Exhibit 10.1


 


SECURITIES
PURCHASE AGREEMENT


 


This Securities Purchase Agreement (this “Agreement”)
is dated as of November 3, 2005, among Focus Enhancements, Inc., a
Delaware corporation (the “Company”), and each Purchaser identified on
the signature pages hereto (each a “Purchaser” and collectively the
“Purchasers”); the Company and each Purchaser are individually referred
to herein as a “party” and collectively as the “parties”.


 


WHEREAS, subject to the terms and conditions
set forth in this Agreement and pursuant to Section 4(2) of the
Securities Act (as defined below), and Rule 506 promulgated thereunder,
the Company desires to issue and sell to the Purchasers, and the Purchasers,
severally and not jointly, desire to purchase from the Company in the aggregate,
up to $6,500,000 of shares of Common Stock and Warrants on the Closing Date,
each as set forth in the respective amounts on the signature pages attached
hereto.


 


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


 


ARTICLE I.

DEFINITIONS


 


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


 


“Action”
shall have the meaning ascribed to such term in Section 3.1(j).


 


“Affiliate”
means any Person that, directly or indirectly through one or more
intermediaries, controls or is controlled by or is under common control with a
Person as such terms are used in and construed under Rule 144.  With respect to a Purchaser, any investment
fund or managed account that is managed on a discretionary basis by the same
investment manager as such Purchaser will be deemed to be an Affiliate of such
Purchaser.


 


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


 


“Cash
Placement Agent Fee” shall have the meaning ascribed to such term in Section 3.1(s).


 


“Closing”
means the closing of the purchase and sale of the Common Stock and the Warrants
pursuant to Section 2.1.


 


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“Closing
Date” means the Trading Day when all of the Transaction Documents have been
executed and delivered by the applicable parties thereto, and all conditions precedent
to the Purchasers’ obligations to pay the Subscription Amount have been
satisfied or waived.


 


“Commission” means the Securities and
Exchange Commission.


 


“Common
Stock” means the common stock of the Company, $0.01 par value per share,
and any securities into which such common stock may hereafter be reclassified.


 


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


 


“Company
Counsel” means Manatt, Phelps & Phillips, LLP with offices located
at 1001 Page Mill Road, Bldg. 2, Palo Alto, California  94304-1006.


 


“Disclosure
Schedules” means the Disclosure Schedules attached hereto.


 


“Effective
Date” means the date that the Registration Statement is first declared
effective by the Commission.


 


“Environmental
Laws” shall have the meaning ascribed to such term in Section 3.1(ff).


 


“Escrow
Amount” shall have the meaning ascribed to such term in Section 2.1(c).


 


“Evaluation
Date” shall have the meaning ascribed to such term in Section 3.1(hh).


 


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


 


“GAAP”
shall have the meaning ascribed to such term in Section 3.1(h).


 


 “Intellectual
Property Rights” shall have the meaning ascribed to such term in Section 3.1(o).


 


“Lead
Investor” shall have the meaning ascribed to such term in Section 2.1(d)(iv).


 


“Lead
Investor Counsel” shall have the meaning ascribed to such term in Section 2.1(c).


 


“Lead
Investor Counsel Fees” shall have the meaning ascribed to such term in Section 5.1.


 


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“Lead
Investor Counsel Duties” shall have the meaning ascribed to such term in Section 2.1(d)(iii).


 


“Liens”
means a lien, charge, security interest, encumbrance, right of first refusal,
preemptive right or other restriction.


 


“Material
Adverse Effect” shall have the meaning ascribed to such term in Section 3.1(b).


 


“Material
Permits” shall have the meaning ascribed to such term in Section 3.1(m).


 


“Net Escrow
Amount” means the Escrow Amount less the Cash Placement Agent Fee (as
defined in Section 3.1(s)) and the Lead Investor Counsel Fees (as defined
in Section 5.1).


 


“Per Share
Purchase Price” shall be $0.6576, subject to adjustment for reverse and
forward stock splits, stock dividends, stock combinations and other similar
transactions of the Common Stock that occur after the date of this Agreement
but prior to the Closing.


 


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


 


“Placement
Agent” means First Montauk Securities Corp.


 


“Prohibited
Transaction” shall have the meaning ascribed to such term in Section 3.2(f).


 


“Pro Rata
Share” means, with respect to a Purchaser, the ratio that the number of
Shares to be issued to such Purchaser at the Closing bears to the total number
of Shares to be issued to all of the Purchasers at the Closing.


 


“Registration
Rights Agreement” means the Registration Rights Agreement, dated as of the
date of this Agreement, among the Company and each Purchaser, in the form of Exhibit A
hereto.


 


“Registration
Statement” means a registration statement meeting the requirements set forth
in the Registration Rights Agreement and covering the resale by the Purchasers
of the Shares and the Warrant Shares.


 


“Required
Approvals” shall have the meaning ascribed to such term in Section 3.1(e).


 


“Rule 144”
means Rule 144 promulgated by the Commission pursuant to the Securities
Act, as such Rule may be amended from time to time, or any 


 


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similar rule or
regulation hereafter adopted by the Commission having substantially the same
effect as such Rule.


 


“SEC
Reports” shall have the meaning ascribed to such term in Section 3.1(h).


 


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


 


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


 


“Shares”
means the shares of Common Stock issued or issuable to each Purchaser pursuant
to this Agreement.


 


“Subscription
Amount” means, as to each Purchaser, the amounts set forth below such
Purchaser’s signature block on the signature page hereto, in United States
dollars and in immediately available funds.


 


“Subsidiary”
shall mean the subsidiaries of the Company, if any, set forth on Schedule 3.1(a) or
any business entity in which the Company now or in the future owns or has the
power to vote or control, at the time such is determined,  twenty percent (20%) or more of the
equitable, beneficial,  legal or other
ownership interests thereof.


 


“Trading
Affiliates” shall have the meaning ascribed to such term in Section 3.2(f).


 


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


 


“Trading
Market” means the following markets or exchanges on which the Common Stock
is listed or quoted for trading on the date in question: the American Stock
Exchange, the New York Stock Exchange, the Nasdaq National Market or the Nasdaq
Capital Market.


 


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


 


“VWAP”
means, for any date, the price determined by the first of the following clauses
that applies: (a) if the Common Stock is then listed or quoted on a
Trading Market, the daily volume weighted average price of the Common Stock


 


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for such date (or the nearest preceding date)
on the primary Trading Market on which the Common Stock is then listed or
quoted as reported by Bloomberg Financial L.P. (based on a Trading Day from
9:30 a.m. ET to 4:02 p.m. Eastern Time) using the VAP function; (b) if
the Common Stock is not then listed or quoted on an Trading Market and if
prices for the Common Stock are then quoted on the OTC Bulletin Board, the
volume weighted average price of the Common Stock for such date (or the nearest
preceding date) on the OTC Bulletin Board; (c)  if the Common Stock is not
then listed or quoted on the OTC Bulletin Board and if prices for the Common
Stock are then reported in the “Pink Sheets” published by the National
Quotation Bureau Incorporated (or a similar organization or agency succeeding
to its functions of reporting prices), the most recent bid price per share of
the Common Stock so reported; or (d) in all other cases, the fair market
value of a share of Common Stock as determined by a nationally
recognized-independent appraiser selected in good faith by the Company and the
Purchasers holding a majority of the Shares then outstanding.


 


“Warrants”
means the Common Stock Purchase Warrants, in the form of Exhibit B,
issuable to the Purchasers at the Closing, which warrants shall have an
exercise price equal to $.8505 per share and shall be exercisable for a period
of 5 years.


 


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


 


“19.99%
Share Cap” shall have the meaning ascribed to such term in Section 2.1(a)


 


ARTICLE II.

PURCHASE AND SALE


 


2.1  Closing; Escrow of Purchase
Price.


 


(a)  At
the Closing, each Purchaser shall purchase from the Company, severally and not
jointly with the other Purchasers, and the Company shall issue and sell to each
Purchaser, (a) a number of Shares equal to such Purchaser’s Subscription
Amount divided by the Per Share Purchase Price and (b) the Warrants,
registered in the name of each Purchaser, pursuant to which such Purchaser
shall have the right to acquire up to the number of shares of Common Stock
equal to 25% of the Shares to be issued to such Purchaser at the Closing.  The aggregate number of Shares sold hereunder
(when aggregated with the aggregate number of Warrant Shares and any and all
securities to be issued to the Placement Agent and any other placement agents
or brokers in connection with the transactions contemplated hereby, shall, in
no event, exceed twelve million four hundred seventy five thousand
(12,475,000).  The Subscription Amounts
of the Purchasers shall be appropriately reduced in the event the number of
Shares subscribed for by the Purchasers are required to be reduced as a result
of the 19.99% Share Cap, and any escrowed funds relating to such reduced
Subscription Amounts shall be returned to the Purchasers.


 


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(b)  Upon
satisfaction of the conditions set forth in Section 2.2, (i) the
Company shall deliver or cause to be delivered to Lead Investor Counsel, in
trust, certificates, registered in such name or names as the Purchasers may
designate, representing the Shares and the Warrants, with instructions that
such Shares and Warrants are to be held for release to the Purchasers only upon
payment in full of the aggregate purchase price to the Company by all the
Purchasers and (ii) following receipt of such certificates, the Company
and the Placement Agent shall jointly instruct Lead Investor Counsel to release
(i) the Net Escrow Amount to the Company, (ii) the Cash Placement
Agent Fee to the Placement Agent and (iii) the Lead Investor Counsel Fees
to Lead Investor Counsel.  The Closing
shall occur at the offices of Manatt Phelps & Phillips, LLP, or such
other location as the parties shall mutually agree.


