Document:

EXHIBIT 4.1

THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE
COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO
AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES LAWS. IF THIS WARRANT IS EXERCISED AS AFORESAID, THE
HOLDER OF THIS WARRANT MAY NOT TRANSFER THIS WARRANT UNLESS AND UNTIL SUCH
HOLDER FIRST PHYSICALLY SURRENDERS THIS WARRANT TO VAXGEN, INC., WHEREUPON
VAXGEN, INC. WILL FORTHWITH ISSUE AND DELIVER UPON THE ORDER OF SUCH HOLDER A
REPLACEMENT WARRANT STATING THE NUMBER OF SHARES FOR WHICH THIS WARRANT IS THEN
EXERCISABLE.

THIS WARRANT DOES NOT REQUIRE PHYSICAL SURRENDER OF THE WARRANT UPON ANY PARTIAL
EXERCISE HEREOF. AS A RESULT FOLLOWING ANY EXERCISE OF ANY PORTION OF THIS
WARRANT, THE OUTSTANDING NUMBER OF SHARES AVAILABLE PURSUANT TO THIS WARRANT MAY
BE LESS THAN THE AMOUNT OF SHARES SET FORTH BELOW.

                          COMMON STOCK PURCHASE WARRANT

                               To Purchase 222,883
                            Shares of Common Stock of

                                  VAXGEN, INC.

     THIS CERTIFIES that, for value received, HALIFAX FUND, L.P. and its
successors and assigns (the "Holder") is entitled, upon the terms and subject to
the conditions hereinafter set forth, at any time and from time to time on and
after the date hereof ("Commencement Date"), and on and prior to 8:00 p.m.
Eastern Time on the fifth (5th) anniversary of the date of issuance hereof (the
"Expiration Date"), but not thereafter, to subscribe for and purchase from
VAXGEN, INC., a Delaware corporation (the "Company"), 222,883 shares (the
"Warrant Shares") of common stock, $0.01 par value per share ("Common Stock"),
of the Company. The purchase price of one share of Common Stock under this
Warrant shall be the Exercise Price, as defined below and as may be adjusted
from time to time pursuant to the terms hereof. The Exercise Price and the
number of shares for which this Warrant is exercisable shall be subject to
adjustment as provided herein. This Warrant is being issued in connection with
the Securities Purchase Agreement dated on or about the date hereof (the
"Purchase Agreement") entered into between the Company, the Holder and the other
Purchasers named therein (if any).

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     1. Definitions. Capitalized terms used herein and not otherwise defined
shall have the meaning ascribed thereto in the Purchase Agreement. As used in
this Warrant, the following terms shall have the following respective meanings:

     "Change in Control Transaction" will be deemed to exist if (i) there occurs
any consolidation, merger or other business combination of the Company with or
into any other corporation or other entity or person (whether or not the Company
is the surviving corporation), or any other corporate reorganization or
transaction or series of related transactions in which in any of such events the
voting stockholders of the Company prior to such event cease to own 50% or more
of the voting stock, or corresponding voting equity interests, of the surviving
corporation after such event (including without limitation any "going private"
transaction under Rule 13e-3 promulgated pursuant to the Exchange Act or tender
offer by the Company under Rule 13e-4 promulgated pursuant to the Exchange Act
for 20% or more of the Company's Common Stock), (ii) any person (as defined in
Section 13(d) of the Exchange Act), together with its affiliates and associates
(as such terms are defined in Rule 405 under the Act), beneficially owns or is
deemed to beneficially own (as described in Rule 13d-3 under the Exchange Act
without regard to the 60-day exercise period) in excess of 50% of the Company's
voting power, (iii) there is a replacement of more than one-half of the members
of the Company's Board of Directors which is not approved by those individuals
who are members of the Company's Board of Directors on the date thereof, (iv) in
one or a series of related transactions, there is a sale or transfer of all or
substantially all of the assets of the Company, determined on a consolidated
basis, or (v) the execution by the Company of an agreement to which the Company
is a party or by which it is bound providing for an event set forth in (i),
(ii), (iii) or (iv) above, pursuant to which the Common Stock is converted or
reclassified into other securities, cash or property.

     "Convertible Securities" means any convertible securities, warrants,
options or other rights to subscribe for or to purchase or exchange for, shares
of Common Stock.

     "Effective Registration" shall have the meaning set forth in the Purchase
Agreement.

     "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.

     "Exercise Price" means $25.2375 ("Fixed Price"), provided, however, that on
the one-year anniversary of the Commencement Date, the Exercise Price hereunder
shall be automatically adjusted to (and shall thereafter equal, until further
adjusted) a price (the "Adjusted Price") equal to the lesser of (A) the Fixed
Price and (B) the average of the closing bid prices for the Common Stock on the
Principal Market during the Pricing Period (as defined below), provided that the
Exercise Price shall not be adjusted to a figure that is less than the Floor
Price, except pursuant to an adjustment required under Section 13 below; in each
case such Exercise Price shall be subject to adjustment (or further adjustment,
as the case may be) as provided herein.

     "Floor Price" shall mean $14.133, as such figure may be adjusted pursuant
hereto.

     "Pricing Period" shall mean the period of twenty (20) consecutive Trading
Days immediately preceding the one-year anniversary of the Commencement Date.

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     "Principal Market" shall mean the Approved Market or such other market or
exchange on which the Common Stock is then principally traded.

     "Securities Act" shall mean the Securities Act of 1933, as amended.

     "Trading Day" shall mean a day on which there is trading on the Principal
Market.

     2. Title of Warrant. The Company shall register this Warrant, upon records
to be maintained by the Company for that purpose, in the name of the record
holder hereof from time to time. The Company may deem and treat the registered
holder of this Warrant as the absolute owner hereof for the purpose of any
exercise hereof or any distribution to the holder, and for all other purposes,
and the Company shall not be affected by notice to the contrary except as
provided herein.

     With the written consent of the Company, such written consent not to be
unreasonably withheld, prior to the expiration hereof and subject to compliance
with applicable laws, this Warrant and all rights hereunder are transferable, in
whole or in part, at the office or agency of the Company by the holder hereof in
person or by duly authorized attorney, upon surrender of this Warrant together
with (a) the Assignment Form annexed hereto properly endorsed, and (b) any other
documentation reasonably necessary to satisfy the Company that such transfer is
in compliance with all applicable securities laws; provided that no such
transfer may be made to a person that is not an "accredited investor" as defined
in Rule 501 of Regulation D of the Securities Act; and provided further that no
consent of the Company is required for any transfer or assignment in whole or in
part from time to time to an "accredited investor" that is an affiliate of the
Purchaser or of the then holder of this Warrant. The term "holder" as used
herein shall refer to the Holder or any subsequent transferee of this Warrant.
If this Warrant is duly assigned in accordance with the terms hereof, then the
Company agrees, upon the request of the assignee, to amend or supplement
promptly any effective registration statement covering the Warrant Shares so
that the such assignee is added as a selling stockholder thereunder, subject to
such assignee providing the information required for such amendment or
supplement and provided that no unreasonable change may be required to the
description of the intended methods of distribution as set forth in such
registration statement by virtue of such transfer.

     3. Authorization of Shares. The Company covenants that all shares of Common
Stock which may be issued upon the exercise of rights represented by this
Warrant will, upon exercise of the rights represented by this Warrant and
payment of the Exercise Price as set forth herein, be duly authorized, validly
issued, fully paid and nonassessable and free from all taxes, liens,
encumbrances and charges in respect of the issue thereof (other than taxes in
respect of any transfer occurring contemporaneously with such issue or otherwise
specified herein).

     4. Exercise of Warrant.

          (a) Exercise Procedure. Exercise of the purchase rights represented by
this Warrant may be made at any time and from time to time, in whole or in part,
on or after the Commencement Date but before 8:00 p.m. Eastern Time on the
Expiration Date, by delivering the Notice of Exercise annexed hereto duly
completed and executed (which may be by facsimile) to the Company at the
principal office of the Company (or such other office or agency of the

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Company as it may designate by notice in writing to the registered holder hereof
at the address of such holder appearing on the books of the Company), and upon
payment of the full Exercise Price of the shares thereby purchased (which shall
be paid within two Trading Days following the exercise date) (subject to
subsection (b) below), the holder of this Warrant shall be entitled to receive a
certificate for the number of shares of Common Stock so purchased. Subject to
subsection (b) below, payment of the Exercise Price of the shares shall be by
certified check or cashier's check or by wire transfer to an account designated
by the Company in an aggregate amount equal to the Exercise Price multiplied by
the number of shares being purchased.

          (b) Cashless Exercise. Alternatively, and only in the event (i) the
Warrant Shares are not subject to Effective Registration, and have not been for
a period of at least two (2) full Trading Days, and (ii) the Fair Market Value
exceeds the Exercise Price, the Holder may exercise this Warrant, in whole or in
part in a "cashless" or "net-issue" exercise by delivering to the offices of the
Company or any transfer agent for the Common Stock a Notice of Exercise
specifying the number of Warrant Shares to be delivered to such Warrant holder
(the "Deliverable Shares") and the number of Warrant Shares with respect to
which this Warrant is being exercised (the "Exercised Shares"). The number of
Deliverable Shares shall be calculated as follows:

 # of Deliverable Shares = # of Exercised Shares x Fair Market Value
                           of Common Stock less Exercise Price
                           -----------------------------------------
                               Fair Market Value of Common Stock

     "Fair Market Value" shall be deemed to be the last reported sale price of
Common Stock on the Trading Day immediately prior to exercise, or, if not
reported, the fair market value of such Common Stock as reasonably determined by
the Company and such Holder.

          (c) Issuance of Warrant Shares and Unexercised Warrants. Subject to
subsection (d) below, in the event that this Warrant is not exercised in full,
the number of Warrant Shares for which this Warrant may be exercised shall be
reduced by the number of such Warrant Shares for which this Warrant is exercised
and/or surrendered, and the Company, at its expense, shall within five (5)
Trading Days, issue and deliver to or upon the order of the Holder a new Warrant
of like tenor in the name of the Holder or as the Holder (upon payment by the
Holder of any applicable transfer taxes) may request, reflecting such adjusted
number of Warrant Shares.

     All exercises of this Warrant will be deemed to occur as of the date of
receipt by the Company of a validly executed Notice of Exercise (or such later
date as may be indicated on such Notice of Exercise) (such date being referred
to herein as the "Exercise Date"), and certificates for shares of Common Stock
purchased hereunder shall be delivered to the Holder hereof within three (3)
Trading Days after the Exercise Date. The Holder may withdraw its Notice of
Exercise under Section 3(a) or 3(b) at any time thereafter, in whole or in part,
if the Company fails to timely deliver the applicable certificates to the Holder
as provided in this Warrant.

     In lieu of delivering physical certificates representing the Warrant Shares
issuable upon conversion of this Warrant, provided the Company's transfer agent
is participating in the Depository Trust Company ("DTC") Fast Automated
Securities Transfer ("FAST") program, upon request of the holder, the Company
shall use its best efforts to cause its transfer agent to

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electronically transmit the Warrant Shares issuable upon exercise to the holder,
by crediting the account of the holder's prime broker with DTC through its
Deposit Withdrawal Agent Commission ("DWAC") system. The time periods for
delivery described above shall apply to the electronic transmittals through the
DWAC system. The Company agrees to coordinate with DTC to accomplish this
objective.

          (d) Book-Entry. Notwithstanding anything to the contrary set forth
herein, upon exercise of any portion of this Warrant in accordance with the
terms hereof, the Holder shall not be required to physically surrender this
Warrant to the Company unless such Holder is purchasing the full amount of
Warrant Shares represented by this Warrant. The Holder and the Company shall
maintain records showing the number of Warrant Shares so purchased hereunder and
the dates of such purchases or shall use such other method, reasonably
satisfactory to the Holder and the Company, so as not to require physical
surrender of this Warrant upon each such exercise.

     5. No Fractional Shares or Scrip. No fractional Warrant Shares or scrip
representing fractional Warrant Shares shall be issued upon the exercise of this
Warrant. Any fractional share or scrip shall be rounded up to the nearest whole
number.

     6. Charges, Taxes and Expenses. Issuance of certificates for shares of
Common Stock upon the exercise of this Warrant shall be made without charge to
the holder hereof for any issue or transfer tax or other incidental expense in
respect of the issuance of such certificate, all of which taxes and expenses
shall be paid by the Company, and such certificates shall be issued in the name
of the holder of this Warrant or in such name or names as may be directed by the
holder of this Warrant; provided, however, that in the event certificates for
shares of Common Stock are to be issued in a name other than the name of the
holder of this Warrant, this Warrant when surrendered for exercise shall be
accompanied by the Assignment Form attached hereto duly executed by the holder
hereof and reasonable evidence of compliance with the provisions of Section 2
hereof; and provided further, that the Company shall not be required to pay any
tax or taxes which may be payable in respect of any transfer involved in the
issuance of any Warrant certificates or any certificates for the Warrant Shares
in a name other than the name of the holder.

     7. Closing of Books. The Company will at no time close its stockholder
books or records in any manner which interferes with the timely exercise of this
Warrant.

