Securities in an “offshore
transaction” (as defined in Rule 902(i) of Regulation S).  The Securities were not offered to the
Offshore Purchaser in the United States and at the time of execution of this
Agreement and the time of any offer to the Offshore Purchaser to purchase the
Securities hereunder, the Offshore Purchaser was physically outside of the
United States.


 


ARTICLE III


 


COVENANTS


 


The Company covenants with each
Purchaser as follows, which covenants are for the benefit of each Purchaser and
their respective permitted assignees.


 


Section
3.1             Securities Compliance.  The Company shall notify the Commission in
accordance with its rules and regulations, of the transactions contemplated by
any of the Transaction Documents and shall take all other necessary action and
proceedings as may be required and permitted by applicable law, rule and
regulation, for the legal and valid issuance of the Securities to the
Purchasers, or their respective subsequent holders.


 


Section
3.2             Registration and Listing.  The Company shall use its reasonable best
efforts to cause its Common Stock to continue to be registered under Sections
12(b) or 12(g) of the Exchange Act, to comply
in all respects with its reporting and filing obligations under the Exchange
Act, to comply with all requirements related to any registration statement
filed pursuant to this Agreement, and to not take any action or file any
document (whether or not permitted by the Securities Act or the rules
promulgated thereunder) to terminate or suspend such registration or to
terminate or suspend its reporting and filing obligations under the Exchange
Act or Securities Act, except as permitted herein.  The Company shall use its reasonable best
efforts to continue the listing or trading of its Common Stock on the OTC
Bulletin Board or any successor market.


 


Section 3.3             Inspection Rights.  Subject to the execution of a confidentiality
agreement reasonably acceptable to the Company, the Company shall permit,
during normal business hours and upon reasonable request and reasonable notice,
each Purchaser or any employees, agents or representatives thereof, so long as
such Purchaser shall be obligated hereunder to purchase the Notes or shall
beneficially own any Conversion Shares or Warrant


 


15





















 


Shares, for purposes reasonably related to such
Purchaser’s interests as a stockholder to examine and make reasonable copies of
the records and books of account of, and visit and inspect the properties,
assets, operations and business of the Company and any Subsidiary, and to
discuss the affairs, finances and accounts of the Company and any Subsidiary
with any of its officers, consultants, directors, and key employees.


 


Section 3.4             Compliance with Laws.  The Company shall comply, and cause each
Subsidiary to comply, with all applicable laws, rules, regulations and orders,
noncompliance with which would be reasonably likely to have a Material Adverse
Effect.


 


Section 3.5             Keeping of Records and Books of
Account.  The Company shall keep and
cause each Subsidiary to keep adequate records and books of account, in which
complete entries will be made in accordance with GAAP consistently applied,
reflecting all financial transactions of the Company and its Subsidiaries, and
in which, for each fiscal year, all proper reserves for depreciation,
depletion, obsolescence, amortization, taxes, bad debts and other purposes in
connection with its business shall be made.


 


Section 3.6             Reporting Requirements.  If the Company ceases to file its periodic
reports with the Commission, or if the Commission ceases making these periodic
reports available via the Internet without charge, then the Company shall
furnish the following to each Purchaser so long as such Purchaser shall be
obligated hereunder to purchase the Securities or shall beneficially own
Conversion Shares or Warrant Shares:


 


(a)           Quarterly
Reports filed with the Commission on Form 10-Q contemporaneously with the
filing thereof with the Commission after the end of each of the first three
fiscal quarters of the Company;


 


(b)           Annual
Reports filed with the Commission on Form 10-K contemporaneously with the
filing thereof with the Commission after the end of each fiscal year of the
Company; and


 


(c)           Copies of all notices, information and proxy
statements in connection with any meetings, that are, in each case, provided to
holders of shares of Common Stock, contemporaneously with the delivery of such
notices or information to such holders of Common Stock.


 


Section
3.7             Other Agreements.  The Company shall not enter into any
agreement in which the terms of such agreement would restrict or impair the
right or ability to perform of the Company or any Subsidiary under any
Transaction Document.


 


Section
3.8             Subsequent Financings; Right of
First Refusal. (a) For purposes of this Agreement, a “Subsequent
Financing” shall be defined as any subsequent offer or sale to, or
exchange with (or other type of distribution to), any third party of Common
Stock or any securities convertible, exercisable or exchangeable into Common
Stock, including convertible debt securities (collectively, the “Financing
Securities”), except for a Permitted Financing.  A “Permitted Financing” shall mean (i)
the Company’s issuance of Common Stock and warrants therefor in connection with
a merger and/or acquisition or consolidation, (ii) the issuance of shares of Common
Stock or warrants therefor in connection with bona fide strategic license


 


16





















 


agreements or other partnering arrangements so long as
such issuances are not for the purpose of raising capital, (iii) the Company’s
issuance of Common Stock or the issuance or grants of options to purchase
Common Stock pursuant to the Company’s stock option plans and employee stock
purchase plans, consultant stock plans or other arrangement duly adopted by a
majority of the non-employee members of the Board of Directors of the Company
or a majority of the members of a committee of non-employee directors
established for such purpose outstanding as they now exist, (iv) the Company’s
issuance of Financing Securities in connection with a bona fide firm
underwritten public offering resulting in gross proceeds to the Company of at
least $10,000,000, and (v) the issuance of Common Stock upon the exercise or
conversion of any securities outstanding on the date hereof.


 