 


(c)  Simultaneously
with the execution and delivery of a counterpart to this Agreement by a
Purchaser, such Purchaser shall promptly cause a wire transfer of immediately
available funds in an amount representing such Purchaser’s Subscription Amount
to be paid to the non-interest bearing escrow account of Lowenstein Sandler PC,
the Purchasers’ counsel (“Lead Investor Counsel”), set forth on Schedule I
attached hereto (the aggregate amounts being held in escrow are referred to
herein as the “Escrow Amount”). 
Lead Investor Counsel shall hold the Escrow Amount in escrow until (i) Lead
Investor Counsel receives written instructions from the Company and the Lead
Investor authorizing the release of the Escrow Amount in accordance with this Section 2.1;
or (ii) Lead Investor Counsel receives written instructions from the
Company and/or the Purchasers (or a specific terminating Purchaser) that the
Agreement has been terminated in which case Lead Investor Counsel shall return
to each Purchaser (or, in the case of a termination of this Agreement by a
Purchaser solely with respect to itself, such terminating Purchaser), the
portion of the Escrow Amount each such Purchaser delivered to the Lead Investor
Counsel.  The Company hereby authorizes
the Lead Investor Counsel to release from the Escrow Amount, at the Closing,
without further action or deed (other than receipt of the written instructions
from the Company and the Placement Agent authorizing the release of the Escrow
Amount), the (i) Cash Placement Agent Fee to the Placement Agent; (ii) Lead
Investor Counsel Fees to Lead Investor Counsel; and (iii) the Net Escrow
Amount to the Company.


 


(d)  The
Company and the Purchasers acknowledge and agree for the benefit of Lead
Investor Counsel (which shall be deemed to be a third party beneficiary of this
Section 2.1) as follows:


 


(i)            Lead
Investor Counsel (A) is not responsible for the performance by the Company
or the Purchasers of this Agreement or any of the Transaction Documents or for
determining or compelling compliance therewith; (B) is only responsible
for (I) holding the Escrow Amount in escrow pending receipt of written
instructions from the Placement Agent and the Company directing the release of
the Escrow Amount in accordance with this Section 2.1 or (II) disbursing
the Escrow Amount in accordance with the written instructions from the Company
and/or the Purchasers in accordance with this Section 2.1, each of the
responsibilities of Lead Investor Counsel in clause (I) and (II) is ministerial
in nature, and no implied duties or obligations of any kind shall be read into
this Agreement against or on the part of Lead Investor Counsel (collectively,
the “Lead Investor Counsel Duties”); (C) shall not be 


 


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obligated to take any legal or
other action hereunder which might in its judgment involve or cause it to incur
any expense or liability unless it shall have been furnished with
indemnification acceptable to it, in its sole discretion; (D) may rely on
and shall be protected in acting or refraining from acting upon any written
notice, instruction (including, without limitation, wire transfer instructions,
whether incorporated herein or provided in a separate written instruction),
instrument, statement, certificate, request or other document furnished to it
hereunder and believed by it to be genuine and to have been signed or presented
by the proper Person, and shall have no responsibility for making inquiry as
to, or for determining, the genuineness, accuracy or validity thereof, or of
the authority of the Person signing or presenting the same; (E) may
consult counsel satisfactory to it, and the written opinion or advice of such
counsel in any instance shall be full and complete authorization and protection
in respect of any action taken, suffered or omitted by it hereunder in good
faith and in accordance with the opinion or advice of such counsel; and (F) shall
be authorized to distribute, at the Closing, to Lead Investor Counsel the Lead
Investor Counsel Fees.  Documents and
written materials referred to in this Section 2.1 including, without
limitation, e-mail and other electronic transmissions capable of being printed,
whether or not they are in fact printed; and any such e-mail or other
electronic transmission may be deemed and treated by Lead Investor Counsel as
having been signed or presented by a Person if it bears, as sender, the Person’s
e-mail address.


 


(ii)           Lead
Investor Counsel shall not be liable to anyone for any action taken or omitted
to be taken by it hereunder in connection with its Lead Investor Counsel
Duties, except in the case of Lead Investor Counsel’s gross negligence, willful
misconduct or bad faith (as finally determined by a court of competent
jurisdiction) in breach of the Lead Investor Counsel Duties.  IN NO EVENT SHALL THE LEAD INVESTOR COUNSEL
BE LIABLE FOR INDIRECT, PUNITIVE, SPECIAL OR CONSEQUENTIAL DAMAGE OR LOSS
(INCLUDING BUT NOT LIMITED TO LOST PROFITS) WHATSOEVER, EVEN IF LEAD INVESTOR
COUNSEL HAS BEEN INFORMED OF THE LIKELIHOOD OF SUCH LOSS OR DAMAGE AND
REGARDLESS OF THE FORM OF ACTION.


 


(iii)          The
Company and the Purchasers hereby indemnify and hold harmless Lead Investor
Counsel from and against, any and all loss, liability, cost, damage and
expense, including, without limitation, reasonable counsel fees and expenses,
which Lead Investor Counsel may suffer or incur by reason of any action, claim
or proceeding brought against Lead Investor Counsel arising out of or relating
to the performance of the Lead Investor Counsel Duties, unless such action,
claim or proceeding is the result of the gross negligence, willful misconduct
or bad faith (as finally determined by a court of competent jurisdiction) of
Lead Investor Counsel.


 


(iv)          Lead
Investor Counsel has acted as legal counsel to the Purchasers in connection
with this Agreement and the other Transaction Documents, is merely acting as an
escrow agent under this Agreement and is, therefore, hereby authorized to
continue acting as legal counsel to Nite Capital, L.P. (the “Lead Investor”)
including, without limitation, with regard to any dispute arising out of this
Agreement, the other Transaction Documents, the Escrow Amount or any other
matter.  Each of the Company and the
Purchasers hereby expressly consents to permit Lead Investor Counsel 


 


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to represent the Lead Investor
in connection with all matters relating to or arising from this Agreement,
including, without limitation, with regard to any dispute arising out of this
Agreement, the other Transaction Documents, the Escrow Amount or any other
matter, and hereby waives any conflict of interest or appearance of conflict or
impropriety with respect to such representation.  The Company has consulted with its own counsel
specifically about this Section 2.1 to the extent it deemed necessary, and
has entered into this Agreement after being satisfied with such advice.


 


2.2  Closing Conditions;
Deliveries.


 


(a)  Conditions to the Purchasers’ Obligations.
The obligation of each Purchaser to purchase the Shares and Warrants at the
Closing is subject to the fulfillment to the Purchasers’ reasonable
satisfaction, on or prior to the Closing Date, of the following conditions, any
of which may be waived in writing by the Purchasers:


 


(i)            The
representations and warranties made by the Company in Section 3.1 hereof
qualified as to materiality shall be true and correct at all times prior to and
on the Closing Date, except to the extent any such representation or warranty
expressly speaks as of an earlier date, in which case such representation or
warranty shall be true and correct as of such earlier date, and, the
representations and warranties made by the Company in Section 3.1 hereof
not qualified as to materiality shall be true and correct in all material
respects at all times prior to and on the Closing Date, except to the extent
any such representation or warranty expressly speaks as of an earlier date, in
which case such representation or warranty shall be true and correct in all
material respects as of such earlier date. 
The Company shall have performed in all material respects all
obligations and conditions herein required to be performed or observed by it on
or prior to the Closing Date (including the delivery of the certificates
representing the Shares and the delivery of the Warrants in accordance with Section 2.1
hereof).


 


(ii)           The
Company shall have obtained in a timely fashion any and all material consents,
permits, approvals, registrations and waivers necessary or appropriate for
consummation of the purchase and sale of the Shares and Warrants, all of which
shall be and remain so long as necessary in full force and effect.


 


(iii)          The
Company shall have executed and delivered the Registration Rights Agreement to
the Purchasers.


 


(iv)          No
judgment, writ, order, injunction, award or decree of or by any court, or
judge, justice or magistrate, including any bankruptcy court or judge, or any
order of or by any governmental authority, shall have been issued, and no
action or proceeding shall have been instituted by any governmental authority,
or self-regulatory organization enjoining or preventing the consummation of the
transactions contemplated hereby or in the other Transaction Documents.


 


(v)           The
Company shall have delivered a Certificate, executed on behalf of the Company
by its Chief Executive Officer or its Chief Financial Officer, dated as of the
Closing Date, certifying to the fulfillment of the conditions specified in
subsections (i), (ii), (iv), (viii) and (ix) of this Section 2.2(a).


 


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


 


(vii)         The
Purchasers shall have received an opinion from Company Counsel, in the form of Exhibit C
attached hereto, dated as of the Closing Date, which shall be reasonably
satisfactory to the Lead Investor Counsel.


 


(viii)        No
stop order or suspension of trading shall have been imposed by any Person with
respect to public trading in the Common Stock.


 


(ix)           No
consent of the stockholders of the Company shall be required to issue the
Shares relating to such aggregate Subscription Amounts.


 


(x)            The
Company’s Common Stock (including the Shares and the Warrant Shares) shall be
eligible for inclusion on the Nasdaq Capital Market and listed and admitted and
authorized for trading on the Nasdaq Capital Market by the Effectiveness Date,
as such term is defined in the Registration Rights Agreement by and between the
Company and the Purchasers of even date herewith.