     8. No Rights as Stockholder until Exercise. Subject to Sections 12 and 13
of this Warrant and the provisions of any other written agreement between the
Company and the Holder, prior to the exercise of this Warrant as provided
herein, the Holder shall not be entitled to vote or receive dividends or be
deemed the holder of Warrant Shares or any other securities of the Company that
may at any time be issuable on the exercise hereof for any purpose, nor shall
anything contained herein be construed to confer upon the Holder, as such, any
of the rights of a stockholder of the Company or any right to vote for the
election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action (whether
upon any recapitalization, issuance of stock, reclassification of stock, change
of par value, or change of stock to no par value, consolidation, merger,
conveyance or otherwise) or to receive notice of meetings, or to receive
dividends or subscription rights. However, at the

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time of the exercise of this Warrant pursuant to Section 4 hereof, the Warrant
Shares so purchased hereunder shall be deemed to be issued to such Holder as the
record owner of such shares as of the close of business on the date on which
this Warrant shall have been exercised.

     9. [Intentionally Omitted].

     10. Loss, Theft, Destruction or Mutilation of Warrant; Denomination. In the
event that any holder notifies the Company that its Warrant(s) have been lost,
stolen or destroyed, then replacement Warrant(s) identical in all respects to
the original Warrant(s) (except for any registration number and any adjustments
to Exercise Price or the number of Warrant Shares issuable hereunder pursuant
hereto, if different than that shown on the original Warrant(s)) shall be
delivered to the holder by the Company within five (5) Trading Days, provided
that such holder executes and delivers to the Company an agreement reasonably
satisfactory to the Company to indemnify the Company from any loss incurred by
it in connection with such Warrants. This Warrant is exchangeable for an equal
aggregate number of Warrants of different denominations, as requested by the
holder surrendering the same. No service charge will be made for such
registration, replacement, transfer or exchange.

     11. Saturdays, Sundays, Holidays, etc. If the last or appointed day for the
taking of any action or the expiration of any right required or granted herein
shall be a Saturday, Sunday or a legal holiday, then such action may be taken or
such right may be exercised on the next succeeding day not a legal holiday.

     12. Effect of Certain Events. If at any time while this Warrant or any
portion hereof is outstanding and unexpired there shall be a Change in Control
Transaction, then the Holder shall have the right thereafter to purchase, by
exercise of this Warrant and payment of the aggregate Exercise Price in effect
immediately prior to such Change in Control Transaction, the kind and amount of
consideration including cash, stock, other securities, assets or any other
property, which it would have owned or have been entitled to receive upon or
after the happening of such transaction had this Warrant been exercised
immediately prior thereto, subject to further adjustment as provided in Section
13. The Company shall not consummate a Change in Control Transaction unless the
entity resulting from such transaction (if not the Company), or such transferee
entity, as the case may be, shall expressly assume, by supplemental agreement
reasonably satisfactory in form and substance to the Holder, the due and
punctual performance and observance of each and every covenant and condition of
this Warrant to be performed and observed by the Company, provided, however,
that in lieu of such assumption by such resulting or transferee entity, the
Company or such entity may instead redeem this Warrant for cash on or during the
5 days immediately preceding the consummation of such Change in Control
Transaction at a redemption price equal to the value of this Warrant on such
redemption date using a Black-Scholes valuation model and assumptions in each
case reasonably mutually acceptable to the Company and Holder.

     13. Adjustments of Exercise Price and Number of Warrant Shares. For
purposes of any adjustment of the Exercise Price pursuant to this Section 13,
the "Exercise Price" shall be deemed to be the Fixed Price, the Adjusted Price,
the Floor Price and each closing bid price during the Pricing Period which
occurs prior to the applicable event set forth below (in each case

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as such Fixed Price, Floor Price and/or closing bid price may have been
previously adjusted hereunder).

          (a) Stock Dividends, Splits, Combinations and Reclassifications. If,
to the extent not covered by Section 12 above, the Company or any Subsidiary, at
any time while this Warrant or any portion thereof is issued, outstanding and
unexpired: (A) shall declare or pay a stock dividend or otherwise make a
distribution or distributions on any equity securities (including securities
convertible into or exchangeable or exercisable for such equity securities) in
shares of Common Stock; (B) subdivide outstanding Common Stock into a larger
number of shares; (C) combine outstanding Common Stock into a smaller number of
shares; or (D) issue any shares of its capital stock in a reclassification of
the Common Stock (including without limitation in connection with any merger or
consolidation), then the Exercise Price then in effect hereunder shall be
adjusted by multiplying the Exercise Price by a fraction of which the numerator
shall be the number of shares of Common Stock (excluding treasury shares, if
any) outstanding before such event and of which the denominator shall be the
number of shares of Common Stock (excluding treasury shares, if any) outstanding
after such event. Any adjustment made pursuant to this Section 13(a) shall
become effective immediately after the record date for the determination of
stockholders entitled to receive such dividend or distribution and shall become
effective immediately after the effective date in the case of a subdivision or
combination.

          (b) Distributions. If the Company or any Subsidiary, at any time while
this Warrant is outstanding, shall distribute to all holders of Common Stock
evidences of its indebtedness or assets or cash or rights or warrants to
subscribe for or purchase any security of the Company or any of its
subsidiaries, then the Exercise Price in effect at the opening of business on
the day following the date fixed for the determination of holders of Common
Stock entitled to receive such distribution shall be adjusted by multiplying
such Exercise Price by a fraction, the numerator of which shall be the Fair
Market Price (as defined below) per share of the Common Stock less the then fair
market value as reasonably determined by the Board of Directors of the portion
of the evidences of indebtedness or assets or rights or warrants so distributed
(and for which an adjustment to the Exercise Price has not previously been made
pursuant to the terms of this Section 13) applicable to one share of Common
Stock, and the denominator of which shall be such Fair Market Price per share of
the Common Stock, such adjustment to become effective immediately after the
opening of business on the day following the date fixed for the determination of
holders of Common Stock entitled to receive such distribution. "Fair Market
Price" shall mean the closing market price per share of Common Stock on the
Principal Market on the Trading Day next preceding such fixed determination date

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or such other date on which the Fair Market Price is being determined. The
Company shall deliver to each holder of Warrants a notice setting forth the
Exercise Price after such adjustment and setting forth a brief statement of the
facts requiring such adjustment and the computation thereof. In the event that
the Exercise Price shall change by more than 5%, the holders of Warrants shall
have the right to have the fair market value determined by an independent
nationally reputable investment banker mutually selected by the Company and the
Holder, at the Company's expense.

          (c) Common Stock Issuances. In the event that the Company or any of
its subsidiaries (X) issues or sells any Common Stock or Convertible Securities,
other than:

            (i)   shares or options issued or which may be issued pursuant to
                  the Company's duly adopted employee or director stock option,
                  stock incentive, employee stock purchase or 401(k), plans;

            (ii)  shares issued upon exercise of options, warrants or rights
                  outstanding on the date of this Warrant and listed in the
                  Company's Pre-Agreement SEC Documents);

            (iii) shares issued upon conversion of shares of the Company's
                  Series A 6% Cumulative Convertible Preferred Stock, or as a
                  dividend or distribution on such shares;

            (iv)  shares issued pursuant to an event covered by Section 13(a)
                  above; and

            (v)   shares issued or issuable in a transaction as to which the
                  application of this Section 13(c) has been waived by written
                  consent of holders of 75% of the issuable Warrant Shares;

     or (Y) directly or indirectly effectively reduces the conversion, exercise
     or exchange price for any Convertible Securities which are currently
     outstanding, in any case under clause (X) or (Y) at an effective purchase
     price per share which is less than the Exercise Price, then in each such
     case, the Exercise Price in effect immediately prior to such issue or sale
     or record date, as applicable, shall be reduced effective concurrently with
     such issue or sale to an amount determined by multiplying the Exercise
     Price then in effect by a fraction, (x) the numerator of which shall be the
     sum of (1) the number of shares of Common Stock outstanding immediately
     prior to such issue or sale, plus (2) the number of shares of Common Stock
     which the aggregate consideration received by the Company for such
     additional shares would purchase at such Exercise Price or Fair Market
     Price, as the case may be, and (y) the denominator of which shall be the
     number of shares of Common Stock of the Company outstanding immediately
     after such issue or sale.

     For the purposes of the foregoing adjustment, in the case of the issuance
     of any Convertible Securities, the maximum number of shares of Common Stock
     issuable upon exercise, exchange or conversion of such Convertible
     Securities shall be deemed to be

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     outstanding, provided that no further adjustment shall be made upon the
     actual issuance of Common Stock upon exercise, exchange or conversion of
     such Convertible Securities.

          (d) Inverse Proportional Adjustments to Exercise Price and Warrant
Shares. In the event of any adjustment in the number of Warrant Shares issuable
hereunder upon exercise, the Exercise Price shall be inversely proportionately
increased or decreased as the case may be, such that aggregate purchase price
for Warrant Shares upon full exercise of this Warrant shall remain the same.
Similarly, in the event of any adjustment in the Exercise Price hereunder,
including without limitation the adjustment to the Adjusted Price on the
one-year anniversary of the Commencement Date, the number of Warrant Shares
issuable hereunder upon exercise shall be inversely proportionately increased or
decreased as the case may be, such that aggregate purchase price for Warrant
Shares upon full exercise of this Warrant shall remain the same.

     14. Notices. If:

            (i)   the Company shall declare a dividend (or any other
                  distribution) on its Common Stock; or

            (ii)  the Company shall declare a special nonrecurring cash dividend
                  on or a redemption of its Common Stock; or

            (iii) the Company shall authorize the granting to all holders of the
                  Common Stock rights or warrants to subscribe for or purchase
                  any shares of capital stock of any class or of any rights; or

            (iv)  the approval of any stockholders of the Company shall be
                  required in connection with any reclassification of the Common
                  Stock of the Company, any consolidation or merger to which the
                  Company is a party, any sale or transfer of all or
                  substantially all of the assets of the Company, or any
                  compulsory share exchange whereby the Common Stock is
                  converted into other securities, cash or property; or

            (v)   the Company shall authorize the voluntary dissolution,
                  liquidation or winding up of the affairs of the Company;

     then the Company shall cause to be mailed to each Holder at their last
     addresses as they shall appear upon the Warrant register of the Company, at
     least 15 calendar days prior to the applicable record or effective date
     hereinafter specified, a notice stating (x) the date on which a record is
     to be taken for the purpose of such dividend, distribution, redemption,
     rights or warrants, or if a record is not to be taken, the date as of which
     the holders of Common Stock of record to be entitled to such dividend,
     distributions, redemption, rights or warrants are to be determined and/or
     (y) the date on which such reclassification, consolidation, merger, sale,
     transfer or share exchange is expected to become effective or close, and
     the date as of which it is expected that holders of Common Stock of record
     shall be entitled to exchange their shares of Common Stock for securities,

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     cash or other property deliverable upon such reclassification,
     consolidation, merger, sale, transfer, share exchange, dissolution,
     liquidation or winding up.

     15. Voluntary Adjustment by the Company. The Company may at its option, at
any time during the term of this Warrant, reduce but not increase the then
current Exercise Price to any amount and for any period of time deemed
appropriate by the Board of Directors of the Company.

     16. Notice of Adjustment. Whenever the number of Warrant Shares or number
or kind of securities or other property purchasable upon the exercise of this
Warrant or the Exercise Price is adjusted (including without limitation the
adjustment to the Adjusted Price), the Company shall promptly mail by registered
or certified mail, return receipt requested, to the holder of this Warrant a
notice setting forth the number of Warrant Shares (and other securities or
property) purchasable upon the exercise of this Warrant and the Exercise Price
of such Warrant Shares after such adjustment, setting forth a brief statement of
the facts requiring such adjustment and setting forth the computation by which
such adjustment was made.

     17. Authorized Shares. The Company covenants that during the period this
Warrant is outstanding and exercisable, it will reserve from its authorized and
unissued Common Stock a sufficient number of shares to provide for the issuance
of the Warrant Shares upon the exercise of any and all purchase rights under
this Warrant. The Company further covenants that its issuance of this Warrant
shall constitute full authority to its officers who are charged with the duty of
executing stock certificates to execute and issue the necessary certificates for
the Warrant Shares upon the exercise of the purchase rights under this Warrant.
The Company will take all such reasonable action as may be necessary to assure
that such Warrant Shares may be issued as provided herein without violation of
any applicable law or regulation, or of any requirements of the Principal Market
or any other domestic securities exchange or market upon which the Common Stock
may be listed.

     18. Exercise Limitation.

               (a) Notwithstanding anything to the contrary contained herein,
          the number of shares of Common Stock that may be acquired by the
          Holder upon exercise pursuant to the terms hereof shall not exceed a
          number that, when added to the total number of shares of Common Stock
          deemed beneficially owned by such Holder (other than by virtue of the
          ownership of securities or rights to acquire securities (including the
          Warrant Shares) that have limitations on the Holder's right to
          convert, exercise or purchase similar to the limitation set forth
          herein), together with all shares of Common Stock deemed beneficially
          owned (other than by virtue of the ownership of securities or rights
          to acquire securities that have limitations on the right to convert,
          exercise or purchase similar to the limitation set forth herein) by
          the Holder's "affiliates" (as defined in Rule 144 of the Securities
          Act) ("Aggregation Parties") that

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          would be aggregated for purposes of determining whether a group under
          Section 13(d) of the Exchange Act, exists, would exceed 9.9% of the
          total issued and outstanding shares of the Common Stock (the
          "Restricted Ownership Percentage"). Each Holder shall have the right
          (x) at any time and from time to time to reduce its Restricted
          Ownership Percentage immediately upon notice to the Company and (y)
          (subject to waiver) at any time and from time to time, to increase its
          Restricted Ownership Percentage immediately in the event of the
          announcement as pending or planned, of a Change in Control
          Transaction.

