Document:

Exhibit 10.1

 

SECURITIES PURCHASE
AGREEMENT

This SECURITIES PURCHASE AGREEMENT (this “Agreement”), dated as of August
 8, 2006, is by and between LIPID SCIENCES, INC., a Delaware corporation
(the “Company”), and each of the
entities whose names appear on the signature pages hereof.  Such entities are each referred to herein as
an “Investor” and, collectively, as the “Investors.”

The Company wishes
to sell to each Investor, and each Investor wishes to purchase, on the terms
and subject to the conditions set forth in this Agreement, (1) shares (the
“Shares”) of the Company’s common
stock, $0.001 par value per share (the “Common Stock”),
and a Warrant in the form attached hereto as Exhibit A (each, a “Warrant” and, collectively with the
other Warrants issued hereunder, the “Warrants”).  The shares of Common Stock into which the
Warrants are exercisable are referred to herein as the “Warrant
Shares,”
and the Shares, the Warrants and the Warrant Shares are collectively referred
to herein as the “Securities.”

Each Warrant
purchased by an Investor shall (1) entitle such Investor to purchase a
number of Warrant Shares equal to the product of (i) the number of Shares
being purchased by such Investor at the Closing and (ii) 0.30,
(2) have an exercise price equal to $1.51 (which is equal to 120% of VWACP
and subject to adjustment as provided therein), and (3) be exercisable for
the period commencing on the first Business Day following the six (6)
month anniversary of the Closing Date and expiring sixty (60) months thereafter.

The Company has
agreed to effect the registration of the Shares and the Warrant Shares for
resale by the holders thereof under the Securities Act of 1933, as amended (the
“Securities Act”), pursuant to a
Registration Rights Agreement in the form attached hereto as Exhibit B (the “Registration Rights Agreement”).

The sale of the
Shares and the Warrants by the Company to the Investors will be effected in
reliance upon the exemption from the securities registration requirements of
the Securities Act afforded by the provisions of Regulation D (“Regulation D”), as promulgated
by the Commission (as defined below) under the Securities Act.

The obligations of each Investor hereunder are several and not joint
with the obligations of the other Investors hereunder, and no Investor shall be
responsible in any way for the performance of the obligations of any other
Investor hereunder.

The Company and each Investor hereby agree as follows:

1.                                       PURCHASE AND SALE OF SHARES AND WARRANTS.

1.1           Closing.  Upon the terms and subject to the
satisfaction or waiver of the conditions set forth herein, the Company agrees
to sell and each Investor agrees to purchase (i) Shares in the amount set
forth below such Investor’s name on the signature pages hereof, and (ii) a
Warrant.  The date on which the closing
of such purchase and sale occurs (the “Closing”)
is hereinafter referred to as the “Closing Date”.
The Closing will be deemed to occur at the offices of the Company, 7068 Koll
Center Parkway, Suite 401, Pleasanton, CA 94566 at 12:30 p.m., Pacific Daylight
Time, on August 8, 2006, or at such other time and place upon which the Company
and the Investors shall agree.

1.2           Certain
Definitions.  When used herein, the
following terms shall have the respective meanings indicated:

 

“Affiliate” means, as to any
Person (the “subject Person”), any other
Person (a) that directly or indirectly through one or more intermediaries
controls or is controlled by, or is under direct or indirect common control
with, the subject Person, (b) that directly or indirectly beneficially
owns or holds ten percent (10%) or more of any class of voting equity of the
subject Person, or (c) ten percent (10%) or more of the voting equity of
which is directly or indirectly beneficially owned or held by the subject
Person. For the purposes of this definition, “control”
when used with respect to any Person means the power to direct the management and policies of such
Person, directly or indirectly, whether through the ownership of voting
securities, through representation on such Person’s board of directors or other
management committee or group, by contract or otherwise.

“Board of Directors” means the
Company’s board of directors.

“Business Day” means any day other
than a Saturday, a Sunday or a day on which the New York Stock Exchange is
closed or on which banks in the City of New York are required or authorized by
law to be closed.

“Closing” has the meaning specified
in Section 1.1 of this Agreement.

“Closing Date” has the meaning
specified in Section 1.1 of this Agreement.

“Commission” means the Securities and
Exchange Commission.

“Common Stock” has the meaning
specified in the preamble to this Agreement.

“Disclosure Documents” means all SEC
Documents filed with the Commission at least five (5) Business Days prior to
the Execution Date.

“Effective Date” has the meaning set
forth in the Registration Rights Agreement.

“Environmental Law” means any
federal, state, provincial, local or foreign law, statute, code or ordinance,
principle of common law, rule or regulation, as well as any Permit, order,
decree, judgment or injunction issued, promulgated, approved or entered
thereunder, relating to pollution or the protection, cleanup or restoration of
the environment or natural resources, or to the public health or safety, or
otherwise governing the generation, use, handling, collection, treatment,
storage, transportation, recovery, recycling, discharge or disposal of
hazardous materials.

“Equity Securities” means
(i) any shares of Common Stock, (ii) any other equity security of the
Company, including without limitation shares of preferred stock, (iii) any
other security of the Company which by its terms is convertible into or
exchangeable or exercisable for any equity security of the Company, or
(iv) any option, warrant or other right to subscribe for, purchase or
otherwise acquire any such security described in the foregoing clauses (i)
through (iii).

“ERISA” means the Employee Retirement
Income Security Act of 1974, as amended, and the regulations and published
interpretations thereunder.

“Exchange Act” means the Securities
Exchange Act of 1934, as amended (or any successor act), and the rules and
regulations thereunder (or respective successors thereto).

“Execution Date” means the date of
this Agreement.

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“GAAP” means
generally accepted accounting principles, applied on a consistent basis, as set
forth in (i) opinions of the Accounting Principles Board of the American
Institute of Certified Public Accountants, (ii) statements of the
Financial Accounting Standards Board and (iii) interpretations of the
Commission and the staff of the Commission. 
Accounting principles are applied on a “consistent basis” when the
accounting principles applied in a current period are comparable in all
material respects to those accounting principles applied in a preceding period.

“Governmental Authority” means any
nation or government, any state, provincial or political subdivision thereof
having jurisdiction over the Company and any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government, including without limitation any stock exchange, securities
market or self-regulatory organization.

“Governmental Requirement” means any
law, statute, code, ordinance, order, rule, regulation, judgment, decree,
injunction, franchise, license or other directive or requirement of any
federal, state, county, municipal, parish, provincial or other Governmental
Authority or any department, commission, board, court, agency or any other
instrumentality of any of them to which the Company is bound.

“Intellectual Property” means any
U.S. or foreign patents, patent rights, patent applications, trademarks, trade
names, service marks, brand names, logos and other trade designations
(including unregistered names and marks), trademark and service mark
registrations and applications, copyrights and copyright registrations and
applications, inventions, invention disclosures, protected formulae,
formulations, processes, methods, trade secrets, computer software, computer programs
and source codes, manufacturing research and similar technical information,
engineering know-how, customer and supplier information, assembly and test data
drawings or royalty rights.

“Knowledge of the Company” means any
other phrases of similar import, with respect to any matter in question
relating to the Company, if S. Lewis Meyer, Sandra Gardiner or H. Bryan
Brewer, Jr., M.D. has actual knowledge of such matter, without duty of
investigation or inquiry.

“Lien” means, with respect to any
Property, any mortgage, pledge, hypothecation, assignment, deposit arrangement,
security interest, tax lien, financing statement, pledge, charge, or other
lien, charge, easement, encumbrance, preference, priority or other security
agreement or preferential arrangement of any kind or nature whatsoever on or
with respect to such Property (including, without limitation, any conditional
sale or other title retention agreement having substantially the same economic
effect as any of the foregoing).

“Material Adverse Effect” means an
effect that is material and adverse to (i) the consolidated business,
properties, assets, operations, results of operations, financial condition or
prospects, of the Company taken as a whole, or (ii) the ability of the
Company to perform its obligations under this Agreement or the other
Transaction Documents (as defined below).

“Material Contracts” means, as to the
Company, any agreement required pursuant to Item 601 of Regulation S-B or Item
601 of Regulation S-K, as applicable, promulgated under the Securities Act to
be filed as an exhibit to any report, schedule, registration statement or
definitive proxy statement filed or required to be filed by the Company with
the Commission under the Exchange Act or any rule or regulation promulgated
thereunder, and any and all amendments, modifications, supplements, renewals or
restatements thereof.

“NASD” means the National Association
of Securities Dealers, Inc.

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“Pension Plan”
means an employee benefit plan (as defined in ERISA) maintained by the Company
for employees of the Company or any of its Affiliates.