 


(b)  Conditions
to Obligations of the Company. The Company’s obligation to sell and issue
the Shares and Warrants at the Closing is subject to the fulfillment to the
satisfaction of the Company on or prior to the Closing Date of the following
conditions, any of which may be waived by the Company:


 


(i)            The
representations and warranties made by each of the Purchasers in Section 3.2
hereof shall be true and correct in all material respects when made, and shall
be true and correct in all material respects on the Closing Date with the same
force and effect as if they had been made on and as of said date.  The Purchasers shall have performed in all
material respects all obligations and conditions herein required to be
performed or observed by them on or prior to the Closing Date.


 


(ii)           The
Purchasers shall have executed and delivered the Registration Rights Agreement
to the Company at or prior to Closing; provided, that, this condition shall be
satisfied with respect to each Purchaser who has executed and delivered the
Registration Rights Agreement.


 


(iii)          Each
of the Purchasers shall have delivered such Purchaser’s Subscription Amount by
wire transfer to the account set forth on Schedule I attached
hereto.


 


(iv)          No
judgment, writ, order, injunction, award or decree of or by any court, or
judge, justice or magistrate, including any bankruptcy court or judge, or any
order of or by any governmental authority, shall have been issued, and no
action or


 


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proceeding shall have been
instituted by any governmental authority, or self-regulatory organization
enjoining or preventing the consummation of the transactions contemplated
hereby or in the other Transaction Documents.


 


(c)  Termination of Obligations to Effect
Closing; Effects.


 


(i)            The
obligations of the Company, on the one hand, and the Purchasers, on the other
hand, to effect the Closing shall terminate as follows:


 


(A)          Upon the mutual written consent of the
Company and the Purchasers;


 


(B)           By the Company if any of the
conditions set forth in Section 2.2(b) shall have become incapable of
fulfillment, and shall not have been waived by the Company;


 


(C)           By a Purchaser (with respect to
itself only) if any of the conditions set forth in Section 2.2(a) shall
have become incapable of fulfillment, and shall not have been waived by such
Purchaser; or


 


(D)          By either the Company or any Purchaser
(with respect to itself only) if the Closing has not occurred on or prior to November 8,
2005;


 


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


 


(ii)           Nothing
in this Section 2.2(c) shall be deemed to release any party from any
liability for any breach by such party of the terms and provisions of this
Agreement or the other Transaction Documents or to impair the right of any
party to compel specific performance by any other party of its obligations
under this Agreement or the other Transaction Documents.


 


(iii)          In
the event of termination by a Purchaser of its obligations to effect the
Closing pursuant to this Section 2.2(c), written notice thereof shall
forthwith be given by the Company to the other Purchasers and the other
Purchasers shall have the right to terminate their obligations to effect the
Closing upon written notice to the Company.


 


ARTICLE III.

REPRESENTATIONS AND WARRANTIES


 


3.1  Representations and
Warranties of the Company.  Except as
set forth under the corresponding section of the Disclosure Schedules
delivered concurrently herewith, the Company hereby makes the following
representations and warranties as of the date hereof and as of the Closing Date
to each Purchaser:


 


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(a)  Subsidiaries.  Except as set forth on Schedule 3.1(a),
the Company has no direct or indirect subsidiaries.  Except as set forth on Schedule 3.1(a),
the Company owns, directly or indirectly, all of the capital stock or other
equity interests of each Subsidiary free and clear of any Liens, and all the
issued and outstanding shares of capital stock of each Subsidiary are validly
issued and are fully paid, non-assessable and free of preemptive and similar
rights.  If the Company has no
subsidiaries, then references in the Transaction Documents to the Subsidiaries
will be disregarded.


 


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


 


(c)  Authorization; Enforcement.  The Company has the requisite corporate power
and authority to enter into and to consummate the transactions contemplated by
each of the Transaction Documents and otherwise to carry out its obligations
thereunder.  The execution and delivery
of each of the Transaction Documents by the Company and the consummation by it
of the transactions contemplated thereby have been duly authorized by all
necessary action on the part of the Company and no further action is required
by the Company in connection therewith other than in connection with the
Required Approvals.  Each Transaction
Document has been (or upon delivery will have been) duly executed by the
Company and, when delivered in accordance with the terms hereof, will
constitute the valid and binding obligation of the Company enforceable against
the Company in accordance with its terms except (i) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium and other laws of
general application affecting enforcement of creditors’ rights generally and (ii) as
limited by laws relating to the availability of specific performance,
injunctive relief or other equitable remedies.


 


(d)  No Conflicts.  The execution, delivery and performance of
the Transaction Documents by the Company and the consummation by the Company 


 


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of the transactions contemplated thereby do
not and will not (i) conflict with or violate any provision of the Company’s
or any Subsidiary’s certificate or articles of incorporation, bylaws or other
organizational or charter documents, or (ii) conflict with, or constitute
a default (or an event that with notice or lapse of time or both would become a
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation (with or without notice, lapse of time or both)
of, any agreement, credit facility, debt or other instrument (evidencing a
Company or Subsidiary debt or otherwise) or other understanding to which the
Company or any Subsidiary is a party or by which any property or asset of the
Company or any Subsidiary is bound or affected, or (iii) subject to the
Required Approvals, conflict with or result in a violation of any law, rule,
regulation, order, judgment, injunction, decree or other restriction of any
court or governmental authority to which the Company or a Subsidiary is subject
(including federal and state securities laws and regulations), or by which any
property or asset of the Company or a Subsidiary is bound or affected, or (iv) conflict
with or violate the terms of any agreement by which the Company or any
Subsidiary is bound or to which any property or asset of the Company or any
Subsidiary is bound or affected; except in the case of each of clauses (ii) and
(iii), such as could not have or reasonably be expected to result in a Material
Adverse Effect.


 


(e)  Filings, Consents and Approvals.  The Company is not required to obtain any
consent, waiver, authorization or order of, give any notice to, or make any
filing or registration with, any court or other federal, state, local or other
governmental authority or other Person in connection with the execution,
delivery and performance by the Company of the Transaction Documents, other
than (i) filings required pursuant to Section 4.4 of this Agreement, (ii) the
filing with the Commission of the Registration Statement, (iii) application(s)
to each applicable Trading Market for the listing of the Shares and Warrant
Shares for trading thereon in the time and manner required thereby, and (iv) the
filing of Form D with the Commission and such filings as are required to
be made under applicable state securities laws, with each of the items listed
in clauses (i)-(iv) inclusive being deemed a “Required Approval”).


 


(f)  Issuance of the Securities.  The Shares and Warrants are duly authorized
and, when issued and paid for in accordance with the Transaction Documents,
will be duly and validly issued, fully paid and nonassessable, free and clear
of all Liens imposed by the Company other than restrictions on transfer
provided for in the Transaction Documents. 
The Warrant Shares, when issued in accordance with the terms of the
Transaction Documents, will be validly issued, fully paid and nonassessable,
free and clear of all Liens imposed by the Company.  The Company has reserved from its duly
authorized capital stock the maximum number of shares of Common Stock issuable
pursuant to this Agreement and the Warrants.


 


(g)  Capitalization.  The capitalization of the Company is as
described in the Company’s most recent periodic report filed with the
Commission.  The Company has not issued
any capital stock since such filing other than pursuant to the exercise of
employee stock options under the Company’s stock option plans, 


 


12





















 


the issuance of shares of Common Stock to
employees pursuant to the Company’s employee stock purchase plan and pursuant
to the conversion or exercise of outstanding Common Stock Equivalents.  No Person has any right of first refusal,
preemptive right, right of participation, or any similar right to participate
in the transactions contemplated by the Transaction Documents.  Except as a result of the purchase and sale
of the Securities, there are no outstanding options, warrants, script rights to
subscribe to, calls or commitments of any character whatsoever relating to, or
securities, rights or obligations convertible into or exchangeable for, or
giving any Person any right to subscribe for or acquire, any shares of Common
Stock, or contracts, commitments, understandings or arrangements by which the
Company or any Subsidiary is or may become bound to issue additional shares of
Common Stock, or securities or rights convertible or exchangeable into shares of
Common Stock, other than as set forth in the SEC Reports or in connection with
the Company’s stock option plans.  The
issue and sale of the Securities will not obligate the Company to issue shares
of Common Stock or other securities to any Person (other than the Purchasers)
and will not result in a right of any holder of Company securities to adjust
the exercise, conversion, exchange or reset price under such securities. All of
the outstanding shares of capital stock of the Company are validly issued, fully
paid and nonassessable, have been issued in compliance with all federal and
state securities laws, and none of such outstanding shares was issued in
violation of any preemptive rights or similar rights to subscribe for or
purchase securities.  No further approval
or authorization of any stockholder, the Board of Directors of the Company or
others is required for the issuance and sale of the Securities.  Except as disclosed in the SEC Reports, there
are no stockholders agreements, voting agreements or other similar agreements
with respect to the Company’s capital stock to which the Company is a party or,
to the knowledge of the Company, between or among any of the Company’s
stockholders.


