Exhibit 10.34


NOTE
AND WARRANT PURCHASE


AGREEMENT


Dated as of August 10, 2006


by and
among


COMMUNICATION INTELLIGENCE CORPORATION


and


THE
PURCHASERS LISTED ON EXHIBIT A
















TABLE OF CONTENTS


	
  

  	
   

  	
  Page

  
	
   

  	
   

  
	
  ARTICLE I
  PURCHASE AND SALE OF NOTES AND WARRANTS

  	
  1

  
	
  Section 1.1

  	
  Purchase and
  Sale of Notes and Warrants

  	
  1

  
	
  Section 1.2

  	
  Purchase Price
  and Closing

  	
  1

  
	
  Section 1.3

  	
  Warrant Shares

  	
  2

  
	
   

  	
   

  	
   

  
	
  ARTICLE II
  REPRESENTATIONS AND WARRANTIES

  	
  2

  
	
  Section 2.1

  	
  Representations
  and Warranties of the Company

  	
  2

  
	
  Section 2.2

  	
  Representations
  and Warranties of the Purchasers

  	
  12

  
	
   

  	
   

  	
   

  
	
  ARTICLE III
  COVENANTS

  	
  14

  
	
  Section 3.1

  	
  Securities
  Compliance

  	
  14

  
	
  Section 3.2

  	
  Registration and
  Listing

  	
  14

  
	
  Section 3.3

  	
  Compliance with
  Laws

  	
  15

  
	
  Section 3.4

  	
  Keeping of
  Records and Books of Account

  	
  15

  
	
  Section 3.5

  	
  Reporting
  Requirements

  	
  15

  
	
  Section 3.6

  	
  Other Agreements

  	
  15

  
	
  Section 3.7

  	
  Use of Proceeds

  	
  16

  
	
  Section 3.8

  	
  Reporting Status

  	
  16

  
	
  Section 3.9

  	
  Disclosure of
  Transaction

  	
  16

  
	
  Section 3.10

  	
  Disclosure of
  Material Information

  	
  16

  
	
  Section 3.11

  	
  Amendments

  	
  16

  
	
  Section 3.12

  	
  Reservation of
  Shares

  	
  16

  
	
  Section 3.13

  	
  Disposition of
  Assets

  	
  17

  
	
  Section 3.14

  	
  Non-Shorting

  	
  17

  
	
   

  	
   

  	
   

  
	
  ARTICLE IV
  CONDITIONS

  	
  17

  
	
  Section 4.1

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

  	
  17

  
	
  Section 4.2

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

  	
  18

  
	
   

  	
   

  	
   

  
	
  ARTICLE V
  CERTIFICATE LEGEND

  	
  19

  
	
  Section 5.1

  	
  Legend

  	
  19

  
	
   

  	
   

  	
   

  
	
  ARTICLE VI
  INDEMNIFICATION

  	
  20

  
	
  Section 6.1

  	
  General
  Indemnity

  	
  20

  
	
  Section 6.2

  	
  Indemnification
  Procedure

  	
  20

  
	
   

  	
   

  	
   

  
	
  ARTICLE VII
  MISCELLANEOUS

  	
  21

  
	
  Section 7.1

  	
  Fees and
  Expenses

  	
  21

  
	
  Section 7.2

  	
  Specific
  Performance; Consent to Jurisdiction; Venue

  	
  22

  
	
  Section 7.3

  	
  Entire
  Agreement; Amendment

  	
  22

  
	
  Section 7.4

  	
  Notices

  	
  22

  
	
  Section 7.5

  	
  Waivers

  	
  23

  
	
  Section 7.6

  	
  Headings

  	
  23

  
	
  Section 7.7

  	
  Successors and
  Assigns

  	
  24

  
				



 











 


	
  

  	
   

  	
  Page

  	 

	
   

  	
   

  	 

	
  Section 7.8

  	
  No Third Party Beneficiaries

  	
  24

  
	
  Section 7.9

  	
  Governing Law

  	
  24

  
	
  Section 7.10

  	
  Survival

  	
  24

  
	
  Section 7.11

  	
  Counterparts

  	
  24

  
	
  Section 7.12

  	
  Publicity

  	
  24

  
	
  Section 7.13

  	
  Severability

  	
  25

  
	
  Section 7.14

  	
  Further Assurances

  	
  25

  
						



 















 


EXECUTION
COPY


NOTE
AND WARRANT PURCHASE AGREEMENT


This NOTE AND
WARRANT PURCHASE AGREEMENT dated as of August 10, 2006  (this “Agreement”) by and between
Communication Intelligence Corporation, a Delaware corporation (the “Company”),
and each of the purchasers of the promissory notes of the Company whose names
are set forth on Exhibit A attached hereto (each a “Purchaser”
and collectively, the “Purchasers”).


