Document:

Exhibit
10.1

STOCK PURCHASE AGREEMENT

This STOCK PURCHASE AGREEMENT (this “Agreement”),
dated as of December 18, 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, shares (“Shares”) of the Company’s
common stock, $0.001 par value per share (the “Common
Stock”).

The Company has agreed to effect the registration of the 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 A (the “Registration Rights Agreement”).

The sale of the Shares 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.

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, severally and not jointly, to purchase Shares
in the amount set forth below such Investor’s name on the signature pages
hereof.  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 December 18, 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.

“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.

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“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.

“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 

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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 $1.35.

“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.

“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 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.

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“Transaction Documents” means,
collectively, this Agreement, the Registration Rights Agreement, the warrant
issued to the Placement Agent (as defined herein) and all other agreements,
schedules, documents and other instruments executed and/or delivered by or on
behalf of the Company or any of its officers at 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 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 Shares
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 the Shares 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 Shares 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 Shares.

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.  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
Shares 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.

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2.5           Legend.  Such Investor understands that the
certificates representing the Shares 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 Shares is registered pursuant to an effective registration statement,
(B) such Shares have been sold pursuant to Rule 144, or (C) such
Shares are eligible for resale under Rule 144(k) or any successor provision,
such Shares shall be issued without any legend or other restrictive language
and, with respect to Shares 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 Shares 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 Shares.

2.7           Non-Affiliate
Status; Common Stock Ownership. 
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 Shares or otherwise in respect of the Company.  Investor’s investment in the Shares is not
for the purpose of acquiring, directly or indirectly, control of, and it has 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 Shares
or the fairness or suitability of the investment in the Shares nor have such
authorities passed upon or endorsed the merits of the offering of the Shares.

2.11         No
General Solicitation.  Investor is
not purchasing the Shares 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.

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2.12         Short
Sales.  From the time Investor first
learned of the offering until the public announcement of the offering, (i)
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 Shares, and (ii) neither the
Investor nor its Affiliates has engaged or will engage in any short sales of
Shares or other securities of the Company (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 Shares, 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 Shares, relied solely upon the
advice of such Investor’s own counsel and has not relied upon or consulted
counsel of the Company.

2.14         Acknowledgment
Regarding Placement Agent.  Investor
acknowledges that Oppenheimer & Co. Inc. (“Placement Agent”) is acting as the
exclusive placement agent on a “best efforts” basis for the Shares being
offered hereby and will be compensated by the Company for acting in such
capacity in the form of a cash fee equal to 7% of the gross proceeds of the
sale of the Shares and warrants to purchase shares of the Company’s Common
Stock equal to 4% of the number of Shares sold. 
Investor represents that (i) Investor was contacted regarding the
sale of the Shares by the Placement Agent (or an authorized representative
thereof) and (ii) no Shares were offered or sold by it by means of any
form of general solicitation or general advertising.

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 to
the Investors in accordance with the terms hereof and thereof.  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) 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.

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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 on a timely
basis 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”).  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). 
Since the date of the latest audited financial statements included
within the SEC Documents, except as disclosed in the SEC Documents, (i) there
has been no event, occurrence or development that, individually or in the
aggregate, has had or that would result in a Material Adverse Effect, (ii) the
Company has not altered its method of accounting, (iii) the Company has not
declared or made any dividend or distribution of cash or other property to its
stockholders, in their capacities as such, or purchased, redeemed or made any
agreements to purchase or redeem any shares of its capital stock (except for
repurchases by the Company of shares of capital stock held by employees,
officers, directors, or consultants pursuant to an option of the Company to
repurchase such shares upon the termination of employment or services), and
(iv) the Company has not issued any equity securities to any officer, director
or Affiliate, except pursuant to existing Company stock-based plans.  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 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 applicable Closing, will not
be Insolvent (as defined below).  For
purposes of this Section 3.4, “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 (as defined below), (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.