“Permitted Liens” means the
following:

(a)           encumbrances
consisting of easements, rights-of-way, zoning restrictions or other
restrictions on the use of real property or imperfections to title that do not
(individually or in the aggregate) materially impair the ability of the Company
to use such Property in its businesses, and none of which is violated in any
material respect by existing or proposed structures or land use;

(b)           Liens for taxes,
assessments or other governmental charges (including without limitation in
connection with workers’ compensation and unemployment insurance) that are not
delinquent or which are being contested in good faith by appropriate
proceedings, which proceedings have the effect of preventing the forfeiture or
sale of the Property subject to such Liens, and for which adequate reserves (as
determined in accordance with GAAP) have been established;

(c)           Liens of mechanics,
materialmen, warehousemen, carriers, landlords or other similar statutory Liens
securing obligations that are not yet due and are incurred in the ordinary
course of business or which are being contested in good faith by appropriate
proceedings, which proceedings have the effect of preventing the forfeiture or
sale of the Property subject to such Liens, for which adequate reserves (as
determined in accordance with GAAP) have been established; and

(d)           Liens in an amount
not to exceed $10,000.

“Person” means any individual,
corporation, trust, association, company, partnership, joint venture, limited
liability company, joint stock company, Governmental Authority or other entity.

“Principal Market” means the
principal exchange or market on which the Common Stock is listed or traded.

“Property” means property and/or assets
of all kinds, whether real, personal or mixed, tangible or intangible
(including, without limitation, all rights relating thereto).

“Pro Rata Share” means, with respect
to an Investor, the ratio determined by dividing (i) the number of Shares
purchased hereunder by such Investor by (ii) the aggregate number of
Shares purchased hereunder by all of the Investors.

“Purchase Price” means, with respect
to an Investor, the number of Shares purchased by such Investor at the Closing multiplied
by $1.26 (the VWACP).

“Registrable Securities” has the
meaning set forth in the Registration Rights Agreement.

“Rule 144” means Rule 144 under the
Securities Act or any successor provision.

“SEC Documents” has the meaning
specified in Section 3.4 of this Agreement.

“Securities” has the meaning
specified in the preamble to this Agreement.

“Subsequent Placement” means the
issuance, sale, exchange, or agreement or obligation to issue, sell or exchange
or reserve, or agreement to or set aside for issuance, sale or exchange, any 

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Equity Securities, other
than in connection with bona fide licensing or other strategic transactions not
for the primary purpose of raising equity capital approved by the Board of
Directors.

“Subsidiary” means, with respect to
any Person, any corporation or other entity of which at least a majority of the
outstanding shares of stock or other ownership interests having by the terms
thereof ordinary voting power to elect a majority of the board of directors (or
Persons performing similar functions) of such corporation or entity (regardless
of whether or not at the time, in the case of a corporation, stock of any other
class or classes of such corporation shall have or might have voting power by
reason of the happening of any contingency) is at the time directly or
indirectly owned or controlled by such Person or one or more of its
Subsidiaries or by such Person and one or more of its Subsidiaries.

“Trading Day” means any day on which
the Common Stock is purchased and sold on the Principal Market.

“Transaction Documents” means,
collectively, this Agreement, the Registration Rights Agreement, the Warrants,
and all other agreements, documents and other instruments executed and
delivered by or on behalf of the Company or any of its officers at the Closing.

“VWACP” means the volume weighted
average closing price of the Company’s Common Stock for the 10 Trading Days
immediately preceding the Closing; provided, that such price shall not be less
than the closing bid price for the Company’s Common Stock immediately prior to
the Closing.

1.3           Other
Definitional Provisions.  All
definitions contained in this Agreement are equally applicable to the singular
and plural forms of the terms defined. 
The words “hereof”, “herein” and “hereunder”
and words of similar import referring to this Agreement refer to this Agreement
as a whole and not to any particular provision of this Agreement.

2.                                       REPRESENTATIONS AND WARRANTIES OF EACH INVESTOR.

Each Investor
(with respect to itself only) hereby represents and warrants to the Company and
agrees with the Company that, as of the Execution Date:

2.1           Authorization;
Enforceability.  Such Investor is
duly and validly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation or organization as set forth
below such Investor’s name on the signature page hereof.  Such Investor has the requisite
organizational power and authority to purchase the Shares and Warrant to be
purchased by it hereunder and to execute, deliver and perform its obligations
pursuant to this Agreement and the other Transaction Documents to which it is a
party.  This Agreement constitutes, and
upon execution and delivery thereof, each other Transaction Document to which
such Investor is a party will constitute, such Investor’s valid and legally
binding obligation, enforceable in accordance with its terms, subject to
(i) applicable bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium or other similar laws of general application
relating to or affecting the enforcement of creditors’ rights generally, and
(ii) general principles of equity.

2.2           Accredited
Investor.  Such Investor (i) is
an “accredited investor” as that term is defined in Rule 501 of
Regulation D, (ii) was not formed or organized for the specific purpose
of making an investment in the Company, and (iii) is acquiring the
Securities solely for its own account and not with a present view to the public
resale or distribution of all or any part thereof, except pursuant to sales
that are registered under, or exempt from the registration requirements of, the
Securities Act; provided, however,
that in making such representation, such Investor reserves the right to sell,
transfer or otherwise dispose of 

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the Securities in accordance with the provisions of
this Agreement (including pursuant to the Registration Rights Agreement) and
with Federal and state securities laws applicable to such sale, transfer or
disposition. Such Investor can bear the economic risk of a total loss of its
investment in the Securities and has such knowledge and experience in business
and financial matters so as to enable it to understand the risks of and form an
investment decision with respect to its investment in the Securities.

2.3           Information.  Investor acknowledges that it has been provided
with information regarding the business, operations and financial condition of
the Company and has, prior to the Execution Date, been granted the opportunity
to ask questions of and receive answers from representatives of the Company,
its officers, directors, employees and agents concerning the Company in order
for such Investor to make an informed decision with respect to its investment
in the Shares and Warrants.  Neither such
information nor any other investigation conducted by such Investor or any of
its representatives shall modify, amend or otherwise affect such Investor’s
right to rely on the Company’s representations and warranties contained in this
Agreement.

2.4           Limitations on
Disposition.  Such Investor
acknowledges that, except as provided in the Registration Rights Agreement, the
Securities have not been and are not being registered under the Securities Act
and may not be transferred or resold without registration under the Securities
Act or unless pursuant to an exemption therefrom.

2.5           Legend.  Such Investor understands that the
certificates representing the Securities may bear at issuance a restrictive
legend in substantially the following form:

“The securities
represented by this certificate have not been registered under the Securities
Act of 1933, as amended (the “Securities Act”),
or the securities laws of any state, and may not be offered or sold unless a
registration statement under the Securities Act and applicable state securities
laws shall have become effective with regard thereto, or an exemption from
registration under the Securities Act and applicable state securities laws is
available in connection with such offer or sale.”

Notwithstanding
the foregoing, it is agreed that, as long as (A) the resale or transfer
(including without limitation a pledge) of any of the Securities is registered
pursuant to an effective registration statement, (B) such Securities have
been sold pursuant to Rule 144, or (C) such Securities are eligible for
resale under Rule 144(k) or any successor provision, such Securities shall be
issued without any legend or other restrictive language and, with respect to
Securities upon which such legend is stamped, the Company shall issue new
certificates without such legend to the holder upon request; provided that, in the case of
clause (B) and (C), such holder provides customary documentation
reasonably acceptable to the Company.

2.6           Reliance on
Exemptions.  Such Investor
understands that the Securities are being offered and sold to it in reliance
upon specific exemptions from the registration requirements of U.S. federal and
state securities laws and that the Company is relying upon the truth and
accuracy of the representations and warranties of such Investor set forth in
this Section 2 in order to determine the availability of such
exemptions and the eligibility of such Investor to acquire the Securities.

2.7           Non-Affiliate
Status; Common Stock Ownership. 
Except as disclosed in the SEC Documents, such Investor is not an
Affiliate of the Company or of any other Investor and is not acting in
association or concert with any other Person in regard to its purchase of the
Securities or otherwise in respect of the Company.  In addition, except as disclosed in the SEC
Documents, such Investor’s investment in the Securities is not for the purpose
of acquiring, directly or indirectly, control of, and it has 

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no intent to acquire or exercise control of, the
Company or to influence the decisions or policies of the Board of Directors.

2.8           Fees.  Such Investor is not obligated to pay any
compensation or other fee, cost or related expenditure to any underwriter,
broker, agent or other representative in connection with the transactions
contemplated hereby.

2.9           No Conflicts.  The execution and performance of this
Agreement and the other Transaction Documents to which it is a party do not
conflict in any material respect with any agreement to which such Investor is a
party or is bound thereby, any court order or judgment applicable to such
Investor, or the constituent documents of such Investor.

2.10         No Governmental
Review.  Such Investor understands
that no U.S. federal or state agency or any other Governmental Authority has
passed on or made any recommendation or endorsement of the Securities or the
fairness or suitability of the investment in the Securities nor have such
authorities passed upon or endorsed the merits of the offering of the
Securities.

2.11         No General
Solicitation.  Investor is not
purchasing the Securities as a result of any advertisement, article, notice or
other communication published in a newspaper or magazine or similar media or
broadcast over television or radio, whether closed circuit, or generally
available, or any seminar, meeting or other conference whose attendees were
invited by any general solicitation or general advertising.