The parties hereto
agree as follows:


ARTICLE
I


PURCHASE
AND SALE OF NOTES AND WARRANTS


Section 1.1             Purchase and Sale of Notes and
Warrants.


(a)           Upon the following terms and
conditions, the Company shall issue and sell to the Purchasers, and the
Purchasers shall purchase from the Company, promissory notes in the aggregate
principal amount of up to Six Hundred Thousand Dollars ($600,000) bearing
interest at the rate of fifteen percent (15%) per annum, in substantially the
form attached hereto as Exhibit B (the “Notes”).  The Company and the Purchasers are executing
and delivering this Agreement in accordance with and in reliance upon the
exemption from securities registration afforded by Section 4(2) of the U.S.
Securities Act of 1933, as amended, and the rules and regulations promulgated
thereunder (the “Securities Act”), including Regulation D (“Regulation D”),
and/or upon such other exemption from the registration requirements of the
Securities Act as may be available with respect to any or all of the
investments to be made hereunder.


(b)           Upon the following terms and
conditions, the Purchasers shall be issued (i) Warrants, in substantially the
form attached hereto as Exhibit C (the “Warrants”), to purchase
the number of shares of Common Stock set forth opposite such Purchaser’s name
on Exhibit A attached hereto.  The
Warrants shall have an exercise price equal to the Warrant Price (as defined in
the respective Warrant) and shall be exercisable as stated therein.  Each Warrant shall have a term of three (3)
years from the later of i) the date it is issued (the “Issuance Date”) or ii)
June 30, 2007.


Section 1.2             Purchase Price and Closing.  Subject to the terms and conditions hereof,
the Company agrees to issue and sell to the Purchasers and, in consideration of
and in express reliance upon the representations, warranties, covenants, terms
and conditions of this Agreement, the Purchasers, severally but not jointly,
agree to purchase the Notes and Warrants for an aggregate purchase price of up
to Six Hundred Thousand Dollars ($600,000) as set forth opposite the name of
each Purchaser on Exhibit A hereto.  The
execution of this Agreement shall take place at the offices of Davis Wright
Tremaine LLP, 1300 S.W. Fifth Avenue, 23rd Floor, Portland, Oregon 97201 (the “Closing”)
at 10:00 a.m., Pacific Daylight Time (i) on or before August 10, 2006;
provided, that all of the conditions set forth in Article IV hereof and
applicable to the Closing shall have been fulfilled or waived in accordance
herewith, or (ii) at such other time and place or on such date as the
Purchasers and the Company may agree upon (the “Closing Date”).  During the Borrowing Period and subject to
the terms and conditions of this Agreement, 



 1
 






 



the Company may issue and
sell the Notes and Warrants to the Purchasers in an amount not to exceed
$600,000 (such amount, the “Purchase Price”) by giving notice thereof to each
Purchaser.  Within seven (7) business
days of receipt of such notice, the Company shall deliver or cause to be
delivered to each Purchaser (x) its Note for the amount of the Purchase Price
being drawn upon and (y) a Warrant to purchase the pro rata number of shares of
Common Stock corresponding to the Purchase Price (the maximum number of shares
to be issued pursuant to such warrants shall be 3,111,000 if the full $600,000
in notes are issued) and each Purchaser shall deliver its Purchase Price by
wire transfer to an account designated by the Company.  When the Company draws available funds from
purchaser the “borrowing period” for the amount requested will represent a
period of eighteen (18) months beginning on the Closing Date.  If multiple requests are made over a period
of time, each request will be treated separately for purposes of determining
the 18 month borrowing period.  This
agreement shall expire on November 15, 2006. 
Upon expiration of this agreement, if the Company has not drawn the full
amount available, the Purchasers shall be entitled to receive, based upon the
amount not drawn to the amount available, a pro rata portion of 335,000 shares
of Common Stock as a standby commitment fee within thirty (30) days from the
date of the expiration of the agreement. 
Any funds that were drawn during the agreement period will follow the 18
month borrowing period and other terms of purchase.


Section 1.3             Warrant Shares.  The Company has authorized and has reserved
and covenants to continue to reserve, free of preemptive rights and other
similar contractual rights of stockholders, 2,200,000 of its authorized but
unissued shares of Common Stock (the “Reserved Shares”) to effect the exercise
of the Warrants.  If at any time any
Warrant is exercised and the number of the Reserved Shares is insufficient to
effect the exercise, the Company shall seek authorization at the next scheduled
annual meeting of its shareholders to increase the number of the Reserved
Shares to effect the exercise of the Warrants. 
Any shares of Common Stock issuable upon exercise of the Warrants (and
such shares when issued) are herein referred to as the “Warrant Shares.”  The Notes, the Warrants and the Warrant
Shares are sometimes collectively referred to herein as the “Securities”.