 


(h)  SEC Reports; Financial Statements.  The Company has filed all reports required to
be filed by it under the Securities Act and the Exchange Act, including
pursuant to Section 13(a) or 15(d) thereof, for the two years
preceding the date hereof (or such shorter period as the Company was required
by law to file such material) (the foregoing materials, including the exhibits
thereto, being collectively referred to herein as the “SEC Reports”) on
a timely basis or has received a valid extension of such time of filing and has
filed any such SEC Reports prior to the expiration of any such extension.  As of their respective dates, the SEC Reports
complied in all material respects with the requirements of the Securities Act
and the Exchange Act and the rules and regulations of the Commission
promulgated thereunder, and none of the SEC Reports, when filed, contained any
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.  The financial statements of
the Company included in the SEC Reports comply in all material respects with
applicable accounting requirements and the rules and regulations of the
Commission with respect thereto as in effect at the time of filing.  Such financial statements have been prepared
in accordance with generally accepted accounting principles applied on a
consistent basis during the periods 


 


13





















 


involved (“GAAP”), except as may be
otherwise specified in such financial statements or the notes thereto and
except that unaudited financial statements may not contain all footnotes
required by GAAP, and fairly present in all material respects the financial
position of the Company and its consolidated subsidiaries as of and for the
dates thereof and the results of operations and cash flows for the periods then
ended, subject, in the case of unaudited statements, to normal, immaterial,
year-end audit adjustments.


 


(i)  Material Changes.  Since the date of the latest audited
financial statements included within the SEC Reports, except as disclosed in
the SEC Reports (i) there has been no event, occurrence or development
that has had or that could reasonably be expected to result in a Material
Adverse Effect, (ii) the Company has not incurred any liabilities
(contingent or otherwise) other than (A) trade payables and accrued
expenses incurred in the ordinary course of business consistent with past
practice and (B) liabilities required to be reflected in the Company’s
financial statements pursuant to GAAP (which liabilities have not resulted in
and could not reasonably be expected to result in a Material Adverse Effect) or
required to be disclosed in filings made with the Commission, (iii) the
Company has not altered its method of accounting, (iv) the Company has not
declared or made any dividend or distribution of cash or other property, with
or without consideration, to its stockholders or purchased, redeemed or made
any agreements to purchase or redeem any shares of its capital stock and (v) the
Company has not issued any equity securities to any officer, director or
Affiliate, except pursuant to existing Company stock option plans.  Except as disclosed in the SEC Reports, the
Company does not have pending before the Commission any request for
confidential treatment of information.


 


(j)  Litigation.  Except as disclosed in the SEC Reports: There
is no action, suit, inquiry, notice of violation, proceeding or investigation
pending or, to the knowledge of the Company, threatened against or affecting
the Company, any Subsidiary or any of their respective properties before or by
any court, arbitrator, governmental or administrative agency or regulatory
authority (federal, state, county, local or foreign) (collectively, an “Action”)
which (i) adversely affects or challenges the legality, validity or
enforceability of any of the Transaction Documents or the Securities or (ii) could,
if there were an unfavorable decision, have or reasonably be expected to result
in a Material Adverse Effect.  Neither
the Company nor any Subsidiary, nor any director or officer thereof, is or has
been the subject of any Action involving a claim of violation of or liability
under federal or state securities laws or a claim of breach of fiduciary
duty.  There has not been, and to the
knowledge of the Company, there is not pending or contemplated, with respect to
the Company, any investigation by the Commission involving the Company or any
current or former director or officer of the Company.  The Commission has not issued any stop order
or other order suspending the effectiveness of any registration statement filed
by the Company or any Subsidiary under the Exchange Act or the Securities Act.


 


(k)  Employment Matters.  The Company and its Subsidiaries are in
compliance with all federal, state, local and foreign laws and regulations 


 


14





















 


respecting labor, employment and employment
practices and benefits, terms and conditions of employment and wages and hours,
except where the failure to be in compliance would not, either individually or
in the aggregate, reasonably be expected to result in a Material Adverse
Effect.  Neither the Company nor any of
its Subsidiaries is a party to any collective bargaining agreement.  The Company and its Subsidiaries believe that
their overall relations with their employees are satisfactory.  No executive officer of the Company or any of
its Subsidiaries (as defined in Rule 501(f) of the Securities Act)
has notified the Company or any such Subsidiary that such officer intends to
leave the Company or any such Subsidiary or otherwise terminate such officer’s
employment with the Company or any such Subsidiary.


 


(l)  Compliance.  Except as disclosed in the SEC Reports,
neither the Company nor any Subsidiary (i) is in default under or in
violation of (and no event has occurred that has not been waived that, with
notice or lapse of time or both, would result in a default by the Company or
any Subsidiary under), nor has the Company or any Subsidiary received notice of
a claim that it is in default under or that it is in violation of, any
indenture, loan or credit agreement or any other agreement or instrument to
which it is a party or by which it or any of its properties is bound (whether
or not such default or violation has been waived), (ii) is in violation of
any order of any court, arbitrator or governmental body, or (iii) is or
has been in violation of any statute, rule or regulation of any
governmental authority, including without limitation all foreign, federal,
state and local laws applicable to its business, except in each case as could
not have a Material Adverse Effect.


 


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


 


(n)  Title to Assets.  The Company and the Subsidiaries have good
and marketable title in fee simple to all real property owned by them that is
material to the business of the Company and the Subsidiaries and good and
marketable title in all personal property owned by them that is material to the
business of the Company and the Subsidiaries, in each case free and clear of
all Liens, except for Liens as do not materially affect the value of such
property and do not materially interfere with the use made and proposed to be
made of such property by the Company and the Subsidiaries and Liens as
disclosed in the SEC Reports and for the payment of federal, state or other
taxes, the payment of which is neither delinquent nor subject to
penalties.  Any real property and
facilities held under lease by the Company and the Subsidiaries are held by
them under valid, subsisting and enforceable leases with which the Company and
the Subsidiaries are in compliance.


 


15





















 


(o)  Patents and Trademarks.  Except as set forth in the SEC Reports, the
Company and its Subsidiaries have, or have rights to use, all patents, patent
applications, trademarks, trademark applications, service marks, trade names,
copyrights, licenses and other similar rights (collectively, the “Intellectual
Property Rights”) that are necessary or material for use in connection with
their respective businesses as described in the SEC Reports and which the
failure to so have could have or reasonably be expected to result in a Material
Adverse Effect.  To the knowledge of the
Company (after due inquiry), the Intellectual Property Rights owned and
licensed by the Company and/or its Subsidiaries, do not violate or infringe
upon the rights of any Person.  To the
knowledge of the Company, all such Company Intellectual Property Rights are
enforceable.


 


(p)  Insurance.  The Company and the Subsidiaries are insured
by insurers against such losses and risks and in such amounts as are prudent
and customary in the businesses in which the Company and the Subsidiaries are
engaged.  Neither the Company nor any
Subsidiary has any reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business.


 


(q)  Transactions With Affiliates and Employees.  Except as set forth in the SEC Reports, none
of the officers or directors of the Company and, to the knowledge of the
Company, none of the employees of the Company is presently a party to any
transaction with the Company or any Subsidiary (other than for services as
employees, officers and directors), including any contract, agreement or other
arrangement providing for the furnishing of services to or by, providing for
rental of real or personal property to or from, or otherwise requiring payments
to or from any officer, director or such employee or, to the knowledge of the
Company, any entity in which any officer, director, or any such employee has a
substantial interest or is an officer, director, trustee or partner, other than
(i) for services as employees, officers and directors, (ii) reimbursement
for expenses incurred on behalf of the Company and (iii) for other
employee benefits, including stock option agreements under any stock option
plan of the Company.


 


(r)  Sarbanes-Oxley.  The Company is in material compliance with
all provisions of the Sarbanes-Oxley Act of 2002 and applicable rules and
regulations promulgated by the Commission thereunder, in each case which are
applicable to it as of the Closing Date.


 


(s)  Certain Fees.  Except for the cash commissions to be paid to
the Placement Agent (the “Cash Placement Agent Fee”), no cash brokerage
or cash finder’s fees or commissions are or will be payable by the Company to
any broker, financial advisor or consultant, finder, placement agent,
investment banker, bank or other Person with respect to the transactions
contemplated by this Agreement.  The
Purchasers shall have no obligation with respect to any fees or with respect to
any claims made by or on behalf of other Persons for fees of a type
contemplated in this Section that may be due in connection with the
transactions contemplated by this Agreement.


 


16





















 


(t)  Private Placement. Assuming the
accuracy of the Purchasers representations and warranties set forth in Section 3.2,
no registration under the Securities Act is required for the offer and sale of
the Securities by the Company to the Purchasers as contemplated hereby. The issuance
and sale of the Securities hereunder does not contravene the rules and
regulations of the Trading Market.


 


(u)  Investment Company. The Company is
not, and is not an Affiliate of, an “investment company” within the meaning of
the Investment Company Act of 1940, as amended.


 


(v)  Registration Rights.  Except as set forth on the disclosure schedule to
the Registration Rights Agreement, no Person has any right to cause the Company
to effect the registration under the Securities Act of any securities of the
Company.


 


(w)  Listing and Maintenance Requirements.  The Company’s Common Stock is registered
pursuant to Section 12(g) of the Exchange Act, and the Company has
taken no action designed to, or which to its knowledge is likely to have the
effect of, terminating the registration of the Common Stock under the Exchange
Act nor has the Company received any notification that the Commission is
contemplating terminating such registration. 
Except as disclosed in the SEC Reports, the Company has not, in the 12
months preceding the date hereof, received notice from any Trading Market on
which the Common Stock is or has been listed or quoted to the effect that the
Company is not in compliance with the listing or maintenance requirements of
such Trading Market.