(b)  For a period of one (1) year following
the Closing Date, the Company
covenants and agrees to promptly notify (in no event later than five (5) Trading
Days (as defined in Section 3.11 hereof) after making or receiving an
applicable offer) in writing (a “Rights Notice”) the Purchasers of the
terms and conditions of any Subsequent Financing other than a Permitted
Financing.  The Rights Notice shall
describe, in reasonable detail, the proposed Subsequent Financing, the proposed
closing date of the Subsequent Financing, which shall be within thirty (30)
calendar days from the date the Rights Notice is given, including, without
limitation, all of the material terms and conditions thereof and proposed
definitive documentation to be entered into in connection therewith.  The Rights Notice shall provide each
Purchaser an option (the “Rights Option”) during the ten (10) Trading Days
following delivery of the Rights Notice (the “Option Period”) to agree
to purchase up to its pro rata portion of the securities being offered in such
Subsequent Financing on the same terms and conditions as contemplated by such
Subsequent Financing (the “First Refusal Rights”).  If any Purchaser elects not to participate in
such Subsequent Financing, the other Purchasers may participate on a pro-rata basis
so long as such participation in the aggregate does not exceed the total
Purchase Price hereunder.  For
purposes of this Section, all references to “pro rata” means, for any Purchaser
electing to participate in such Subsequent Financing, the percentage obtained
by dividing (x) the principal amount of the Notes purchased by such Purchaser
at the Closing by (y) the total principal amount of all the Notes purchased by
all of the participating Purchasers at the Closing.  Delivery
of any Rights Notice constitutes a representation and warranty by the Company
that there are no other material terms and conditions, arrangements, agreements
or otherwise except for those disclosed in the Rights Notice, to provide
additional compensation to any party participating in any proposed Subsequent
Financing, including, but not limited to, additional compensation based on
changes in the Purchase Price or any type of reset or adjustment of a purchase
or conversion price or to issue additional securities at any time after the
closing date of a Subsequent Financing. 
If the Company does not receive notice of exercise of the Rights Option
from any of the Purchasers within the Option Period, the Company shall have the
right to close the Subsequent Financing on the scheduled closing date or within
thirty (30) days thereof with a third party (and, if applicable, with such
Purchasers as shall have exercised their Rights Option); provided that all of
the material terms and conditions of the closing are the same as those provided
to the Purchasers in the Rights Notice. 
If the closing of the proposed Subsequent Financing does not occur within
thirty (30) days of the closing date specified in the Rights Notice, any
closing of the contemplated Subsequent Financing or any other Subsequent
Financing shall be subject to all of the provisions of this Section, including,
without limitation, the delivery of a new Rights Notice.


 


17





















 


Section 3.9             Use of Proceeds.  The proceeds from the sale of the Securities will
be used by the Company for working capital and general corporate purposes.


 


Section 3.10           Reporting Status.  So
long as a Purchaser beneficially owns any of the Securities, the Company shall
timely file all reports required to be filed with the Commission pursuant to
the Exchange Act, and the Company shall not terminate its status as an issuer
required to file reports under the Exchange Act even if the Exchange Act or the
rules and regulations thereunder would permit such termination.


 


Section 3.11           Disclosure of Transaction.  The Company shall issue a press release describing
the material terms of the transactions contemplated hereby (the “Press
Release”) on the day of the Closing (but in no event later than two (2)
hours after the Closing); provided, however, that if Closing
occurs after 4:00 P.M. Eastern Time on any Trading Day, the Company shall issue
the Press Release no later than 9:00 A.M. Eastern Time on the first Trading Day
following the Closing Date.  The Company
shall also file with the Commission a Current Report on Form 8-K (the “Form
8-K”) describing the material terms of the transactions contemplated hereby
(and attaching as exhibits thereto this Agreement, the Note, the Registration
Rights Agreement and the form of Warrant) as soon as practicable following the Closing
Date but in no event more than three (3) Trading Days following the Closing
Date, which Press Release and Form 8-K shall be subject to prior review and
comment by counsel to the Purchasers.  “Trading
Day” means any day during which the principal exchange on which the Common
Stock is traded shall be open for trading.


 


Section 3.12           Disclosure of Material Information.  The Company covenants and agrees that neither
it nor any other person acting on its behalf has provided or will provide any
Purchaser or its agents or counsel with any information that the Company
believes constitutes material non-public information, unless prior thereto such
Purchaser shall have executed a written agreement regarding the confidentiality
and use of such information.  The Company understands and confirms that
each Purchaser shall be relying on the foregoing representations in effecting
transactions in securities of the Company; provided, however,
nothing herein shall excuse such Purchaser from compliance with all applicable
federal and state securities laws regarding the purchase or sale of securities
while in possession of material non-public information.


 


Section 3.13           Pledge of Securities.  The Company acknowledges and agrees that,
subject to compliance with applicable federal and state securities laws, the
Securities may be pledged by a Purchaser in connection with a bona  fide
margin agreement or other loan or financing arrangement that is secured by the Securities.  Subject to compliance with applicable federal
and state securities laws, the pledge of Securities shall not be deemed to be a
transfer, sale or assignment of the Securities hereunder, and no Purchaser
effecting a pledge of the Securities shall be required to provide the Company
with any notice thereof or otherwise make any delivery to the Company pursuant
to this Agreement or any other Transaction Document; provided that a Purchaser
and its pledgee shall be required to comply with the provisions of Article V
hereof in order to effect a sale, transfer or assignment of Securities to such
pledgee and with all applicable federal and state securities laws. At the
Purchasers’ expense, the Company hereby agrees to execute and deliver such
documentation as a pledgee of the Securities may reasonably request in
connection with a pledge of the Securities to such pledgee by a Purchaser.


 


18





















 


Section 3.14           Registration Statements.  Except in connection with a Permitted
Financing, the Company shall not file any registration statement under the
Securities Act registering shares of its equity securities until the date that
is at least six (6) months following the Effectiveness Date, other than any
post-effective amendments to registration statements required to be filed by
the Commission covering securities previously registered with the Commission.


 


Section 3.15           Amendments.  The Company shall not amend or waive any
provision of the Certificate or Bylaws of the Company in any way that would
adversely affect exercise rights, voting rights, conversion rights, prepayment
rights or redemption rights of the holder of the Notes.


 


Section 3.16           Distributions.  So long as any of the Notes or Warrants
remain outstanding, the Company agrees that it shall not (i) declare or pay any
dividends or make any distributions to any holder(s) of Common Stock or (ii)
purchase or otherwise acquire for value, directly or indirectly, any Common
Stock or other equity security of the Company.


 


Section 3.17           Reservation of Shares.  So long as any of the Notes or Warrants
remain outstanding, the Company shall take all action necessary to at all times
have authorized and reserved for the purpose of issuance, the aggregate number
of shares of Common Stock needed to provide for the issuance of the Conversion
Shares and the Warrant Shares.