ARTICLE
II


REPRESENTATIONS
AND WARRANTIES


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


(a)           Organization, Good Standing and
Power.  The Company is a corporation
duly incorporated, validly existing and in good standing under the laws of the
State of Delaware and has the requisite corporate power to own, lease and
operate its properties and assets and to conduct its business as it is now
being conducted.  The Company does not
have any Subsidiaries (as defined in Section 2.1(g)) or own securities of any
kind in any other entity except as set forth on Schedule 2.1(g)
hereto.  The Company and each such
Subsidiary (as defined in Section 2.1(g)) is duly qualified as a foreign
corporation to do business and is in good standing in every jurisdiction in
which the nature of the business conducted or property owned by it makes such 



 2
 






 



qualification necessary
except for any jurisdiction(s) (alone or in the aggregate) in which the failure
to be so qualified will not have a Material Adverse Effect.  For the purposes of this Agreement, “Material
Adverse Effect” means any effect on the business (including a material
change in management), results of operations, prospects, properties, assets or
condition (financial or otherwise) of the Company that is material and adverse
to the Company and its subsidiaries, taken as a whole, and/or any condition,
circumstance, factor or situation (including, without limitation, an
investigation by the Securities and Exchange Commission (the “Commission”))
that would prohibit or otherwise materially interfere with the ability of the
Company from entering into and performing any of its obligations under the
Transaction Documents (as defined below) in any material respect.


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


(c)           Capitalization.  The authorized capital stock of the Company
as of August 10, 2006 is set forth on Schedule 2.1(c) hereto.  All of the outstanding shares of the Common
Stock and any other outstanding security of the Company have been duly and
validly authorized.  Except as set forth
in this Agreement and as set forth on Schedule 2.1(c) hereto, no shares
of Common Stock or any other security of the Company are entitled to preemptive
rights or registration rights and there are no outstanding options, warrants,
scrip, rights to subscribe to, call or commitments of any character whatsoever
relating to, or securities or rights convertible into, any shares of capital
stock of the Company.  Furthermore,
except as set forth in this Agreement and as set forth on Schedule 2.1(c)
hereto, there are no contracts, commitments, understandings, or arrangements by
which the Company is or may become bound to issue additional shares of the
capital stock of the Company or options, securities or rights convertible into
shares of capital stock of the Company. 
Except for customary transfer restrictions contained in agreements
entered into by the Company in order to sell restricted securities or as
provided on Schedule 2.1(c) hereto, the Company is not a party to or
bound by any agreement or understanding granting registration or anti-dilution
rights to any person with respect to any of its equity or debt securities.  Except as set forth on Schedule 2.1(c),
the Company is not a party to, and it has no knowledge of, any agreement or
understanding restricting the voting or transfer of any shares of the capital
stock of the Company.



 3
 






 



(d)           Issuance of Securities.  The Notes and the Warrants to be issued have
been duly authorized by all necessary corporate action and, when paid for or
issued in accordance with the terms hereof, the Notes shall be validly issued
and outstanding, free and clear of all liens, encumbrances and rights of
refusal of any kind.  When the Warrant
Shares are issued and paid for in accordance with the terms of this Agreement
and as set forth in the Warrants, such shares will be duly authorized by all
necessary corporate action and validly issued and outstanding, fully paid and
non-assessable, free and clear of all liens, encumbrances and rights of refusal
of any kind and the holders shall be entitled to all rights accorded to a
holder of Common Stock.


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


(f)            Commission Documents, Financial
Statements.  The Common Stock of the
Company is registered pursuant to Section 12(b) or 12(g) of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), and the Company
has timely filed all reports, schedules, forms, statements and other documents
required to be filed by it with the Commission pursuant to the reporting
requirements of the Exchange Act (all of the foregoing including filings
incorporated by reference therein being referred to herein as the “Commission
Documents”).  At the times of their
respective filings, the Form 10-Q for the fiscal quarters ended March 31, 2006
(the “Form 10-Q”) and the Form 10-K for the fiscal year ended December
31, 2005 as filed on March 30, 2006, as amended on Form 10-K/A as filed on
March 31, 2006 (collectively, the “Form 10-K”) complied in all material
respects with the requirements of the Exchange Act and the rules and
regulations of the Commission promulgated thereunder and other federal, state
and local laws, rules and regulations applicable to such documents, and the
Form 10-Q and Form 10-K



 4
 






 



did not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.  As of their respective dates, the financial
statements of the Company included in the Commission Documents complied as to
form in all material respects with applicable accounting requirements and the
published rules and regulations of the Commission or other applicable rules and
regulations with respect thereto.  Such
financial statements have been prepared in accordance with generally accepted
accounting principles (“GAAP”) applied on a consistent basis during the
periods involved (except (i) as may be otherwise indicated in such financial
statements or the Notes thereto or (ii) in the case of unaudited interim
statements, to the extent they may not include footnotes or may be condensed or
summary statements), and fairly present in all material respects the financial
position of the Company and its Subsidiaries as of the dates thereof and the
results of operations and cash flows for the periods then ended (subject, in
the case of unaudited statements, to normal year-end audit adjustments).