 


(x)  Application of Takeover Protections.  Assuming the Purchasers beneficially own no
shares of Common Stock immediately prior to the date hereof, the Company and
its Board of Directors have taken all necessary action, if any, in order to
render inapplicable any control share acquisition, business combination, poison
pill (including any distribution under a rights agreement) or other similar
anti-takeover provision under the Company’s Certificate of Incorporation (or
similar charter documents) or the laws of its state of incorporation that is or
could become applicable to the Purchasers as a result of the Purchasers and the
Company fulfilling their obligations or exercising their rights under the
Transaction Documents, including without limitation the Company’s issuance of
the Securities and the Purchasers’ ownership of the Securities.


 


(y)  Disclosure.  The Company confirms that, neither the
Company nor any other Person acting on its behalf has provided any of the
Purchasers or their agents or counsel with any information that constitutes or
might constitute material, non-public information.  The Company understands and confirms that the
Purchasers will rely on the foregoing representations and covenants in
effecting transactions in securities of the Company.  All disclosure provided to the Purchasers
regarding the Company, its business and the transactions contemplated hereby,
including the Disclosure Schedules to this Agreement, furnished by or on behalf
of the Company are true and correct and do not contain any untrue 


 


17





















 


statement of a material fact or omit to state
any material fact necessary in order to make the statements made therein, in
light of the circumstances under which they were made, not misleading.


 


(z)  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
this offering of the Securities to be integrated with prior offerings by the
Company for purposes of the Securities Act or any applicable shareholder
approval provisions, including, without limitation, under the rules and
regulations of any exchange or automated quotation system on which any of the
securities of the Company are listed or designated.


 


(aa)  Form S-3 Eligibility.  The Company is eligible to register the
resale of its Common Stock by the Purchasers under Form S-3 promulgated
under the Securities Act.


 


(bb)  Taxes. 
Except for matters that would not, individually or in the aggregate,
have or reasonably be expected to result in a Material Adverse Effect, the
Company and each Subsidiary has timely prepared and filed all necessary
federal, state and foreign income and franchise tax returns and has paid or
accrued all taxes shown as due thereon, and the Company has no knowledge of a
tax deficiency which has been asserted or threatened against the Company or any
Subsidiary. All taxes and other assessments and levies that the Company or any
Subsidiary is required to withhold or to collect for payment have been duly
withheld and collected and paid to the proper governmental entity or third
party when due.  There are no tax liens or
claims pending or, to the Company’s knowledge, threatened against the Company,
any Subsidiary or any of their respective assets or property.


 


(cc)  General Solicitation.  Neither the Company nor, to the Company’s
knowledge, any person acting on behalf of the Company has offered or sold any
of the Securities by any form of general solicitation or general
advertising.  To the Company’s knowledge,
based upon representations by such Purchasers or other investors, the Company
has offered the Shares and Warrants for sale only to the Purchasers and certain
other “accredited investors” within the meaning of Rule 501 under the
Securities Act.


 


(dd)  Acknowledgment Regarding Purchasers’
Purchase of Shares and Warrants.  The
Company acknowledges and agrees that each of the Purchasers is acting solely in
the capacity of an arm’s length purchaser with respect to the Transaction
Documents and the transactions contemplated hereby.  The Company further acknowledges that no
Purchaser is acting as a financial advisor or fiduciary of the Company (or in
any similar capacity) with respect to this Agreement and the transactions
contemplated hereby and any advice given by any Purchaser or any of their
respective representatives or agents in connection with this Agreement and the
transactions contemplated hereby is merely incidental to the Purchasers’
purchase of the Shares and Warrants.  The
Company further 


 


18





















 


represents to each Purchaser that the Company’s
decision to enter into this Agreement has been based solely on the independent
evaluation of the transactions contemplated hereby by the Company and its
representatives.


 


(ee)  Acknowledgement Regarding Purchasers’
Trading Activity.  Anything in this
Agreement or elsewhere herein to the contrary notwithstanding (except for
Sections 3.2(g) and 4.15 hereof), it is understood and agreed by the
Company (i) that none of the Purchasers have been asked to agree, nor has
any Purchaser agreed, to desist from purchasing or selling, long and/or short,
securities of the Company, or “derivative” securities based on securities
issued by the Company or to hold the Securities for any specified term; (ii) that
past or future open market or other transactions by any Purchaser, including
Short Sales, and specifically including, without limitation, Short Sales or “derivative”
transactions, before or after the closing of this or future private placement
transactions, may negatively impact the market price of the Company’s
publicly-traded securities; (iii) that any Purchaser, and counter parties
in “derivative” transactions to which any such Purchaser is a party, directly
or indirectly, presently may have a “short” position in the Common Stock, and (iv) that
each Purchaser shall not be deemed to have any affiliation with or control over
any arm’s length counter-party in any “derivative” transaction.


 


(ff)  Environmental Matters.  To the Company’s knowledge, the Company (i) is
not in violation of any statute, rule, regulation, decision or order of any
governmental agency or body or any court, domestic or foreign, relating to the
use, disposal or release of hazardous or toxic substances or relating to the
protection or restoration of the environment or human exposure to hazardous or
toxic substances (collectively, “Environmental Laws”), (ii) does
not own or operate any real property contaminated with any substance in
violation of any Environmental Laws, (iii) is not liable for any off-site
disposal or contamination pursuant to any Environmental Laws, and (iv) is
not subject to any claim relating to any Environmental Laws; which violation,
contamination, liability or claim has had or could reasonably be expected to
have a Material Adverse Effect, individually or in the aggregate; and there is
no pending or, to the Company’s knowledge, threatened investigation that might
lead to such a claim.


 


(gg)  Accounting Controls.  The Company and its Subsidiaries maintain a
system of internal accounting controls sufficient to provide reasonable
assurance that (i) transactions are executed in accordance with management’s
general or specific authorizations, (ii) transactions are recorded as
necessary to permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain asset accountability,
and (iii) access to assets is permitted only in accordance with management’s
general or specific authorization.


 


(hh)  Internal Controls.  The Company has established disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15 and 15d-15)
for the Company and designed such disclosure controls and procedures to ensure
that material information relating to the Company is made known to the
certifying 


 


19





















 


officers by others within those entities,
particularly during the period in which the Company’s most recently filed
period report under the Exchange Act, as the case may be, is being
prepared.  The Company’s certifying
officers have evaluated the effectiveness of the Company’s disclosure controls
and procedures as of the end of the most recent periodic reporting period under
the Exchange Act (such date, the “Evaluation Date”).  The Company presented in its most recently
filed periodic report under the Exchange Act the conclusions of the certifying
officers about the effectiveness of the disclosure controls and procedures
based on their evaluations as of the Evaluation Date.  Since the Evaluation Date, except as
described in the SEC Reports, there have been no significant changes in the
Company’s internal control over financial reporting (as such term is defined in
Item 308(c) of Regulation S-K) or, to the Company’s knowledge, in other
factors that could significantly affect the Company’s internal control over
financial reporting.  The Company
maintains and will continue to maintain a standard system of accounting
established and administered in accordance with generally accepted accounting
principles and the applicable requirements of the Exchange Act.


 


3.2 Representations and Warranties of the
Purchasers.  Each Purchaser hereby,
for itself and for no other Purchaser, represents and warrants as of the date
hereof and as of the Closing Date to the Company as follows:


 


(a)  Organization; Authority.  Such Purchaser is an entity duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
organization with full right, corporate or partnership power and authority to
enter into and to consummate the transactions contemplated by the Transaction
Documents and otherwise to carry out its obligations thereunder. The execution,
delivery and performance by such Purchaser of the transactions contemplated by
this Agreement have been duly authorized by all necessary corporate action on
the part of such Purchaser.  Each Transaction
Document to which it is a party has been duly executed by such Purchaser, and
when delivered by such Purchaser in accordance with the terms hereof, will
constitute the valid and legally binding obligation of such Purchaser,
enforceable against it in accordance with its terms, except (i) as limited
by general equitable principles and applicable bankruptcy, insolvency,
reorganization, moratorium and other laws of general application affecting
enforcement of creditors’ rights generally, (ii) as limited by laws
relating to the availability of specific performance, injunctive relief or
other equitable remedies and (iii) insofar as indemnification and
contribution provisions may be limited by applicable law.


 


(b)  Purchaser’s Intent.  Such Purchaser understands that the
Securities are “restricted securities” and have not been registered under the
Securities Act or any applicable state securities law and is acquiring the
Securities as principal for its own account for investment purposes (this
representation and warranty not limiting such Purchaser’s right to sell the
Securities pursuant to the Registration Statement or otherwise in compliance
with applicable federal and state securities laws).  Such Purchaser is acquiring the Securities
hereunder in the ordinary course of its business. Such Purchaser does not have
any agreement or understanding, 


 


20





















 


directly or indirectly, with any Person to
transfer or distribute any of the Securities.


 


(c)  Purchaser Status.  At the time such Purchaser was offered the
Securities, it was, and at the date hereof it is an “accredited investor” as
defined in Rule 501(a) under the Securities Act.  Such Purchaser is not required to be
registered as a broker-dealer under Section 15 of the Exchange Act.


 


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


 


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


 


(f)  Compliance with Patriot Act.  The funds utilized by such Purchaser for the
purchase of the Securities do not violate any provisions of the USA Patriot Act
of 2001.