 


Section 3.18           Transfer Agent Instructions.  The Company shall issue irrevocable
instructions to its transfer agent, and any subsequent transfer agent, to issue
certificates, registered in the name of each Purchaser or its respective
nominee(s), for the Conversion Shares and the Warrant Shares in such amounts as
specified from time to time by each Purchaser to the Company upon conversion of
the Notes or exercise of the Warrants in the form of Exhibit E attached
hereto (the “Irrevocable Transfer Agent Instructions”).  All certificates representing the Conversion
Shares and the Warrant Shares shall bear the restrictive legend specified in
Section 5.1 of this Agreement until the Conversion Shares and/or the Warrant
Shares are sold pursuant to an effective registration statement and such
Purchaser represents that it has complied with the prospectus delivery requirements
in connection with such sale.  The
Company warrants that no instruction other than the Irrevocable Transfer Agent
Instructions referred to in this Section 3.18 will be given by the Company to
its transfer agent and that the Conversion Shares and Warrant Shares shall
otherwise be freely transferable on the books and records of the Company as and
to the extent provided in this Agreement and the Registration Rights
Agreement.  Nothing in this Section 3.18
shall affect in any way each Purchaser’s obligations and agreements set forth
in Section 5.1 to comply with all applicable prospectus delivery requirements,
if any, upon resale of the Conversion Shares and the Warrant Shares.  If a Purchaser provides the Company with an
opinion of counsel, in a generally acceptable form, to the effect that a public
sale, assignment or transfer of the Conversion Shares or Warrant Shares may be
made without registration under the Securities Act or the Purchaser provides
the Company with reasonable assurances that the Conversion Shares or Warrant
Shares can be sold pursuant to Rule 144 without any restriction as to the
number of securities acquired as of a particular date that can then be
immediately sold, the Company shall permit the transfer, and, in the case of the
Conversion Shares and the Warrant Shares, promptly instruct its transfer agent
to issue one or more certificates in such name and in such denominations as
specified by such Purchaser and without any restrictive legend.  The Company acknowledges that a breach by it
of its obligations under this Section 3.18 will cause


 


19





















 


irreparable harm to the Purchasers by vitiating the
intent and purpose of the transaction contemplated hereby.  Accordingly, the Company acknowledges that
the remedy at law for a breach of its obligations under this Section 3.18
will be inadequate and agrees, in the event of a breach or threatened breach by
the Company of the provisions of this Section 3.18, that the Purchasers shall
be entitled, in addition to all other available remedies, to an order and/or
injunction restraining any breach and requiring immediate issuance and
transfer, without the necessity of showing economic loss and without any bond
or other security being required.


 


Section 3.19           Disposition of Assets.  So long as the Notes remain outstanding,
neither the Company nor any subsidiary shall sell, transfer or otherwise
dispose of any of its material properties, assets and rights including, without
limitation, its software and intellectual property, to any person except for
(i) sales to customers in the ordinary course of business, (ii) with the prior
written consent of the holders of a majority of the Notes then outstanding, or
(iii) in connection with a Subsequent Financing.


 


Section 3.20           Cornell
Capital Partners, L.P Indebtedness.  The Company convenants and agrees that within
forty-eight (48) hours of receipt of a major receivable from an unnamed
insurance company referenced in the press release issued by the Company on October
27, 2004, the Company will pay off all outstanding indebtedness owed to Cornell
Capital Partners, L.P.  Furthermore, the
Company convenants and agrees so long as the Notes remain outstanding that it will not request any draw downs in connection
with that certain Equity Line of Credit Agreement dated July 23, 2002 between
the Company and Cornell Capital Partners, L.P.


 


Section 3.21           Regulation S.  The Company covenants and agrees that if the
Company fails to register the Conversion Shares and Warrant Shares by the
Effectiveness Date (as defined in the Registration Rights Agreement), then for
so long as such registration statement is not effective and so long as any of
the Conversion Shares or Warrant Shares remain outstanding and continue to be “restricted
securities” within the meaning of Rule 144 under the Securities Act, the
Company shall, in order to permit resales of any of the Conversion Shares or
Warrant Shares pursuant to Regulation S under the Securities Act, (a) continue
to file all material required to be filed pursuant to Section 13(a) or 15(d) of
the Exchange Act, and (b) not knowingly engage in directed selling efforts in
connection with the resale of securities by the Offshore Purchaser under
Regulation S.


 


ARTICLE IV


 


CONDITIONS


 


Section 4.1             Conditions Precedent to the
Obligation of the Company to Close and to Sell the Securities.  The obligation hereunder of the Company to
close and issue and sell the Securities to the Purchasers at the Closing is
subject to the satisfaction or waiver, at or before the Closing of the
conditions set forth below.  These
conditions are for the Company’s sole benefit and may be waived by the Company
at any time in its sole discretion.


 


(a)           Accuracy
of the Purchasers’ Representations and Warranties.  The representations and warranties of each
Purchaser shall be true and correct in all material respects as of the date
when made and as of the Closing Date as though made at that time, except for


 


20





















 


representations and warranties that are expressly made
as of a particular date, which shall be true and correct in all material
respects as of such date.


 


(b)           Performance
by the Purchasers.  Each Purchaser
shall have performed, satisfied and complied in all material respects with all
covenants, agreements and conditions required by this Agreement to be
performed, satisfied or complied with by the Purchasers at or prior to the
Closing Date.


 


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


 


(d)           Delivery
of Purchase Price.  The Purchase
Price for the Securities shall have been delivered to the Company on the
Closing Date.


 


(e)           Delivery
of Transaction Documents.  The
Transaction Documents shall have been duly executed and delivered by the
Purchasers to the Company.


 


Section 4.2             Conditions Precedent to the
Obligation of the Purchasers to Close and to Purchase the Securities.  The obligation hereunder of the Purchasers to
purchase the Securities and consummate the transactions contemplated by this
Agreement is subject to the satisfaction or waiver, at or before the Closing,
of each of the conditions set forth below. 
These conditions are for the Purchasers’ sole benefit and may be waived
by the Purchasers at any time in their sole discretion.


 


(a)           Accuracy
of the Company’s Representations and Warranties.  Each of the representations and warranties of
the Company in this Agreement and the Registration Rights Agreement shall be
true and correct in all material respects as of the Closing Date, except for
representations and warranties that speak as of a particular date, which shall
be true and correct in all material respects as of such date.


 


(b)           Performance
by the Company.  The Company shall
have performed, satisfied and complied in all material respects with all
covenants, agreements and conditions required by this Agreement to be
performed, satisfied or complied with by the Company at or prior to the Closing
Date.


 


(c)           No
Suspension, Etc.  Trading in the
Common Stock shall not have been suspended by the Commission or the OTC Bulletin
Board (except for any suspension of trading of limited duration agreed to by
the Company, which suspension shall be terminated prior to the Closing), and,
at any time prior to the Closing Date, trading in securities generally as
reported by Bloomberg Financial Markets (“Bloomberg”) shall not have
been suspended or limited, or minimum prices shall not have been established on
securities whose trades are reported by Bloomberg, or on the New York Stock
Exchange, nor shall a banking moratorium have been declared either by the
United States or New York State authorities.


 


(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


 


21





















 


governmental authority of competent jurisdiction which
prohibits the consummation of any of the transactions contemplated by this
Agreement.