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


(h)           No Material Adverse Change.  Since March 31, 2006, the Company has not
experienced or suffered any Material Adverse Effect, except as disclosed on Schedule
2.1(h) hereto.


(i)            No Undisclosed Liabilities.  Except as disclosed on Schedule 2.1(i)
hereto, neither the Company nor any of its Subsidiaries has incurred any
liabilities, obligations, claims or losses (whether liquidated or unliquidated,
secured or unsecured, absolute, accrued, contingent or otherwise) other than
those incurred in the ordinary course of the Company’s or its Subsidiaries
respective businesses or which, individually or in the aggregate, are not
reasonably likely to have a Material Adverse Effect.



 5














 


(j)            No Undisclosed Events or
Circumstances.  Since March 31, 2006,
except as disclosed on Schedule 2.1(j) hereto, no event or circumstance
has occurred or exists with respect to the Company or its Subsidiaries or their
respective businesses, properties, prospects, operations or financial
condition, which, under applicable law, rule or regulation, requires public
disclosure or announcement by the Company but which has not been so publicly
announced or disclosed.


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


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


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


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



 6
 






 



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


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


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


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


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


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



 7
 






 



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


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


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


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



 8
 






 



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


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


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


(y)           Absence of Certain Developments.  Except as provided on Schedule 2.1(y)
hereto, since March 31, 2006, neither the Company nor any Subsidiary has:


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


(ii)           borrowed any amount in excess of
$300,000 or incurred or become subject to any other liabilities in excess of
$100,000 (absolute or contingent) except current liabilities incurred in the
ordinary course of business which are comparable in nature and amount to the
current liabilities incurred in the ordinary course of business during the
comparable portion of its prior fiscal year, as adjusted to reflect the current
nature and volume of the business of the Company and its Subsidiaries;



 9
 






 



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


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


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


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


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


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


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


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


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


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


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


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


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



 10
 






 



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


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


(cc)         No Integrated Offering.  Neither the Company, nor any of its affiliates,
nor any person acting on its or their behalf, has directly or indirectly made
any offers or sales of any security or solicited any offers to buy any security
under circumstances that would cause the offering of the Securities pursuant to
this Agreement to be integrated with prior offerings by the Company for
purposes of the Securities Act which would prevent the Company from selling the
Securities pursuant to Regulation D and Rule 506 thereof under the Securities
Act, or any 



 11
 






 



applicable exchange-related stockholder approval
provisions, nor will the Company or any of its affiliates or subsidiaries take
any action or steps that would cause the offering of the Securities to be
integrated with other offerings.  Except
as set forth on Schedule 2.1(cc), the Company does not have any
registration statement pending before the Commission or currently under the
Commission’s review and, except as set forth on Schedule 2.1(cc), since
March 31, 2006, the Company has not offered or sold any of its equity securities
or debt securities convertible into shares of Common Stock.


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


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


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


(b)           Authorization and Power.  Each Purchaser has the requisite power and
authority to enter into and perform the Transaction Documents and to purchase
the Securities being sold to it hereunder. 
The execution, delivery and performance of the Transaction Documents by
each Purchaser and the consummation by it of the transactions contemplated
hereby have been duly authorized by all necessary corporate or partnership
action, and no further consent or authorization of such Purchaser or its Board
of Directors, stockholders, or partners, as the case may be, is required.  When executed and delivered by the Purchasers
and the Company, the other Transaction Documents shall constitute valid and
binding obligations of each Purchaser enforceable against such Purchaser in
accordance with their terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation,
conservatorship, receivership or similar laws relating to, or affecting
generally the enforcement of, creditor’s rights and remedies or by other
equitable principles of general application.