 


(g)  Prohibited Transactions.   During the last thirty (30) days prior to
the date of this Agreement, neither such Investor nor any Affiliate of such
Purchaser which (x) had knowledge of the transactions contemplated hereby, (y)
has or shares discretion relating to such Purchaser’s investments or trading or
information concerning such Purchaser’s investments, including in respect of
the Securities, or (z) is subject to such Purchaser’s review or input
concerning such Affiliate’s investments or trading (collectively, “Trading
Affiliates”) has, directly or indirectly, effected or agreed to effect any
transactions in the securities of the Company, including any short sale,
whether or not against the box, established any “put equivalent position” (as
defined in Rule 16a-1(h) under the 1934 Act) with respect to the
Common Stock, granted any other right (including, without limitation, any put
or call option) with respect to the Common Stock or with respect to any security
that includes, relates to or derived any significant part of its value from the
Common Stock or otherwise sought to hedge its position in the Securities (each,
a “Prohibited Transaction”).  Such
Purchaser shall not, and shall cause its Trading Affiliates not to, engage,
directly or indirectly, in a Prohibited Transaction during the period from the
date hereof until such time as (i)  the transactions contemplated by this
Agreement are first publicly announced or (ii) this Agreement is
terminated pursuant to Section 2.2(c) hereof.


 


(h)  Blue Sky Compliance.  Such Purchaser shall agree to comply with any
state blue sky limitations on the resale of the Securities, if any.


 


21





















 


(i)  Limitation on Shares.  As a result of the transactions contemplated
by this Agreement, such Purchaser, together with such Purchaser’s Affiliates,
shall not own more than 19.99% of the Company’s Common Stock assuming
conversion of all of such Purchaser’s and all of such Purchaser’s Affiliates
securities of the Company which are convertible into Common Stock.


 


(j)  Such Purchaser understands and acknowledges
that the Company is providing compensation to the Placement Agent, a registered
securities broker dealer firm, and certain other broker dealer firms, in
connection with services provided to the Company as selling agent in connection
with the sale of the Securities.  The
Placement Agent and the other selling agents shall be entitled to receive the
Cash Placement Agent Fee equal to eight percent (8%) of the gross proceeds from
the sale of the Shares to the Purchasers and warrants equal to ten percent
(10%) of the number of Shares purchased by the Purchasers.  The warrants shall have an exercise price of
$0.8505 and a five year term.


 


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


 


ARTICLE IV.

OTHER AGREEMENTS OF THE PARTIES


 


4.1  Transfer Restrictions. (a) The
Securities may only be disposed of in compliance with state and federal
securities laws.  In connection with any
transfer of Securities other than pursuant to an effective registration
statement or Rule 144, to the Company, or in connection with a pledge as
contemplated in Section 4.1(b), the Company may require the transferor
thereof to provide to the Company an opinion of counsel selected by the
transferor, the form and substance of which opinion shall be reasonably
satisfactory to the Company, to the effect that such transfer does not require
registration of such transferred Securities under the Securities Act.  As a condition of transfer, any such
transferee shall agree in writing to be bound by the applicable terms of this
Agreement and shall have the rights of a Purchaser under this Agreement and the
Registration Rights Agreement.


 


(b)  The Purchasers agree to the imprinting, so
long as is required by this Section 4.1(b), of a legend on any of the Securities
in the following form:


 


THESE SECURITIES HAVE NOT BEEN REGISTERED
WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY
STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE
OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE 


 


22





















 


SECURITIES ACT AND IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL
(OTHER THAN IN CONNECTION WITH ANY TRANSFER PURSUANT TO RULE 144) TO THE TRANSFEROR
TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY.  THESE SECURITIES MAY BE
PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT WITH A REGISTERED
BROKER-DEALER OR OTHER LOAN WITH A FINANCIAL INSTITUTION THAT IS AN “ACCREDITED
INVESTOR” AS DEFINED IN RULE 501(a) UNDER THE SECURITIES ACT.


 


The Company
acknowledges and agrees that a Purchaser may from time to time pledge pursuant
to a bona fide margin agreement with a registered broker-dealer or grant a
security interest in some or all of the Securities to a financial institution
that is an “accredited investor” as defined in Rule 501(a) under the
Securities Act and, if required under the terms of such arrangement, such
Purchaser may transfer pledged or secured Securities to the pledgees or secured
parties.  Such a pledge or transfer would
not be subject to approval of the Company and no legal opinion of legal counsel
of the pledgee, secured party or pledgor shall be required in connection
therewith.  Further, no notice shall be
required of such pledge.  At the
appropriate Purchaser’s expense, the Company will execute and deliver such
reasonable documentation as a pledgee or secured party of Securities may
reasonably request in connection with a pledge or transfer of the Securities,
including, if the Securities are subject to registration pursuant to the
Registration Rights Agreement, the preparation and filing of any required
prospectus supplement under Rule 424(b)(3) under the Securities Act
or other applicable provision of the Securities Act to appropriately amend the
list of selling stockholders thereunder.


 


(c)  Certificates evidencing the Shares and
Warrant Shares (other than Shares or Warrant Shares issued to an Affiliate)
shall not contain any legend (including the legend set forth in Section 4.1(b)),
(i) following any sale pursuant to a registration statement (including the
Registration Statement) covering the resale of such security is effective under
the Securities Act, or (ii) following any sale of such Shares or Warrant
Shares pursuant to Rule 144, or (iii) if such Shares or Warrant
Shares are eligible for sale under Rule 144(k), or (iv) if such
legend is not required under applicable requirements of the Securities Act
(including judicial interpretations and pronouncements issued by the Staff of
the Commission).  The Company shall cause
its counsel to issue a legal opinion to the Company’s transfer agent promptly
after the Effective Date if required by the Company’s transfer agent to effect
the removal of the legend hereunder, subject to any state blue sky law
limitations.  If all or any portion of a
Warrant is exercised at a time when there is an effective registration
statement to cover the resale of the Warrant Shares for which the applicable
portion of the Warrant has been exercised, such Warrant Shares shall be issued
free of all legends following any sale pursuant to a registration statement
covering the resale of such security. 
The Company agrees that following the Effective Date or at such time as
such legend 


 


23





















 


is no longer required under this Section 4.1(c),
it will, no later than five Trading Days following the delivery by a Purchaser
to the Company or the Company’s transfer agent of a certificate representing
Shares or Warrant Shares, as the case may be, issued with a restrictive legend
(such date, the “Legend Removal Date”), deliver or cause to be delivered
to such Purchaser a certificate representing such Securities that is free from
all restrictive and other legends.  The
Company may not make any notation on its records or give instructions to any
transfer agent of the Company that enlarge the restrictions on transfer set
forth in this Section.


 


(d)  In addition to such Purchaser’s other
available remedies, the Company shall pay to a Purchaser, in cash, as
liquidated damages and not as a penalty, for each $1,000 of Shares or Warrant
Shares (based on the VWAP of the Common Stock on the date such Securities are
delivered to the Company’s transfer agent and written notice is delivered to
the Company) subject to Section 4.1(c), $10 per Trading Day (increasing to
$20 per Trading Day ten (10) Trading Days after such damages have begun to
accrue) for each Trading Day after such fifth Trading Day after the Legend
Removal Date until such certificate is delivered. Nothing herein shall limit
such Purchaser’s right to pursue actual damages for the Company’s failure to
deliver certificates representing any Securities as required by the Transaction
Documents, and such Purchaser shall have the right to pursue all remedies
available to it at law or in equity including, without limitation, a decree of
specific performance and/or injunctive relief.


 


(e)  Each Purchaser, severally and not jointly
with the other Purchasers, agrees that the removal of the restrictive legend
from certificates representing Securities as set forth in this Section 4.1
is predicated upon the Company’s reliance that such Purchaser will sell any
Securities pursuant to either the registration requirements of the Securities
Act, including any applicable prospectus delivery requirements, or an exemption
therefrom.


 


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


 


4.3  Integration.  The Company shall not sell, offer for sale or
solicit offers to buy or otherwise negotiate in respect of any security (as
defined in Section 2 of the Securities Act) that (X) would be integrated
with the offer or sale of the Securities in a manner that would require the
registration under the Securities Act of the sale of the Securities to the
Purchasers or (Y) that would be integrated with the offer or sale of the
Securities for 


 


24





















 


purposes of the rules and
regulations of any Trading Market such that it would require shareholder
approval.


 


4.4  Securities Laws Disclosure;
Publicity.  Except as set forth
below, no public release or announcement concerning the transactions
contemplated hereby shall be issued by the Company or the Purchasers without
the prior consent of the other party (which consent shall not be unreasonably
withheld), except as such release or announcement may be required by law or the
applicable rules or regulations of any securities exchange or securities
market, in which case the Company or the Purchasers, as the case may be, shall
allow the other party to the extent reasonably practicable in the
circumstances, reasonable time to comment on such release or announcement in
advance of such issuance.  By 8:30 a.m.
(New York City time) on the Trading Day immediately following the date of this
Agreement, the Company shall issue a press release disclosing the execution of
this Agreement.  The Company will promptly
file a Form 8-K(s) relating to the execution of this Agreement and the
consummation of the transactions contemplated hereby in accordance with
applicable Commission regulations.  In
addition, the Company will make such other filings and notices in the manner
and time required by the Commission. 
Notwithstanding the foregoing, the Company shall not publicly disclose
the name of any Purchaser, or include the name of any Purchaser in any filing
with the Commission (other than the Registration Statement and any exhibits to
filings made in respect of this transaction in accordance with periodic filing
requirements under the Exchange Act) or any other regulatory agency, without
the prior written consent of such Purchaser, except to the extent such disclosure
is required by law or trading market regulations, in which case the Company
shall provide the Purchasers with prior notice of such disclosure except to the
extent such prior notice is provided in this Agreement.