 


(e)           No
Proceedings or Litigation.  No
action, suit or proceeding before any arbitrator or any governmental authority
shall have been commenced, and no investigation by any governmental authority
shall have been threatened, against the Company or any Subsidiary, or any of
the officers, directors or affiliates of the Company or any Subsidiary seeking
to restrain, prevent or change the transactions contemplated by this Agreement,
or seeking damages in connection with such transactions.


 


(f)            Opinion
of Counsel.  The Purchasers shall
have received an opinion of counsel to the Company, dated the date of such
Closing, substantially in the form of Exhibit F hereto, with such
exceptions and limitations as shall be reasonably acceptable to counsel to the
Purchasers.


 


(g)           Notes
and Warrants.  At or prior to the
Closing, the Company shall have delivered to the Purchasers the Notes (in such
denominations as each Purchaser may request) and the Warrants.


 


(h)           Secretary’s
Certificate.  The Company shall have
delivered to the Purchasers a secretary’s certificate, dated as of the Closing
Date, as to (i) the resolutions adopted by the Board of Directors approving the
transactions contemplated hereby, (ii) the Certificate, (iii) the Bylaws, each
as in effect at the Closing, and (iv) the authority and incumbency of the
officers of the Company executing the Transaction Documents and any other
documents required to be executed or delivered in connection therewith.


 


(i)            Officer’s
Certificate.  On the Closing Date,
the Company shall have delivered to the Purchasers a certificate signed by an
executive officer on behalf of the Company, dated as of the Closing Date,
confirming the accuracy of the Company’s representations, warranties and
covenants as of the Closing Date and confirming the compliance by the Company
with the conditions precedent set forth in paragraphs (b)-(e) of this Section
4.2 as of the Closing Date (provided that, with respect to the matters in
paragraphs (d) and (e) of this Section 4.2, such confirmation shall be based on
the knowledge of the executive officer after due inquiry).


 


(j)            Registration
Rights Agreement.  As of the Closing
Date, the parties shall have entered into the Registration Rights Agreement.


 


(k)           Material
Adverse Effect.  No Material Adverse
Effect shall have occurred at or before the Closing Date.


 


(l)            Transfer
Agent Instructions.  The Irrevocable
Transfer Agent Instructions, in the form of Exhibit E attached hereto,
shall have been delivered to the Company’s transfer agent.


 


22





















 


ARTICLE V


 


CERTIFICATE LEGEND 


 


Section 5.1             Legend.  Each certificate representing the Securities
issued to each of the Purchasers (other than the Offshore Purchaser) shall be
stamped or otherwise imprinted with a legend substantially in the following
form (in addition to any legend required by applicable state securities or “blue
sky” laws):


 


THE SECURITIES REPRESENTED BY THIS CERTIFICATE (THE “SECURITIES”) HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES
ACT”) OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED OR
OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER THE SECURITIES ACT AND UNDER
APPLICABLE STATE SECURITIES LAWS OR COMMUNICATION INTELLIGENCE CORPORATION
SHALL HAVE RECEIVED AN OPINION OF COUNSEL THAT REGISTRATION OF SUCH SECURITIES
UNDER THE SECURITIES ACT AND UNDER THE PROVISIONS OF APPLICABLE STATE
SECURITIES LAWS IS NOT REQUIRED.


 


Each certificate representing the Securities issued to the Offshore
Purchaser shall be stamped or otherwise imprinted with a legend substantially
in the following form (in addition to any legend required by applicable state
securities or “blue sky” laws):


 


THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE HAVE BEEN
ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES
ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”) OR ANY STATE SECURITIES LAWS AND
MAY NOT BE OFFERED, SOLD OR TRANSFERRED UNLESS (I) THERE IS AN EFFECTIVE
REGISTRATION STATEMENT COVERING SUCH OFFER, SALE OR TRANSFER OR (II) THERE
IS AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO THE COMPANY, THAT AN
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR ANY
APPLICABLE STATE SECURITIES LAWS FOR SUCH OFFER, SALE OR TRANSFER IS AVAILABLE.
HEDGING TRANSACTIONS INVOLVING THE SHARES REPRESENTED HEREBY MAY NOT BE
CONDUCTED UNLESS IN COMPLIANCE WITH THE SECURITIES ACT.


 


In connection with a proposed transfer of any of the
Conversion Shares or Warrant Shares, the Company agrees to reissue certificates
representing any of the Conversion Shares and the Warrant Shares, without the
applicable legend set forth above if at such time, prior to making any transfer
of any such Conversion Shares or Warrant Shares, such holder thereof shall give
written notice to the Company describing the manner and terms of such transfer
and removal as the Company may reasonably request.  Such proposed transfer and removal will not
be effected until: (a) either (i) the Company has received an opinion of
counsel reasonably satisfactory to the


 


23





















 


Company, to the effect
that the registration of the Conversion Shares or Warrant Shares under the
Securities Act is not required in connection with such proposed transfer, (ii)
a registration statement under the Securities Act covering such proposed
transfer has been filed by the Company with the Commission and has become
effective under the Securities Act, (iii) the Company has received other
evidence reasonably satisfactory to the Company that such registration and
qualification under the Securities Act and state securities laws are not
required, or (iv) the holder provides the Company with reasonable assurances
that such security can be transferred pursuant to Rule 144 or under another
exemption from registration under the Securities Act; and (b) either (i) the Company
has received an opinion of counsel reasonably satisfactory to the Company, to
the effect that registration or qualification under the securities or “blue sky”
laws of any state is not required in connection with such proposed disposition,
(ii) compliance with applicable state securities or “blue sky” laws has been
effected, or (iii) the holder provides the Company with reasonable assurances
that a valid exemption exists with respect thereto.  The Company will respond to any such notice
from a holder within five (5) business days. 
In the case of any proposed transfer under this Section 5.1, the Company
will use reasonable efforts to comply with any such applicable state securities
or “blue sky” laws, but shall in no event be required, (x) to qualify to do
business in any state where it is not then qualified, (y) to take any action
that would subject it to tax or to the general service of process in any state
where it is not then subject, or (z) to comply with state securities or “blue
sky” laws of any state for which registration by coordination is unavailable to
the Company.  The restrictions on
transfer contained in this Section 5.1 shall be in addition to, and not by way
of limitation of, any other restrictions on transfer contained in any other
section of this Agreement.  Whenever a
certificate representing the Conversion Shares or Warrant Shares is required to
be issued to a Purchaser without a legend, in lieu of delivering physical
certificates representing the Conversion Shares or Warrant Shares, provided the
Company’s transfer agent is participating in the Depository Trust Company (“DTC”) Fast Automated
Securities Transfer program, the Company shall use its reasonable best efforts
to cause its transfer agent to electronically transmit the Conversion Shares or
Warrant Shares to a Purchaser by crediting the account of such Purchaser’s
Prime Broker with DTC through its Deposit Withdrawal Agent Commission (“DWAC”)
system (to the extent not inconsistent with any provisions of this Agreement).