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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 exercisable for, or convertible
into or exchangeable for any shares of Common Stock, is as set forth on
Schedule 3.5 and 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 Shares, (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).  To the
Knowledge of the Company, except as disclosed in the Disclosure Documents and
any schedules filed with the SEC pursuant to Rule 13d-1 of the Exchange Act by
reporting persons, no Person or group of related Persons beneficially owns (as
determined pursuant to Rule 13d-3 under the Exchange Act), or has the right to
acquire, by agreement with or by obligation binding upon the Company,
beneficial ownership of in excess of 5% of the Company’s outstanding Common
Stock.

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.

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) 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.

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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 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 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 

 10
 

 

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 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 those certain Registration Rights Agreements dated
September 28, 2005 and August 8, 2006 (as disclosed in the Disclosure
Documents), the registration rights being granted to the Placement Agent
covering the shares issuable upon exercise of the Placement 

 11
 

 

Warrants, 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 advertising (within the meaning of Regulation D) in connection
with the offer or sale of the Shares, 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 Shares under the
Securities Act.

3.13         Fees.  Except as set forth herein, 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

 12

 

circumstances under which they were made.  Neither the Company nor any Person acting on
its behalf or at its direction has provided such Investor with material
non-public information other than the terms of the transactions contemplated
hereby.  Following the Company’s issuance
of a press release disclosing the terms of the sale of the Shares, to the
Company’s Knowledge, such Investor will not possess any material non-public
information concerning the Company that was provided to such Investor by the
Company or its agents or representatives. 
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 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 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 Shares, 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

 13
 

 

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 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
Governmental Requirements, 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 Shares 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.

3.30                           No
General Solicitation; Placement Agent. 
Neither the Company, nor any of its Affiliates, nor any Person acting on
its or their behalf, has engaged in any form of general solicitation or general
advertising (within the meaning of Regulation D promulgated under the
Securities Act) in connection with the offer or sale of the Shares.  Other than the Placement Agent, the Company
has not engaged any placement agent or other agent in connection with the sale
of the Shares.

3.31                           Application
of Takeover Protections.  Except as
described in Schedule 3.31, there is no control share acquisition, business
combination, poison pill (including any distribution under a rights agreement)
or other similar anti-takeover provision under the Company’s charter documents
that is or could become applicable to any of the Investors as a result of the
Investors and the Company fulfilling their obligations or exercising their
rights under the Transaction Documents, including, without limitation, as a
result of the Company’s issuance of the Shares and the Investors’ ownership of
the Shares.

 14
 

 

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 Shares 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 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.

(c)                                  on
or before 8:30 a.m., New York time, on the first Trading Day following
execution of this Agreement, issue a press release reasonably acceptable to the
Investors disclosing all material terms of the transactions contemplated
hereby.  On the first Trading Day
following the execution of this Agreement, the Company shall file a Current
Report on Form 8-K with the SEC (the “8-K
Filing”) describing the terms of the transactions contemplated by
the Transaction Documents and including as exhibits to such Current Report on
Form 8-K the Transaction Documents, in the form required by the Exchange
Act.  Thereafter, the Company shall
timely file any filings and notices required by the SEC or applicable law with
respect to the transactions contemplated hereby.  Except as herein provided, the Company shall
not publicly disclose the name of any Investor, or include the name of any
Investor in any press release without the prior written consent of such
Investor, unless otherwise required by law. 
The Company shall not, and shall cause each of its Subsidiaries and its
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 issuance of the above
referenced press release without the express written consent of such Investor.

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

(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;

(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

 15
 

 

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

4.3                                 Use
of Proceeds.  The Company shall use
the proceeds from the sale of the Shares 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.

4.4                                 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.

4.5                                 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.

4.6                                 Limitations
on Disposition.  No Investor shall
sell, transfer, assign or dispose of any Shares, 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 Shares
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 Shares under a margin arrangement with a
broker-dealer or other financial institution or the sale of any such Shares by
such broker-dealer or other financial institution following such Investor’s
default under such margin arrangement.

4.7                                 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.

4.8                                 Listing.  The Company has listed all of the Shares and
shares issuable upon exercise of the warrant issued to the Placement Agent on
the Nasdaq Global Market.

4.9                                 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.