               (b) The Holder covenants at all times on each day (each such day
          being referred to as a "Covenant Day") as follows: During the balance
          of such Covenant Day and the succeeding sixty-one (61) days (the
          balance of such Covenant Day and the succeeding 61 days being referred
          to as the "Covenant Period") such Holder will not acquire shares of
          Common Stock pursuant to any right (including exercise of Warrants)
          existing at the commencement of the Covenant Period to the extent the
          number of shares so acquired by such Holder and its Aggregation
          Parties (ignoring all dispositions) would exceed:

               (i)  the Restricted Ownership Percentage of the total number of
                    shares of Common Stock outstanding at the commencement of
                    the Covenant Period, minus

               (ii) the number of shares of Common Stock actually owned by such
                    Holder and its Aggregation Parties at the commencement of
                    the Covenant Period.

               A new and independent covenant will be deemed to be given by the
          Holder as of each moment of each Covenant Day. No covenant will
          terminate, diminish or modify any other covenant. The Holder agrees to
          comply with each such covenant. This Section 18 controls in the case
          of any conflict with any other provision of the Purchase Agreement or
          any agreement entered into in connection therewith.

               The Company's obligation to issue Common Stock which would exceed
          such limits referred to in this Section 18 shall be suspended to the
          extent necessary until such time, if any, as shares of Common Stock
          may be issued in compliance with such restrictions.

               (c) Notwithstanding anything contained herein, in no event shall
          the Company issue shares of Common Stock hereunder to the extent that
          the total number of shares issued or deemed issued to the Holder under
          the Purchase Agreement would exceed 19.9% of the Company's issued and
          outstanding shares of Common Stock on the date of issuance hereof,
          unless otherwise approved by the Company's shareholders. Instead, the
          Company shall redeem this Warrant to the extent necessary at such
          consideration required to place the Holder in the same economic
          position they would have been if not for such limitation or as
          otherwise provided under the Purchase Agreement.

                                       12
<PAGE>

     19. Miscellaneous.

          (a) Issue Date; Choice of Law; Venue; Jurisdiction; No Jury Trial. THE
PROVISIONS OF THIS WARRANT SHALL BE CONSTRUED AND SHALL BE GIVEN EFFECT IN ALL
RESPECTS AS IF IT HAD BEEN ISSUED AND DELIVERED BY THE COMPANY ON THE DATE
HEREOF. THIS WARRANT SHALL BE BINDING UPON ANY SUCCESSORS OR ASSIGNS OF THE
COMPANY. THIS WARRANT WILL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND
GOVERNED BY THE LAWS OF THE STATE OF NEW YORK, EXCEPT FOR MATTERS ARISING UNDER
THE SECURITIES ACT, WITHOUT REFERENCE TO PRINCIPLES OF CONFLICTS OF LAW. EACH OF
THE PARTIES CONSENTS TO THE EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL
COURTS SITTING IN THE COUNTY OF NEW YORK IN THE STATE OF NEW YORK IN CONNECTION
WITH ANY DISPUTE ARISING UNDER THIS WARRANT AND HEREBY WAIVES, TO THE MAXIMUM
EXTENT PERMITTED BY LAW, ANY OBJECTION, INCLUDING ANY OBJECTION BASED ON FORUM
NON CONVENIENS, TO THE BRINGING OF ANY SUCH PROCEEDING IN SUCH JURISDICTION.
EACH PARTY HEREBY AGREES THAT IF THE OTHER PARTY TO THIS WARRANT OBTAINS A
JUDGMENT AGAINST IT IN SUCH A PROCEEDING, THE PARTY WHICH OBTAINED SUCH JUDGMENT
MAY ENFORCE SAME BY SUMMARY JUDGMENT IN THE COURTS OF ANY COUNTRY HAVING
JURISDICTION OVER THE PARTY AGAINST WHOM SUCH JUDGMENT WAS OBTAINED, AND EACH
PARTY HEREBY WAIVES ANY DEFENSES AVAILABLE TO IT UNDER LOCAL LAW AND AGREES TO
THE ENFORCEMENT OF SUCH A JUDGMENT. EACH PARTY TO THIS WARRANT IRREVOCABLY
CONSENTS TO THE SERVICE OF PROCESS IN ANY SUCH PROCEEDING BY THE MAILING OF
COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO SUCH PARTY
AT ITS ADDRESS IN ACCORDANCE WITH SECTION 19(C). NOTHING HEREIN SHALL AFFECT THE
RIGHT OF ANY PARTY TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. EACH
PARTY WAIVES ITS RIGHT TO A TRIAL BY JURY.

          (b) Modification and Waiver. This Warrant and any provisions hereof
may be changed, waived, discharged or terminated only with the written approval
of the holder hereof. Any amendment effected in accordance with this paragraph
shall be binding upon the Holder, each future holder of this Warrant and the
Company. No waivers of, or exceptions to, any term, condition or provision of
this Warrant, in any one or more instances, shall be deemed to be, or construed
as, a further or continuing waiver of any such term, condition or provision.

          (c) Notices. Any notice, request or other document required or
permitted to be given or delivered to the Holder or future holders hereof or the
Company shall be personally delivered or facsimiled or shall be sent by
reputable overnight courier or certified or registered mail, postage prepaid, to
the Holder or each such holder at its address as shown on the books of the
Company or to the Company at the address set forth in the Purchase Agreement.
All notices under this Warrant shall be deemed to have been given (i) in the
case of personal delivery or facsimile, on the date of such delivery, (ii) in
the case of mailing, on the fifth business day following the date of such
mailing, and (iii) in the case of overnight courier, upon receipt. A party may
from time to time change the address to which notices to it are to be delivered
or mailed hereunder by notice in accordance with the provisions of this Section
19(c).

                                       13
<PAGE>

          (d) Severability. Whenever possible, each provision of this Warrant
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Warrant is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
the validity, legality or enforceability of any other provision of this Warrant
in such jurisdiction or affect the validity, legality or enforceability of any
provision in any other jurisdiction, but this Warrant shall be reformed,
construed and enforced in such jurisdiction as if such invalid, illegal or
unenforceable provision had never been contained herein.

          (e) No Impairment. The Company shall not, by amendment of its
Certificate of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms of this Warrant, but shall at all times in good faith assist in the
carrying out of all such terms and in the taking of all such action as may be
necessary or appropriate in order to protect the rights of the Warrant holder
against impairment. Without limiting the generality of the foregoing, the
Company (a) shall not increase the par value of any Warrant Shares above the
amount payable therefor on such exercise, and (b) shall take all such action as
may be reasonably necessary or appropriate in order that the Company may validly
and legally issue fully paid and nonassessable Warrant Shares on the exercise of
this Warrant.

          (f) Specific Performance. The Company acknowledges and agrees that
irreparable damage would occur in the event that the Company failed to perform
any of the provisions of this Warrant in accordance with its specific terms. It
is accordingly agreed that the Holder shall be entitled to an injunction or
injunctions to prevent or cure breaches of the provisions of this Warrant and to
enforce specifically the terms and provisions hereof, this being in addition to
any other remedy to which the Holder may be entitled by law or equity.

                            [Signature Page Follows]

                                       14
<PAGE>

          IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed as of this 22nd day of May, 2001.

                                           VAXGEN, INC.

                                           By: ______________________________
                                           Name:
                                           Title:

ATTEST:

Sign:__________________________
       Print Name:

                                           HOLDER:

                                           HALIFAX FUND, L.P.

                                           By: ______________________________
                                           Name:
                                           Title:

                                       15
<PAGE>

                               NOTICE OF EXERCISE
             (To be executed by the Holder to exercise the right to
          purchase shares of Common Stock under the foregoing Warrant)

To:  VAXGEN, INC.
Re:  COMMON STOCK PURCHASE WARRANT issued to Halifax Fund, L.P. on May 22, 2001
     to purchase shares of Common Stock (the "Warrant")

(1)  CHECK ONE:

_______   (a) The undersigned hereby elects to purchase ________ shares of
          Common Stock of VAXGEN, INC. pursuant to Section 4(a) of the Warrant,
          and will tender payment of the purchase price in full, together with
          all applicable transfer taxes payable pursuant to the Warrant, if any.

                                       OR

_______   (b) The undersigned hereby exercises the Warrant with respect ________
          shares of Common Stock of VAXGEN, INC. on a cashless, "net basis"
          pursuant to Section 4(b) of the Warrant, and hereby instructs the
          Company to deliver _______ shares of Common Stock to the holder of the
          Warrant based on a Fair Market Value of $____.

(2)  The number of Warrant Shares issuable under the Warrant immediately prior
     this exercise:________________
     The number of Warrant Shares for which the Warrant is being exercised
     hereby:______________
     The number of Warrant Shares issuable under the Warrant immediately
     following this exercise:_________________

(3)  Please issue a certificate or certificates representing said shares of
     Common Stock in the name of the undersigned or in such other name as is
     specified below:

                      _____________________________________
                      Name
                      _____________________________________
                      Address
                      _____________________________________

(4)  Please issue a new Warrant for the unexercised portion of the attached
     Warrant in the name of the undersigned or in such other name as is
     specified below:

                      _____________________________________
                      Name
                      _____________________________________
                      Address
                      _____________________________________

(5)  The undersigned represents as of the date hereof that, after giving effect
     to the exercise of this Warrant pursuant to this Notice of Exercise, the
     undersigned will remain in compliance with Section 18(b) of the Warrant and
     not exceed the "Restricted Ownership Percentage" contained in Section 18(a)
     of the Warrant.

Dated: ______________                      Print Name of Holder:
                                           _____________________________________

                                           (Sign) By:___________________________
                                           Print Name:
                                           Print Title:

<PAGE>

                                 ASSIGNMENT FORM

                    (To assign the foregoing Warrant, execute
                 this form and supply the required information.
                 Do not use this form to exercise the Warrant.)

     FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto ________________________________ the right represented by the within
Warrant to purchase ____________ shares of Common Stock of VAXGEN, INC. to which
the within Warrant relates and appoints ________________ attorney to transfer
said right on the books of VAXGEN, INC. with full power of substitution in the
premises.

Dated:

_________________

                             __________________________________________________
                             (Signature must conform in all respects to name
                             of holder as specified on the face of the Warrant)

                             __________________________________________________
                             Address of Transferee

                             __________________________________________________

                             __________________________________________________

In the presence of:

________________________EXHIBIT 10.1

                          SECURITIES PURCHASE AGREEMENT

     SECURITIES PURCHASE AGREEMENT ("Agreement") dated as of May 23, 2001 by and
among VAXGEN, INC., a Delaware corporation (the "Company"), and each person or
entity listed as a Purchaser on Schedule I attached to this Agreement (each
individually a "Purchaser" and collectively the "Purchasers").

                              W I T N E S S E T H:

     WHEREAS, the Company desires to sell and issue to the Purchasers, and the
Purchasers, severally, but not jointly, wish to purchase from the Company, for
an aggregate purchase price of $20 million, (i) an aggregate of 20,000 shares of
the Company's Series A 6% Cumulative Convertible Preferred Stock, par value $.01
per share (all such shares being "Preferred Shares" or "Preferred Stock"), which
are convertible into shares ("Common Shares") of the Company's common stock,
$.01 par value ("Common Stock"), in accordance with the terms of a certain
Certificate of Designations (the "Certificate") attached hereto as Annex A, and
(ii) 5-year warrants, in the form attached hereto as Annex B, to purchase the
number of shares of Common Stock set forth therein (the "Warrants"), all on the
terms and conditions described below;

     WHEREAS, the Common Shares and the shares of Common Stock issuable upon
exercise of the Warrants (the "Warrant Shares") will carry registration rights,
pursuant to the terms of that certain Registration Rights Agreement to be
entered into between the Company and the Purchasers substantially in the form
annexed hereto as Annex C (the "Registration Rights Agreement").

     NOW, THEREFORE, in consideration of the foregoing premises and the
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:

                                   ARTICLE I

               Purchase and Sale of Preferred Shares and Warrants

     Section 1.1 Issuance of Preferred Shares and Warrants. Upon the following
terms and conditions, the Company shall issue and sell to each Purchaser
severally, and each Purchaser, severally, and not jointly, shall purchase from
the Company, the number of Preferred Shares and number of Warrants indicated
next to such Purchaser's name on Schedule I attached hereto.

          (a) Purchase Price. The purchase price for the Preferred Stock and
Warrants to be acquired by each Purchaser (the "Purchase Price") shall be the
Purchase Price set forth next to each such Purchaser's name on Schedule I. For
purposes of this Agreement, the term "Principal Market" shall mean the Nasdaq
National Market System or if the Common Stock is not quoted thereon, on such
exchange or market (which for purposes of this Agreement

                                       3
<PAGE>

shall mean the New York Stock Exchange, the American Stock Exchange, and the
NASDAQ Small Cap Market) upon which the Common Stock is principally traded or
quoted, and "Trading Day" shall mean (x) if the Common Stock is listed on the
New York Stock Exchange or the American Stock Exchange, a day on which there is
trading on such stock exchange, or (y) if the Common Stock is not listed on
either of such stock exchange but sale prices of the Common Stock are reported
on an automated quotation system, a day on which trading is reported on the
principal automated quotation system on which sales of the Common Stock are
reported, or (z) if the foregoing provisions are inapplicable, a day on which
quotations are reported by National Quotation Bureau Incorporated.

          (b) The Closing.