(c)           No Conflict.  The execution, delivery and performance of
the Transaction Documents by the Purchaser and the consummation by the Purchaser
of the transactions contemplated thereby and hereby do not and will not (i)
violate any provision of the Purchaser’s charter or organizational documents,
(ii) conflict with, or constitute a default (or an event which with notice or
lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation of, any
agreement, mortgage, deed of trust, indenture, note, bond, license, lease
agreement, instrument or obligation to which the Purchaser is a party or by
which the Purchaser’s respective properties or assets are bound, or (iii)
result in a violation of any federal, state, local or foreign statute, rule,
regulation, order, judgment or decree (including federal and state securities
laws and regulations) applicable to the Purchaser or by which any property or
asset of the Purchaser are bound or affected, except, in all cases, 



 12
 






 



other than violations pursuant to clauses (i) or (iii)
(with respect to federal and state securities laws) above, except, for such
conflicts, defaults, terminations, amendments, acceleration, cancellations and
violations as would not, individually or in the aggregate, materially and
adversely affect the Purchaser’s ability to perform its obligations under the
Transaction Documents.


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


(e)           Rule 144.  Each Purchaser understands that the
Securities must be held indefinitely unless such Securities are registered
under the Securities Act or an exemption from registration is available.  Each Purchaser acknowledges that such person
is familiar with Rule 144 of the rules and regulations of the Commission, as
amended, promulgated pursuant to the Securities Act (“Rule 144”), and
that such Purchaser has been advised that Rule144 permits resales only under
certain circumstances.  Each Purchaser
understands that to the extent that Rule 144 is not available, such Purchaser
will be unable to sell any Securities without either registration under the
Securities Act or the existence of another exemption from such registration
requirement.


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


(g)           No General Solicitation.  Each Purchaser acknowledges that the
Securities were not offered to such Purchaser by means of any form of general
or public solicitation or general advertising, or publicly disseminated
advertisements or sales literature, including (i) any advertisement, article,
notice or other communication published in any newspaper, magazine, or similar
media, or broadcast over television or radio, or (ii) any seminar or meeting to
which such 



 13
 






 



Purchaser was invited by any of the foregoing means of
communications.  Each Purchaser, in
making the decision to purchase the Securities, has relied upon independent
investigation made by it and has not relied on any information or
representations made by third parties.


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


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


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


ARTICLE
III


COVENANTS


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


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


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


Section 3.3             Compliance with Laws.  The Company shall comply, and cause each
Subsidiary to comply, with all applicable laws, rules, regulations and orders, noncompliance
with which would be reasonably likely to have a Material Adverse Effect.



 14














 


Section 3.4             Keeping of Records and Books of
Account.  The Company shall keep and
cause each Subsidiary to keep adequate records and books of account, in which
complete entries will be made in accordance with GAAP consistently applied,
reflecting all financial transactions of the Company and its Subsidiaries, and
in which, for each fiscal year, all proper reserves for depreciation,
depletion, obsolescence, amortization, taxes, bad debts and other purposes in
connection with its business shall be made.


Section 3.5             Reporting Requirements.  If the Company ceases to file its periodic
reports with the Commission, or if the Commission ceases making these periodic
reports available via the Internet without charge, then the Company shall
furnish the following to each Purchaser so long as such Purchaser shall be
obligated hereunder to purchase the Securities or shall beneficially own
Warrant Shares:


(a)           Quarterly Reports filed with the
Commission on Form 10-Q as soon as available, and in any event within
forty-five (45) days after the end of each of the first three fiscal quarters
of the Company;


(b)           Annual Reports filed with the
Commission on Form 10-K as soon as available, and in any event within ninety
(90) days after the end of each fiscal year of the Company; and


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


Section 3.6             Other Agreements.  The Company shall not enter into any
agreement in which the terms of such agreement would restrict or impair the
right or ability to perform of the Company or any Subsidiary under any
Transaction Document.


Section 3.7             Use of Proceeds.  The proceeds from the sale of the Securities
will be used by the Company for working capital and general corporate purposes.


Section 3.8             Reporting Status.  So
long as a Purchaser beneficially owns any of the Securities, the Company shall timely
file all reports required to be filed with the Commission pursuant to the
Exchange Act, and the Company shall not terminate its status as an issuer
required to file reports under the Exchange Act even if the Exchange Act or the
rules and regulations thereunder would permit such termination.


Section 3.9             Disclosure of Transaction.  The Company shall issue a press release
describing the material terms of the transactions contemplated hereby (the
“Press Release”) on the day of the Closing; provided, however, that if Closing
occurs after 4:00 P.M. Eastern Time on any Trading Day but in no event later
than one hour after the Closing, the Company shall issue the Press Release no
later than 9:00 A.M. Eastern Time on the first Trading Day following the Closing
Date.  The Company shall also file with
the Commission a Current Report on Form 8-K (the “Form 8-K”) describing the
material terms of the transactions contemplated hereby (and attaching as
exhibits thereto this Agreement, the Note, the Registration Rights Agreement
and the form of Warrant) as soon as practicable following the date of execution
of this Agreement 



 15
 






 



but in no event more than two (2) Trading Days
following the date of execution of this Agreement.  “Trading Day” means any day during which the
principal exchange on which the Common Stock is traded shall be open for
trading.