2.12         Short Sales.  Between the time Investor learned of the
offering, and the public announcement of the offering, Investor has not and
will not, directly or indirectly, offer, sell, pledge, transfer or otherwise
dispose of (or solicit any offers to buy, purchase or otherwise acquire or take
a pledge of) any of the Securities, nor has Investor or its Affiliates engaged
or will Investor or its Affiliates engage in any short sale that resulted or
will result in a disposition of the Securities (including the Warrant Shares)
or other securities of the Company by Investor (including all securities over
which the Investor and its Affiliates exercise investment or voting control).

2.13         Reliance on
Information.  Investor has, in
connection with Investor’s decision to purchase Securities, not relied upon any
representations or other information (whether oral or written) other than as
set forth in the representations and warranties of the Company contained herein
and the SEC Documents, and Investor has, with respect to all matters relating
to this Agreement and the offer and sale of Securities, relied solely upon the
advice of such Investor’s own counsel and has not relied upon or consulted
counsel of the Company.

3.                                       REPRESENTATIONS AND WARRANTIES OF THE COMPANY.  The Company hereby represents and warrants to
each Investor and agrees with each Investor that, as of the Execution Date:

3.1           Organization,
Good Standing and Qualification.  The
Company is duly organized, validly existing and in good standing under the laws
of the State of Delaware and has all requisite power and authority to carry on
its business as now conducted.  The
Company is duly qualified to transact business and is in good standing in each
jurisdiction in which it conducts business except where the failure so to
qualify has not had or would not reasonably be expected to have a Material
Adverse Effect.  The Company does not
have any operating Subsidiaries.

3.2           Authorization;
Consents.  The Company has the
requisite corporate power and authority to enter into and perform its
obligations under the Transaction Documents, to issue and sell the Shares 

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and the Warrants to the Investors in accordance with
the terms hereof and thereof, and to issue the Warrant Shares upon exercise of
the Warrants.  No further consent or
authorization of the Company, its Board of Directors, any Governmental
Authority or organization, or any other Person is required (other than such
approval as may be required under the Securities Act and applicable state securities
laws in respect of the Registration Rights Agreement, or to the extent that any
sale to any Investor hereunder constitutes a change in control under Nasdaq
Marketplace Rule 4350(i)(B) requiring shareholder approval) except for such
consents or authorizations that have been obtained.

3.3           Enforcement.  This Agreement has been and, at or prior to
the Closing, each other Transaction Document to be delivered at the Closing
will be, duly executed and delivered by the Company. This Agreement constitutes
and, upon the execution and delivery thereof by the Company, each other
Transaction Document will constitute the valid and legally binding obligation
of the Company, enforceable against it in accordance with its terms, subject to
(i) applicable bankruptcy, insolvency, fraudulent transfer, moratorium,
reorganization or other similar laws of general application relating to or
affecting the enforcement of creditors’ rights generally and (ii) general
principles of equity.

3.4           Disclosure
Documents; Agreements; Financial Statements; Other Information.  The Company is subject to the reporting
requirements of the Exchange Act and has filed with the Commission all reports,
schedules, registration statements and definitive proxy statements that the
Company was required to file with the Commission on or after December 31,
2005 (collectively, the “SEC Documents”).  With the exception of reporting quarterly
financial results, the Company is not aware of any event occurring or expected
to occur on or prior to the Closing Date (other than the transactions effected
hereby) that would require the filing of, or with respect to which the Company
intends to file, a Form 8-K within five (5) Business Days after the
Closing.  Each SEC Document, as of the
date of the filing thereof with the Commission (or if amended or superseded by
a filing prior to the Execution Date, then on the date of such amending or
superseding filing), complied in all material respects with the requirements of
the Securities Act or Exchange Act, as applicable, and the rules and
regulations promulgated thereunder and, as of the date of such filing (or if
amended or superseded by a filing prior to the Execution Date, then on the date
of such filing), such SEC Document (including all exhibits and schedules
thereto and documents incorporated by reference therein) did not contain an
untrue statement of material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.  All documents required to be filed as
exhibits to the SEC Documents have been filed as required.  Except as set forth in the Disclosure
Documents, the Company has no liabilities, contingent or otherwise, other than
liabilities incurred in the ordinary course of business which, under GAAP, are
not required to be reflected in the financial statements included in the
Disclosure Documents and which, individually or in the aggregate, are not
material to the consolidated business or financial condition of the Company
taken as a whole.  As of their respective
dates, the financial statements of the Company included in the SEC Documents
complied as to form in all material respects with applicable accounting
requirements and the published rules and regulations of the Commission with
respect thereto. Such financial statements have been prepared in accordance
with GAAP consistently applied at the times and 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 exclude footnotes or may be condensed or summary
statements) and fairly present in all material respects the financial position
of the Company as of the dates thereof and the results of its operations and
cash flows for the periods then ended (subject, in the case of unaudited
statements, to normal year-end adjustments).

3.5           Capitalization.  The capitalization of the Company, including
its authorized capital stock, the number of shares issued and outstanding, the
number of shares issuable and reserved for issuance pursuant to the Company’s
stock option plans and agreements, and the number of shares issuable and
reserved for issuance pursuant to securities (other than the Warrants)
exercisable for, or convertible into 

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or exchangeable for any shares of Common Stock, is as
set forth in the Disclosure Documents. 
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.  All outstanding
shares of capital stock of the Company have been, or upon issuance will be,
validly issued, fully paid and non-assessable, and issued and sold in
compliance with the Securities Act and applicable state securities laws.  No shares of the capital stock of the Company
are subject to preemptive rights or any other similar rights of the
shareholders of the Company or any Liens created by or through the
Company.  Except (i) as a result of
the purchase and sale of the Securities, (ii) with respect to securities
issued pursuant to employee stock option plans or (iii) as set forth in
the Disclosure Documents, there are no outstanding options, warrants, scrip,
rights to subscribe to, calls or commitments of any character whatsoever
relating to, or securities or rights convertible into or exercisable or
exchangeable for, any shares of capital stock of the Company or any of its
Subsidiaries, or arrangements by which the Company or any of its Subsidiaries
is or may become bound to issue additional shares of capital stock of the
Company or any of its Subsidiaries (whether pursuant to anti-dilution, “reset”
or other similar provisions).

3.6           Due
Authorization; Valid Issuance.  The
Shares are duly authorized and reserved for issuance and, when issued in
accordance with the terms of this Agreement, will be duly and validly issued,
fully paid and nonassessable, free and clear of any Liens imposed by or through
the Company other than restrictions on transfer provided for in the Transaction
Documents.  The Warrants are duly
authorized and, when issued, sold and delivered in accordance with the terms
hereof, will be duly and validly issued, free and clear of any Liens imposed by
or through the Company other than restrictions on transfer provided for in the
Transaction Documents.  The Warrant
Shares issuable under the Warrants are duly authorized and reserved for
issuance and, when issued in accordance with the terms of the Warrants, will be
duly and validly issued, fully paid and nonassessable, free and clear of any
Liens imposed by or through the Company other than restrictions on transfer
provided for in the Transaction Documents.

3.7           No Conflict.  The Company is not in violation of any
provisions of its charter or Bylaws.  The
Company is not in violation of or in default (and no event has occurred which,
with notice or lapse of time or both, would constitute a default) under any
provision of any Material Contract, or in violation of any provision of any
Governmental Requirement applicable to the Company, except for any violation or
default that has not had or would not reasonably be expected to have a Material
Adverse Effect.  The (i) execution,
delivery and performance of this Agreement and the other Transaction Documents
and (ii) consummation of the transactions contemplated hereby and thereby
(including without limitation, the issuance of the Shares and the Warrants and
the reservation for issuance and issuance of the Warrant Shares) will not result
in any violation of any provisions of the Company’s charter or Bylaws or in a
default under any provision of any Material Contract, or in violation of any
provision of any Governmental Requirement applicable to the Company (other than
any provision under the rules of the Principal Market requiring prior notice to
the Principal Market of the transactions contemplated by this Agreement and the
other Transaction Documents) or be in conflict with or constitute, with or
without the passage of time and giving of notice, either a default under any
such provision, instrument or contract or an event which results in the
creation of any Lien upon any assets of the Company or the triggering of any
preemptive or anti-dilution rights (including without limitation pursuant to
any “reset” or similar provisions) or rights of first refusal or first offer,
or any other rights that would allow or permit the holders of the Company’s
securities to purchase shares of Common Stock or other securities of the
Company (whether pursuant to a shareholder rights plan provision or otherwise),
on the part of holders of the Company’s securities.