                    (i) The closing of the purchase and sale of the Preferred
               Shares and Warrants (the "Closing") shall take place at the
               offices of Kleinberg, Kaplan, Wolff & Cohen, P.C. ("KKWC"), on or
               about the date hereof (the "Closing Date").

                    (ii) On the Closing Date, the Company shall deliver, or
               shall cause to be delivered, to each Purchaser a certificate
               representing the Preferred Shares and the Warrants that such
               Purchaser is purchasing hereunder, each registered in the name of
               each such Purchaser or its nominee. On the Closing Date, each
               Purchaser shall deliver its Purchase Price by wire transfer to an
               account designated in writing by the Company. In addition, each
               party shall deliver all documents, instruments and writings
               required to be delivered by such party pursuant to this Agreement
               at or prior to the Closing. In addition, at the Closing, the
               Company shall pay to KKWC its legal fees and disbursements set
               forth in Section 3.4. At the option of the Purchasers, such fees
               and disbursements may be reflected as a credit towards the
               Purchase Price.

                                   ARTICLE II

                         Representations and Warranties

     Section 2.1 Representations and Warranties of the Company. The Company
hereby makes the following representations and warranties to the Purchasers as
of the date hereof and the Closing Date, except as set forth on the Schedule of
Exceptions attached hereto with each numbered schedule corresponding to the
Section number herein:

          (a) Organization and Qualification; Material Adverse Effect. The
Company is a corporation duly organized and in good standing under the laws of
the State of Delaware and has the requisite corporate power to own its
properties and to carry on its business as now being conducted. The Company does
not have any direct or indirect subsidiaries (defined as any entity of which the
Company owns, directly or indirectly, 50% or more of the equity or voting
power). The Company is duly qualified to transact business and is in good
standing as a foreign corporation in each jurisdiction in which the nature of
the business conducted or property owned by it makes such qualification
necessary other than those in which the failure so to qualify would not have a
Material Adverse Effect. "Material Adverse Effect" means any adverse effect on
the business, operations, prospects, properties or condition (financial or
otherwise) of the entity with respect to which such term is used and which is
(either alone or together with all

                                       4
<PAGE>

other adverse effects) material to such entity and other entities controlling or
controlled by such entity taken as a whole, and any material adverse effect on
any of the rights or remedies of the Purchasers or obligations of the Company
contemplated under this Agreement, the Registration Rights Agreement or any
other agreement or document contemplated hereby or thereby.

          (b) Authorization; Enforcement. (i) The Company has all requisite
corporate power and authority to enter into and perform this Agreement, the
Certificate, the Warrants and the Registration Rights Agreement (the
"Transaction Documents") and to issue the Preferred Shares and the Warrants
(collectively, the "Securities") in accordance with the terms hereof and
thereof, (ii) the execution and delivery of the Transaction Documents by the
Company and the consummation by it of the transactions contemplated hereby and
thereby, including the issuance of the Preferred Shares, Warrants, Common Shares
and Warrant Shares, have been duly authorized by all necessary corporate action,
and no further consent or authorization of the Company or its Board of Directors
(or any committee or subcommittee thereof) or stockholders is required, (iii)
the Transaction Documents have been duly executed and delivered by the Company,
and (iv) the Transaction Documents constitute valid and binding obligations of
the Company enforceable against the Company in accordance with their terms,
except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, liquidation or similar laws relating to,
or affecting generally the enforcement of creditors' rights and remedies or by
other equitable principles of general application, or to the extent that the
indemnification provisions contained in the Registration Rights Agreement may be
limited by applicable laws.

          (c) Capitalization. The authorized capital stock of the Company
consists of 20,000,000 shares of Common Stock and 20,000,000 shares of preferred
stock, of which there are 14,093,524 shares of Common Stock and no shares of
preferred stock issued and outstanding; and, except as set forth on Schedule
2.1(c), no shares of Common Stock and no shares of preferred stock were reserved
for issuance to persons other than the Purchasers. All of the outstanding shares
of the Company's Common Stock and preferred stock have been validly issued and
are fully paid and non-assessable. No shares of capital stock are entitled to
preemptive rights and, except as set forth on Schedule 2.1(c), there are no
outstanding options or outstanding warrants for shares of Common Stock
(excluding the Warrants). Except as set forth on Schedule 2.1(c), there are no
other scrip, rights to subscribe to, calls or commitments of any character
whatsoever relating to, or securities or rights exchangeable for or convertible
into, any shares of capital stock of the Company, or contracts, commitments,
understandings, or arrangements by which the Company is or may become bound to
issue additional shares of capital

                                       5
<PAGE>

stock of the Company or options, warrants, scrip, rights to subscribe to, or
commitments to purchase or acquire, any shares, or securities or rights
convertible or exchangeable into shares, of capital stock of the Company. The
Company has furnished the Purchasers with a true and correct copy of the
Company's Certificate of Incorporation (the "Charter"), as in effect on the date
hereof, and a true and correct copy of the Company's By-Laws, as in effect on
the date hereof (the "By-Laws").

          (d) Issuance of Securities. The Preferred Shares, Common Shares and
Warrant Shares are duly authorized and reserved for issuance and, upon issuance
in accordance with the terms of this Agreement, the Certificate, the Preferred
Shares and the Warrants, respectively, such Preferred Shares, Warrants, Common
Shares, and Warrant Shares, respectively, will be validly issued, fully paid and
non-assessable, will be free and clear of any and all liens, claims and
encumbrances, will be free of restrictions on transfer other than restrictions
on transfer under this Agreement, the Registration Rights Agreement and under
applicable state and federal securities laws, and, subject to the registration
of such shares in accordance with the applicable provisions of the Securities
Act of 1933, as amended (the "Securities Act" or the "Act") and the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), will be entitled to be
quoted and/or listed on the Principal Market (or the American Stock Exchange,
the New York Stock Exchange or Nasdaq Small Cap Market or collectively with the
Principal Market, the "Approved Markets"), and the holders of such Common Shares
and Warrant Shares shall be entitled to all rights and preferences then accorded
to a holder of Common Stock. The outstanding shares of freely tradable Common
Stock are currently quoted on the Principal Market.

          (e) No Conflicts. The execution, delivery and performance of the
Transaction Documents by the Company and the consummation by the Company of the
transactions contemplated hereby and thereby and the issuance of the Securities
and the issuance of the Common Shares and Warrant Shares do not and will not (i)
result in a violation of the Company's Charter or By-Laws or (ii) conflict with,
or constitute a default (or an event which with notice or lapse of time, or
both, would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation of, any material obligation
or loss of any material benefit under any material agreement, indenture, patent,
patent license or instrument to which the Company is a party (collectively,
"Company Agreements"), or (iii) result in a violation of any federal, state,
local or foreign law, rule, regulation, order, judgment or decree (including
federal and state securities laws and regulations) applicable to the Company or
by which any property or asset of the Company is bound

                                       6
<PAGE>

or affected, except (other than in the case of clause (i) above) where such
violation would not reasonably be expected to have a Material Adverse Effect.
The Company is not in violation or default in any material respect of any
provision of (i) its Charter and By-Laws, (ii) any Company Agreements or (iii)
any applicable laws, ordinances or regulations of any governmental entity,
except (other than in the case of clause (i) above) where such violation would
not reasonably be expected to have a Material Adverse Effect. Except for
filings, consents and approvals required under applicable state and federal
securities laws, rules or regulations, or the rules and regulations of the
Approved Markets and covered by the Registration Rights Agreement, the Company
is not required under federal, state, local or foreign law, rule or regulation
to obtain any consent, authorization or order of, or make any filing or
registration with, any court or local, state or federal governmental authority
in order for it to execute, deliver or perform any of its obligations under the
Transaction Documents, or to issue and sell the Securities, except (i) the
registration provisions provided in the Registration Rights Agreement and (ii)
the filing of the Certificate with the Secretary of State of the State of
Delaware.

          (f) SEC Documents; No Non-Public Information; Financial Statements.
The Common Stock of the Company is registered pursuant to Section 12(g) of the
Exchange Act and the Company and its subsidiaries have filed all reports,
schedules, forms, statements and other documents required to be filed by it with
the Securities and Exchange Commission ("SEC") pursuant to the reporting
requirements of the Exchange Act, including all such proxy information,
solicitation statement and registration statements, and any amendments thereto
required to have been filed as of the Closing Date (all of the foregoing
including filings incorporated by reference therein being referred to herein as
the "SEC Documents"). The Company has not directly or indirectly provided, and
will not directly or indirectly provide, to the Purchasers any material
non-public information or any information which, according to applicable law,
rule or regulation, should have been disclosed publicly by the Company but which
has not been so disclosed (excluding the transactions contemplated hereby to the
extent material). As of their respective filing times, the SEC Documents
complied in all material respects with the applicable requirements of the
Exchange Act and the Securities Act, as the case may be, and the rules and
regulations of the SEC promulgated thereunder and other federal, state and local
laws, rules and regulations applicable to such SEC Documents, and none of the
SEC Documents contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading. The SEC Documents contain all material information
concerning the Company,

                                       7
<PAGE>

and no event or circumstance has occurred prior to the date hereof or will have
occurred on the Closing Date which would require the Company to disclose such
event or circumstance in order to make the statements in the SEC Documents not
misleading but which has not, or will have not, been so disclosed.

          (g) Financial Statements. The financial statements (including, in each
case, any related notes) of the Company included in the SEC Documents complied
as to form and substance in all material respects with applicable accounting
requirements of the SEC and the published rules and regulations of the SEC or
other applicable SEC or NASDAQ rules and regulations with respect thereto. Such
financial statements were prepared in accordance with United States generally
accepted accounting principles applied on a consistent basis during the periods
involved (except (i) as may be otherwise indicated in such financial statements
or the notes thereto or (ii) in the case of unaudited interim statements, to the
extent they may not include footnotes, may be condensed or summary statements)
and fairly presented in all material respects, the financial position of the
Company as of the respective dates thereof and the results of operations and
cash flows for the periods indicated (subject, in the case of unaudited
statements, to normal year-end audit adjustments).

          (h) Principal Exchange/Market. The principal market on which the
Common Stock is currently quoted is the Principal Market.

          (i) No Material Adverse Change. Except as disclosed in the
Pre-Agreement SEC Documents, since December 31, 2000 (1) no Material Adverse
Effect has occurred or exists, (2) to the Company's knowledge no event or
circumstance has occurred that with notice or the passage of time or both is
reasonably likely to result in a Material Adverse Effect with respect to the
Company, and (3) no change in the financial condition or the assets, liabilities
or properties of the Company has occurred that could reasonably be foreseen to
have a Material Adverse Effect with respect to the Company.

          (j) No Undisclosed Liabilities. The Company has no liabilities or
obligations not disclosed in the Pre-Agreement SEC Documents (as defined below),
other than those liabilities incurred in the ordinary course of the Company's
business since December 31, 2000, which liabilities, individually or in the
aggregate, are not reasonably likely to have a Material Adverse Effect on the
Company.

          (k) No Undisclosed Events or Circumstances. To the best knowledge of
the Company, no material event or circumstance has occurred or exists with
respect to the Company or its prospects,

                                       8
<PAGE>

business, properties, operations or financial condition, of which, under
applicable law, rule or regulation, public disclosure or announcement is
reasonably likely to be required by the Company but which has not been so
publicly announced or disclosed.

          (l) No General Solicitation. Neither the Company, nor any of its
affiliates, or, to its knowledge, any person acting on its or their behalf, has
engaged in any form of general solicitation or general advertising (within the
meaning of Regulation D under the Securities Act) in connection with the offer
or sale of the Securities, the Common Shares or the Warrant Shares.

          (m) No Integrated Offering. Neither the Company, nor any of its
affiliates, nor to its knowledge 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 require registration
of the Securities or cause this offering of the Securities to the Purchasers to
be integrated with any prior offering of the Company's securities which would
require stockholder approval under the rules of the NASD or the market or
exchange on which the Common Stock is traded.

          (n) Form S-3. The Company is currently eligible to file the
Registration Statement (as defined in the Registration Rights Agreement) on Form
S-3 under the Securities Act and rules promulgated thereunder for the
transactions contemplated hereby. To the Company's knowledge, there exists no
facts or circumstances that would prohibit or delay the preparation and filing
of a registration statement on Form S-3 with respect to the Registrable
Securities (as defined in the Registration Rights Agreement).

          (o) Intellectual Property. The Company owns or possesses adequate
rights or licenses to use all trademarks, trade names, service marks, service
mark registrations, service names, patents, patent rights, patent applications,
copyrights, inventions, licenses, approvals, governmental authorizations, trade
secrets and confidential business information, computer software, and all other
proprietary or intellectual property rights (collectively, "Intellectual
Property") necessary to conduct its business as now conducted or currently
contemplated to be conducted in the future. Except for such expirations and
terminations that would not individually or in the aggregate have a Material
Adverse Effect, none of the Company's Intellectual Property rights have expired
or terminated, or are expected to expire or terminate within three (3) years
from the date of this Agreement. The Schedule of Exceptions contains a complete
list of patents (with descriptions and expiration dates) and pending patent
applications of the Company. Except as would not individually or in

                                       9
<PAGE>

the aggregate have a Material Adverse Effect, the Company does not have any
knowledge of any infringement, interference or misappropriation by the Company
or its subsidiaries of or with Intellectual Property or other similar rights of
others, or of any such development of similar or identical trade secrets or
technical information by others, and the Company is not aware of any claim,
action or proceeding being made or brought against or being threatened against
the Company regarding Intellectual Property or other infringement, interference
or misappropriation of Intellectual Property. The Company has taken reasonably
adequate measures to protect its Intellectual Property. To the knowledge of the
Company, no third party has interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of the
Company, except for such interferences, infringements, misappropriations or
conflicts, if any, as would not individually or in the aggregate have a Material
Adverse Effect.