 


4.5  Shareholders Rights Plan.  No claim will be made or enforced by the
Company or, to the knowledge of the Company, any other Person that any
Purchaser is an “Acquiring Person” under any shareholders rights plan or
similar plan or arrangement in effect or hereafter adopted by the Company, or that
any Purchaser could be deemed to trigger the provisions of any such plan or
arrangement, by virtue of receiving Securities under the Transaction Documents
or under any other agreement between the Company and the Purchasers.


 


4.6  Non-Public Information.  The Company covenants and agrees that neither
it nor any other Person acting on its behalf will provide any Purchaser or its
agents or counsel with any information that the Company believes constitutes
material non-public information, unless prior to disclosure of such information
the Company identifies such information as being material nonpublic information
and provides such Purchaser with the opportunity to accept or refuse to accept
such material nonpublic information for review and any Purchaser wishing to
obtain such information shall have executed a written agreement regarding the
confidentiality and use of such information.


 


4.7  Use of Proceeds.  The Company shall use the net proceeds from
the sale of the Securities hereunder for working capital and general corporate
purposes.


 


4.8  Reimbursement.  If any Purchaser becomes involved in any
capacity in any Proceeding by or against any Person who is a stockholder of the
Company (except as 


 


25





















 


a result of sales, pledges,
margin sales and similar transactions by such Purchaser to or with any current
stockholder), solely as a result of such Purchaser’s acquisition of the
Securities under this Agreement, the Company will reimburse such Purchaser for
its reasonable legal and other expenses (including the cost of any
investigation preparation and travel in connection therewith) incurred in
connection therewith, as such expenses are incurred.  The reimbursement obligations of the Company
under this paragraph shall be in addition to any liability which the Company
may otherwise have, shall extend upon the same terms and conditions to any
Affiliates of the Purchasers who are actually named in such action, proceeding
or investigation, and partners, directors, agents, employees and controlling
persons (if any), as the case may be, of the Purchasers and any such Affiliate,
and shall be binding upon and inure to the benefit of any successors, assigns,
heirs and personal representatives of the Company, the Purchasers and any such
Affiliate and any such Person.  The
Company also agrees that neither the Purchasers nor any such Affiliates,
partners, directors, agents, employees or controlling persons shall have any
liability to the Company or any Person asserting claims on behalf of or in
right of the Company solely as a result of acquiring the Securities under this
Agreement.


 


4.9  Indemnification of
Purchasers.   The Company will
indemnify and hold each Purchaser and each Purchaser’s Affiliates and the
directors, officers, shareholders, partners, employees and agents of each
Purchaser and each Purchaser’s Affiliates (each, a “Purchaser Party”)
harmless from any and all losses, liabilities, obligations, claims,
contingencies, damages, costs and expenses, including all judgments, amounts
paid in settlements, court costs and reasonable attorneys’ fees and costs of
investigation that any such Purchaser Party may suffer or incur as a result of
or relating to: (a) any misrepresentation, breach or inaccuracy of any of
the representations, warranties, covenants or agreements made by the Company in
this Agreement or in the other Transaction Documents; or (b) any cause of
action, suit or claim brought or made against such Purchaser Party and arising
solely out of or solely resulting from the execution, delivery, performance or
enforcement of this Agreement or any of the other Transaction Documents and
without causation by any other activity, obligation, condition or liability
pertaining to such Purchaser Party. The Company will reimburse such Purchaser
Party for its reasonable legal and other expenses (including the cost of any
investigation, preparation and travel in connection therewith) incurred in
connection therewith, as such expenses are incurred.


 


4.10  Reservation of Common Stock.   As of the date hereof, the Company has
reserved and the Company shall continue to reserve and keep available at all
times, free of preemptive rights, a sufficient number of shares of Common Stock
for the purpose of enabling the Company to issue Shares pursuant to this
Agreement and Warrant Shares pursuant to any exercise of the Warrants.


 


4.11  Listing of Common Stock.
Promptly following the date hereof, the Company shall take all necessary action
to cause the Shares and the Warrant Shares to be approved for inclusion in the
Nasdaq Capital Market.  Further, if the
Company applies to have its Common Stock or other securities traded on any
other Trading Market, it shall include in such application the Shares and the
Warrant Shares and will take such other action as is necessary to cause such
Common Stock to be so listed.  The
Company will use commercially reasonable efforts to continue the listing and
trading of its Common


 


26





















 


Stock on the Nasdaq Capital Market
and, in accordance, therewith, will use commercially reasonable efforts to
comply in all respects with the Company’s reporting, filing and other
obligations applicable to issuers whose securities are listed on such market.


 


4.12  Equal Treatment of Purchasers.  No consideration shall be offered or paid to
any person to amend or consent to a waiver or modification of any provision of
any of the Transaction Documents unless the same consideration is also offered
to all of the parties to the Transaction Documents. For clarification purposes,
this provision constitutes a separate right granted to each Purchaser by the
Company and negotiated separately by each Purchaser, and is intended to treat
for the Company the Purchasers as a class and shall not in any way be construed
as the Purchasers acting in concert or as a group with respect to the purchase,
disposition or voting of Securities or otherwise.


 


4.13  Limitation on Future
Financing. From the date hereof until fifteen (15) Trading Days after the
Effective Date, the Company shall not effect a financing of its Common Stock or
Common Stock Equivalents. Notwithstanding anything to the contrary herein, this
Section 4.13 shall not apply to the following: (a) the granting of
options or restricted stock to employees, consultants, officers and directors
of the Company pursuant to any stock option plan duly adopted by the Board of
Directors of the Company or a majority of the members of a committee of
non-employee directors established for such purpose, (b) the exercise of
any security issued by the Company in connection with the offer and sale of the
Company’s securities pursuant to this Agreement, (c) the exercise of or
conversion of any convertible securities, options or warrants issued and
outstanding on the date hereof, provided such securities have not been amended
since the date hereof, (d) the issuance of securities in connection with a
business combination, joint venture or development agreement or strategic
partnership or similar agreement approved by the Company’s board of directors,
the primary purpose of which is not to raise equity capital, (e) the
exchange or conversion for any Company securities (however denominated) of any
Company indebtedness or Subsidiary indebtedness issued after the date hereof so
long as such Company securities are not registered earlier than fifteen days
after the Effective Date, or (f) any potential financing set forth on Schedule 4.14
which provides Purchaser with a right of participation.


 


4.14  Right of Participation.  For a period of two-hundred seventy (270)
calendar days from the Closing Date, each Purchaser shall be given not less
than five (5) Business Days prior written notice of any proposed sale by
the Company of its Common Stock or Common Stock Equivalents in connection with
any follow on equity or equity-linked capital financing.  Each Purchaser who exercise its rights
pursuant to this Section 4.14 shall have the right to participate in the
purchase of such offered Common Stock or Common Stock Equivalents, in accordance
with the terms and conditions set forth in such notice, and to purchase up to
its Pro Rata Share of the securities offered as part of such equity or
equity-linked capital financing transaction. 
In the event such terms and conditions are modified during the notice
period, the Purchasers shall be given prompt notice of such modification and
shall have the right during the original notice period or for a period of five (5) Business
Days following the notice of modification, whichever is longer, to exercise
such right.  Notwithstanding the
foregoing, the rights granted to Purchasers pursuant to this Section 4.14
shall not apply to (i) a financing transaction from any of the Company’s
strategic partners, (ii) a financing transaction from any of the 


 


27





















 


Company’s current lenders, or a
financing transaction from any of the officers or directors of the Company in
which no other third party participates or (iii) a convertible debt
financing transaction pursuant to which such debt may be convertible into
capital stock of any Subsidiary or capital stock of the Company, which, in the
case of such Subsidiary, after the date of such convertible debt transaction,
the Company holds greater than 50% of the capital stock of such Subsidiary, provided,
however, that in the case of subsection (iii) of this Section 4.14,
both the conversion price and the exercise price of any shares of Common Stock
issuable upon conversion and/or exercise, as the case may be, of any Common
Stock Equivalents issued in connection with such debt financing shall be
greater than the closing bid price of a share of Common Stock on the Trading
Market on the Trading Day immediately preceding the consummation of such debt
financing (and the conversion and/or exercise price of the Common Stock
Equivalents issued in such debt financing shall not provide for a downward
adjustment solely related to the passage of time or some other feature designed
to circumvent the obligation that the conversion and/or exercise price be
greater than the closing bid price of a share of Common Stock on the Trading
Market on the Trading Day immediately preceding the consummation of such debt
financing).


 


4.15  No Net Short Position.  Each Purchaser agrees, severally and not
jointly with any other Purchasers, that they or any Person acting at the
request or direction of Purchaser, will not, until the Effective Date, use the
Shares or the Warrant Shares to cover any Short Sales (as hereinafter defined).  For purposes of this Section 4.15, a “Short
Sale” by any Purchaser shall mean a sale of Common Stock by such Purchaser that
is marked as a short sale and that is made at a time when there is no
equivalent offsetting long position in Common Stock held by such
Purchaser.  Additionally, each Purchaser
understands and acknowledges, severally and not jointly with any other
Purchaser, that the SEC currently takes the position that coverage of short
sales of shares of the Common Stock “against the box” prior to the Effective
Date of the Registration Statement with the Shares purchased hereunder is a
violation of Section 5 of the Securities Act, as set forth in Item 65, Section 5
under Section A, of the Manual of Publicly Available Telephone
Interpretations, dated July 1997, compiled by the Office of Chief Counsel,
Division of Corporation Finance. Accordingly, each Purchaser hereby agrees not
to use any of the Shares to directly cover any short sales made prior to the
Effective Date.