4.10                           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

 16
 

 

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 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 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
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;

 17
 

 

5.1.4                        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 B;

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

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

5.1.7                        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;

5.1.8                        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;

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

5.1.10                  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;

 18
 

 

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

5.2.5                        such
Investor shall have tendered to the Company the Purchase Price for the Shares
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 C
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 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

 19
 

 

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 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 New York
applicable to contracts made and to be performed entirely within the State of
New York.  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:

If to the Company:

Lipid Sciences, Inc.

7068 Koll Center Parkway

Suite 401

Pleasanton, CA
94566

Attn:  Sandra Gardiner

 20
 

 

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.

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 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.

6.13                           Termination.  This Agreement may be terminated by the
Company or any Investor, by written notice to the other parties, if the Closing
has not been consummated by the third Business Day following the date of this
Agreement; provided that no such termination will affect the right of any party
to sue for any breach by the other party (or parties).

6.14                           Adjustments
in Share Numbers and Prices.  In the
event of any stock split, subdivision, dividend or distribution payable in
shares of Common Stock (or other securities or rights convertible into, or
entitling the holder thereof to receive directly or indirectly shares of Common
Stock), combination or other similar recapitalization or event occurring after
the date hereof and prior to the Closing, each reference in any Transaction
Document to a number of shares or a price per share shall be amended to
appropriately account for such event.

[Signature Pages to
Follow]

 21
 

 

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

LIPID SCIENCES,
INC.,

a Delaware corporation

	
  

  	
  By:

  	
   

  	
  /s/

  	
  S. Lewis Meyer, Ph.D.

  
	
   

  	
  Name:

  	
  S. Lewis Meyer,
  Ph.D.

  
	
   

  	
  Its:

  	
  President and
  Chief Executive Officer

  
							

 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 Stock 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.                                       Control
of Your Shares by Other Persons.  In
the selling shareholder table of the Registration Statement, the Company is
required to identify the beneficial owner
of shares being sold by the selling shareholders.  The following is a sample disclosure:

“Acme Capital Management, Inc., the managing
partner of Science Fund, LP, has discretionary authority to vote and dispose of
the securities held by Science Fund, LP, and is deemed to be the beneficial
owner of the securities.”

Accordingly, as to the
Shares being purchased by you or your organization, will any person or
organization, other than the person identified as the Registered Holder have:

(a)                                  The
sole or shared power to vote or to direct the voting of any of such securities?

Yes o                                                                                                                                                                                     No o

or                                     (b)                                 The
sole or shared power to dispose or to direct the disposition of any such
securities?

Yes o                                                                                                                                                                                     No o

If the answer is “yes” to either of the foregoing questions, please set
forth the name and address of each person who has either such power or with
whom the indicated Registered Holder shares either such power, together with
the number of shares to which such right relates, and a description of
relationship of the parties.  Please use the sample above to describe the
relationship.  A description
of beneficial ownership is
attached to this questionnaire as Appendix A.

	
  Name and Address

  	
   

  	
  Number of Shares

  	
   

  	
  Relationship of Parties

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  

 

3.                                       Plan
of Distribution.  If you plan to sell
your shares other than in open market transactions, please describe in detail
such plan.

4.                                       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:

	
  

  

 

5.                                       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
 

 

APPENDIX A

to
Investor Questionnaire

Beneficially - The term “beneficially” as applied to
an interest in securities describes any interest in the securities in question
which entitles you to any of the rights or benefits of ownership, even though
you are not the holder or owner of record. 
Interests in securities held in an estate, trust, or partnership, or by
a nominee, are examples of beneficial interests.

If you have any contract, understanding, relationship, agreement, or
other arrangement with any other person with respect to securities, pursuant to
which you obtain benefits substantially equivalent to the ownership of
securities, you should consider such securities as “beneficially owned” by
you.  For purposes of this questionnaire,
you will be regarded as having benefits substantially equivalent to ownership
of securities if:

(a)          Directly or indirectly,
through any contract, arrangement, understanding, relationship, or otherwise
you have or share

(i)                                     voting
power, which includes the power to vote, or to direct the voting of, the
security; or

(ii)                                  investment
power, which includes the power to dispose of, or to direct the disposition of,
the security;

(b)         You have the right to
acquire beneficial ownership of the security, including but not limited to any
right to acquire

(i)                                     through
the exercise of any option, warrant, or right;

(ii)                                  through
the conversion of a security;

(iii)                               pursuant
to a power to revoke a trust, discretionary account, or similar arrangement; or

(iv)                              pursuant
to the automatic termination of a trust, discretionary account, or similar
arrangement; or

(c)          You can apply income
from securities to meet expenses which you otherwise would meet from other
sources.