          (p) Poison Pill Provisions. The Company does not have a stockholder
rights plan or other similar plan. None of the acquisition of the Securities nor
the deemed beneficial ownership of shares of Common Stock prior to, or the
acquisition of such shares pursuant to, the conversion or exercise of the
Preferred Stock or Warrants, respectively, will in any event under any
circumstance trigger the poison pill provisions of any plan or agreement, and
the Company agrees not to adopt or enter into any such plan or agreement which
could so trigger any such poison pill provisions.

          (q) No Litigation. Except as set forth in the reports or documents
filed at least 5 Trading Days prior to the Closing Date by the Company pursuant
to Section 13(a) or 15(d) of the Exchange Act (the "Pre-Agreement SEC
Documents"), no litigation or claim (including those for unpaid taxes) against
the Company is pending or, to the Company's knowledge, threatened, and, to the
Company's knowledge, no other event has occurred which, if determined adversely,
could reasonably be expected to have a Material Adverse Effect on the Company or
could reasonably be expected to materially and adversely affect the transactions
contemplated hereby. There is no legal proceeding described in the Pre-Agreement
SEC Documents that could reasonably be expected to have a Material Adverse
Effect on the Company.

          (r) Brokers. Except as set forth in Schedule 2.1(r), the Company has
taken no action which would give rise to any claim by any person for brokerage
commissions, finder's fees or similar payments by any Purchaser relating to this
Agreement or the transactions contemplated hereby. The Company shall be
responsible for any payments to the brokerage firms identified in Section
2.1(r).

                                       10
<PAGE>

          (s) Other Purchasers. Except as set forth on Schedule 2.1(s), there
are no outstanding securities issued by the Company that are entitled to
registration rights under the Securities Act. Except as set forth on Schedule
2.1(s), there are no outstanding securities issued by the Company that are
directly or indirectly convertible into, exercisable into, or exchangeable for,
shares of Common Stock of the Company, or that have anti-dilution or similar
rights that would be affected by the issuance of any of the Securities.

          (t) Certain Transactions. Except as disclosed in the Pre-Agreement SEC
Documents and except as disclosed on Schedule 2.1(t), none of the officers,
directors, or key employees of the Company is presently 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 corporation,
partnership, trust or other entity in which any officer, director, or any such
employee has a substantial interest or is an officer, director, trustee or
partner.

          (u) Insurance. The Company is insured against such losses and risks
and in such amounts as reasonably prudent and customary in the businesses in
which the Company is engaged by insurers reasonably selected by the Company. 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 its business
without a significant increase in cost.

          (v) No Reliance on Purchasers. The Company acknowledges and agrees
that each Purchaser is acting solely in the capacity of an arm's length
purchaser with respect to the Transaction Documents and the transactions
contemplated hereby and thereby. The Company further acknowledges that no
Purchaser is acting as a financial advisor or fiduciary of the Company (or in
any similar capacity) with respect to the Transaction Documents and the
performance hereunder and thereunder and the transactions contemplated hereby
and thereby. The Company further represents to the Purchasers that the Company's
decision to enter into the Transaction Documents and the performance hereunder
and thereunder has been based solely on the independent evaluation by the
Company and its representatives.

          (w) Foreign Corrupt Practices Act. Neither the Company, nor any
director, officer, agent, employee or other person acting on behalf of the
Company or any

                                       11
<PAGE>

subsidiary has, in the course of acting for, or on behalf of, the Company,
directly or indirectly used any corporate funds for any unlawful contribution,
gift, entertainment or other unlawful expenses relating to political activity;
directly or indirectly made any direct or indirect unlawful payment to any
foreign or domestic government or party official or employee from corporate
funds; violated or is in violation of any provision of the U.S. Foreign Corrupt
Practices Act of 1977, as amended; or directly or indirectly made any bribe,
rebate, payoff, influence payment, kickback or other unlawful payment to any
foreign or domestic government or party official or employee.

          (x) Application of Takeover Protections. The Company and its board of
directors have taken all necessary action, if any, in order to render
inapplicable any anti-takeover provision contained in the Company's Certificate
of Incorporation or By-Laws which is or could become applicable to the
Purchasers as a result of the transactions contemplated by the Transaction
Documents, including, without limitation, the Company's issuance of the Common
Stock and the Purchasers' ownership of Common Stock.

          (y) Acknowledgement of Dilution. The number of shares of Common Stock
issuable upon conversion of the Preferred Stock, and exercise of the Warrants
may increase substantially in certain circumstances. The Company acknowledges
that its obligation to issue shares of Common Stock in accordance with the
Transaction Documents is absolute and unconditional, regardless of the dilution
that such issuance may have on other shareholders of the Company.

          (z) Permits; Compliance. The Company has all franchises, grants,
authorizations, licenses, permits, easements, variances, exemptions, consents,
certificates, approvals and orders necessary to own, lease and operate its
properties and to carry on its business as it is now being conducted
(collectively, the "Company Permits"), except where failure to possess such
Company Permits would not have a Material Adverse Effect on the Company and
there is no action pending or, to the knowledge of the Company, threatened
regarding suspension or cancellation of any of the Company Permits except for
such Company Permits the failure of which to possess, or the cancellation or
suspension of which, would not, individually or in the aggregate, have a
Material Adverse Effect on the Company. To the best of its knowledge, the
Company is not in material conflict with, or in material default or material
violation of, any of the Company Permits. Since December 31, 2000, the Company
has not received any notification with respect to possible material conflicts,
material defaults or material violations of applicable laws.

          (aa) Internal Accounting Controls. The Company maintains a system of
internal accounting controls sufficient, in the judgment of the Company's
management, to provide reasonable assurance that (i) transactions are executed
in accordance with management's general or specific authorizations, (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain asset accountability, (iii) access to assets is permitted only in
accordance with management's general or specific authorization and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.

                                       12
<PAGE>

          (bb) Environmental Matters. Except as otherwise disclosed in the
Pre-Agreement SEC Documents, the Company is in compliance in all material
respects with all applicable state and federal environmental laws except where
any such non-compliance would not reasonably be expected to have a Material
Adverse Effect on the Company and no event or condition has occurred that may
interfere with the compliance by the Company or any of its subsidiaries with any
environmental law or that may give rise to any liability under any environmental
law that, individually or in the aggregate, would have a Material Adverse
Effect.

          (cc) Solvency.

               (i) Based on the financial condition of the Company as of the
Closing Date, including the receipt of the proceeds of the sale of the Preferred
Shares and Warrants as of such date, the Company's assets do not constitute
unreasonably small capital to carry out its business for the year 2001 as now
conducted and as proposed to be conducted including the Company's year 2001
capital needs taking into account the particular capital requirements of the
business conducted by the Company, and projected capital requirements and
capital availability thereof.

               (ii) The Company does not intend to incur debts beyond its
ability to pay such debts as they mature (taking into account the timing and
amounts of cash to be payable on or in respect of its debt). Based on the
financial condition of the Company as of the Closing Date, the current cash flow
of the Company, together with the proceeds the Company would receive, were it to
liquidate all of its assets, after taking into account all anticipated uses of
the cash, would be sufficient to pay all amounts on or in respect of its debt
when such amounts are required to be paid.

               (iii) Neither the Company nor any of its subsidiaries is subject
to any bankruptcy, insolvency or similar proceeding.

          (dd) Taxes. Except as disclosed in the Pre-Agreement SEC Documents,
since December 31, 2000 all federal, state, city and other tax returns, reports
and declarations required to be filed or extended by or on behalf of the Company
have been filed or extended, except those being contested in good faith and
disclosed in the Schedule of Exceptions, and all such filed returns are complete
and accurate in all material respects, and disclose all taxes (whether based
upon income, operations, purchases, sales, payroll, licenses, compensation,
business, capital, properties or assets or otherwise) required to be paid in the
periods covered thereby. All taxes required to be withheld by or on behalf of
the Company or any such subsidiary in connection with amounts paid or owing to
any employees, independent contractor, creditor or other party have been
withheld, and such withheld taxes have either been duly and timely paid to the
proper governmental authorities or set aside in accounts for such purposes.

          (ee) Title to Properties; Encumbrances. The Company owns (with good
and marketable title in the case of real property, except for such imperfections
of title as would not have a Material Adverse Effect) all the properties and
assets (whether real, personal, or mixed and whether tangible or intangible
("Company Property")) that it purports to own and that is material to the
business of the Company.

                                       13
<PAGE>

          (ff) MFN and Variable Rate Transactions. The Company has not entered
into any MFN Transaction or Variable Rate Transaction (other than transactions
entered into with the Purchasers), pursuant to which: (1) securities or
potential obligations to issue securities are still outstanding or (2) the
issuance, conversion, or exercise, as the case may be, of the Preferred Shares
or the Warrants trigger, or may in the future trigger, an adjustment. The term
"MFN Transaction" shall mean a transaction in which the Company issues or sells
any securities in a capital raising transaction or series of related
transactions (the "MFN Offering") which grants to a purchaser (the "MFN
Purchaser") the right to receive additional shares (including without limitation
as a result of a lower conversion, exchange or exercise price but excluding
customary antidilution protections) based upon subsequent transactions of the
Company on terms more favorable than those granted to such MFN Purchaser in such
MFN Offering. As used herein, term "Variable Rate Transaction" shall mean a
transaction in which the Company issues or sells (i) any debt or equity
securities that are convertible into, exchangeable or exercisable for, or
include (pursuant to the terms of the securities or the transaction documents
pursuant to which such securities were issued) the right to receive additional
shares of, Common Stock either (x) at a conversion, exercise or exchange rate or
other price that is based upon and/or varies with the trading prices of or
quotations for the Common Stock at any time after the initial issuance of such
debt or equity securities, or (y) with a fixed conversion, exercise or exchange
price that is subject to being reset at some future date after the initial
issuance of such debt or equity security or upon the occurrence of specified or
contingent events directly or indirectly related to the business of the Company
or the market for the Common Stock (but excluding standard stock split
anti-dilution provisions), or (ii) any securities of the Company pursuant to an
"equity line" structure which provides for the sale, from time to time, of
securities of the Company which are registered for resale under the Act.

     Section 2.2 Representations and Warranties of the Purchasers. Each
Purchaser as to itself only, hereby makes the following representations and
warranties to the Company as of the date hereof and the Closing Date:

          (a) Organization. Such Purchaser is duly organized, validly existing
and in good standing under the laws of the jurisdiction of its organization.

          (b) Authorization; Enforcement. (i) Such Purchaser has the requisite
power and authority to enter into and perform the Transaction Documents and to
purchase the Securities being sold to it hereunder, (ii) the execution and
delivery of the Transaction Documents by such Purchaser and the consummation by
it of the transactions contemplated thereby have been duly authorized by all
necessary corporate or partnership action, and (iii) the Transaction Documents
constitute valid and binding obligations of such Purchaser enforceable against
such Purchaser in accordance with their terms, except as such enforceability may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium,
liquidation or similar laws relating to, or affecting generally the enforcement
of creditors' rights and remedies or by other equitable principles of general
application.

          (c) No Conflicts. The execution, delivery and performance of the
Transaction Documents and the consummation by such Purchaser of the transactions
contemplated thereby do not and will not (i) result in a violation of such
Purchaser's organizational documents, or (ii) conflict with any agreement,
indenture or instrument to which

                                       14
<PAGE>

such Purchaser is a party, or (iii) result in a material violation of any law,
rule, or regulation, or any order, judgment or decree of any court or
governmental agency applicable to such Purchaser.

          (d) Purchase Representations.

               (i) Access to Other Information. Such Purchaser acknowledges that
the Company has made available to such Purchaser the opportunity to examine such
additional documents from the Company and to ask questions of, and receive full
answers from, the Company concerning, among other things, the Company, its
financial condition, its management, its prior activities and any other
information which such Purchaser considers relevant or appropriate in connection
with entering into this Agreement.

               (ii) Risks of Investment. Such Purchaser acknowledges that the
Securities have not been registered under the Act. Such Purchaser is capable of
assessing the risks of an investment in the Securities and is fully aware of the
economic risks thereof.

               (iii) Purchase Representation. Such Purchaser is purchasing the
Preferred Stock and Warrants, and may purchase the, Registrable Securities, for
its own account and not with a view to distribution in violation of any
securities laws; provided, however, that by making the representations herein,
such Purchaser does not agree to hold the Securities, Common Shares or Warrant
Shares for any minimum or other specific term and reserves the right to dispose
of the Securities at any time in accordance with federal and state securities
laws applicable to such disposition.

               (iv) Restricted Securities. Such Purchaser acknowledges and
understands that the terms of issuance have not been reviewed by the SEC or by
any state securities authorities and that the Securities have been issued in
reliance on the certain exemptions for non-public offerings under the Act, which
exemptions depend upon, among other things, the representations made and
information furnished by such Purchaser.

               (v) Ability to Bear Economic Risk. Such Purchaser is an
"accredited investor" as defined in Rule 501 of Regulation D, as amended, under
the Act, and that it (i) is able to bear the economic risk of its investment in
the Securities, (ii) is able to hold the Securities for an indefinite period of
time, and (iii) can afford a complete loss of its investment in the Securities.