3.8           Financial
Condition; Taxes; Litigation.

3.8.1        The
financial condition of the Company and each Company Subsidiary is, in all
material respects, as described in the Disclosure Documents, except for changes
in the ordinary course of 

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business and normal
year-end adjustments that are not, in the aggregate, materially adverse to the
consolidated business or financial condition of the Company taken as a
whole.  There has been no
(i) material adverse change to the business, operations, properties,
financial condition, or results of operations of the Company and its
Subsidiaries taken as a whole since the date of the Company’s most recent
audited financial statements contained in the Disclosure Documents or
(ii) change by the Company in its accounting principles, policies and
methods except as required by changes in GAAP.

3.8.2        The
Company has prepared in good faith and duly and timely filed all tax returns
required to be filed by it and such returns are complete and accurate in all
material respects.  The Company has paid
all taxes required to have been paid by it, except for taxes which it
reasonably disputes in good faith and for which adequate reserves are
established in accordance with GAAP on the most recent financial statements
included in the Disclosure Documents.

3.8.3        The
Company is not the subject of any pending or, except as otherwise disclosed to
Investors, to the Company’s Knowledge, threatened inquiry, investigation or
administrative or legal proceeding by the Internal Revenue Service, the taxing
authorities of any state or local jurisdiction, the Commission, the NASD, any
state securities commission or other Governmental Authority.

3.8.4        Except
as disclosed in the Disclosure Documents, there is no material claim,
litigation or administrative proceeding pending, or, to the Company’s Knowledge
or otherwise disclosed to the Investors, threatened or contemplated, against
the Company, or against any officer, director or employee of the Company in
connection with such person’s employment therewith.  The Company is not a party to or subject to
the provisions of, any order, writ, injunction, judgment or decree of any court
or Government Authority that is not disclosed in the Disclosure Documents and
which has had or would reasonably be expected to have a Material Adverse
Effect.

3.9           Form S-3.  The Company is eligible to register the
Shares and Warrant Shares for resale in a secondary offering by each Investor
on a registration statement on Form S-3 under the Securities Act. To
the Knowledge of the Company, there exist no facts or circumstances (including
without limitation any required approvals or waivers of any circumstances that
may delay or prevent the obtaining of accountant’s consents) that could
reasonably be expected to prohibit or delay the preparation, filing or
effectiveness of such registration statement.

3.10         Intellectual
Property.

(a)           The Company owns,
free and clear of claims or rights of any other Person, with full right to use,
sell, license, sublicense, dispose of, and bring actions for infringement of,
or, to the Company’s Knowledge, has acquired licenses or other rights to use,
all Intellectual Property necessary for the conduct of its respective business
as presently conducted.

(b)           The business of the
Company as presently conducted and the production, marketing, licensing, use
and servicing of any products or services of the Company do not, to the Company’s
Knowledge, infringe or conflict with any patent, trademark, copyright, or trade
secret rights of any third parties or any other Intellectual Property of any
third parties.  The Company has not
received written notice from any third party asserting that any Intellectual
Property owned or licensed by the Company, or which the Company otherwise has
the right to use, is invalid or unenforceable by the Company and, to the
Company’s Knowledge, there is no valid basis for any such claim (whether or not
pending or threatened).

(c)           No claim is pending
or, to the Company’s Knowledge, threatened against the Company nor has the
Company received any written notice or other written claim from any Person 

 10
 

 

asserting that any of the Company’s present activities
infringe or may infringe in any material respect any Intellectual Property of
such Person, and the Company is not aware of any infringement by any other
Person of any material rights of the Company under any Intellectual Property.

(d)           All licenses or
other agreements under which the Company is granted Intellectual Property
(excluding licenses to use software utilized in the Company’s internal
operations and which is generally commercially available) are in full force and
effect and, to the Company’s Knowledge, there is no material default by any
party thereto.  The Company has no reason
to believe that the licensors under such licenses and other agreements do not
have and did not have all requisite power and authority to grant the rights to
the Intellectual Property purported to be granted thereby.

(e)           All licenses or
other agreements under which the Company has granted rights to Intellectual
Property to others (including all end-user agreements) are (i) in full
force and effect, (ii) not subject to material default by the Company, and
(iii) to the Company’s Knowledge, not subject to material default by any
other party thereto.

(f)            The Company has
taken all steps required in accordance with commercially reasonable business
practice to establish and preserve its ownership in its owned Intellectual
Property and to keep confidential all material technical information developed
by or belonging to the Company which has not been patented or copyrighted.  To the Knowledge of the Company, the Company
is not using unlawfully any Intellectual Property of any other Person,
including, without limitation, any former employer of any past or present
employees of the Company.  To the
Knowledge of the Company, neither the Company, nor any of its employees has any
agreements or arrangements with former employers of such employees relating to
any Intellectual Property of such employers, which materially interfere or
conflict with the performance of such employee’s duties for the Company or
result in any former employers of such employees having any rights in, or claims
on, the Company’s Intellectual Property. 
Each current employee of the Company has executed agreements regarding
confidentiality, proprietary information and assignment of inventions and
copyrights to the Company, each independent contractor or consultant of the
Company has executed agreements regarding confidentiality and proprietary
information, and the Company has not received written notice that any employee,
consultant or independent contractor is in violation of any agreement or in
breach of any agreement or arrangement with former or present employers
relating to proprietary information or assignment of inventions.  Without limiting the foregoing: (i) the
Company has taken reasonable security measures to guard against unauthorized
disclosure or use of any of its Intellectual Property that is confidential or
proprietary; and (ii) the Company has no reason to believe that any Person
(including, without limitation, any former employee or consultant of the
Company) has unauthorized possession of any of its Intellectual Property, or
any part thereof, or that any Person has obtained unauthorized access to any of
its Intellectual Property.  The Company
has complied in all material respects with its respective obligations pursuant
to all material agreements relating to Intellectual Property rights that are
the subject of licenses granted by third parties, except for any non-compliance
that has not had or would not reasonably be expected to have a Material Adverse
Effect.

3.11         Registration
Rights; Rights of Participation. 
Other than with respect to the registration rights granted to various
investors pursuant to that certain Registration Rights Agreement dated
September 28, 2005,  the Company has not
granted or agreed to grant to any Person any rights (including “piggy-back”
registration rights) to have any securities of the Company registered with the
Commission or any other Governmental Authority, which registration obligation
has not been satisfied in full or waived prior to the date hereof.

3.12         Solicitation;
Other Issuances of Securities. 
Neither the Company nor any of its Affiliates, nor any Person acting on
its or their behalf, (i) has engaged in any form of general solicitation
or general 

 11
 

 

advertising (within the meaning of Regulation D)
in connection with the offer or sale of the Securities, or (ii) has,
directly or indirectly, made any offers or sales of any security or the right
to purchase any security, or solicited any offers to buy any security or any
such right, under circumstances that would require registration of the
Securities under the Securities Act.

3.13         Fees.  Except as otherwise disclosed to the
Investors, the Company is not obligated to pay any brokers, finders or
financial advisory fees or commissions to any underwriter, broker, agent or
other representative in connection with the transactions contemplated
hereby.  The Company will indemnify and
hold harmless such Investor from and against any claim by any Person alleging
that such Investor is obligated to pay any such compensation, fee, cost or
related expenditure in connection with the transactions contemplated hereby.

3.14         Foreign Corrupt
Practices.  Neither the Company, nor,
to the Knowledge of the Company, any director, officer, agent, employee or
other Person acting on behalf of the Company, has (i) used any corporate
funds for any unlawful contribution, gift or entertainment expense relating to
political activity, (ii) made any direct or indirect unlawful payment to
any foreign or domestic government official or employee, or (iii) violated
any provision of the Foreign Corrupt Practices Act of 1977, as amended, or made
any bribe, rebate, payoff, influence payment, kickback or other unlawful
payment to any foreign or domestic government official or employee.

3.15         Employee Matters.  There is no strike, labor dispute or union
organization activities pending or, to the Knowledge of the Company, threatened
by its employees.  No employees of the
Company belong to any union or collective bargaining unit. The Company has
complied in all material respects with all applicable federal and state equal
opportunity and other laws related to employment.

3.16         Environment.  Except as disclosed in the Disclosure
Documents, the Company has no liabilities under any Environmental Law, nor, to
the Company’s Knowledge, do any factors exist that are reasonably likely to
give rise to any such liability, affecting any of the properties owned or
leased by the Company that, individually or in the aggregate, has had or would
reasonably be expected to have a Material Adverse Effect.  The Company has not violated any
Environmental Law applicable to it now or previously in effect, other than such
violations or infringements that, individually or in the aggregate, have not
had and would not reasonably be expected to have a Material Adverse Effect.

3.17         ERISA.  The Company is in compliance with the
presently applicable provisions of ERISA and the United States Internal Revenue
Code of 1986, as amended, with respect to each Pension Plan except in any such
case for any such matters that, individually or in the aggregate, have not had,
and would not reasonably be expected to have, a Material Adverse Effect.