You are considered to be the beneficial owner of a security if you,
directly or indirectly, create or use a trust, proxy, power of attorney,
pooling arrangement, or any other contract, arrangement, or advice with the
purpose or effect of divesting yourself of beneficial ownership of such
security or preventing the vesting of such beneficial ownership as part of a
plan or scheme to evade the reporting requirements of Section 13(d) or 13(g) of
the Securities Exchange Act.

 25

 

EXHIBIT A

FORM OF
REGISTRATION RIGHTS AGREEMENT

 1

 

EXHIBIT
B

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.  The Company has all requisite power and
authority to own and operate its properties and assets and to carry on its
business as currently being conducted.

(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 Shares, 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
Shares and shares of common stock issuable upon exercise of the warrants issued
to the Placement Agent (the “Warrant Shares”) have been duly authorized by all
necessary corporate action on the part of the Company.  The Shares and Warrant Shares, when issued,
sold and delivered against payment therefor in accordance with the provisions
of the Purchase Agreement, will be validly issued, fully paid and
non-assessable, and the issuance of the 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 Shares, 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 Shares, 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 Shares, except as may be required by
any applicable state or Blue Sky laws and U.S. federal securities laws.

 1

 

EXHIBIT C

WIRE INSTRUCTIONS

-OMITTED-

 1Exhibit 10.2

November
29, 2006

S.
Lewis Meyer

President & CEO

Lipid Sciences, Inc.

7068 Koll Center Parkway

Suite 401

Pleasanton, CA  94566

Dear
Dr. Meyer:

1.                           This letter agreement (the “Agreement”)
confirms our understanding that Lipid Sciences, Inc. (“Company”) has engaged
Oppenheimer & Co. Inc. (“Oppenheimer”) to act as placement agent to the
Company for a period of 30 days, commencing as of the date of your acceptance
of this letter, for the sale by the Company of a minimum of $4,000,000 and a
maximum of $6,000,000 of shares of common stock (the “Securities” or the “Shares”)
of the Company, and warrants (“Warrants”), if any, to purchase shares of common
stock of the Company (the “Proposed Financing”).

The Proposed Financing
will be made pursuant to the exemptions afforded by Section 4(2) of the
Securities Act of 1933, as amended (the “Act”) and Regulation D promulgated
thereunder and applicable state securities laws. Our undertaking herein shall
be subject to, among other things, the terms and conditions set forth in this
Agreement, our due diligence investigation of the Company, the continuance of
the Company without material adverse change, the absence of unfavorable market
conditions in general, approval of our commitment committee and our continued satisfaction
with the results of our ongoing review of the Company’s business and
affairs.  It is understood that execution
of this Agreement does not assure the successful completion of the Proposed
Financing.

2.                           Our services to the Company will include: (i)
assistance in the preparation of the Company’s Offering Materials described
below, if any; (ii) assistance in structuring the Proposed Financing and its
terms; (iii) identifying and contacting up to and not to exceed eight selected
qualified purchasers (the “Purchasers”) of the Proposed Financing and
furnishing them, on behalf of the Company, with copies of the Offering
Materials; and (iv) negotiating under your guidance the financial aspects of
the Proposed Financing.

3.                           As compensation for the services to be
provided by Oppenheimer hereunder, the Company agrees to pay to Oppenheimer a
cash fee equal to 7.0% of the gross proceeds of the Proposed Financing payable
to Oppenheimer at the closing of the Proposed Financing (the “Closing”) and
warrants to purchase 4% of the shares of the Offering with an exercise price of
120% of the 10-day volume weighted average per share closing price immediately
prior to the closing of the Proposed Financing (which can in no event be less
than $1.35 per share) and other terms similar to warrants investors receive or
have received in past financings. If the Proposed Financing is consummated by
means of more than one Closing, Oppenheimer shall be entitled to the fees
provided herein with respect to each such Closing.