          (e) Brokers. Except for the broker's fee of and payable by the
Company, such Purchaser has taken no action which would give rise to any claim
by any person for brokerage commissions, finder's fees or similar payments by
the Company relating to the Transaction Documents or the transactions
contemplated thereby. All fees and amounts payable to the brokers listed in
Section 2.1(r) shall be solely the responsibility of the Company.

                                  ARTICLE III

                                    Covenants

     Section 3.1 Registration and Listing; Effective Registration. For so long
as the Preferred Shares and Warrants are outstanding, the

                                       15
<PAGE>

Company will cause the Common Stock issuable upon the conversion or exercise
thereof to continue at all times to be registered under Section 12(b) or Section
12(g) of the Exchange Act, will comply in all respects with its reporting and
filing obligations under the Exchange Act, and will not take any action or file
any document (whether or not permitted by the Exchange Act or the rules
thereunder) to terminate or suspend its status as an issuer required to file
reports under the Exchange Act. Until such time as no Preferred Shares or
Warrants are outstanding, the Company shall continue the listing and/or quoting
of the Common Stock on the Principal Market or one of the other Approved Markets
and comply in all respects with the Company's reporting, filing and other
obligations under the bylaws or rules of the Approved Market on which the
Registrable Securities are listed and/or quoted, as the case may be. The Company
shall use best efforts to cause the Registrable Securities to be quoted on the
Principal Market no later than the registration of the Registrable Securities
under the Securities Act, and at all times shall use best efforts to continue
such listing(s) and/or quoting on one of the Approved Markets. As used herein
and in the other Transaction Documents, the term "Effective Registration" shall
mean: (i) the Company is in compliance with the Transaction Documents; (ii) the
resale of Registrable Securities (as defined in the Registration Rights
Agreement) is covered by an effective registration statement and such
registration statement (the "Registration Statement") is not subject to any
suspension or stop orders; (iii) the resale of such securities may be effected
pursuant to a current and deliverable prospectus that is not subject to any
blackout or similar circumstance; (iv) such securities are listed on an Approved
Market and are not subject to any trading suspension; (v) no Interfering Event
(as described in the Registration Rights Agreement) then exists; (vi) no
Purchaser is identified as an underwriter in the Registration Statement; and
(vii) the Company is not subject to any bankruptcy, insolvency or similar
proceeding.

     Section 3.2 Preferred Shares on Conversion and Warrants on Exercise.

          (a) Subject to the book entry procedures set forth in the Certificate,
upon any conversion by a Purchaser (or then holder of Preferred Shares) of the
Preferred Shares pursuant to the terms thereof where such holder surrenders a
stock certificate therefore, the Company shall issue and deliver to such
Purchaser (or holder) within five (5) Trading Days of the Conversion Date, a new
certificate for the number of Preferred Shares which such Purchaser (or holder)
has not yet elected to convert but which is evidenced in part by the
certificate(s) submitted to the Company in connection with such conversion (with
the number of and denomination of such new Certificates designated by such
Purchaser or holder).

          (b) Subject to the book-entry procedures set forth in the Warrants,
upon any partial exercise by a Purchaser (or then holder of the Warrants) of the
Warrants where such holder surrenders the Warrants therefore, the Company shall
issue and deliver to such Purchaser (or holder) within five (5) Trading Days of
the date on which such Warrants are

                                       16
<PAGE>

exercised, a new Warrant or Warrants representing the number of adjusted Warrant
Shares in accordance with the terms of Section 3 of such Warrants.

     Section 3.3 Replacement Preferred Share Certificates and Warrants.

          (a) The Preferred Shares Certificates held by any Purchaser (or then
holder) may be exchanged by such Purchaser (or such holder) at any time and from
time to time for Certificates with different denominations of a minimum of 100
shares representing an equal aggregate number of Preferred Shares, as requested
by such Purchaser (or such holder) upon surrendering the same. No service charge
will be made for such registration or transfer or exchange.

          (b) The Warrants will be exchangeable at the option of the Purchaser
(or then holder of the Warrants) at the office of the Company for other Warrants
of different denominations entitling the holder thereof to purchase in the
aggregate the same number of Warrant Shares as are purchasable under such
Warrants. No service charge will be made for such transfer or exchange.

     Section 3.4 Expenses. The Company shall pay to KKWC in immediately
available funds, at the Closing, upon receipt of an invoice for same (which may
include fees and expenses estimated to be incurred for the completion of the
transaction, including post-closing matters), all reasonable legal fees and
expenses incurred by the Purchasers in connection with the transactions
contemplated by this Agreement, the Registration Rights Agreement, the
Certificate and the Warrants, provided that the amount paid by the Company shall
not exceed $50,000. Any amounts in excess of $50,000 shall be paid to KKWC by
Purchasers. In lieu thereof, the Purchasers may pay such amounts due to KKWC,
with the amount of such payment being credited towards the payment of its
Purchase Price. In the event any amount paid by or on behalf of the Company is
ultimately less than actual fees and expenses, the Company shall (subject to the
$50,000 cap) promptly pay such deficiency to KKWC upon receipt of an invoice
therefor.

     Section 3.5 Securities Compliance. The Company shall take all action it
shall reasonably determine is necessary by applicable law, rule and regulation,
for the legal and valid issuance of the Securities. Without limiting the
foregoing, the Company shall, within one (1) Trading Day following the Closing
Date, issue a press release describing in detail the transactions contemplated
in the Transaction Documents, and within three (3) Trading Days following the
Closing Date, file a current report on Form 8-K with the SEC concerning the
transactions contemplated hereby and attaching this Agreement, together with all
Annexes hereto (excluding the Schedule of Exceptions), as exhibits to such Form
8-K. Such Form 8-K and any other Form 8-K and/or press release or other
publicity concerning the Transaction Documents shall contain such information as
reasonably requested by the Purchaser and be reasonably approved by the
Purchaser in writing prior to issuance. If the Company fails to so file a Form
8-K or issue a press release as required herein within the requisite time
period, the Purchaser at any

                                       17
<PAGE>

time may issue a press release covering the transactions contemplated by the
Transaction Documents.

     Section 3.6 Dividends or Distributions; Purchases of Equity Securities. For
so long as any Preferred Shares or Warrants remain outstanding, the Company
agrees that, without the prior written approval of the holders of at least 75%
of the Preferred Shares (which may be withheld in their sole discretion), it
shall not (a) declare or pay any dividends or make any distributions to any
holder or holders of Common Stock (other than dividends payable in Common Stock)
in their capacity as shareholders, or (b) purchase or otherwise acquire for
value, directly or indirectly, any shares of Common Stock or other equity
security of the Company (other than Preferred Shares or Warrants).

     Section 3.7 Notices. The Company agrees to provide all holders of Warrants
with copies of all notices and information, including without limitation notices
and proxy statements in connection with any meetings, that are provided to the
holders of shares of Common Stock, contemporaneously with the delivery of such
notices or information to such Common Stock holders.

     Section 3.8 Use of Proceeds. The Company agrees that the proceeds received
by the Company from the sale of the Preferred Stock and Warrants hereunder and
the sale of the shares of Common Stock issuable upon exercise of the Warrants
shall be used only for legally permitted general corporate purposes.

                                       18
<PAGE>

     Section 3.9 Notification of Additional Financings; Adjustments. The Company
agrees that, subject to any existing rights of first refusal described on
Schedule 3.9 hereto, until the first anniversary of the Closing Date, the
Purchasers shall have a right of first refusal with respect to all non-public
capital raising transactions, including without limitation all private
placements and private financings but excluding "equity-line" transactions (each
a "Financing Transaction"), as set forth in this Section 3.9. The Company shall
give advance written notice to the Purchasers, together with detailed
information regarding such offer or proposed sale (including without limitation
any term sheets or proposed negotiation) prior to any offer or sale of any of
debt or equity securities of the Company or its subsidiaries or of any
borrowings by the Company or any subsidiary in a Financing Transaction. The
Purchasers shall have 10 business days from receipt of such notice to deliver a
written notice to the Company that one or more of such Purchasers (or their
related designees) elects to exercise its right of first refusal. If, subsequent
to the Company giving notice to the Purchasers hereunder, the terms and
conditions of the proposed Financing Transaction are changed in any material
way, the Company shall be required to provide a new notice to the Purchasers
hereunder and the Purchasers shall have the right of refusal again to purchase
all of the securities in the offering on such changed terms and conditions as
provided hereunder. In such event, if such other Financing Transaction provides
for non-cash consideration, in whole or in part, from such other potential
purchaser(s), the Purchasers (or their related designees) shall still have the
right to participate in the Financing Transaction as provided herein, provided
that cash or cash equivalents may be substituted by the Purchasers for such
non-cash consideration. This right of first refusal shall continue even if the
Purchasers elect not to participate in one or more Financing Transactions.
Notwithstanding anything herein to the contrary, this right of first refusal
shall not apply to issuances of the Company's securities pursuant to (i) the
Company's current or future employee, director or bona fide consultant options
plans and/or compensation arrangements, (ii) strategic corporate alliances not
undertaken principally for financing purposes, or (iii) duly adopted employee
stock purchase plans. The foregoing right of first refusal shall be allocated
pro-rata among the Purchasers based on the number of Preferred Shares purchased.
The Company agrees that, until the first anniversary of the Closing Date,
neither the Company nor any of its subsidiaries shall enter into any
"equity-line" or similar transactions (including without limitation agreements
to purchase securities covered by a shelf registration statement) without the
prior written approval of the holders of at least 50% of the outstanding
Preferred Shares (which may be withheld in their sole discretion).

     Section 3.10 Reservation of Stock Issuable Upon Conversion of Preferred
Shares and Exercise of the Warrants. The Company shall at all times reserve and
keep available out of its authorized but unissued shares

                                       19
<PAGE>

of Common Stock, solely for the purpose of effecting the conversion of Preferred
Shares and exercise of the Warrants, such number of its shares of Common Stock
as shall from time to time be sufficient to effect the full conversion of all
Preferred Shares and the full exercise of all the Warrants, and if at any time
the number of authorized but unissued shares of Common Stock shall not be
sufficient to effect the full conversion of all Preferred Stock and the full
exercise of the Warrants, the Company will take such corporate action as may be
necessary to increase its authorized but unissued shares of Common Stock to such
number of shares as shall be sufficient for such purposes, including without
limitation engaging in best efforts to obtain the requisite shareholder
approval. Without in any way limiting the foregoing, the Company agrees to
reserve and at all times keep available solely for purposes of the conversion of
Preferred Shares and exercise of the Warrants such number of authorized but
unissued shares of Common Stock that is at least equal to 100% of the aggregate
shares issuable upon full conversion of the Preferred Stock, plus 100% of the
number of shares of Common Stock issuable upon exercise of the Warrants in full,
which numbers shall be appropriately adjusted for any stock split, reverse
split, stock dividend or reclassification of the Common Stock, provided that
after June 1, 2001 such percentages shall increase to 175%. If the Company falls
below the reserves specified in the immediately preceding sentence and does not
cure such non-compliance within 30 days of its start, then the Purchasers will
be entitled to the compensatory payments specified in Section 2(b)(i) of the
Registration Rights Agreement. If at any time the number of authorized but
unissued shares of Common Stock is not sufficient to effect the full conversion
of the Preferred Shares and the full exercise of the Warrants, the Purchasers
shall be entitled to, inter alia, the premium price redemption rights provided
in the Registration Rights Agreement. All calculations pursuant to this
paragraph shall be performed without regard to any restrictions or limitations
on beneficial ownership of Common Stock contained in the Certificate or
Warrants.

     Section 3.11 Best Efforts. The parties shall use their best efforts to
satisfy timely each of the conditions described in Article 3 of this Agreement.

     Section 3.12 Limitations on Transfers. The Company shall not contribute or
transfer its assets to any of its subsidiaries, other than a subsidiary that has
delivered its guarantee to the Purchasers in form and substance satisfactory to
the Purchasers.

     Section 3.13 Form D; Blue Sky Laws. The Company agrees to file a Form D
with respect to the Securities, as required under Regulation D of the Act and to
provide a copy thereof to each Purchaser promptly after such filing. The Company
shall, on or before the Closing Date, take such action as the Company shall have
reasonably determined is necessary

                                       20
<PAGE>

to qualify the applicable Securities for sale to the Purchasers at the Closing
pursuant to this Agreement under applicable securities or "blue sky" laws of the
states of the United States (or to obtain an exemption from such qualification),
and shall provide evidence of any such action so taken to each Purchaser on or
prior to the Closing Date.