3.18         Disclosure.  The representations, warranties and written
statements contained in this Agreement and the other Transaction Documents and
in the certificates, exhibits and schedules delivered to such Investor by the
Company pursuant to this Agreement and the other Transaction Documents and in
connection with such Investor’s due diligence investigation of the Company, do
not contain any untrue statement of a material fact, and do not omit to state a
material fact required to be stated therein or necessary in order to make such
representations, warranties or statements not misleading in light of the
circumstances under which they were made. 
The Company acknowledges that such Investor is relying on the
representations, acknowledgments and agreements made by the Company in this Section 3.18
and elsewhere in this Agreement in making trading and other decisions
concerning the Company’s securities.

3.19         Insurance.  The Company maintains insurance in such
amounts and covering such losses and risks as is reasonably sufficient and
customary in the businesses in which the Company is engaged. As of the date
hereof and as of the Closing Date, no notice of cancellation has been received
for any of 

 12
 

 

such policies and the Company is in compliance in all
material respects with all of the terms and conditions thereof.  The Company has no 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 to conduct its business as currently conducted without a
significant increase in cost.  Without
limiting the generality of the foregoing, the Company maintains director’s and
officer’s insurance in an amount not less than $10 million for each covered
occurrence.

3.20         Property.  The Company has good and marketable title to
all Property owned by it, in each case free and clear of all Liens, except for
Permitted Liens.  Any Property held under
lease by the Company is held by it under valid, subsisting and enforceable
leases with such exceptions as are not material and do not interfere with the
use made or proposed to be made of such Property by the Company.

3.21         Regulatory Permits.  The Company possesses all certificates,
authorizations and permits issued by the appropriate federal, state or foreign
regulatory Governmental Authorities necessary to conduct its businesses, except
where the failure to have any such authorization or permit would have a
Material Adverse Effect, and the Company has not received any notice of
proceedings relating to the revocation or modification of any such certificate,
authorization or permit.

3.22         Exchange Act
Registration.  The Company’s Common
Stock is registered pursuant to Section 12(g) of the Exchange Act
and is listed on the Nasdaq Global Market. 
The Company has taken no action designed to, or which, to the Knowledge
of the Company, would reasonably be expected to have the effect of, terminating
the registration of the Common Stock under the Exchange Act or delisting the
Common Stock from the Nasdaq Global Market. 
The Company meets the continued listing requirements of the Nasdaq Global
Market.

3.23         Investment Company
Status.  The Company is not, and
immediately after receipt of payment for the Shares and the Warrants issued
under this Agreement will not be, an “investment company” or an entity “controlled”
by an “investment company” within the meaning of the Investment Company Act of
1940, as amended (the “Investment Company Act”),
and shall conduct its business in a manner so that it will not become subject
to the Investment Company Act.

3.24         Transfer Taxes.  No stock transfer or other taxes (other than
income taxes) are required to be paid in connection with the issuance and sale
of any of the Securities, other than such taxes for which the Company has
established appropriate reserves and intends to pay in full on or before the
Closing.

3.25         Sarbanes-Oxley
Act; Internal Controls and Procedures. 
The Company is in material compliance with any and all applicable
requirements of the Sarbanes-Oxley Act of 2002 and any and all applicable rules
and regulations promulgated by the SEC thereunder that are effective as of the
date hereof.  The Company maintains
internal accounting controls, policies and procedures, and such books and
records as are reasonably designed to provide reasonable assurance that (i) all
transactions to which the Company is a party or by which its Properties are
bound are effected by a duly authorized employee or agent of the Company,
supervised by and acting within the scope of the authority granted by the
Company’s senior management; (ii) the recorded accounting of the Company’s
consolidated assets is compared with existing assets at regular intervals; and
(iii) all transactions to which the Company is a party, or by which its
properties are bound, are recorded (and such records maintained) in accordance
with all Government Requirements applicable to the Company and as may be
necessary or appropriate to ensure that the financial statements of the Company
are prepared in accordance with GAAP.

3.26         Transactions with
Interested Persons.  Except as
disclosed in the Disclosure Documents, no officer, director or employee of the
Company is or has made any arrangements with the Company to become a party to
any transaction with the Company (other than for services as employees,
officers and 

 13
 

 

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.

3.27         Accountants.  The Company’s accountants that rendered their
opinion with respect to the financial statements included in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2005, are, to
the Knowledge of the Company, independent accountants as required by the
Securities Act.

3.28         Compliance with
Laws.  The Company has conducted the
business in compliance in all material respects with all applicable laws,
except where non-compliance has not had or would not reasonably be expected to
have a Material Adverse Effect.

3.29         No Integration.  Assuming the accuracy of the Investors’
representations and warranties set forth in Section 2 of this
Agreement, neither the Company, nor to the Knowledge of the Company, 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 the Nasdaq Global
Market.

4.                                       COVENANTS OF THE COMPANY AND EACH INVESTOR.

4.1           The
Company agrees with each Investor that the Company will:

(a)           file a Form D with
respect to the Securities issued at the Closing as and when required under
Regulation D and provide a copy thereof to such Investor promptly after
such filing; and

(b)           take such action as
the Company reasonably determines upon the advice of counsel is necessary to
qualify the sale of the Shares and Warrants to the Investors under applicable
state or “blue-sky” laws or obtain an exemption therefrom, and shall promptly
provide evidence of any such action to such Investor at such Investor’s
request.

4.2           Existence and
Compliance.  The Company agrees that
it will, while any Investor holds any Shares or Warrants:

(a)           maintain its
corporate existence in good standing;

(b)           comply with all
Governmental Requirements applicable to the operation of its business, except
for instances of noncompliance that would not reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect;

(c)           comply with all
Material Contracts, except for instances of noncompliance that would not
reasonably be expected to have, individually or in the aggregate, a Material
Adverse Effect;

(d)           provide each
Investor with copies of all materials sent to its shareholders at the same time
as such materials are delivered to such shareholders;

 14

 

(e)           timely
file with the Commission all reports required to be filed pursuant to the
Exchange Act and refrain from terminating its status as an issuer required by
the Exchange Act to file reports thereunder even if the Exchange Act or the
rules or regulations thereunder would permit such termination;

(f)            until the Effective Date, take
commercially reasonable steps to restrict each of the Company’s executive
officers (as defined in Rule 501(f) of the Securities Act) (each, a “Key Employee”) from selling shares
of Common Stock, other than in connection with any 10b-5(1) trading plans in
effect as of the Execution Date and disclosed to each Investor in writing; and

(g)           use commercially reasonable efforts
to maintain adequate insurance coverage (including D&O insurance) for the
Company.

4.3           Reservation of Common Stock.  The Company shall, on the Closing Date,
have  authorized and reserved for
issuance to the Investors free from any preemptive rights, and shall keep
available at all times during which any Warrants are outstanding, a number of
shares of Common Stock (the “Reserved Amount”)
that, on the Closing Date, is equal to the number of Warrant Shares issuable
upon exercise of all of the Warrants issued at the Closing without regard to
any limitation or restriction on exercise that may be set forth in the
Warrants.  The Reserved Amount shall be
allocated in accordance with each Investor’s Pro Rata Share.  In the event that an Investor shall sell or
otherwise transfer any of such Investor’s Warrants, each transferee shall be
allocated a pro rata portion of such transferor’s Reserved Amount.  While any Warrants are outstanding, the
Company shall not reduce the Reserved Amount without obtaining the prior
written consent of each Investor then holding Warrants.

4.4           Use of Proceeds.  The Company shall use the proceeds from the
sale of the Shares and Warrants for working capital and general corporate
purposes; provided that the
Company shall not use any of such proceeds (i) to pay any dividend or make
any distribution on any of its securities, or (ii) to repay any loan made
to or incurred by any Key Employee or any other officer or director or
Affiliate of the Company.

4.5           Transactions with Affiliates.  The Company agrees that any transaction or
arrangement between it and any Affiliate or employee of the Company shall be
effected on an arms’ length basis and shall be approved by the Company’s
independent directors.

4.6           Use of Investor Name.  Except as may be required by applicable law
and/or this Agreement, the Company shall not use, directly or indirectly, any
Investor’s name or the name of any of its Affiliates in any advertisement,
announcement, press release or other similar communication unless it has
received the prior written consent of any Investor for the specific use
contemplated or as otherwise required by applicable law or regulation.

