Document:

Exhibit
10.1

COMMON STOCK PURCHASE AGREEMENT

Dated December 11, 2006

by and between

DEPOMED, INC.

and

AZIMUTH OPPORTUNITY LTD.

 

TABLE OF CONTENTS

	
  

  	
  Page

  
	
  Article I PURCHASE AND SALE OF COMMON STOCK

  	
  1

  
	
  Section 1.1

  	
  Purchase and Sale of Stock

  	
  1

  
	
  Section 1.2

  	
  Effective Date; Settlement Dates

  	
  1

  
	
  Section 1.3

  	
  The Shares

  	
  2

  
	
  Section 1.4

  	
  Current Report; Prospectus Supplement

  	
  2

  
	
   

  	
   

  	
   

  
	
  Article II FIXED REQUEST TERMS; OPTIONAL AMOUNT

  	
  2

  
	
  Section 2.1

  	
  Fixed Request Notice

  	
  2

  
	
  Section 2.2

  	
  Fixed Requests

  	
  3

  
	
  Section 2.3

  	
  Share Calculation

  	
  4

  
	
  Section 2.4

  	
  Limitation of Fixed Requests

  	
  4

  
	
  Section 2.5

  	
  Reduction of Commitment

  	
  4

  
	
  Section 2.6

  	
  Below Threshold Price

  	
  4

  
	
  Section 2.7

  	
  Settlement

  	
  5

  
	
  Section 2.8

  	
  Reduction of Pricing Period

  	
  5

  
	
  Section 2.9

  	
  Optional Amount

  	
  6

  
	
  Section 2.10

  	
  Calculation of Optional Amount Shares

  	
  6

  
	
  Section 2.11

  	
  Exercise of Optional Amount

  	
  7

  
	
  Section 2.12

  	
  Aggregate Limit

  	
  7

  
	
   

  	
   

  	
   

  
	
  Article III REPRESENTATIONS AND WARRANTIES OF THE
  INVESTOR

  	
  8

  
	
  Section 3.1

  	
  Organization and Standing of the Investor

  	
  8

  
	
  Section 3.2

  	
  Authorization and Power

  	
  8

  
	
  Section 3.3

  	
  No Conflicts

  	
  8

  
	
  Section 3.4

  	
  Information

  	
  9

  
	
   

  	
   

  	
   

  
	
  Article IV REPRESENTATIONS AND WARRANTIES OF THE
  COMPANY

  	
  9

  
	
  Section 4.1

  	
  Organization, Good Standing and Power

  	
  9

  
	
  Section 4.2

  	
  Authorization, Enforcement

  	
  9

  
	
  Section 4.3

  	
  Capitalization

  	
  10

  
	
  Section 4.4

  	
  Issuance of Shares

  	
  10

  
	
  Section 4.5

  	
  No Conflicts

  	
  10

  
	
  Section 4.6

  	
  Commission Documents, Financial Statements

  	
  11

  
	
  Section 4.7

  	
  Subsidiaries

  	
  12

  
	
  Section 4.8

  	
  No Material Adverse Effect

  	
  12

  
	
  Section 4.9

  	
  Indebtedness

  	
  12

  
	
  Section 4.10

  	
  Title To Assets

  	
  13

  
	
  Section 4.11

  	
  Actions Pending

  	
  13

  
	
  Section 4.12

  	
  Compliance With Law

  	
  13

  
	
  Section 4.13

  	
  Certain Fees

  	
  13

  
	
  Section 4.14

  	
  Operation of Business

  	
  14

  

 i
 

 

 

	
  Section 4.15

  	
  Environmental Compliance

  	
  16

  
	
  Section 4.16

  	
  Material Agreements

  	
  16

  
	
  Section 4.17

  	
  Transactions With Affiliates

  	
  17

  
	
  Section 4.18

  	
  Securities Act

  	
  17

  
	
  Section 4.19

  	
  Employees

  	
  19

  
	
  Section 4.20

  	
  Use of Proceeds

  	
  19

  
	
  Section 4.21

  	
  Public Utility Holding Company Act and Investment
  Company Act Status

  	
  19

  
	