 


ARTICLE VI


 


INDEMNIFICATION


 


Section 6.1             General
Indemnity.  The Company agrees to indemnify and hold
harmless the Purchasers (and their respective directors, officers, affiliates,
agents, successors and assigns) from and against any and all losses,
liabilities, deficiencies, costs, damages and expenses (including, without
limitation, reasonable attorneys’ fees, charges and disbursements) incurred by
the Purchasers as a result of any inaccuracy in or breach of the
representations, warranties or covenants made by the Company herein.  Each Purchaser severally but not jointly
agrees to indemnify and hold harmless the Company and its directors, officers,
affiliates, agents, successors and assigns from and against any and all losses,
liabilities, deficiencies, costs, damages and expenses (including, without
limitation, reasonable attorneys’ fees, charges and disbursements) incurred by
the Company as result of any inaccuracy in or breach of the representations,
warranties or covenants made by such Purchaser herein.  The maximum


 


24





















 


aggregate liability of each Purchaser pursuant to its
indemnification obligations under this Article VI shall not exceed the portion
of the Purchase Price paid by such Purchaser hereunder. The maximum aggregate
liability of the Company pursuant to its indemnification obligations under this
Article VI shall not exceed the aggregate Purchase Price, including any actual
moneys paid by the Purchasers for the Warrant Shares.


 


Section 6.2             Indemnification Procedure.  Any party entitled to indemnification under
this Article VI (an “indemnified party”) will give written notice to the
indemnifying party of any matter giving rise to a claim for indemnification;
provided, that the failure of any party entitled to indemnification hereunder
to give notice as provided herein shall not relieve the indemnifying party of
its obligations under this Article VI except to the extent that the
indemnifying party is actually prejudiced by such failure to give notice.  In case any such action, proceeding or claim
is brought against an indemnified party in respect of which indemnification is
sought hereunder, the indemnifying party shall be entitled to participate in
and, unless in the reasonable judgment of the indemnifying party a conflict of
interest between it and the indemnified party exists with respect to such
action, proceeding or claim (in which case the indemnifying party shall be
responsible for the reasonable fees and expenses of one separate counsel for
the indemnified parties), to assume the defense thereof with counsel reasonably
satisfactory to the indemnified party. 
In the event that the indemnifying party advises an indemnified party
that it will not contest such a claim for indemnification hereunder, or fails,
within thirty (30) days of receipt of any indemnification notice to notify, in
writing, such person of its election to defend, settle or compromise, at its
sole cost and expense, any action, proceeding or claim (or discontinues its
defense at any time after it commences such defense), then the indemnified
party may, at its option, defend, settle or otherwise compromise or pay such
action or claim.  In any event, unless
and until the indemnifying party elects in writing to assume and does so assume
the defense of any such claim, proceeding or action, the indemnified party’s
costs and expenses arising out of the defense, settlement or compromise of any
such action, claim or proceeding shall be losses subject to indemnification
hereunder.  The indemnified party shall
cooperate fully with the indemnifying party in connection with any negotiation
or defense of any such action or claim by the indemnifying party and shall
furnish to the indemnifying party all information reasonably available to the
indemnified party which relates to such action or claim.  The indemnifying party shall keep the
indemnified party fully apprised at all times as to the status of the defense
or any settlement negotiations with respect thereto.  If the indemnifying party elects to defend
any such action or claim, then the indemnified party shall be entitled to
participate in such defense with counsel of its choice at its sole cost and
expense.  The indemnifying party shall
not be liable for any settlement of any action, claim or proceeding effected
without its prior written consent. 
Notwithstanding anything in this Article VI to the contrary, the
indemnifying party shall not, without the indemnified party’s prior written
consent, settle or compromise any claim or consent to entry of any judgment in
respect thereof which imposes any future obligation on the indemnified party or
which does not include, as an unconditional term thereof, the giving by the
claimant or the plaintiff to the indemnified party of a release from all
liability in respect of such claim.  The
indemnification obligations to defend the indemnified party required by this
Article VI shall be made by periodic payments of the amount thereof during the
course of investigation or defense, as and when bills are received or expense,
loss, damage or liability is incurred, so long as the indemnified party shall
refund such moneys if it is ultimately determined by a court of competent
jurisdiction that such party was not entitled to indemnification.  The indemnity agreements contained herein
shall be in addition to


 


25





















 


(a) any cause of action or similar rights of the
indemnified party against the indemnifying party or others, and (b) any
liabilities the indemnifying party may be subject to pursuant to the law.  No indemnifying party will be liable to the
indemnified party under this Agreement to the extent, but only to the extent
that a loss, claim, damage or liability is attributable to the indemnified party’s
breach of any of the representations, warranties or covenants made by such
party in this Agreement or in the other Transaction Documents.


 


ARTICLE VII


 


MISCELLANEOUS


 


Section 7.1             Fees and Expenses.  Each party shall pay the fees and expenses of
its advisors, counsel, accountants and other experts, if any, and all other
expenses, incurred by such party incident to the negotiation, preparation,
execution, delivery and performance of this Agreement; provided, however,
that the Company shall pay all actual attorneys’ fees and expenses (including
disbursements and out-of-pocket expenses) incurred by the Purchasers in
connection with (i) the preparation, negotiation, execution and delivery of
this Agreement, the Registration Rights Agreement and the transactions
contemplated thereunder, which payment shall be made at Closing and shall not
exceed $25,000 (plus disbursements and out-of-pocket expenses), (ii) the filing
and declaration of effectiveness by the Commission of the Registration
Statement (as defined in the Registration Rights Agreement) and (iii) any
amendments, modifications or waivers of this Agreement or any of the other
Transaction Documents so long as such amendments, modifications or waivers are
at the request of, or for the benefit of, the Company.  In addition, the Company and the Purchasers hereby agree that
the prevailing party in any suit, action or proceeding arising out of or
relating to the enforcement of this Agreement or any of the other Transaction
Documents shall be entitled to reimbursement for reasonable legal fees from the
non-prevailing party.