 

In addition and regardless of whether the Proposed Financing is
consummated, upon request by Oppenheimer from time to time, the Company shall
reimburse Oppenheimer for all out-of-pocket expenses incurred by Oppenheimer in
connection with its engagement hereunder, including reasonable fees and
expenses of its counsel, which will be limited to $ 25,000 without prior
written consent by the Company.

4.                           The Company acknowledges and agrees that
Oppenheimer has been retained solely to provide the advice or services set forth
in this Agreement. Oppenheimer shall act as an independent contractor, and any
duties of Oppenheimer arising out of its engagement hereunder shall be owed
solely to the Company. As Oppenheimer will be acting on your behalf in such
capacity, it is our firm practice to be indemnified in connection with
engagements of this type and the Company agrees to the indemnification
agreement attached hereto as Exhibit A and the other obligations as set forth
in paragraph 13 of this Agreement.

5.                           The sale of the Securities pursuant to the
Proposed Financing shall be made pursuant to the terms of a purchase agreement
or subscription agreement (each a “Purchase Agreement”) in form satisfactory to
Oppenheimer.  The Company represents and
warrants that (i) the representations and warranties contained in each Purchase
Agreement will be true and correct in all respects on the date such Purchase
Agreement is entered into and as of the closing date of the sale of the
Securities to which such Purchase Agreement relates, and (ii) Oppenheimer shall
be entitled to rely on such representations and warranties as if they were made
directly to Oppenheimer.  Oppenheimer
shall also be entitled to rely upon any opinions of counsel delivered to any purchaser
of the Securities, including, without limitation, any opinions relating to the
Registration Statement.  Oppenheimer and
the Company shall establish an escrow account (the “Escrow Account”) with a
suitable financial institution agreeable to the Company and Oppenheimer (the “Escrow Agent”), and shall enter into
an Escrow Agreement (the “Escrow Agreement”) with the Escrow Agent.  Upon the closing of the Proposed Financing
(or each such closing if there shall be more than one), the Escrow Agent shall
deliver to the Company, by wire transfer of immediately available funds, the
funds deposited in the Escrow Account in payment for the Securities, less (x)
the amounts payable to the Escrow Agent pursuant to the terms of the Escrow
Agreement, and (y) the amounts payable to Oppenheimer pursuant to Section 3
hereof.  The receipt by Oppenheimer of
the amounts to which it is entitled pursuant to Section 3 shall be a condition
to any closing of the Proposed Financing. The Company will also cause to be
furnished to Oppenheimer at the Closing, copies of such other agreements,
opinions, certificates and other documents delivered at the Closing as
Oppenheimer may reasonably request including, without limitation, subject to
customary assumptions and qualifications, an opinion of Company counsel to the
effect that the placement of the Securities was exempt from registration under
the Act.

6.                           The Company has not taken, and the Company
and Oppenheimer will not take, any action, directly or indirectly, so as to
cause the Proposed Financing to fail to be entitled to exemption under Section
4(2) of the Act or any other applicable securities laws.

7.                           Any advice, written or oral, provided by
Oppenheimer pursuant to this Agreement will be treated by the Company as
confidential, will be solely for the information and assistance of the Company
in connection with the Proposed Financing and may not be quoted, nor will any
such advice or (except as may be required by applicable laws and regulations)
the name of Oppenheimer be referred to, in any report, document, release or other
communication, whether written (including,

 2
 

 

without
limitation, the Offering Materials) or oral, prepared, issued or transmitted by
the Company or any affiliate, director, officer, employee, agent or
representative of any thereof, without, in each instance, Oppenheimer ‘s prior
written consent.

8.                           Intentionally omitted.

9.                           This Agreement may be terminated by either
the Company or Oppenheimer at any time upon receipt of written notice to that
effect by the other party. Upon the expiration or termination of this
Agreement, Oppenheimer will be entitled to prompt reimbursement of all its
out-of-pocket expenses and fees as described above.  In addition, if at any time prior to 12
months after the termination or expiration of this Agreement, the Company
consummates a private financing transaction, including the Proposed Financing,
with any party contacted regarding the Proposed Financing during the term of
our engagement, Oppenheimer will be entitled to payment in full of the
compensation described in the third paragraph of this Agreement.  Promptly following any termination or
expiration of this Agreement, Oppenheimer will provide the Company with written
notice of the parties contacted by Oppenheimer regarding the Proposed Financing
during the term of our engagement. The indemnity and other provisions contained
in paragraph 11 and Exhibit A will also remain operative and in full force and
effect regardless of any expiration or termination of this Agreement.