     Section 3.14 Nasdaq Rule. Notwithstanding anything contained herein, the
Preferred Stock and Warrants shall not be convertible and exercisable to the
extent that in excess of 2,817,296 shares of Common Stock (19.99% of the Common
Stock issued and outstanding on the date hereof, which number shall be subject
to readjustment for any stock split, stock dividend or reclassification of the
Common Stock) (the "20% Cap") would be issued thereon, unless the Company
receives stockholder approval for such issuance. Each Purchaser shall be
entitled to receive the number of Registrable Securities equal to such
Purchaser's pro rata share of the 20% Cap (based upon its aggregate Purchase
Price hereunder). Once a Purchaser has received its total pro rata share upon
conversion of its Preferred Shares and exercise of its Warrants, and if the
Company shall not have complied with its obligations to obtain the stockholder
approval described below by the date set forth below, it shall have the right to
compel the Company to redeem its remaining Preferred Shares and Warrants at a
price equal to the Premium Redemption Price (as defined in the Registration
Rights Agreement) plus accrued but unpaid dividends and liquidated damages in
effect at that time. If a Purchaser has converted and exercised all of its
Preferred Shares and Warrants, but has not depleted the total number of pro rata
shares allocated to it, its remaining pro rata shares shall be reallocated
amongst the Purchasers still holding Preferred Shares and Purchasers Warrants on
a pro rata basis. The Company agrees that if at any point in time (the "Trigger
Date") the number of Common Shares issuable upon full conversion of all the
Preferred Shares and full exercise of all the Warrants then outstanding (without
regard to any limitations on beneficial ownership contained in the Certificate
or Warrants), together with the number of Common Shares already issued by the
Company upon conversion of Preferred Shares and exercise of Warrants, would
exceed 85% of the 20% Cap, then the Company shall promptly call a shareholders
meeting to obtain shareholder approval for the issuance of Common Shares
hereunder in excess of the 20% Cap. If such shareholder approval is not obtained
within 60 days of the Trigger Date, then each holder of Preferred Shares and
Warrants shall have the right to sell to the Company such number of Preferred
Shares and/or Warrants which cannot be converted or exercised due to such 20%
Cap limitation at a redemption price equal to the Premium Redemption Price.
Subject to any consent or approval rights of the Purchasers hereunder, in the
event the Company contemplates an offering of its equity or debt securities
within six months of the date hereof, the Company agrees that, upon the
reasonable request of at least 75% of the Purchasers, the Company shall first
disclose the terms and conditions and other relevant facts of such proposed
transaction

                                       21
<PAGE>

to Nasdaq and seek to obtain from Nasdaq its assurance that such transaction
will not be integrated with the offering which is the subject of this Agreement
for purposes of the Nasdaq rules requiring shareholder approval of the issuance
of 20% or more of an issuer's outstanding common stock. In the event that (i)
the Company fails to seek such assurances, or (ii) the Company proceeds with
such other transaction after not receiving a response from Nasdaq and such other
transaction is integrated with this offering, then, at the election of a
Purchaser, the Company shall redeem within five (5) days any or all Securities
at the Premium Redemption Price.

     Section 3.15 Transactions With Affiliates. The Company agrees that any
transaction or arrangement between it or any of its subsidiaries and any
affiliate or employee of the Company shall be effected on an arms' length basis
in accordance with customary commercial practice and, except with respect to
grants of options and stock to service providers, including employees, shall be
approved by a majority of the Company's outside directors.

     Section 3.16 Press Release. Purchasers shall have the opportunity to review
any press release in connection with the transactions contemplated hereby prior
to its issuance.

     Section 3.17 Reporting Lack of Effective Registration. The Company shall
promptly notify each Purchaser in writing if there shall ever be a lack of
Effective Registration, as well as when Effective Registration is
re-established.

     Section 3.18 Rule 144. With a view to making available to the Purchasers
the benefits of Rule 144 promulgated under the Securities Act or any other
similar rule or regulation of the SEC that may at any time permit the Purchasers
to sell securities of the Company to the public without registration ("Rule
144"), the Company agrees, until such time as all of the Securities may be
freely sold to the public under Rule 144(k) (or any successor thereto), to:

          (a) make and keep public information available, as those terms are
understood and defined in Rule 144;

          (b) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act
so long as the Company remains subject to such requirements (it being understood
that nothing herein shall limit any of the Company's other obligations under
this Agreement and the filing of such reports and other documents is required
for the applicable provisions of Rule 144); and

          (c) furnish to each Purchaser so long as such Purchaser owns
Securities or Registrable Securities, promptly upon request, (i) a written
statement by the Company that it has complied with the reporting requirements of
Rule 144, the Securities Act and the Exchange Act, (ii) a copy of the most
recent annual or quarterly report of the Company and such other reports and
documents so filed by the Company, and (iii) such other information

                                       22
<PAGE>

as may be reasonably requested to permit the Purchasers to sell such securities
pursuant to Rule 144 without registration.

                                   ARTICLE IV

                             Conditions to Closings

     Section 4.1 Conditions Precedent to the Obligation of the Company to Sell.
The obligation hereunder of the Company to issue and/or sell the Preferred
Shares and Warrants to the Purchasers at the Closing is subject to the
satisfaction at or before the Closing of each of the applicable conditions set
forth below. These conditions are for the Company's sole benefit and may be
waived by the Company at any time in its sole discretion.

          (a) Accuracy of the Purchasers' Representations and Warranties. The
representations and warranties of the Purchasers will be true and correct as of
the date when made and as of the Closing Date.

          (b) Performance by the Purchasers. The Purchasers shall have performed
all agreements and satisfied all conditions required to be performed or
satisfied by the Purchasers at or prior to the Closing including payment of the
applicable purchase price.

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

     Section 4.2 Conditions Precedent to the Obligation of the Purchasers to
Purchase. The obligation hereunder of the Purchasers to acquire and pay for the
Preferred Shares and Warrants at the Closing is subject to the satisfaction, at
or before the Closing, of each of the applicable conditions set forth below.
These conditions are for the Purchasers' benefit and may be waived by the
Purchasers at any time in their sole discretion.

          (a) Accuracy of the Company's Representations and Warranties. The
representations and warranties of the Company shall be true and correct as of
the date when made and as of the Closing date as though made at that time
(except for representations and warranties expressly as of an earlier date,
which shall be true and correct in all material respects as of such date).

                                       23
<PAGE>

          (b) Performance by the Company. The Company shall have performed all
agreements and satisfied all conditions required to be performed or satisfied by
the Company at or prior to the Closing, including, without limitation, delivery
of the Preferred Shares and Warrants.

          (c) Trading and/or Quotation. Trading in and/or quotation of the
Company's Common Stock shall not have been suspended by the SEC and trading in
securities generally as reported by the Principal Market (or other Approved
Market) shall not have been suspended or limited, and the Common Stock shall be
listed on an Approved Market.

          (d) No Injunction. No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent jurisdiction which
prohibits the consummation of any of the transactions contemplated by
Transaction Documents. The NASD shall not have objected or indicated that it may
object to the consummation of any of the transactions contemplated by this
Agreement.

          (e) Opinion of Counsel. The Purchasers shall have received an opinion
of counsel to the Company in the applicable form attached hereto as Exhibit
4.2(e) and such other opinions, certificates and documents as the Purchasers or
their counsel shall reasonably require incident to the closing.

          (f) Registration Rights Agreement. The Company and the Purchasers
shall have executed and delivered the Registration Rights Agreement in the form
and substance of Exhibit 4.2(f) attached hereto.

          (g) Officer's Certificate. The Company shall have delivered to the
Purchasers a certificate in form and substance satisfactory to the Purchasers
and the Purchasers' counsel, executed by an officer of the Company, certifying
as to satisfaction of applicable closing conditions, incumbency of signing
officers, and the true, correct and complete nature of the Certificate of
Incorporation, By-laws, good standing and authorizing resolutions of the
Company.

          (h) Filed Certificate. The Company shall have delivered to the
Purchasers a copy of the filed Certificate stamped by the Secretary of State's
office of the State of Delaware.

          (i) Miscellaneous. The Company shall have delivered to the Purchasers
such other documents relating to the transactions

                                       24
<PAGE>

contemplated by this Agreement as the Purchasers or their counsel may reasonable
request.

     Section 4.3 Closing Date Deliveries.

          (a) On the Closing Date, the Company shall deliver to the Purchaser:

               (i) Certificate of Designations in the form of Annex A and
certificates for the Preferred Shares;

               (ii) Warrants in the form attached as Annex B;

               (iii) The certificate referred to in Section 4.2(g) above;

               (iv) The executed Registration Rights Agreement in the form
attached as Annex C; and

               (v) The opinion of counsel referred to in Section 4.2(e) above.

          (b) On the Closing Date, the Purchasers shall deliver to the Company:

               (i) The Purchase Price set forth on Schedule I hereto; and

               (ii) The executed Registration Rights Agreement.

                                   ARTICLE V

                                Legend and Stock

     The Preferred Shares and Warrants issued hereunder shall be stamped or
otherwise imprinted with a legend substantially in the following form:

          THESE SECURITIES HAVE NOT BEEN REGISTERED FOR OFFER OR SALE UNDER THE
          SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE
          SOLD OR OFFERED FOR SALE EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
          STATEMENT UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAW OR AN
          APPLICABLE EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS.

     The Company agrees to reissue Preferred Shares and reissue or issue
Warrants, as the case may be, without the legend set forth above at such time as
(i) the holder thereof is permitted to dispose of such Preferred Shares and/or
Warrants pursuant to Rule 144 under the Securities Act, or (ii) such Preferred
Shares and/or Warrants are sold to a purchaser or purchasers who (in

                                       25
<PAGE>

the opinion of counsel to the seller or such purchaser(s), in form and substance
reasonably satisfactory to the Company and its counsel) are able to dispose of
such shares publicly pursuant to an Effective Registration or exemption.

     Prior to the Registration Statement (as defined in the Registration Rights
Agreement) being declared effective, or Rule 144(k) becoming available, any
Common Shares issued pursuant to conversion of Preferred Shares or Warrant
Shares issued upon exercise of the Warrants shall bear a legend in substantially
the same form as the legend indicated above. Upon such Registration Statement
becoming effective, the Company agrees to issue or cause to be issued new
certificates representing such Common Shares and Warrant Shares without such
legend as soon as reasonably practicable but no later than five (5) Trading Days
thereafter. Upon Rule 144(k) under the Act becoming available, the Company
agrees to issue or cause to be issued new certificates representing such Common
Shares and Warrant Shares without such legend as soon as reasonably practicable
following any holders' request and subject to such legend removable being
permissible under the Securities Act. Any Common Shares issued pursuant to
conversion of Preferred Shares or shares of Common Stock issued upon exercise of
the Warrants after the Registration Statement has become effective shall be free
and clear of any legends, transfer restrictions and stop orders. Notwithstanding
the removal of such legend, each Purchaser agrees to sell the Common Shares and
Warrant Shares represented by the new certificates in accordance with the
applicable prospectus delivery requirements (if copies of a current prospectus
are provided to such Purchaser by the Company) or in accordance with an
exemption from the registration requirements of the Act.

     Nothing herein shall limit the right of any holder to pledge these
securities pursuant to a bona fide margin account or lending arrangement entered
into in compliance with law, including applicable securities laws.

                                   ARTICLE VI

                                 Indemnification

     In consideration of the Purchasers' execution and delivery of this
Agreement and the Registration Rights Agreement and in addition to all of the
Company's other obligations under the Transaction Documents, the Company shall
defend, protect, indemnify and hold harmless the Purchasers and all of their
partners, officers, directors, employees, members and direct or indirect
Purchasers and any of the foregoing persons' agents or other representatives
(including, without limitation, those retained in connection with the
transactions contemplated by this Agreement) (collectively, the "Indemnitees")
from and against any and all actions, causes of action, suits, claims, losses,
costs, penalties, fees, liabilities and damages, and expenses in connection
therewith (irrespective of whether any such Indemnitee is a party to the action
for which indemnification hereunder is sought), and including reasonable
attorneys' fees and disbursements (the "Indemnified Liabilities"), incurred by
any Indemnitee as a result of, or arising out of, or relating to (a) any
misrepresentation or breach of any representation or warranty made by the
Company in the Transaction Documents or any other certificate or document
contemplated hereby or thereby, (b) any breach of any covenant, agreement or
obligation of the

                                       26
<PAGE>

Company contained in the Transaction Documents or any other certificate or
document contemplated hereby or thereby, (c) any cause of action, suit or claim
brought or made against such Indemnitee by a third party and arising out of or
resulting from (i) the execution, delivery, performance, breach by the Company
or enforcement of the Transaction Documents or any other certificate, instrument
or document contemplated hereby or thereby, (ii) any transaction financed or to
be financed in whole or in part, directly or indirectly, with the proceeds of
the issuance of the Securities or (iii) the status of the Purchaser or holder of
the Securities or Warrants as Purchasers in the Company, and (d) the enforcement
of this Section.

                                  ARTICLE VIA

                     Provisions Regarding Societe Generale

     Section 6A.1 No Influence on Business. Societe Generale ("SG")(whether in
its capacity as holder of the Preferred Shares, the Warrants and/or the Common
Shares or Warrant Shares or otherwise) covenants and agrees with the Company
that it will not: (a) in any manner exercise or attempt to exercise a
controlling influence over the management or policies of the Company or attempt
to influence the business activities or decisions of the Company; (b) propose a
director or slate of directors to serve on the board of directors of the
Company; (c) have or seek to have a representative of SG be appointed to serve
as a director of the Company or participate as an observer at meetings of the
board of directors (or committees thereof) or have or seek to have any employee
or representative of SG serve as an officer, agent or employee of the Company;
(d) attempt to influence the dividend policies or practicies of the Company; (e)
solicit or participate in soliciting proxies with respect to any matter
presented to the shareholders of the Company; (f) dispose or threaten to dispose
of the Preferred Shares, Warrants, Common Shares or Warrant Shares to any third
party in any manner as a condition to specific action or non-action by the
Company; or (g) enter into any joint venture, enterprise or undertaking of any
kind with the Company.