 


Section 7.2             Specific Performance; Consent to
Jurisdiction; Venue.


 


(a)           The
Company and the Purchasers acknowledge and agree that irreparable damage would
occur in the event that any of the provisions of this Agreement or the other
Transaction Documents were not performed in accordance with their specific
terms or were otherwise breached.  It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent or cure breaches of the provisions of this Agreement or
the other Transaction Documents and to enforce specifically the terms and
provisions hereof or thereof, this being in addition to any other remedy to
which any of them may be entitled by law or equity.


 


(b)           The parties agree that venue for any dispute
arising under this Agreement will lie exclusively in the state or federal
courts located in New York County, New York, and the parties irrevocably waive
any right to raise forum non conveniens
or any other argument that New York is not the proper venue.  The parties irrevocably consent to personal
jurisdiction in the state and federal courts of the state of New York.  The Company and each Purchaser consent to
process being served in any such suit, action or proceeding by mailing a copy
thereof to such party at the address in effect for notices to it under this
Agreement and agrees that such service shall constitute good and sufficient
service of process and notice thereof. 
Nothing in this Section 7.2


 


26





















 


shall affect or limit any right to serve process in
any other manner permitted by law.  The
Company and the Purchasers hereby agree that the prevailing party in any suit,
action or proceeding arising out of or relating to the Securities, this Agreement
or the Registration Rights Agreement, shall be entitled to reimbursement for
reasonable legal fees from the non-prevailing party.


 


Section 7.3             Entire Agreement; Amendment.  This Agreement and the Transaction Documents
contain the entire understanding and agreement of the parties with respect to
the matters covered hereby and, except as specifically set forth herein or in
the other Transaction Documents, neither the Company nor any Purchaser make any
representation, warranty, covenant or undertaking with respect to such matters,
and they supersede all prior understandings and agreements with respect to said
subject matter, all of which are merged herein. 
No provision of this Agreement may be waived or amended other than by a
written instrument signed by the Company and the Purchasers holding at least a
majority of the principal amount of the Notes then held by the Purchasers.  Any amendment or waiver effected in
accordance with this Section 7.3 shall be binding upon each Purchaser (and
their permitted assigns) and the Company.


 


Section 7.4             Notices.  Any notice, demand, request, waiver or other
communication required or permitted to be given hereunder shall be in writing
and shall be effective (a) upon hand delivery by telecopy or facsimile at the
address or number designated below (if delivered on a business day during
normal business hours where such notice is to be received), or the first
business day following such delivery (if delivered other than on a business day
during normal business hours where such notice is to be received) or (b) on the
second business day following the date of mailing by express courier service,
fully prepaid, addressed to such address, or upon actual receipt of such
mailing, whichever shall first occur. 
The addresses for such communications shall be:


 


	
  If to the Company:

  	
  Communication Intelligence Corporation

  
	
   

  	
  275 Shoreline Drive, Suite 500

  
	
   

  	
  Redwood Shores, California 94065

  
	
   

  	
  Attention: Frank Dane, Chief Financial and Legal Officer

  
	
   

  	
  Tel. No.: (650) 802-7737

  
	
   

  	
  Fax No.: (419) 735-7922

  
	
   

  	
   

  
	
  with copies (which copies

  shall not constitute notice

  to the Company) to:

  	
  Davis Wright Tremaine LLP

  
	
   

  	
  1300 S.W. Fifth Avenue, 23rd Floor

  
	
   

  	
  Portland, OR 97201

  
	
   

  	
  Attention: Michael C. Phillips

  
	
   

  	
  Tel. No.: (503) 241-2300

  
	
   

  	
  Fax No.: (503) 778-5299

  
	
   

  	
   

  
	
  If to any Purchaser:

  	
  At the address of such Purchaser set forth on Exhibit A to
  this Agreement, with copies to Purchaser’s counsel as set forth on

  



 


27





















 


	
   

  	
  Exhibit A or as specified in writing by such
  Purchaser with copies to:

  
	
   

  	
   

  
	
   

  	
  Jenkens & Gilchrist Parker Chapin LLP

  
	
   

  	
  The Chrysler Building

  
	
   

  	
  405 Lexington Avenue 

  
	
   

  	
  New York, NY 10174

  
	
   

  	
  Attention: Christopher S. Auguste

  
	
   

  	
  Tel No.: (212) 704-6000

  
	
   

  	
  Fax No.: (212) 704-6288

  



 


Any party hereto may from time to time change its
address for notices by giving written notice of such changed address to the
other party hereto.


 


Section 7.5             Waivers.  No waiver by either party of any default with
respect to any provision, condition or requirement of this Agreement shall be
deemed to be a continuing waiver in the future or a waiver of any other
provision, condition or requirement hereof, nor shall any delay or omission of
any party to exercise any right hereunder in any manner impair the exercise of
any such right accruing to it thereafter.


 


Section 7.6             Headings.  The article, section and subsection headings
in this Agreement are for convenience only and shall not constitute a part of
this Agreement for any other purpose and shall not be deemed to limit or affect
any of the provisions hereof.


 


Section 7.7             Successors and Assigns.  This Agreement shall be binding upon and
inure to the benefit of the parties and their successors and assigns.  After the Closing, the assignment by a party
to this Agreement of any rights hereunder shall not affect the obligations of
such party under this Agreement.  Subject
to Section 5.1 hereof, the Purchasers may assign the Securities and its rights
under this Agreement and the other Transaction Documents and any other rights
hereto and thereto without the consent of the Company.


 


Section 7.8             No Third Party Beneficiaries.  This Agreement is intended for the benefit of
the parties hereto and their respective permitted successors and assigns and is
not for the benefit of, nor may any provision hereof be enforced by, any other
person.


 


Section 7.9             Governing Law.  This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York,
without giving effect to any of the conflicts of law principles which would result
in the application of the substantive law of another jurisdiction.  This Agreement shall not be interpreted or
construed with any presumption against the party causing this Agreement to be
drafted.


 


Section 7.10           Survival.  The representations and warranties of the
Company and the Purchasers shall survive the execution and delivery hereof and
the Closing until the second anniversary of the Closing Date, except the
agreements and covenants set forth in Articles I, III, V, VI and VII of this
Agreement shall survive the execution and delivery hereof and the Closing
hereunder.


 


28





















 


Section 7.11           Counterparts.  This Agreement may be executed in any number
of counterparts, all of which taken together shall constitute one and the same
instrument and shall become effective when counterparts have been signed by
each party and delivered to the other parties hereto, it being understood that
all parties need not sign the same counterpart.