10.                     This Agreement shall not give rise to any
express or implied commitment by Oppenheimer to purchase or place any
securities of the Company.

11.                     The Company acknowledges that Oppenheimer is
acting as placement agent and advisor for the Company in the transactions
contemplated by this engagement. In addition to the terms of this Agreement and
the provisions set forth in Exhibit A, the Company agrees to indemnify
Oppenheimer, and its officers, directors, agents, selected dealers, sub-agents,
employees and controlling persons (each “Indemnified Person”), whether
currently employed or formerly employed, to the fullest extent against any and
all claims, demands, losses and expenses, as incurred individually or as a
group.

12.                     This Agreement incorporates the entire
understanding of the parties and supersedes all previous agreements relating to
the subject matter hereof.  The benefits
of this Agreement shall inure to the parties hereto, their respective
successors and assigns and to the Indemnified Persons hereunder and their respective
successors and assigns, and the obligations and liabilities assumed in this
Agreement shall be binding upon the parties hereto and their respective
successors and assigns.  Notwithstanding
anything contained herein to the contrary, none of the parties hereto shall
assign any of its obligations hereunder without the prior written consent of
each of the other parties hereto.

All notices provided
hereunder shall be given in writing and either delivered personally or by
overnight courier service or sent by certified mail, return receipt requested,
if to Oppenheimer, to Oppenheimer & Co. Inc., 125 Broad Street, 16th Floor,
New York, New York 10004, Attention: Stuart Barich, with a copy to Mintz,
Levin, Cohn, Ferris, Glovsky and Popeo P.C., 666 Third Avenue, New York, New
York 10017, Attention:  Ivan K.
Blumenthal, Esq. and if to the Company, to Lipid Sciences, Inc., 7068 Koll
Center Parkway Suite 401 Pleasanton, CA 
94566  Attention S. Lewis Meyer,
with a copy to Allen Matkins Leck Gamble Mallory & Natsis LLP, Three
Embarcadero Center, 12th Floor,
San Francisco, CA

 3
 

 

94111, Attention: Roger
S. Mertz, Esq.  Any notice delivered
personally shall be deemed given upon receipt; any notice given by overnight
courier shall be deemed given on the next business day after delivery to the overnight
courier; and any notice given by certified mail shall be deemed given upon the
second business day after certification thereof.

13.                     The failure or neglect of either of the
parties hereto to insist, in any one or more instances, upon the strict
performance of any of the terms or conditions of this Agreement, or its waiver
of strict performance of any of the terms or conditions of this Agreement,
shall not be construed as a waiver or relinquishment in the future of such term
or condition by such party, but the same shall continue in full force and
effect.  Any waiver must be in writing.

14.                     This Agreement shall be governed by and
construed in accordance with the laws of the State of New York applicable to
agreements made and to be fully performed therein, without regard to conflicts
of law principles.  Each of the parties
irrevocably submits to the exclusive jurisdiction of any court of the City of
New York, State of New York or the United States District Court located in the
City of New York, State of New York for the purpose of any suit, action or
other proceeding arising out of this Agreement, or any of the agreements or
transactions contemplated hereby, and agrees that service of process in
connection with any such suit, action or proceeding may be made in accordance
with Section 16 hereof.  The parties
hereby expressly waive all rights to trial by jury in any suit, action or
proceeding arising under this Agreement.

15.                     This Agreement may not be modified or amended
except in a writing duly executed by the parties hereto.

16.                     At any time after the consummation of the
Proposed Financing, Oppenheimer may place an announcement, the content of which
is previously agreed upon by the Company and Oppenheimer, in such newspapers
and publications as it may choose, stating that Oppenheimer has acted as
exclusive financial advisor and/or placement agent in connection with the
Proposed Financing.