  Section 4.22

  	
  ERISA

  	
  19

  
	
  Section 4.23

  	
  Taxes

  	
  19

  
	
  Section 4.24

  	
  Insurance

  	
  20

  
	
  Section 4.25

  	
  Acknowledgement Regarding Investor’s Purchase of
  Shares

  	
  20

  
	
   

  	
   

  	
   

  
	
  Article V COVENANTS

  	
  20

  
	
  Section 5.1

  	
  Securities Compliance;NASD Filing

  	
  20

  
	
  Section 5.2

  	
  Registration and Listing

  	
  21

  
	
  Section 5.3

  	
  Compliance with Laws

  	
  21

  
	
  Section 5.4

  	
  Keeping of Records and Books of Account; Foreign
  Corrupt Practices Act

  	
  22

  
	
  Section 5.5

  	
  Limitations on Holdings and Issuances

  	
  22

  
	
  Section 5.6

  	
  Other Agreements and Other Financings

  	
  23

  
	
  Section 5.7

  	
  Stop Orders

  	
  24

  
	
  Section 5.8

  	
  Amendments to the Registration Statement; Prospectus
  Supplements; Free Writing Prospectuses

  	
  25

  
	
  Section 5.9

  	
  Prospectus Delivery

  	
  25

  
	
  Section 5.10

  	
  Selling Restrictions

  	
  26

  
	
  Section 5.11

  	
  Effective Registration Statement

  	
  27

  
	
  Section 5.12

  	
  Non-Public Information

  	
  27

  
	
  Section 5.13

  	
  Broker/Dealer

  	
  27

  
	
  Section 5.14

  	
  Update of Disclosure Schedule

  	
  27

  
	
   

  	
   

  	
   

  
	
  Article VI
  OPINION OF COUNSEL AND CERTIFICATE; CONDITIONS TO THE SALE AND PURCHASE OF
  THE SHARES

  	
  27

  
	
  Section 6.1

  	
  Opinion of Counsel and Certificate

  	
  27

  
	
  Section 6.2

  	
  Conditions Precedent to the Obligation of the
  Company

  	
  27

  
	
  Section 6.3

  	
  Conditions Precedent to the Obligation of the
  Investor

  	
  29

  
	
   

  	
   

  	
   

  
	
  Article VII TERMINATION

  	
  31

  
	
  Section 7.1

  	
  Term, Termination by Mutual Consent

  	
  31

  
	
  Section 7.2

  	
  Other Termination

  	
  32

  
	
  Section 7.3

  	
  Effect of Termination

  	
  32

  
	
   

  	
   

  	
   

  
	
  Article VIII INDEMNIFICATION

  	
  33

  
	
  Section 8.1

  	
  General Indemnity

  	
  33

  
	
  Section 8.2

  	
  Indemnification Procedures

  	
  35

  
	
   

  	
   

  	
   

  
	
  Article IX MISCELLANEOUS

  	
  36

  
	
  Section 9.1

  	
  Fees and Expenses

  	
  36

  
	
  Section 9.2

  	
  Specific Enforcement, Consent to Jurisdiction,
  Waiver of Jury Trial

  	
  37

  

 ii
 

 

 

	
  Section 9.3

  	
  Entire Agreement; Amendment

  	
  37

  
	
  Section 9.4

  	
  Notices

  	
  38

  
	
  Section 9.5

  	
  Waivers

  	
  39

  
	
  Section 9.6

  	
  Headings

  	
  39

  
	
  Section 9.7

  	
  Successors and Assigns

  	
  39

  
	
  Section 9.8

  	
  Governing Law

  	
  39

  
	
  Section 9.9

  	
  Survival

  	
  39

  
	
  Section 9.10

  	
  Counterparts

  	
  39

  
	
  Section 9.11

  	
  Publicity

  	
  39

  
	
  Section 9.12

  	
  Severability

  	
  40

  
	
  Section 9.13

  	
  Further Assurances

  	
  40

  
	
   

  	
   

  
	
  Annex A.