 


Section 7.12           Publicity.  The Company agrees that it will not disclose,
and will not include in any public announcement, the names of the Purchasers
without the consent of the Purchasers, which consent shall not be unreasonably
withheld or delayed, or unless and until such disclosure is required by law,
rule or applicable regulation, including without limitation any disclosure
pursuant to a registration statement registering the Conversion Shares and the
Warrant Shares, and then only to the extent of such requirement.


 


Section 7.13           Severability.  The provisions of this Agreement are
severable and, in the event that any court of competent jurisdiction shall
determine that any one or more of the provisions or part of the provisions
contained in this Agreement shall, for any reason, be held to be invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision or part of a provision of
this Agreement and this Agreement shall be reformed and construed as if such invalid
or illegal or unenforceable provision, or part of such provision, had never
been contained herein, so that such provisions would be valid, legal and
enforceable to the maximum extent possible.


 


Section 7.14           Further Assurances.  From and after the date of this Agreement,
upon the request of the Purchasers or the Company, the Company and each
Purchaser shall execute and deliver such instruments, documents and other
writings as may be reasonably necessary or desirable to confirm and carry out
and to effectuate fully the intent and purposes of this Agreement and the other
Transaction Documents.


 


 


[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]


 


29





















 


IN WITNESS
WHEREOF, the parties hereto have caused this Note and Warrant Purchase
Agreement to be duly executed by their respective authorized officers as of the
date first above written.


 


 


	
   

  	
  COMMUNICATION INTELLIGENCE CORPORATION

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
              /s/ Frank Dane

  	
   

  
	
   

  	
   

  	
  Name:      Frank Dane

  
	
   

  	
   

  	
  Title:        Chief Financial
  and Legal Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  PURCHASER:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
             /s/

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  



 





















 


EXHIBIT A


 


LIST OF PURCHASERS


 


	
  Names and Addresses

  of Purchasers

  	
   

  	
  Investment Amount and Number of

  Warrants Purchased

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  



 


i





















 


EXHIBIT B


FORM OF NOTE


 


ii





















 


EXHIBIT C


FORM OF WARRANT


 


iii





















 


EXHIBIT D


FORM OF REGISTRATION RIGHTS AGREEMENT


 


iv





















 


EXHIBIT E


FORM OF IRREVOCABLE TRANSFER AGENT
INSTRUCTIONS


 


COMMUNICATION INTELLIGENCE CORPORATION


 


	
   

  	
  as of
  October 28, 2004

  



 


[Name and address of Transfer Agent]


Attn:                  


 


Ladies and Gentlemen:


 


Reference is made to that certain Note and Warrant Purchase Agreement
(the “Purchase Agreement”), dated as of
October 28, 2004, by and among Communication Intelligence Corporation, a
Delaware corporation (the “Company”), and
the purchasers named therein (collectively, the “Purchasers”)
pursuant to which the Company is issuing to the Purchasers convertible
promissory notes (the “Notes”) and
warrants (the “Warrants”) to purchase shares of
the Company’s common stock, par value $0.01 per share (the “Common Stock”).  This
letter shall serve as our irrevocable authorization and direction to you
(provided that you are the transfer agent of the Company at such time) to issue
shares of Common Stock upon conversion of the Notes (the “Conversion
Shares”) and exercise of the Warrants (the “Warrant
Shares”) to or upon the order of a Purchaser from time to time upon
(i) surrender to you of a properly completed and duly executed Conversion
Notice or Exercise Notice, as the case may be, in the form attached hereto as
Exhibit I and Exhibit II, respectively, (ii) in the case of the conversion of
Notes, a copy of the Note (with the original delivered to the Company)
representing the Notes being converted or, in the case of Warrants being
exercised, a copy of the Warrants (with the original Warrants delivered to the
Company) being exercised (or, in each case, an indemnification undertaking with
respect to such Notes or the Warrants in the case of their loss, theft or
destruction), and (iii) delivery of a treasury order or other appropriate order
duly executed by a duly authorized officer of the Company.  So long as you have previously received (x)
written confirmation from counsel to the Company that a registration statement
covering resales of the Conversion Shares or Warrant Shares, as applicable, has
been declared effective by the Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended (the “1933 Act”), and no subsequent notice by the Company or its
counsel of the suspension or termination of its effectiveness and (y) a copy of
such registration statement, and if the Purchaser represents in writing that
the Conversion Shares or the Warrant Shares, as the case may be, were sold
pursuant to the Registration Statement, then certificates representing the
Conversion Shares and the Warrant Shares, as the case may be, shall not bear
any legend restricting transfer of the Conversion Shares and the Warrant
Shares, as the case may be, thereby and should not be subject to any
stop-transfer restriction.  Provided,
however, that if you have not previously received (i) written confirmation from
counsel to the Company that a registration statement covering resales of the
Conversion Shares or Warrant Shares, as applicable, has been declared effective
by the SEC under the 1933 Act, and (ii) a copy of such registration statement,
then the certificates for the Conversion Shares and the Warrant Shares shall
bear the following legend:


 


Legend for each Purchaser other than the Offshore Purchaser (as defined
in the Purchase Agreement):


 


“THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
SECURITIES ACT”), OR ANY STATE


 


v





















 


SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED OR
OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER THE SECURITIES ACT OR APPLICABLE
STATE SECURITIES LAWS, OR COMMUNICATION INTELLIGENCE CORPORATION SHALL HAVE
RECEIVED AN OPINION OF ITS COUNSEL THAT REGISTRATION OF SUCH SECURITIES UNDER
THE SECURITIES ACT AND UNDER THE PROVISIONS OF APPLICABLE STATE SECURITIES LAWS
IS NOT REQUIRED.”


 


Legend for the Offshore Purchaser (as defined in the Purchase
Agreement):


 


“THE
SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933,
AS AMENDED (THE “SECURITIES ACT”) OR ANY STATE SECURITIES LAWS AND MAY NOT BE
OFFERED, SOLD OR TRANSFERRED UNLESS (I) THERE IS AN EFFECTIVE REGISTRATION
STATEMENT COVERING SUCH OFFER, SALE OR TRANSFER OR (II) THERE IS AN
OPINION OF COUNSEL, REASONABLY SATISFACTORY TO THE COMPANY, THAT AN EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR ANY APPLICABLE
STATE SECURITIES LAWS FOR SUCH OFFER, SALE OR TRANSFER IS AVAILABLE. HEDGING
TRANSACTIONS INVOLVING THE SHARES REPRESENTED HEREBY MAY NOT BE CONDUCTED
UNLESS IN COMPLIANCE WITH THE SECURITIES ACT.”