Section 3.10           Disclosure of Material Information.  The Company covenants and agrees that neither
it nor any other person acting on its behalf has provided or will provide any Purchaser
or its agents or counsel with any information that the Company believes
constitutes material non-public information, unless prior thereto such
Purchaser shall have executed a written agreement regarding the confidentiality
and use of such information.  The Company understands and confirms that
each Purchaser shall be relying on the foregoing representations in effecting
transactions in securities of the Company.


Section 3.11           Amendments.  The Company shall not amend or waive any
provision of the Certificate or Bylaws of the Company in any way that would
adversely affect exercise rights, voting rights, conversion rights, prepayment
rights or redemption rights of the holder of the Notes.


Section 3.12           Reservation of Shares.  So long as any of the Notes or Warrants
remain outstanding, the Company shall take all action necessary to at all times
have 2,200,000 shares of Common Stock authorized and reserved for the purpose
of issuance, and if necessary, shall seek authorization at the next scheduled
annual meeting of its shareholders to increase the aggregate number of shares
of Common Stock needed to provide for the issuance of the Warrant Shares.


Section 3.13           Disposition of Assets.  So long as the Notes remain outstanding,
neither the Company nor any subsidiary shall sell, transfer or otherwise
dispose of any of its properties, assets and rights including, without
limitation, its software and intellectual property, to any person except for
sales to customers in the ordinary course of business or with the prior written
consent of the holders of a majority of the Notes then outstanding.


Section 3.14           Non-Shorting.  So long as the Notes or Warrants remain
outstanding, each Purchaser covenants and agrees that it will not engage in any
short sales of the Company’s Common Stock.


ARTICLE
IV


CONDITIONS


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


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



 16
 






 



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


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


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


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


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


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


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


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


(e)           Secretary’s Certificate.  The Company shall have delivered to the
Purchasers a secretary’s certificate, dated as of the Closing Date, as to (i)
the resolutions adopted by the Board of Directors approving the transactions
contemplated hereby, (ii) the Certificate, (iii) the Bylaws, each as in effect
at the Closing, and (iv) the authority and incumbency of the 



 17
 






 



officers of the Company executing the Transaction
Documents and any other documents required to be executed or delivered in
connection therewith.


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


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


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


ARTICLE
V


CERTIFICATE
LEGEND


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


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


The Company agrees
to reissue certificates representing any of the Warrant Shares, without the
legend set forth above if at such time, prior to making any transfer of any
such Warrant Shares, such holder thereof shall give written notice to the
Company describing the manner and terms of such transfer and removal as the Company
may reasonably request.  Such proposed
transfer and removal will not be effected until: (a) either (i) the Company has
received an opinion of counsel reasonably satisfactory to the Company, to the
effect that the registration of the Warrant Shares under the Securities Act is
not required in connection with such proposed transfer, (ii) a registration
statement under the Securities Act covering such proposed disposition has been
filed by the Company with the Commission and has become effective under the
Securities Act, (iii) the Company has received other evidence reasonably
satisfactory to the 



 18
 






 



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


ARTICLE
VI


INDEMNIFICATION


Section 6.1             General Indemnity.  The Company agrees to indemnify and hold
harmless the Purchasers (and their respective directors, officers, affiliates,
agents, successors and assigns) from and against any and all losses,
liabilities, deficiencies, costs, damages and expenses (including, without
limitation, reasonable attorneys’ fees, charges and disbursements) incurred by
the Purchasers as a result of any inaccuracy in or breach of the
representations, warranties or covenants made by the Company herein.  Each Purchaser severally but not jointly
agrees to indemnify and hold harmless the Company and its directors, officers,
affiliates, agents, successors and assigns from and against any and all losses,
liabilities, deficiencies, costs, damages and expenses (including, without
limitation, reasonable attorneys’ fees, charges and disbursements) incurred by
the Company as result of any inaccuracy in or breach of the representations, warranties
or covenants made by such Purchaser herein. 
The maximum aggregate liability of each Purchaser pursuant to its
indemnification obligations under this Article VI shall not exceed the portion
of the Purchase Price paid by such Purchaser hereunder. The maximum aggregate
liability of the Company pursuant to its indemnification obligations under this
Article VI shall not exceed the aggregate Purchase Price, including any actual
moneys paid by the Purchasers for the Warrant Shares.