17.                     For the convenience of the parties, this
Agreement may be executed in any number of counterparts, each of which shall be
deemed to be an original instrument, but all of which taken together shall
constitute one and the same agreement. 
Facsimile signatures shall be deemed to be original signatures for all
purposes.

 4
 

 

18.                     After reviewing this Agreement, please
confirm that the foregoing is in accordance with your understanding by signing
and returning the duplicate of this letter attached hereto, whereupon it shall
be our binding Agreement.

Very truly yours,

Oppenheimer & Co. Inc.

	
  

  	
  By:

  	
  /s/ Stuart Barich

  	
   

  
	
   

  	
   

  	
  Stuart Barich

  
	
   

  	
   

  	
  Managing Director

  

 

Accepted and agreed to

this 30 day of November 2006.

Lipid Sciences, Inc.

	
  By:

  	
   

  	
  /s/ S. Lewis Meyer, Ph.D.

  	
   

  
	
  S. Lewis Meyer,
  Ph.D.

  
	
  President &
  CEO

  

 

 5

EXHIBIT A

November 14, 2006

Oppenheimer
& Co. Inc.

125
Broad Street

New York, New York  10004

Attention:                 Stuart Barich

Managing Director

Dear Mr. Barich:

In connection with our engagement of Oppenheimer & Co. Inc. (“Oppenheimer”)
as our placement agent, we hereby agree to indemnify and hold harmless
Oppenheimer and its affiliates, and the respective controlling persons,
directors, officers, shareholders, agents and employees of any of the foregoing
(collectively the “Indemnified Persons”), from and against any and all claims,
actions, suits, proceedings (including those of shareholders), damages,
liabilities and expenses incurred by any of them (including the reasonable fees
and expenses of counsel), (collectively a “Claim”), which are (A) related to or
arise out of (i) any actions taken or omitted to be taken (including any untrue
statements made or any statements omitted to be made) by the Company, or (ii)
any actions taken or omitted to be taken by any Indemnified Person in
connection with our engagement of Oppenheimer, or (B) otherwise relate to or
arise out of Oppenheimer’s activities on our behalf under Oppenheimer’s
engagement, and we shall reimburse any Indemnified Person for all expenses
(including the reasonable fees and expenses of counsel) incurred by such
Indemnified Person in connection with investigating, preparing or defending any
such claim, action, suit or proceeding, whether or not in connection with
pending or threatened litigation in which any Indemnified Person is a party.  We will not, however, be responsible for any
Claim, which is finally judicially determined to have resulted from the gross
negligence or willful misconduct of any person seeking indemnification
hereunder.  We further agree that no Indemnified
Person shall have any liability to us for or in connection with our engagement
of Oppenheimer except for any Claim incurred by us as a result of any
Indemnified Person’s gross negligence or willful misconduct.

We further agree that we will not, without the prior written consent of
Oppenheimer, settle, compromise or consent to the entry of any judgment in any
pending or threatened Claim in respect of which indemnification may be sought
hereunder (whether or not any Indemnified Person is an actual or potential
party to such Claim), unless such settlement, compromise or consent includes an
unconditional, irrevocable release of each Indemnified Person hereunder from
any and all liability arising out of such Claim.

Promptly upon receipt by an Indemnified Person of notice of any
complaint or the assertion or institution of any Claim with respect to which
indemnification is being sought hereunder, such Indemnified Person shall notify
us in writing of such complaint or of such assertion or institution but failure
to so notify us shall not relieve us from any obligation we may have hereunder,
unless and only to the extent such failure results in the forfeiture by us of
substantial rights and defenses.  If we
so elect or are requested by such Indemnified Person, we will assume the
defense of such Claim, including the employment of counsel reasonably
satisfactory to such Indemnified Person and the payment of the fees and
expenses of such counsel. In the event, however, that legal counsel to such
Indemnified Person reasonably determines and provides written correspondence to
us, that having common counsel would