  	
  Definitions

  	
   

  
				

 

 iii

 

COMMON STOCK PURCHASE AGREEMENT

This COMMON STOCK PURCHASE AGREEMENT, made and
entered into on this 11th day of December 2006 (this “Agreement”),
by and between Azimuth Opportunity Ltd., an international business company
incorporated under the laws of the British Virgin Islands (the “Investor”),
and Depomed, Inc., a corporation organized and existing under the laws of
the State of California (the “Company”).

RECITALS

WHEREAS,
the parties desire that, upon the terms and subject to the conditions contained
herein, the Company may issue and sell to the Investor and the Investor shall
thereupon purchase from the Company up to $30,000,000 worth of newly issued
shares of the Company’s common stock, no par value (“Common Stock”),
subject, in all cases, to the Trading Market Limit; and

WHEREAS,
the offer and sale of the shares of Common Stock hereunder have been registered
by the Company in the Registration Statement, which has been declared effective
by order of the Commission under the Securities Act;

NOW,
THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:

ARTICLE I

PURCHASE AND SALE OF COMMON STOCK

Section 1.1            Purchase and Sale
of Stock.  Upon the terms and
subject to the conditions of this Agreement, during the Investment Period the
Company in its discretion may issue and sell to the Investor up to $30,000,000
(the “Total Commitment”) worth of duly authorized, validly issued, fully
paid and non-assessable shares of Common Stock (subject in all cases to the
Trading Market Limit, the “Aggregate Limit”), by (i) the delivery
to the Investor of not more than 24 separate Fixed Request Notices (unless the
Investor and the Company mutually agree that a different number of Fixed
Request Notices may be delivered) as provided in Article II hereof and
(ii) the exercise by the Investor of Optional Amounts, which the Company
may in its discretion grant to the Investor and which may be exercised by the
Investor, in whole or in part, as provided in Article II hereof.  The aggregate of all Fixed Request Amounts
and Optional Amount Dollar Amounts shall not exceed the Aggregate Limit.

Section 1.2            Effective Date;
Settlement Dates.  This Agreement
shall become effective and binding upon delivery of counterpart signature
pages of this Agreement executed by each of the parties hereto, and by
delivery of an opinion of counsel and a certificate of the Company as provided
in Section 6.1 hereof, to the offices of Greenberg Traurig, LLP, 200 Park
Avenue, New York, New York 10166, at l0:00 a.m., New York time, on the
Effective Date.  In consideration of and
in express reliance upon the representations, warranties and covenants, and
otherwise upon the terms and subject to the conditions, of this Agreement, from
and after the Effective Date and during the Investment Period (i) the
Company shall issue and sell to the Investor, and the Investor agrees to
purchase from the Company, the Shares in respect of each Fixed Request and
(ii) the Investor may in its discretion elect to purchase Shares in
respect of

 

each Optional
Amount.  The issuance and sale of Shares
to the Investor pursuant to any Fixed Request or Optional Amount shall occur on
the applicable Settlement Date in accordance with Sections 2.7 and 2.9 (or on
such Trading Day in accordance with Section 2.8, as applicable), provided
in each case that all of the conditions precedent thereto set forth in
Article VI theretofore shall have been fulfilled or (to the extent
permitted by applicable law) waived.

Section 1.3            The Shares.  The Company has duly authorized and reserved
for issuance, and covenants to continue to reserve for issuance, free of all
preemptive and other similar rights, at all times during the Investment Period,
the requisite aggregate number of authorized but unissued shares of its Common
Stock to timely effect the issuance, sale and delivery in full to the Investor
of all Shares to be issued in respect of all Fixed Requests and Optional
Amounts under this Agreement.