 19
 






 



Section 6.2             Indemnification Procedure.  Any party entitled to indemnification under
this Article VI (an “indemnified party”) will give written notice to the
indemnifying party of any matter giving rise to a claim for indemnification;
provided, that the failure of any party entitled to indemnification hereunder
to give notice as provided herein shall not relieve the indemnifying party of
its obligations under this Article VI except to the extent that the
indemnifying party is actually prejudiced by such failure to give notice.  In case any such action, proceeding or claim
is brought against an indemnified party in respect of which indemnification is
sought hereunder, the indemnifying party shall be entitled to participate in
and, unless in the reasonable judgment of the indemnifying party a conflict of
interest between it and the indemnified party exists with respect to such
action, proceeding or claim (in which case the indemnifying party shall be
responsible for the reasonable fees and expenses of one separate counsel for
the indemnified parties), to assume the defense thereof with counsel reasonably
satisfactory to the indemnified party. 
In the event that the indemnifying party advises an indemnified party
that it will not contest such a claim for indemnification hereunder, or fails,
within thirty (30) days of receipt of any indemnification notice to notify, in
writing, such person of its election to defend, settle or compromise, at its
sole cost and expense, any action, proceeding or claim (or discontinues its
defense at any time after it commences such defense), then the indemnified
party may, at its option, defend, settle or otherwise compromise or pay such
action or claim.  In any event, unless
and until the indemnifying party elects in writing to assume and does so assume
the defense of any such claim, proceeding or action, the indemnified party’s
costs and expenses arising out of the defense, settlement or compromise of any
such action, claim or proceeding shall be losses subject to indemnification
hereunder.  The indemnified party shall
cooperate fully with the indemnifying party in connection with any negotiation
or defense of any such action or claim by the indemnifying party and shall
furnish to the indemnifying party all information reasonably available to the
indemnified party which relates to such action or claim.  The indemnifying party shall keep the
indemnified party fully apprised at all times as to the status of the defense
or any settlement negotiations with respect thereto.  If the indemnifying party elects to defend
any such action or claim, then the indemnified party shall be entitled to
participate in such defense with counsel of its choice at its sole cost and
expense.  The indemnifying party shall
not be liable for any settlement of any action, claim or proceeding effected
without its prior written consent. 
Notwithstanding anything in this Article VI to the contrary, the
indemnifying party shall not, without the indemnified party’s prior written
consent, settle or compromise any claim or consent to entry of any judgment in
respect thereof which imposes any future obligation on the indemnified party or
which does not include, as an unconditional term thereof, the giving by the
claimant or the plaintiff to the indemnified party of a release from all
liability in respect of such claim.  The
indemnification obligations to defend the indemnified party required by this
Article VI shall be made by periodic payments of the amount thereof during the
course of investigation or defense, as and when bills are received or expense,
loss, damage or liability is incurred, so long as the indemnified party shall
refund such moneys if it is ultimately determined by a court of competent
jurisdiction that such party was not entitled to indemnification.  The indemnity agreements contained herein
shall be in addition to (a) any cause of action or similar rights of the
indemnified party against the indemnifying party or others, and (b) any
liabilities the indemnifying party may be subject to pursuant to the law.  No indemnifying party will be liable to the
indemnified party under this Agreement to the extent, but only to the extent
that a loss, claim, damage or liability is attributable to the indemnified
party’s breach of any of the 



 20
 






 



representations, warranties or covenants made by such
party in this Agreement or in the other Transaction Documents.


ARTICLE
VII


MISCELLANEOUS


Section 7.1             Fees and Expenses.  Each party shall pay the fees and expenses of
its advisors, counsel, accountants and other experts, if any, and all other
expenses, incurred by such party incident to the negotiation, preparation,
execution, delivery and performance of this Agreement.


Section 7.2             Specific Performance; Consent to
Jurisdiction; Venue.


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


(b)           The parties agree that venue for any
dispute arising under this Agreement will lie exclusively in the state or
federal courts located in California and the parties irrevocably waive any
right to raise forum non conveniens
or any other argument that California is not the proper venue.  The parties irrevocably consent to personal
jurisdiction in the state and federal courts of the state of California.  The Company and each Purchaser consent to
process being served in any such suit, action or proceeding by mailing a copy
thereof to such party at the address in effect for notices to it under this
Agreement and agrees that such service shall constitute good and sufficient
service of process and notice thereof. 
Nothing in this Section 7.2 shall affect or limit any right to serve
process in any other manner permitted by law. 
The Company and the Purchasers hereby agree that the prevailing party in
any suit, action or proceeding arising out of or relating to the Securities,
this Agreement or the Registration Rights Agreement, shall be entitled to
reimbursement for reasonable legal fees from the non-prevailing party.