 

present
such counsel with a conflict of interest or if the defendant in, or target of,
any such Claim, includes an Indemnified Person and us, and legal counsel to
such Indemnified Person reasonably concludes that there may be legal defenses
available to it or other Indemnified Persons different from or in addition to
those available to us, then such Indemnified Person may employ its own separate
counsel to represent or defend it in any such Claim and we shall pay the
reasonable fees and expenses of such counsel. 
Notwithstanding anything herein to the contrary, if we fail timely or
diligently to defend, contest, or otherwise protect against any Claim, the relevant
Indemnified Party shall have the right, but not the obligation, to defend,
contest, compromise, settle, assert crossclaims, or counterclaims or otherwise
protect against the same, and shall be fully indemnified by us therefor,
including without limitation, for the reasonable fees and expenses of its
counsel and all amounts paid as a result of such Claim or the compromise or
settlement thereof.  In any Claim in
which we assume the defense, the Indemnified Person shall have the right to
participate in such Claim and to retain its own counsel therefor at its own
expense.

We agree that if any indemnity sought by an Indemnified Person
hereunder is unavailable for any reason then (whether or not Oppenheimer is the
Indemnified Person), we and Oppenheimer shall contribute to the Claim for which
such indemnity is held unavailable in such proportion as is appropriate to
reflect the relative benefits to us, on the one hand, and Oppenheimer on the
other, in connection with Oppenheimer’s engagement referred to above, subject
to the limitation that in no event shall the amount of Oppenheimer’s
contribution to such Claim exceed the amount of fees actually received by
Oppenheimer from us pursuant to Oppenheimer’s engagement.  We hereby agree that the relative benefits to
us, on the one hand, and Oppenheimer on the other, with respect to Oppenheimer’s
engagement shall be deemed to be in the same proportion as (a) the total value
paid or proposed to be paid or received by us or our stockholders as the case
may be, pursuant to the transaction (whether or not consummated) for which you
are engaged to render services bears to (b) the fee paid or proposed to be paid
to Oppenheimer in connection with such engagement.

Our indemnity, reimbursement and contribution obligations under this
Agreement shall be in addition to, and shall in no way limit or otherwise
adversely affect any rights that any Indemnified Party may have at law or at
equity.

The validity and interpretation of this agreement shall be governed by
and construed and enforced in accordance with the laws of the State of New York
applicable to agreements made and to be fully performed therein (excluding the
conflicts of laws rules). Each of Oppenheimer and the Company hereby
irrevocably submits to the jurisdiction of any court of the State of New York,
County of New York or the United States District Court for the Southern
District of New York for the purpose of any suit, action or other proceeding
arising out of this agreement or the transactions contemplated hereby, which is
brought by or against Oppenheimer or the Company and in connection therewith,
each of Oppenheimer and the Company (i) hereby irrevocably agrees that all
claims in respect of any such suit, action or proceeding may be heard and
determined in any such court, (ii) to the extent that it has acquired, or
hereafter may acquire, any immunity from jurisdiction of any such court or from
any legal process therein, it hereby waives, to the fullest extent permitted by
law, such immunity and (iii) agrees not to commence any action, suit or
proceeding relating to this agreement other than in any such court.  Each of Oppenheimer and the Company hereby
waives and agrees not to assert in any such action, suit or proceeding, to the
fullest extent permitted by applicable law, any claim that (a) it is not personally
subject to the jurisdiction of any such court, (b) it is immune from any legal
process (whether through service or notice, attachment prior to judgment,
attachment in aid of execution, execution or otherwise)

 2
 

 

with
respect to its property of (c) any suit, action or proceeding is brought in an
inconvenient forum.

The provisions of
this Agreement shall remain in full force and effect following the completion
or termination of Oppenheimer's engagement.

Very truly yours,

Lipid Sciences, Inc.

	
  

  	
  By:

  	
  /s/ S. Lewis Meyer, Ph.D.

  	
   

  
	
   

  	
  S. Lewis Meyer, Ph.D.

  	
   

  
	
   

  	
  President & CEO

  

 

Confirmed and agreed to:

Oppenheimer & Co. Inc.

	
  By:

  	
   

  	
  /s/ Stuart Barich

  	
   

  
	
   

  	
   

  	
  Stuart Barich

  	
   

  
	
   

  	
   

  	
  Managing Director

  	
   

  
					

 

	
  Date:

  	
   

  	
  December 6, 2006

  	
   

  

 

 3

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