 


and, provided further, that the Company may from time to time notify
you to place stop-transfer restrictions on the certificates for the Conversion
Shares and the Warrant Shares in the event a registration statement covering
the Conversion Shares and the Warrant Shares is subject to amendment for events
then current.


 


A form of written confirmation from counsel to the Company that a
registration statement covering resales of the Conversion Shares and the
Warrant Shares has been declared effective by the SEC under the 1933 Act is
attached hereto as Exhibit III.


 


Please be advised that the Purchasers are relying upon this letter as
an inducement to enter into the Purchase Agreement and, accordingly, each
Purchaser is a third party beneficiary to these instructions.


 


Please execute this letter in the space indicated to acknowledge your
agreement to act in accordance with these instructions.  Should you have any questions concerning this
matter, please contact me at                 .


 


	
   

  	
  Very truly yours,

  
	
   

  	
   

  
	
   

  	
  COMMUNICATION INTELLIGENCE CORPORATION

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  



 


vi





















 


	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
					



 


ACKNOWLEDGED AND AGREED:


 


[TRANSFER AGENT]


 


	
  By:

  	
   

  	
   

  
	
  Name:

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  
	
  Date:

  	
   

  	
   

  
				



 


vii





















 


EXHIBIT I


 


COMMUNICATION INTELLIGENCE CORPORATION


CONVERSION NOTICE


 


(To be Executed by the Registered Holder in
order to Convert the Note)


 


The undersigned hereby irrevocably elects to convert $              
of the principal amount of the above Note No.      
into shares of Common Stock of COMMUNICATION INTELLIGENCE CORPORATION (the “Maker”)
according to the conditions hereof, as of the date written below.


 


	
  Date of Conversion

  	
   

  
	
   

  
	
  Applicable Conversion Price

  	
   

  
	
   

  
	
  Number of shares of Common Stock beneficially owned or deemed
  beneficially owned by the Holder on the Date of Conversion:

  
	
   

  
	
  Signature

  	
   

  	
   

  
	
   

  
	
  [Name]

  
	
   

  
	
  Address:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
								



 


viii





















 


EXHIBIT II


 


FORM OF EXERCISE NOTICE


 


EXERCISE FORM


 


COMMUNICATION INTELLIGENCE CORPORATION


 


The undersigned                      ,
pursuant to the provisions of the within Warrant, hereby elects to purchase                 
shares of Common Stock of Communication Intelligence Corporation covered by the
within Warrant.


 


	
  Dated:

  	
   

  	
   

  	
  Signature

  	
   

  	
   

  
	
   

  	
  Address

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
							



 


Number of shares of Common Stock beneficially owned or deemed
beneficially owned by the Holder on the date of Exercise:                             


 


ASSIGNMENT


 


FOR VALUE RECEIVED,                                
hereby sells, assigns and transfers unto                                
the within Warrant and all rights evidenced thereby and does irrevocably
constitute and appoint                             ,
attorney, to transfer the said Warrant on the books of the within named
corporation.


 


	
  Dated:

  	
   

  	
   

  	
  Signature

  	
   

  	
   

  
	
   

  	
  Address

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
							



 


PARTIAL ASSIGNMENT


 


FOR VALUE RECEIVED,                               
hereby sells, assigns and transfers unto                                      
the right to purchase                              
shares of Warrant Stock evidenced by the within Warrant together with all
rights therein, and does irrevocably constitute and appoint                                   ,
attorney, to transfer that part of the said Warrant on the books of the within
named corporation.


 


	
  Dated:

  	
   

  	
   

  	
  Signature

  	
   

  	
   

  
	
   

  	
  Address

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
							



 


FOR USE BY THE ISSUER ONLY:


 


This Warrant No. W-           
canceled (or transferred or exchanged) this               
day of                      ,
         , shares of Common Stock
issued therefor in the name of                           ,
Warrant No. W-          
issued for              
shares of Common Stock in the name of                      .


 


ix





















 


EXHIBIT III


 


FORM OF NOTICE OF EFFECTIVENESS


OF REGISTRATION STATEMENT


 


[Name and address of Transfer Agent]


Attn:                          


 


Re:          Communication
Intelligence Corporation 


 


Ladies and Gentlemen:


 


We are counsel to Communication Intelligence Corporation, a Delaware
corporation (the “Company”), and
have represented the Company in connection with that certain Note and Warrant
Purchase Agreement (the “Purchase Agreement”),
dated as of October 28, 2004, by and among the Company and the purchasers named
therein (collectively, the “Purchasers”)
pursuant to which the Company issued to the Purchasers secured convertible
promissory notes (the “Notes”) and
warrants (the “Warrants”) to purchase shares of
the Company’s common stock, par value $0.01 per share (the “Common Stock”). 
Pursuant to the Purchase Agreement, the Company has also entered into a
Registration Rights Agreement with the Purchasers (the “Registration
Rights Agreement”), dated as of October 28, 2004, pursuant to which
the Company agreed, among other things, to register the Registrable Securities
(as defined in the Registration Rights Agreement), including the shares of
Common Stock issuable upon conversion of the Notes and exercise of the Warrants,
under the Securities Act of 1933, as amended (the “1933 Act”).  In connection with the Company’s obligations
under the Registration Rights Agreement, on                     ,
2004, the Company filed a Registration Statement on Form SB-2 (File No. 333-                    )
(the “Registration Statement”) with the
Securities and Exchange Commission (the “SEC”) relating
to the resale of the Registrable Securities which names each of the present
Purchasers as a selling stockholder thereunder.


 


In connection with the foregoing, we advise you that a member of the
SEC’s staff has advised us by telephone that the SEC has entered an order
declaring the Registration Statement effective under the 1933 Act at [ENTER TIME OF EFFECTIVENESS] on [ENTER DATE
OF EFFECTIVENESS] and we have no knowledge, after telephonic inquiry
of a member of the SEC’s staff, that any stop order suspending its
effectiveness has been issued or that any proceedings for that purpose are
pending before, or threatened by, the SEC and accordingly, the Registrable
Securities are available for resale under the 1933 Act pursuant to the
Registration Statement.


 


	
   

  	
  Very truly yours,

  
	
   

  	
   

  
	
   

  	
  [COMPANY COUNSEL]

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  



 


cc:           [LIST NAMES
OF PURCHASERS]


 


x





















 


EXHIBIT F


FORM OF OPINION


 


xi





















 


Schedule I


Name and Address
of Offshore Purchaser


 


xi