4.7           Company’s Instructions to Transfer
Agent.  On or prior to the Closing
Date, the Company shall execute and deliver irrevocable written instructions to
the transfer agent for its Common Stock (the “Transfer
Agent”), and provide each Investor with a copy thereof,
directing the Transfer Agent (i) to issue certificates representing
Warrant Shares upon exercise of the Warrants and (ii) to deliver such
certificates to such Investor no later than the close of business on the third
(3rd) business day following the related Exercise Date (as defined in the
Warrants), as the case may be.  Such
certificates may bear legends pursuant to applicable provisions of this
Agreement or applicable law.  The Company
shall instruct the transfer agent that, in lieu of delivering physical
certificates representing shares of Common Stock to an Investor upon exercise
of the Warrants, and as long as the Transfer Agent is a participant in the
Depository Trust Company (“DTC”) Fast
Automated Securities Transfer program, and such Investor has not informed the
Company that it wishes to receive physical certificates therefor, and no legend
is 

 15
 

 

required to appear on any physical certificate if issued, the transfer
agent shall effect delivery of Warrant Shares by crediting the account of such
Investor or its nominee at DTC for the number of shares for which delivery is
required hereunder within the time frame specified above for delivery of
certificates.  The Company represents to
and agrees with each Investor that it will not give any instruction to the
Transfer Agent that will conflict with the foregoing instruction or otherwise
restrict such Investor’s right to exercise the Warrant or to receive Warrant
Shares upon exercise of the Warrants.  In
the event that the Company’s relationship with the Transfer Agent should be
terminated for any reason, the Company shall use its reasonable best efforts to
cause the Transfer Agent to continue acting as transfer agent pursuant to the
terms hereof until such time that a successor transfer agent is appointed by
the Company and receives the instructions described above.

4.8           Limitations on Disposition.  No Investor shall sell, transfer, assign or
dispose of any Securities, unless:

(a)           there is then in effect an effective
registration statement under the Securities Act covering such proposed
disposition and such disposition is made in accordance with such registration
statement; or

(b)           such Investor has notified the
Company in writing of any such disposition, and furnished the Company with an
opinion of counsel, reasonably satisfactory to the Company, that such
disposition will not require registration of such Securities under the
Securities Act; provided, however,
that no such opinion of counsel will be required (A) if the sale, transfer
or assignment is made to an Affiliate of such Investor, or (B) in
connection with a bona fide
pledge or hypothecation of any Securities under a margin arrangement with a
broker-dealer or other financial institution or the sale of any such Securities
by such broker-dealer or other financial institution following such Investor’s
default under such margin arrangement.

4.9           Disclosure of Non-public
Information.  The Company agrees that
it will not at any time following the Execution Date disclose material
non-public information to any Investor without first obtaining such Investor’s
written consent to such disclosure.

4.10         Listing.  The Company has, or promptly following the
Closing shall, use its commercially reasonable efforts to include all of the
Shares and all of the Warrant Shares issuable upon exercise of the Warrants
(without regard to any limitation on such conversion or exercise) for listing
on the Nasdaq Global Market.

4.11         Restriction on Issuances.  During the period beginning on the Execution
Date and ending on the date that is ninety (90) days after the Effective Date,
the Company will not, directly or indirectly, effect a Subsequent Placement.

4.12         Indemnification of Investors.  The Company will indemnify and hold each
Investor and its directors, managers, officers, shareholders, members,
partners, employees and agents (each, an “Investor 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 Investor Party may suffer or incur as a result of
or relating to (a) any breach 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 action instituted against an Investor, or
any of them or their respective Affiliates, by any shareholder of the Company
who is not an Affiliate of such Investor, with respect to any of the
transactions contemplated by the Transaction Documents (unless such action is
based upon a breach of such Investor’s representations, warranties or covenants
under the Transaction Documents or any agreements or understandings such 

 16
 

 

Investor may have with any such shareholder or any violations by such
Investor of state or federal securities laws or any conduct by such Investor
which constitutes fraud, gross negligence, willful misconduct or malfeasance).  If any action shall be brought against any
Investor Party in respect of which indemnity may be sought pursuant to this
Agreement, such Investor Party shall promptly notify the Company in writing,
and the Company shall have the right to assume the defense thereof with counsel
of its own choosing.  Any Investor Party
shall have the right to engage separate counsel in any such action and
participate in the defense thereof, but the fees and expenses of such counsel
shall be at the expense of such Investor Party except to the extent that
(i) the engagement thereof has been specifically authorized by the Company
in writing, (ii) the Company has failed after a reasonable period of time
following such Investor Party’s written request that it do so, to assume such
defense and to engage counsel or (iii) in such action there is, in the
reasonable opinion of such separate counsel, a material conflict on any
material issue between the position of the Company and the position of such
Investor Party.  The Company will not be
liable to any Investor Party under this Agreement (i) for any settlement
by an Investor Party effected without the Company’s prior written consent,
which shall not be unreasonably withheld or delayed; or (ii) to the
extent, but only to the extent that a loss, claim, damage or liability is
attributable to such Investor Party’s wrongful actions or omissions, or gross
negligence or to such Investor Party’s breach of any of the representations,
warranties, covenants or agreements made by such Investor in this Agreement or
in the other Transaction Documents.

5.                                       CONDITIONS TO CLOSING.

5.1           Conditions to Investors’
Obligations at the Closing.  Each
Investor’s obligations to effect the Closing, including without limitation its
obligation to purchase Shares and Warrants at Closing, are conditioned upon the
fulfillment (or waiver by such Investor in its sole and absolute discretion) of
each of the following events as of the Closing Date:

5.1.1                        the
representations and warranties of the Company set forth in this Agreement and
in the other Transaction Documents shall be true and correct in all material
respects as of the Closing Date as if made on such date (except that to the
extent that any such representation or warranty relates to a particular date,
such representation or warranty shall be true and correct in all material
respects as of that particular date);

5.1.2                        the
Company shall have complied with or performed in all material respects all of
the agreements, obligations and conditions set forth in this Agreement and in
the other Transaction Documents that are required to be complied with or
performed by the Company on or before the Closing;

5.1.3                        the
Closing Date shall occur on a date that is not later than August 15, 2006;

5.1.4                        the
Company shall have delivered to such Investor a certificate, signed by the
Chief Executive Officer and Chief Financial Officer of the Company and dated as
of the Closing Date, certifying that the conditions specified in this Section 5.1
have been fulfilled as of the Closing, it being understood that such Investor
may rely on such certificate as though it were a representation and warranty of
the Company made herein;

5.1.5                        the
Company shall have delivered to such Investor an opinion of counsel for the
Company, dated as of the Closing Date, covering the matters set forth in Exhibit C;

 17
 

 

5.1.6                        the
Company shall have delivered to such Investor duly executed certificates
representing the Shares and the Warrants being purchased by such Investor at
the Closing;

5.1.7                        the
Company shall have executed and delivered to the Investor the Registration
Rights Agreement on or prior to the Closing;

5.1.8                        the
Company shall have delivered to such Investor a certificate, signed by the
Secretary or an Assistant Secretary of the Company and dated as of the Closing
Date, attaching (i) the charter and Bylaws of the Company, and
(ii) resolutions passed by its Board of Directors to authorize the
transactions contemplated hereby and by the other Transaction Documents, and
certifying that such documents are true and complete copies of the originals
and that such resolutions have not been amended or superseded, it being
understood that such Investor may rely on such certificate as a representation
and warranty of the Company made herein;

5.1.9                        there
shall have occurred no material adverse change in the Company’s consolidated
business or financial condition since the date of the Company’s most recent
financial statements contained in the Disclosure Documents;

5.1.10                  the Common Stock
shall be listed and actively traded on the Nasdaq Global Market; and

5.1.11                  there shall be
no injunction, restraining order or decree of any nature of any court or
Government Authority of competent jurisdiction that is in effect that restrains
or prohibits the consummation of the transactions contemplated hereby and by
the other Transaction Documents.

5.2           Conditions to Company’s
Obligations at the Closing.  The
Company’s obligations to effect the Closing with each Investor are conditioned
upon the fulfillment (or waiver by the Company in its sole and absolute
discretion) of each of the following events as of the Closing Date:

5.2.1                        the
representations and warranties of such Investor set forth in this Agreement and
in the other Transaction Documents shall be true and correct in all material respects
as of the Closing Date as if made on such date (except that to the extent that
any such representation or warranty relates to a particular date, such
representation or warranty shall be true and correct in all material respects
as of that date);

5.2.2                        such
Investor shall have complied with or performed all of the agreements,
obligations and conditions set forth in this Agreement that are required to be
complied with or performed by such Investor on or before the Closing;

5.2.3                        there
shall be no injunction, restraining order or decree of any nature of any court
or Government Authority of competent jurisdiction that is in effect that
restrains or prohibits the consummation of the transactions contemplated hereby
and by the other Transaction Documents;

5.2.4                        such
Investor shall have executed each Transaction Document to which it is a party
and shall have delivered the same to the Company; and

 18
 

 

5.2.5                        such
Investor shall have tendered to the Company the Purchase Price for the Shares
and the Warrants being purchased by it at the Closing by wire transfer of
immediately available funds in accordance with the wire transfer instructions
set forth on Exhibit D
hereto.

6.                                       MISCELLANEOUS.

6.1           Survival; Severability.  The representations, warranties, covenants
and indemnities made by the parties herein and in the other Transaction
Documents shall survive the Closing (provided
that such representations and warranties shall survive only for a
period of two years after the Closing), notwithstanding any due diligence investigation
made by or on behalf of the party seeking to rely thereon.  In the event that any provision of this
Agreement becomes or is declared by a court of competent jurisdiction to be
illegal, unenforceable or void, this Agreement shall continue in full force and
effect without said provision; provided
that in such case the parties shall negotiate in good faith to replace such
provision with a new provision which is not illegal, unenforceable or void, as
long as such new provision does not materially change the economic benefits of
this Agreement to the parties.