 


ARTICLE V.

MISCELLANEOUS


 


5.1  Fees and Expenses.  The Company shall pay the reasonable fees and
expenses of Lead Investor Counsel in connection with the transactions
contemplated hereby (the “Lead Investor Counsel Fees”), which Lead
Investor Counsel Fees shall include, without limitation, the fees and expenses
associated with the negotiation, preparation and execution and delivery of this
Agreement and the other Transaction Documents and any amendments, modifications
or waivers thereto, but in no event in an amount to exceed $20,000.  The Lead Investor Counsel Fees shall be paid
to Lead Investor Counsel at the Closing by release to Lead Investor Counsel of
the portion of the Escrow Amount equal to the Lead Investor Counsel Fees.  Except as set forth above, the Company and
the Purchasers shall each bear their own expenses in connection with the
negotiation, 


 


28





















 


preparation, execution,
delivery and performance of this Agreement. 
The Company shall pay all stamp and other taxes and duties levied in
connection with the sale of the Securities.


 


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


 


5.3  Notices.  Any and all notices or other communications
or deliveries required or permitted to be provided hereunder shall be in
writing and shall be deemed given and effective on the earliest of (a) the
date of transmission, if such notice or communication is delivered (receipt
confirmed) via facsimile at the facsimile number set forth on the signature pages attached
hereto prior to 6:30 p.m. (New York City time) on a Trading Day, (b) the
next Trading Day after the date of transmission, if such notice or
communication is delivered (receipt confirmed) via facsimile at the facsimile
number set forth on the signature pages attached hereto on a day that is
not a Trading Day or later than 6:30 p.m. (New York City time) on any
Trading Day, (c) the second Trading Day following the date of deposit with
a carrier or service, if sent by U.S. nationally recognized overnight carrier
or courier service, or (d) upon actual receipt by the party to whom such
notice is required to be given.  The
address for such notices and communications shall be as set forth on the
signature pages attached hereto.


 


5.4  Amendments; Waivers.  No provision of this Agreement may be waived
or amended except in a written instrument signed, in the case of an amendment,
by the Company and each Purchaser or, in the case of a waiver, by the party
against whom enforcement of any such waiver is sought.  No waiver of any default with respect to any
provision, condition or requirement of this Agreement shall be deemed to be a
continuing waiver in the future or a waiver of any subsequent default or a
waiver of any other provision, condition or requirement hereof (unless it so
provides by its terms), nor shall any delay or omission of either party to
exercise any right hereunder in any manner impair the exercise of any such
right.


 


5.5  Construction.  The headings herein are for convenience only,
do not constitute a part of this Agreement and shall not be deemed to limit or
affect any of the provisions hereof.  The
language used in this Agreement will be deemed to be the language chosen by the
parties to express their mutual intent, and no rules of strict
construction will be applied against any party.


 


5.6  Successors and Assigns.  This Agreement shall be binding upon and
inure to the benefit of the parties and their successors and permitted
assigns.  The Company may not assign this
Agreement or any rights or obligations hereunder without the prior written
consent of each Purchaser.  Any Purchaser
may assign any or all of its rights under this Agreement to any Person to whom
such Purchaser assigns or transfers any Securities, provided such transferee
agrees in writing to be bound, with respect to the transferred Securities, by
the provisions hereof that apply to the “Purchasers”.


 


29





















 


5.7  No Third-Party
Beneficiaries.  This Agreement is
intended for the benefit of the parties hereto and their respective successors
and permitted assigns and is not for the benefit of, nor may any provision
hereof be enforced by, any other Person, except as otherwise set forth in Section 4.9.


 


5.8  Governing Law.  All questions concerning the construction,
validity, enforcement and interpretation of the Transaction Documents shall be
governed by and construed and enforced in accordance with the internal laws of
the State of New York, without regard to the principles of conflicts of law
thereof.  Each party agrees that all
legal proceedings concerning the interpretations, enforcement and defense of
the transactions contemplated by this Agreement and any other Transaction
Documents (whether brought against a party hereto or its respective affiliates,
directors, officers, shareholders, employees or agents) shall be commenced
exclusively in the state and federal courts sitting in the City of New
York.  Each party hereto hereby
irrevocably submits to the exclusive jurisdiction of the state and federal
courts sitting in the City of New York, New York for the adjudication of any
dispute hereunder or in connection herewith or with any transaction
contemplated hereby or discussed herein (including with respect to the
enforcement of any of the Transaction Documents), and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is improper.  Each party hereto hereby irrevocably waives
personal service of process and consents to process being served in any such
suit, action or proceeding by delivering a copy thereof via overnight delivery
(with evidence of delivery) to such party at the address in effect for notices
to it under this Agreement and agrees that such service shall constitute good
and sufficient service of process and notice thereof.  Nothing contained herein shall be deemed to
limit in any way any right to serve process in any manner permitted by law.
Each party hereto (including its affiliates, agents, officers, directors and
employees) hereby irrevocably waives, to the fullest extent permitted by
applicable law, any and all right to trial by jury in any legal proceeding
arising out of or relating to this Agreement or the transactions contemplated
hereby. If either party shall commence an action or proceeding to enforce any
provisions of a Transaction Document, then the prevailing party in such action
or proceeding, as determined by the court hearing such matter, shall be
reimbursed by the other party for its reasonable attorneys’ fees and other
costs and expenses incurred with the investigation, preparation and prosecution
of such action or proceeding.


 


5.9  Survival.  The representations and warranties herein
shall survive the Closing and delivery of the Shares and Warrant Shares for a
period of one year after the date of this Agreement.


 


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


 


30





















 


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


 


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


 


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


 


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


 


5.15  Independent Nature of
Purchasers’ Obligations and Rights. 
The obligations of each Purchaser under any Transaction Document are
several and not joint with the obligations of any other Purchaser, and no
Purchaser shall be responsible in any way for the performance of the
obligations of any other Purchaser under any Transaction Document.  Nothing contained herein or in any
Transaction Document, and no action taken by any Purchaser pursuant thereto,
shall be deemed to constitute the Purchasers as a partnership, an association,
a joint venture or any other kind of entity, or create a presumption that the
Purchasers are in any way acting in concert or as a group with respect to such
obligations or the transactions contemplated by the Transaction Document.  Each Purchaser shall be entitled
independently to protect and enforce its rights, including without limitation,
the rights arising out of this Agreement or out of the other Transaction
Documents, and it shall not be necessary for any other Purchaser to be 


 


31





















 


joined as an additional party
in any proceeding for such purpose.  Each
Purchaser has been or has had the opportunity to be represented by its own
separate legal counsel in its review and negotiation of the Transaction
Documents.  The Company has elected to
provide all Purchasers with the same terms and Transaction Documents for the
convenience of the Company and not because it was required or requested to do
so by the Purchasers.


 


(Signature Page Follows)


 


32





















 


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


 


	
  FOCUS ENHANCEMENTS, INC.

  	
   

  	
  Address for Notice:

  	
   

  
	
   

  	
   

  	
   

  	
  1370 Dell Avenue

  
	
   

  	
   

  	
   

  	
  Campbell, California 95008

  
	
  By:

  	
  /s/ Brett Moyer

  	
   

  	
   

  	
  Attn: Brett A. Moyer

  
	
   

  	
  Name:  Brett A. Moyer

  	
   

  	
  President and CEO

  
	
   

  	
  Title:  President and Chief Executive Officer

  	
   

  	
  Tel: (408) 866-8300

  
	
   

  	
   

  	
   

  	
  Fax: (408)866-4795

  
						



 


With copy to (which shall not constitute notice):


 


Manatt, Phelps & Phillips, LLP


1001 Page Mill Road, Bldg. 2


Palo Alto, California  94304-1006


Attn:  Jerrold F. Petruzzelli, Esq.


Tel:    (650) 812-1300


Fax:   (650) 213-0260


 


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INTENTIONALLY LEFT BLANK


SIGNATURE PAGES FOR PURCHASERS
FOLLOW]


 


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[PURCHASER SIGNATURE PAGES TO
FCSE SECURITIES PURCHASE AGREEMENT]


 


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


 


	
  Name of Investing Entity:

  	
   

  	
   

  
	
  Signature of Authorized Signatory of
  Investing Entity:

  	
   

  	
   

  
	
  Name of Authorized Signatory:

  	
   

  	
   

  
	
  Title of Authorized Signatory:

  	
   

  	
   

  
	
  Email Address of Authorized Entity:

  	
   

  	
   

  
	
  Address for Notice of Investing Entity:

  	
   

  	
   

  
								



 


 


Address for Delivery of Securities for Investing Entity (if not same as
above):


 


 


	
  Subscription Amount:

  	
   

  	
   

  
	
  Shares:

  	
   

  	
   

  
	
  Warrant Shares:

  	
   

  	
   

  
					



EIN Number:  [WE SUGGEST YOU PROVIDE THIS UNDER SEPARATE COVER]


 


 


 [PURCHASER SIGNATURE PAGE]


 


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