     Section 6A.2 Limitations on Resales. SG covenants and agrees that it
(together with its Affiliates) will not transfer the Preferred Shares or the
Warrants to any Person (together with such Person's Affiliates), other than the
Company or Affiliates of SG, in a transaction or series of transactions, in an
aggregate principal amount in excess of such principal amount as would be
convertible or exercisable at the date of transfer into in excess of 2% of the
issued and outstanding shares of Common Stock of the Company (based upon, in the
case of the Preferred Shares, the applicable Conversion Price (as defined in the
Certificate) and number of shares of Common Stock of the Company issued and
outstanding on the applicable date of transfer and without giving effect to any
limitations on conversion or exercise set forth in the Certificate and the
Warrants). SG further covenants and agrees that it will not knowingly transfer
to any Person (together with such Person's Affiliates), other than the Company
or Affiliates of SG, in a transaction or series of transactions. Common Shares
or Warrant Shares in an aggregate amount in excess of 2% of the issued and
outstanding shares of Common Stock of the Company (based upon the number of
shares of Common Stock of the Company issued and outstanding on the applicable
date of transfer); in furtherance thereof, SG covenants and agrees that it shall
not during any five (5) consecutive trading days transfer Common Shares or
Warrant Shares in secondary market transactions in which the identity of the
acquiror is not known to SG in an amount in excess of 2% of the issued and
outstanding shares of Common Stock of the Company (based upon the number of
shares of Common Stock of the Company issued and outstanding on the applicable
date of transfer.) SG covenants and agrees that the foregoing transfers to third
parties shall be made in bona fide, arms-length transactions and that upon any
such transfer, it will not retain the power to control the disposition of the
securities transfered or, in the case of Common Shares or Warrant Shares, to
direct the voting with respect thereto.

     Section 6A.3 Restricted Ownership Percentage. Notwithstanding Section 5(1)
of the Certificate and Section 18 of the Warrant issued to SG, the term
"Restricted Ownership Percentage" as used in such provisions, shall, with
respect to SG only, refer to 4.9% and not 9.9%.

                                       27
<PAGE>

                                  ARTICLE VII

                          Governing Law; Miscellaneous.

     Section 7.1 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
CONTRACTS TO BE EXECUTED AND PERFORMED EXCLUSIVELY IN NEW YORK. EACH PARTY
HEREBY IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE STATE AND
FEDERAL COURTS SITTING IN THE CITY OF NEW YORK, BOROUGH OF MANHATTAN, FOR THE
ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR WITH ANY
TRANSACTION CONTEMPLATED HEREBY OR DISCUSSED HEREIN, AND HEREBY IRREVOCABLY
WAIVES, AND AGREES NOT TO ASSERT IN ANY SUIT, ACTION OR PROCEEDING, ANY CLAIM
THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF ANY SUCH COURT, THAT
SUCH SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE
VENUE OF SUCH SUIT, ACTION OR PROCEEDING IS IMPROPER. EACH PARTY HEREBY
IRREVOCABLY WAIVES PERSONAL SERVICE OF PROCESS AND CONSENTS TO PROCESS BEING
SERVED IN ANY SUCH SUIT, ACTION OR PROCEEDING BY MAILING A COPY THEREOF TO SUCH
PARTY AT THE ADDRESS FOR SUCH NOTICES TO IT UNDER THIS AGREEMENT AND AGREES THAT
SUCH SERVICE SHALL CONSTITUTE GOOD AND SUFFICIENT SERVICE OF PROCESS AND NOTICE
THEREOF. NOTHING CONTAINED HEREIN SHALL BE DEEMED TO LIMIT IN ANY WAY ANY RIGHT
TO SERVE PROCESS IN ANY MANNER PERMITTED BY LAW. EACH PARTY HEREBY WAIVES ALL
RIGHTS TO TRIAL BY JURY.

     Section 7.2 Counterparts. This Agreement may be executed in two or more
identical counterparts, all of which shall be considered one and the same
agreement and shall become effective when counterparts have been signed by each
party and delivered to the other party; provided that a facsimile signature
shall be considered due execution and shall be binding upon the signatory
thereto with the same force and effect as if the signature were an original, not
a facsimile signature.

     Section 7.3 Headings. The headings of this Agreement are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Agreement.

     Section 7.4 Severability. If any provision of this Agreement shall be
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement in that jurisdiction or the validity or
enforceability of any provision of this Agreement in any other jurisdiction.

     Section 7.5 Entire Agreement; Amendments; Waivers.

          (a) This Agreement supersedes all other prior oral or written
agreements between the Purchasers, the Company, their affiliates and persons
acting on their behalf with respect to the matters discussed herein, and this
Agreement and the instruments referenced herein (including the other Transaction
Documents) contain the entire understanding of the parties with respect to the
matters covered herein and therein. No provision of this Agreement may be
amended other than by an instrument in writing signed by the Company and the
Purchaser, and no provision hereof may be waived other than by an instrument in
writing signed by the party against whom enforcement is sought. Any Purchaser
may at any time elect, by notice to the Company, to waive (whether permanently
or temporarily, and subject to such conditions, if any, as such Purchaser may
specify in such notice) any of their respective rights (but not obligations)
under any of the Transaction Documents to acquire shares of Common Stock from
the Company, in which event such waiver shall be binding against such Purchaser
in accordance with its terms.

     Section 7.6 Notices. Any notices, consents, waivers or other communications
required or permitted to be given under the terms of this Agreement must be in
writing, must be delivered by (i) courier, mail or hand delivery or (ii)
facsimile, and will be deemed to have been delivered upon receipt. The addresses
and facsimile numbers for such communications shall be:

     If to the Company:

               VaxGen, Inc.
               1000 Marina Blvd. Suite 200
               Brisbane, California  94005
               Telephone:  650-624-1000
               Facsimile:  650-624-1007
               Attention:  Carter A. Lee

                                       28
<PAGE>

     with a copy to:

               Gray Cary Ware & Freidenrich LLP
               999 Third Avenue, Suite 4000
               Seattle, Washington  98104-4033
               Telephone:  206-839-4800
               Facsimile:  206-839-4801
               Attention:  John M. Steel

     If to the Purchasers:

               To each Purchaser at the address and/or fax number set forth in
               Schedule I of this Agreement.

     with a copy to:

               Kleinberg, Kaplan, Wolff & Cohen, P.C.
               551 Fifth Avenue
               New York, New York 10176
               Telephone:  212-986-6000
               Facsimile:  212-986-8866
               Attention:  Peter J. Weisman, Esq.

     Each party shall provide five (5) days prior written notice to the other
party of any change in address, telephone number or facsimile number. Written
confirmation of receipt (A) given by the recipient of such notice, consent,
waiver or other communication, (B) mechanically or electronically generated by
the sender's facsimile machine containing the time, date and recipient facsimile
number or (C) provided by a nationally recognized overnight delivery service,
shall be rebuttable evidence of personal service, receipt by facsimile or
receipt from a nationally recognized overnight delivery service in accordance
with clause (i), (ii) or (iii) above, respectively.

     Section 7.7 Successors and Assigns. Except as otherwise provided herein,
this Agreement shall be binding upon and inure to the benefit of the parties and
their respective successors and assigns. A Purchaser may assign some or all of
its rights hereunder without the consent of the Company in connection with any
sale or transfer of all or any portion of the Securities held by such Purchaser.
The Company shall not assign this Agreement or any rights or obligations
hereunder without the prior written consent of the Purchasers, including by
merger or consolidation.

     Section 7.8 No Third Party Beneficiaries. This Agreement is intended for
the benefit of the parties hereto and their respective permitted

                                       29
<PAGE>

successors and assigns, and is not for the benefit of, nor may any provision
hereof be enforced by, any other person.

     Section 7.9 Survival. The representations, warranties and agreements of the
Company and the Purchasers contained in the Agreement shall survive the Closing.

     Section 7.10 Further Assurances. Each party shall do and perform, or cause
to be done and performed, all such further acts and things, and shall execute
and deliver all such other agreements, certificates, instruments and documents,
as the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.

     Section 7.11 Remedies. Each Purchaser and each permitted assignee shall
have all rights and remedies set forth in this Agreement, the Certificate, the
Warrants and the Registration Rights Agreement and all rights and remedies which
such holders have been granted at any time under any other agreement or contract
and all of the rights which such holders have under any law. Any person having
any rights under any provision of this Agreement shall be entitled to enforce
such rights specifically (without posting a bond or other security), to recover
damages by reason of any breach of any provision of this Agreement and to
exercise all other rights granted by law. Each Purchaser and each permitted
assignee without prejudice may withdraw, revoke or suspend its pursuit of any
remedy at any time prior to its complete recovery as a result of such remedy.

     Section 7.12 Days. Unless the context refers to "business days" or "trading
days," all references herein to "days" shall mean calendar days.

     Section 7.13 Rescission and Withdrawal Right. Notwithstanding anything to
the contrary contained in (and without limiting any similar provisions of) the
Transaction Documents, wherever the Purchasers exercise a right, election,
demand or option under a Transaction Document and the Company does not timely
perform its related obligations within the periods therein provided, then the
Purchasers may rescind or withdraw, in their sole discretion from time to time
upon written notice to the Company, any such notice, demand or election in whole
or in part without prejudice to its future actions and rights.

     Section 7.14 Obligations Absolute. The Company's obligations under the
Transaction Documents are unconditional and absolute and not subject to any
right of set off, counterclaim, delay or reduction.

     Section 7.15 Publicity. Except for the disclosure specified in Section 3.5,
the Company agrees that it will not disclose, and will not include in any public
announcement, the name of any Purchaser without

                                       30
<PAGE>

the express written agreement of such Purchaser, unless and until the Company
reasonably believes such disclosure is required by law or applicable regulation,
and then only to the extent of such requirement. The Company agrees that it will
deliver a copy of any public announcement regarding the matters covered by this
Agreement or any agreement and document executed herewith to each Purchaser and
any public announcement including the name of an Purchaser to such Purchaser,
reasonably in advance of the release of such announcements.

     Section 7.16 Like Treatment of Purchasers and Holders. Neither the Company
nor any of its affiliates shall, directly or indirectly, pay or cause to be paid
any consideration (immediate or contingent), whether by way of interest, fee,
payment for the redemption, conversion of Preferred Shares or exercise of the
Warrants, or otherwise, to any Purchaser or holder of Securities, for or as an
inducement to, or in connection with the solicitation of, any consent, waiver or
amendment of any terms or provisions of the Transaction Documents, unless such
consideration is required to be paid to all Purchasers or holders of Securities
bound by such consent, waiver or amendment. The Company shall not, directly or
indirectly, redeem any Securities unless such offer of redemption is made pro
rata to all Purchasers or holders of Securities, as the case may be, on
identical terms.

     Section 7.17 Actions of Purchasers. Notwithstanding anything herein to the
contrary, the actions and obligations of the Purchasers hereunder shall at all
times be considered several and not joint, and the Purchasers are not, under any
circumstances, agreeing to act jointly with respect to the Securities or any of
their actions or obligations under the Transaction Documents.

                                    * * * * *

                            [Signature Page Follows]

                                       31
<PAGE>

     IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase
Agreement to be duly executed as of the date and year first above written.

                                     VAXGEN, INC.

                                     By:____________________________________
                                          Name:
                                          Title:

                                     PURCHASERS:

                                     HALIFAX FUND, L.P.

                                     By:____________________________________
                                          Name:
                                          Title:

                                     SOCIETE GENERALE

                                     By:____________________________________
                                        Name:
                                        Title:

                                     SDS MERCHANT FUND, L.P.

                                     By:____________________________________
                                        Name:
                                        Title:

<PAGE>

                                     VELOCITY INVESTMENT PARTNERS LTD.

                                     By:____________________________________
                                        Name:
                                        Title:

                 Signature page to Securities Purchase Agreement

                                       34
<PAGE>

List of Schedules

Schedule I                  List of Purchasers
Schedule of Exceptions

List of Exhibits

Exhibit 4.2(e)              Opinion of Counsel

Annexes

Annex A                     Certificate of Designations

Annex B                     Warrant

Annex C                     Registration Rights Agreement

                                       35
<PAGE>

                                   SCHEDULE I

<TABLE>
<CAPTION>
                                                                                 Number of
                                                                                 Preferred            Number of          Purchase
      Purchaser                               Address                              Shares             Warrants             Price
      ---------                               -------                              ------             --------             -----
<S>                                   <C>                                          <C>                 <C>              <C>
Halifax Fund, L.P.                    c/o The Palladin Group, L.P.                 15,000              222,883          $15 million
                                      195 Maplewood Avenue
                                      Maplewood, NJ  07040
                                      Attention: Maurice Hryshko
                                      Facsimile: (973) 313-6491
                                      Telephone: (973) 313-6478

Societe Generale                      1221 Avenue of the Americas                  2,500               37,147           $2.5 million
                                      New York, NY 10020
                                      Attention: Guillaume Pollet
                                      Facsimile: (212) 278-5468
                                      Telephone: (212) 245-5260

SDS Merchant Fund, L.P.               c/o SDS Capital Partners                     1,000               14,859           $1.0 million
                                      One South Shore Drive
                                      Greenwich, CT 06830
                                      Attention: Steve Derby
                                      Facsimile: (203) 629-0345
                                      Telephone: (203) 629-8400

Velocity Investment                   c/o Velocity Asset Management LLC            1,500               22,888           $1.5 million
Partners, Ltd.                        333 West Wacker Drive
                                      Suite 1410
                                      Chicago, Illinois 60606
                                      Attention: Richard Marks
                                                 John Ziegelman
                                      Facsimile: (312) 236-3131
                                      Telephone: (312) 236-3030
</TABLE>

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