6.2           Successors and Assigns.  The terms and conditions of this Agreement
shall inure to the benefit of and be binding upon the respective successors and
permitted assigns of the parties. 
Nothing in this Agreement, express or implied, is intended to confer
upon any party other than the parties hereto or their respective successors and
permitted assigns any rights, remedies, obligations or liabilities under or by
reason of this Agreement, except as expressly provided in this Agreement.  The Investors may assign their respective
rights and obligations hereunder, in connection with any private sale or
transfer of the Shares or Warrants in accordance with the terms hereof, as long
as, as a condition precedent to such transfer, the transferee executes an
acknowledgment agreeing to be bound by the applicable provisions of this
Agreement, in which case the term “Investor” shall be deemed to refer to such
transferee as though such transferee were an original signatory hereto.  The Company may not assign its rights or
obligations under this Agreement without the written consent of each Investor.

6.3           No Reliance.  Each party acknowledges that (i) it has
such knowledge in business and financial matters as to be fully capable of
evaluating this Agreement, the other Transaction Documents and the transactions
contemplated hereby and thereby, (ii) it is not relying on any advice or
representation of any other party in connection with entering into this
Agreement, the other Transaction Documents or such transactions (other than the
representations made in this Agreement or the other Transaction Documents),
(iii) it has not received from any other party any assurance or guarantee
as to the merits (whether legal, regulatory, tax, financial or otherwise) of
entering into this Agreement or the other Transaction Documents or the
performance of its obligations hereunder and thereunder, and (iv) it has
consulted with its own legal, regulatory, tax, business, investment, financial
and accounting advisors to the extent that it has deemed necessary, and has
entered into this Agreement and the other Transaction Documents based on its
own independent judgment and on the advice of its advisors as it has deemed
necessary, and not on any view (whether written or oral) expressed by any other
party.

6.4           Independent Nature of Investors’
Obligations and Rights.  The
obligations of each Investor hereunder are several and not joint with the
obligations of the other Investors hereunder, and no Investor shall be
responsible in any way for the performance of the obligations of any other
Investor hereunder, or is relying upon the advice or assistance of any other
Investor.  The Company acknowledges and
agrees that nothing contained herein or in any other agreement or document
delivered at Closing, and no action taken by any Investor pursuant hereto or
thereto, shall be deemed to constitute the Investors as a partnership, an
association, a joint venture or any other kind of entity, or a “group” as described
in Section 13(d) of the Exchange Act, or create a presumption that the
Investors are in any way acting in concert with respect to such obligations or
the transactions contemplated by this Agreement.  Each 

 19
 

 

Investor has been represented by its own separate counsel in connection
with the transactions contemplated hereby, shall be entitled to protect and
enforce its rights, including without limitation rights arising out of this
Agreement or the other Transaction Documents, individually, and shall not be
required to be join any other Investor as an additional party in any proceeding
for such purpose.

6.5           Investors’ Trading Activity.  The Company acknowledges that, following  the Closing and the press release described
in Section 4.1 of this Agreement, each Investor shall have the
right to purchase or sell, long or short, Common Stock and instruments or
contracts whose value is derived from the market value of the Common Stock, and
that sales of or certain derivative transactions relating to the Common Stock
may have a negative impact on the market price of the Common Stock.

6.6           Injunctive Relief.  The Company acknowledges and agrees that a
breach by it of its obligations hereunder will cause irreparable harm to each
Investor and that the remedy or remedies at law for any such breach will be
inadequate and agrees, in the event of any such breach, in addition to all
other available remedies, such Investor shall be entitled to an injunction
restraining any breach and requiring immediate and specific performance of such
obligations without the necessity of showing economic loss or the posting of
any bond.

6.7           Governing Law; Jurisdiction.  This Agreement shall be governed by and
construed under the laws of the State of California applicable to contracts
made and to be performed entirely within the State of California.  Each party hereby irrevocably submits to the
exclusive jurisdiction of the state and federal courts sitting in the City and
County of San Francisco for the adjudication of any dispute hereunder or in
connection herewith or with any transaction contemplated hereby 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 brought in an inconvenient forum
or that the venue of such suit, action or proceeding is improper.  Each party hereby irrevocably waives personal
service of process and consents 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 contained herein shall
be deemed to limit in any way any right to serve process in any manner
permitted by law.

6.8           Counterparts.  This Agreement may be executed in any number
of counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instrument.  This Agreement may be executed and delivered
by facsimile transmission.

6.9           Headings.  The headings used in this Agreement are used
for convenience only and are not to be considered in construing or interpreting
this Agreement.

6.10         Notices.  Any notice, demand or request required or
permitted to be given by the Company or the Investor pursuant to the terms of
this Agreement shall be in writing and shall be deemed delivered (i) when
delivered personally or by verifiable facsimile transmission, unless such
delivery is made on a day that is not a Business Day, in which case such
delivery will be deemed to be made on the next succeeding Business Day,
(ii) on the next Business Day after timely delivery to a reputable
overnight courier and (iii) on the Business Day actually received if
deposited in the U.S. mail (certified or registered mail, return receipt
requested, postage prepaid), addressed as follows:

 20
 

 

If to
the Company:

Lipid Sciences, Inc.

7068 Koll Center Parkway

Suite 401

Pleasanton, CA 94566

Attn:  Sandra Gardiner

Tel:  (925) 249-4000

Fax:  (925) 249-4080

with a
copy (which shall not constitute notice) to:

Roger S. Mertz,
Esq.

Allen Matkins Leck
Gamble Mallory & Natsis LLP

Three Embarcadero
Center, 12th Floor

San Francisco,
CA  94111-4074

Tel:  (415) 837-1515

Fax:  (415) 837-1516

and if to any Investor,
to such address for such Investor as shall appear on the signature page hereof
executed by such Investor, or as shall be designated by such Investor in
writing to the Company in accordance with this Section 6.10.

6.11         Expenses.  The Company and each Investor shall pay all
costs and expenses that it incurs in connection with the negotiation,
execution, delivery and performance of this Agreement or the other Transaction
Documents; provided, however, subject to approval in advance, the Company shall
pay up to an aggregate of $10,000 in legal fees incurred by the Investors in
connection with the transactions contemplated by this Agreement.

6.12         Entire Agreement; Amendments.  This Agreement and the other Transaction
Documents constitute the entire agreement between the parties with regard to
the subject matter hereof and thereof, superseding all prior agreements or
understandings, whether written or oral, between or among the parties.  Except as expressly provided herein, neither
this Agreement nor any term hereof may be amended except pursuant to a written
instrument executed by the Company and the holders of at least a seventy-five
percent (75%) of the Shares and Warrant Shares into which all of the Warrants
then outstanding are exercisable, and no provision hereof may be waived other
than by a written instrument signed by the party against whom enforcement of
any such waiver is sought.  Any waiver or
consent shall be effective only in the specific instance and for the specific
purpose for which given.

[Signature Pages
to Follow]

 21
 

 

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

	
   

  	
  LIPID SCIENCES, INC.,

  a Delaware
  corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  	
   

  
	
   

  	
   

  	
  Its:

  	
   

  	
   

  
					

 22
 

 

 

	
  I

  	
   

  	
     (INVESTOR NAME)

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
          (Name
  of General Partner/Manager, if applicable)

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   Name:

  	
   

  
	
   

  	
   Title:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Subscription
  Amount: $_______

  	
   

  
	
   

  	
  Number of
  Shares:  _______

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Address:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
					

In connection with the
Securities Purchase Agreement, please provide the following information:

1.                                       The
exact name that your Shares are to be registered in (this is the name that will
appear on your stock certificate(s)). 
You may use a nominee name if appropriate: 

__________________________________

__________________________________

__________________________________

2.                                       The
relationship between the Investor of the Shares and the Registered Holder
listed in response to item 1 above: __________________________________

3.                                       The
mailing address at which the Registered Holder listed in response to item 1
above would like to receive notices pursuant to this Agreement:

___________________________________

___________________________________

4.                                       The
mailing address at which the Registered Holder listed in response to item 1
above would like to receive stock certificate(s) and closing documents:

___________________________________

___________________________________

5.                                       The
Social Security Number or Tax Identification Number of the Registered Holder
listed in response to item 1 above:

___________________________________

 23
 

 

In connection with the
preparation of the Registration Statement, please provide us with the following
information:

1.                                       Pursuant
to the “Selling Shareholder” section of the Registration Statement, please
state your or your organization’s name exactly as it should appear in the
Registration Statement:

2.                                       Please
provide the number of shares that you or your organization will own immediately
after Closing, including those Shares purchased by you or your organization
pursuant to this Purchase Agreement and those shares purchased by you or your
organization through other transactions: 

 

3.                                       Have
you or your organization had any position, office or other material
relationship within the past three years with the Company or its affiliates? o   Yes  o   No

If yes, please indicate the nature of any such relationships below: 

 24

 

 

EXHIBIT A

FORM OF WARRANT

 1
 

 

EXHIBIT B

FORM OF
REGISTRATION RIGHTS AGREEMENT

 1
 

 

EXHIBIT
C

FORM OF LEGAL
OPINION

(1)           The Company is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Delaware.