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



 21
 






 



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


	
  If to the Company:

  	
   

  	
  Communication Intelligence Corporation

  
	
   

  	
   

  	
  275 Shoreline
  Drive, Suite 500

  
	
   

  	
   

  	
  Redwood Shores,
  California 94065

  
	
   

  	
   

  	
  Attention: Frank
  Dane

  
	
   

  	
   

  	
  Tel. No.: (650)
  802-7888

  
	
   

  	
   

  	
  Fax No.: (650)
  802-7777

  
	
   

  	
   

  	
   

  
	
  with copies
  (which copies

  	
   

  	
   

  
	
  shall not
  constitute notice

  	
   

  	
   

  
	
  to the Company)
  to:

  	
   

  	
  Davis Wright
  Tremaine LLP

  
	
   

  	
   

  	
  1300 S.W. Fifth
  Ave., 23rd Floor

  
	
   

  	
   

  	
  Portland, Oregon
  97201

  
	
   

  	
   

  	
  Attention:
  Michael C. Phillips, Esq.

  
	
   

  	
   

  	
  Tel. No. (503)
  241-2300

  
	
   

  	
   

  	
  Fax No.: (503)
  778-5299

  
	
   

  	
   

  	
   

  
	
  If to any
  Purchaser:

  	
   

  	
  At the address
  of such Purchaser set forth on Exhibit A to this Agreement, with
  copies to Purchaser’s counsel as set forth on Exhibit A or as
  specified in writing by such Purchaser with copies to:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  [Insert name and address]

  



 


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


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


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


Section 7.7             Successors and Assigns.  This Agreement shall be binding upon and
inure to the benefit of the parties and their successors and assigns.  After the Closing, the assignment 



 22
 






 



by a party to this Agreement of any rights hereunder
shall not affect the obligations of such party under this Agreement.  Subject to Section 5.1 hereof, the Purchasers
may assign the Securities and its rights under this Agreement and the other
Transaction Documents and any other rights hereto and thereto without the
consent of the Company.


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


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


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


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


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


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


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



 23
 






 



[SIGNATURE
PAGE FOLLOWS]



 24














 


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


	
     

  	
  COMMUNICATION 
  INTELLIGENCE CORPORATION

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By: 

  	
   

  	
  /s/ Frank Dane

  	
   

  
	
   

  	
       Name: Frank Dane

  	
   

  
	
   

  	
  Title:  Chief
  Financial and Legal Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  PURCHASER:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By: 

  	
   

  	
  /s/ Michael W. Engmann

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

  
							



 









 



EXHIBIT A


LIST
OF PURCHASERS


	
  Names and Addresses

  	
   

  	
  Investment Amount and Number of

  	
   

  
	
  of Purchasers

  	
   

  	
  Warrants Purchased

  	
   

  
	
  Michael W.
  Engmann

  	
   

  	
  $600,000

  	
   

  



 









 



EXHIBIT B


FORM OF NOTE









 



EXHIBIT C


FORM OF WARRANT









 



EXHIBIT D


FORM OF
REGISTRATION RIGHTS AGREEMENT









 



SCHEDULE
2.1(b)


None.









 



SCHEDULE 2.1(c)


CAPITALIZATION


Preferred Shares Authorized:
10,000,000


Common Shares Authorized:
125,000,000


No exceptions from public filings









 



SCHEDULE 2.1(g)


SUBSIDIARIES


CICI Limited, Incorporated in
Bermuda, 100% owned by CIC


Communication Intelligence
Computer Corporation, Ltd., Joint Venture in China, 90% owned by CIC, 10% owned
by Jiangsu Hongtu Electronics Company, Ltd.









 



SCHEDULE
2.1(h)


None.









 



SCHEDULE
2.1(i)


None.









 



SCHEDULE
2.1(j)


None.















 


SCHEDULE
2.1(k)


$1,382,692 in Convertible debt to nine (9) investors.  If not converted the debt is payable in
October 2007.









 



SCHEDULE
2.1(l)


None.









 



SCHEDULE
2.1(m)


None.









 



SCHEDULE
2.1(n)


None.









 



SCHEDULE
2.1(o)


None.









 



SCHEDULE
2.1(p)


None.









 



SCHEDULE
2.1(r)


None.









 



SCHEDULE
2.1(u)


None.









 



SCHEDULE
2.1(v)


None.









 



SCHEDULE
2.1(x)


None.









 



SCHEDULE
2.1(y)


·                  64,935 shares were issued to Gamma Opportunity Capital Partners, LP
upon conversion of $30,000 of their convertible note.


·                  875,000 stock options were granted to four (4) employees since March
31, 2005.









 



SCHEDULE 2.1(cc)


None.