(2)           The Company has the requisite
corporate power and authority to enter into and perform its obligations under
the Transaction Documents, and to offer and sell the Securities, in accordance
with the terms of the Transaction Documents. 
The execution and delivery of the Transaction Documents, and the
performance of its obligations under the Transaction Documents, have been duly
authorized by all necessary corporate action on the part of the Company.  Each of the Transaction Documents has been
duly executed and delivered, and constitute valid and binding obligations of
the Company enforceable against the Company in accordance with their respective
terms.

(3)           The Securities have been duly
authorized by all necessary corporate action on the part of the Company.  The Shares, when issued, sold and delivered
against payment therefor in accordance with the provisions of the Purchase
Agreement, and the Warrant Shares, when issued and paid for in accordance with
the terms of the Warrant, will be validly issued, fully paid and non-assessable,
and the issuance of the Shares and the Warrant Shares will not be subject to
any preemptive rights under the Delaware General Corporation Law (“DGCL”), the Company’s
Certificate or Bylaws or any material contract to which the Company is a party
and which has been filed by the Company or incorporated by reference as an
exhibit to its Annual Report on Form 10-K for the fiscal year ended December
31, 2005 (the “2005 10-K”),
or any other report filed by the Company with the SEC under Section 13 of the Exchange
Act since the filing by the Company of the 2005 10-K.

(4)           The execution and delivery by the
Company of the Transaction Documents, and the consummation by the Company of
the transactions contemplated thereby, do not (i) violate the Company’s Certificate
or Bylaws; (ii) to our knowledge violate any judgment, decree, order or award
of any court, governmental body or arbitrator specifically naming the Company;
(iii) to our knowledge violate the provisions of any federal, DGCL or
California statute, or rule or regulation thereunder applicable to the Company;
or (iv) conflict with or result in the breach or termination of any term or
provision of, or constitute a default under, any agreements to which the
Company is a party and which have been filed by the Company or incorporated by
reference to the 2005 10-K or any other report filed by the Company with the
SEC under Section  13 of the Exchange Act
since the filing by the Company of the 2005 10-K.

(5)           Based on the Securities Act and the
rules promulgated thereunder, as such laws and rules presently exist, and
assuming (i) no “general solicitation” or “general advertising” has occurred or
will occur with respect to the offer and sale of the Securities, as such terms
are generally understood for purposes of Regulation D promulgated under the
Securities Act (“Regulation
D”), (ii) the Company timely files a Form D with the SEC in
accordance with Regulation D, and (iii) the representations of the Investors in
the Transaction Documents are correct, the offer and sale of the Securities, to
the Investors pursuant to the terms of the Transaction Documents, will be
exempt from the registration requirements of Section 5 of the Securities Act.

(6)           No consent, approval or authorization
of, or declaration or filing with, any regulatory agency of the State of
Delaware or the United States applicable to the Company is required to be
obtained by the Company (i) to enter into and perform its obligations under the
Transaction Documents or (ii) for the issuance and sale by the Company of the
Securities, except as may be required by any applicable state or Blue Sky laws
and U.S. federal securities laws.

 1
 

 

 

EXHIBIT D

WIRE INSTRUCTIONS

	
  Bank Name:

  	
   

  	
  Wells Fargo Bank

  
	
   

  	
   

  	
   

  
	
  Bank
  Address:

  	
   

  	
  333 South Grand Avenue

  
	
   

  	
   

  	
  Suite 540

  
	
   

  	
   

  	
  Los Angeles, CA
  90071

  
	
   

  	
   

  	
  Tel (213)
  253-3054

  
	
   

  	
   

  	
   

  
	
  ABA
  Number:

  	
   

  	
  121000248

  
	
   

  	
   

  	
   

  
	
  SWIFT:

  	
   

  	
  WFBIUS6S

  
	
   

  	
   

  	
   

  
	
  Account
  Name:

  	
   

  	
  Lipid Sciences, Inc.

  
	
   

  	
   

  	
   

  
	
  Account
  Number:

  	
   

  	
  637-1123100

  

 

 1Exhibit
10.2

August 7, 2006

Re: Lipid Sciences, Inc. — Private Placement 

Dear Investor:

We appreciate your
interest in our private placement of shares of common stock and warrants
issuable for common stock (the “Financing”).  This
letter confirms additional information regarding the Financing.  We understand that you and the other
investors will rely on this letter in connection with the purchase of
securities in the Financing.  Please note
that capitalized terms not defined in this letter have the meaning set forth in
the Securities Purchase Agreement to be entered into by you and the Company.

As of
the Execution Date, the Company confirms to you that:

There is no
transaction, arrangement, or other relationship between the Company and an
unconsolidated or other off balance sheet entity that is required to be
disclosed by the Company in its Exchange Act filings and is not so disclosed or
that otherwise would be reasonably likely to have a Material Adverse Effect.

The Company has
not, and to its knowledge no one acting on its behalf has, (i) taken, directly
or indirectly, any action designed to cause or to result in the stabilization
or manipulation of the price of any security of the Company to facilitate the
sale or resale of any of the Securities, (ii) sold, bid for, purchased, or paid
any compensation for soliciting purchases of, any of the Securities, or (iii)
paid or agreed to pay to any person any compensation for soliciting another to
purchase any other securities of the Company.

Since December 31,
2005, there has been no material adverse change and no material adverse
development in the business, properties, operations, condition (financial or
otherwise), results of operations or prospects of the Company or its
Subsidiaries.  Since December 31, 2005,
the Company has not (i) declared or paid any dividends, (ii) sold any assets,
individually or in the aggregate, in excess of $500,000 outside of the ordinary
course of business or (iii) had capital expenditures, individually or in the
aggregate, in excess of $500,000.  The
Company has not taken any steps to seek protection pursuant to any bankruptcy
law nor does the Company have any knowledge or reason to believe that its
creditors intend to initiate involuntary bankruptcy proceedings or any actual
knowledge of any fact which would reasonably lead a creditor to do so.  The Company is not as of the date hereof, and
after giving effect to the transactions contemplated hereby to occur at the
Closing, will not be Insolvent (as defined below).  For purposes of the foregoing, “Insolvent”
means (i) the present fair saleable value of the Company’s assets is less than
the amount required to pay the Company’s total indebtedness, (ii) the Company
is unable to pay its debts and liabilities, subordinated, contingent or otherwise,
as such debts and liabilities become absolute and matured, or (iii) the Company
intends to incur or believes that it will incur debts that would be beyond its
ability to pay as such debts mature.

7068 Koll Center Parkway, Suite 401, Pleasanton,
CA  94566-3111

Tel: 
925-249-4000    Fax:  925-249-4040

www.lipidsciences.com

 

 

Further,
in connection with the Financing, the Company will do the following on or prior
to the Closing:

·                  deliver
to each Investor a certificate evidencing the incorporation and good standing
of the Company and each of its operating Subsidiaries in such corporation’s
state of incorporation issued by the Secretary of State of such state of
incorporation as of a date within 10 days of the Closing Date;

·                  deliver
to each Investor a certified copy of the Certificate of Incorporation as
certified by the Secretary of State of the State of Delaware within 10 days of
the Closing Date;

·                  deliver
to each Investor a letter from the Company’s transfer agent certifying the
number of shares of Common Stock outstanding as of a date within five days of
the Closing Date; and

·                  obtain
all governmental, regulatory or third party consents and approvals, if any,
necessary for the sale of the Shares and the Warrants.

Further, in connection with the Financing, the Company will
make the following disclosures:

The
Company shall, on or before 8:30 a.m., New York City Time, on the first
Business Day after the date of this Agreement, issue a press release (the “Press Release”)
disclosing all material terms of the transactions contemplated hereby.  From and after the filing of the Company’s
quarterly report on Form 10-Q for the fiscal quarter ended June 30, 2006 with
the Securities and Exchange Commission, no Investor shall be in possession of
any material, nonpublic information received from the Company, any of its
Subsidiaries or any of its respective officers, directors, employees or agents,
that is not disclosed in such quarterly report. 
The Company shall not, and shall cause each of its Subsidiaries and each
of their respective officers, directors, employees and agents, not to, provide
any Investor with any material, nonpublic information regarding the Company or
any of its Subsidiaries from and after the filing of the Press Release without
the express written consent of such Investor.

Please call me if you
have any questions.

	
   

  	
  Sincerely,

  
	
   

  	
   

  
	
   

  	
  LIPID SCIENCES,
  INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Sandra
  Gardiner

  	
   

  
	
   

  	
  Sandra Gardiner

  
	
   

  	
  Chief Financial
  Officer

  

 

 

 2

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