Section 1.4            Current Report;
Prospectus Supplement.  As soon
as practicable, but in any event not later than 5:30 p.m. (New York time)
on the first Trading Day immediately following the Effective Date, the Company
shall file with the Commission a report on Form 8-K relating to the
transactions contemplated by, and describing the material terms and conditions
of, this Agreement and disclosing all information relating to the transactions
contemplated hereby required to be disclosed in the Registration Statement and
the Prospectus (but which permissibly has been omitted therefrom in accordance with
the Securities Act), including, without limitation, information required to be
disclosed in the section captioned “Plan of Distribution” in the
Prospectus (the “Current Report”). 
The Current Report shall include a copy of this Agreement as an exhibit.  To the extent applicable, the Current Report
shall be incorporated by reference in the Registration Statement in accordance
with the provisions of Rule 430B under the Securities Act.  The Company heretofore has provided the
Investor a reasonable opportunity to comment on a draft of such Current Report
and has given due consideration to such comments.  The Company shall file a Prospectus
Supplement pursuant to Rule 424(b) under the Securities Act on or prior
to the second Trading Day immediately following the Effective Date.  Pursuant to Section 5.9 and subject to
the provisions of Section 5.8, on the first Trading Day immediately
following the last Trading Day of each Pricing Period, the Company shall file
with the Commission a Prospectus Supplement pursuant to
Rule 424(b) under the Securities Act disclosing the number of Shares
to be issued and sold to the Investor thereunder, the total purchase price
therefor and the net proceeds to be received by the Company therefrom and, to
the extent required by the Securities Act, identifying the Current Report.

ARTICLE II

FIXED REQUEST TERMS; OPTIONAL AMOUNT

Subject to the
satisfaction of the conditions set forth in this Agreement, the parties agree
(unless otherwise mutually agreed upon by the parties in writing) as follows:

Section 2.1            Fixed Request
Notice.  Upon one
(1) Trading Days’ prior written notice to the Investor, the Company may,
from time to time in its sole discretion, provide a notice to the Investor of a
Fixed Request before 9:30 a.m. (New York time) on the first Trading Day of
the Pricing Period (the “Fixed Request Notice”), substantially in the
form attached hereto as Exhibit A. 
The Fixed Request Notice shall specify the Fixed Amount Requested,
establish the Threshold Price for such Fixed Request, designate the first
Trading Day of the Pricing Period and specify 

 2
 

 

the Optional Amount, if
any, that the Company elects to grant to the Investor during the Pricing Period
and the applicable Threshold Price for such Optional Amount (the “Optional
Amount Threshold Price”).  The
Threshold Price and the Optional Amount Threshold Price established by the
Company in a Fixed Request Notice may be the same or different, in the
Company’s sole discretion.  Upon the
terms and subject to the conditions of this Agreement, the Investor is
obligated to accept each Fixed Request Notice prepared and delivered in
accordance with the provisions of this Agreement.

Section 2.2            Fixed Requests.  From time to time during the Investment
Period, the Company may in its sole discretion deliver to the Investor a Fixed
Request Notice for a specified Fixed Amount Requested, and the applicable
discount price (the “Discount Price”) shall be determined, in accordance
with the price and share amount parameters as set forth below or such other parameters
mutually agreed upon by the Investor and the Company, and upon the terms and
subject to the conditions of this Agreement, the Investor shall purchase from
the Company the Shares subject to such Fixed Request Notice; provided, however,
that the Company may not deliver any single Fixed Request Notice for a Fixed
Amount Requested in excess of the lesser of: (i) the amount in the
applicable Fixed Amount Requested column below and (ii) 2.5% of the Market
Capitalization:

	
  Threshold
  Price

  	
   

  	
  Fixed Amount Requested

  	
   

  	
  Discount Price

  
	
  Equal to or
  greater than $13.00

  	
   

  	
  Not to exceed $8,500,000

  	
   

  	
  96.225% of the VWAP

  
	
  Equal to or
  greater than $12.00 and less than $13.00

  	
   

  	
  Not to exceed $7,750,000

  	
   

  	
  96.125% of the VWAP

  
	
  Equal to or
  greater than $11.00 and less than $12.00

  	
   

  	
  Not to exceed $7,000,000

  	
   

  	
  95.875% of the VWAP

  
	
  Equal to or
  greater than $10.00 and less than $11.00

  	
   

  	
  Not to exceed $6,250,000

  	
   

  	
  95.625% of the VWAP

  
	
  Equal to or
  greater than $9.00 and less than $10.00

  	
   

  	
  Not to exceed $5,500,000

  	
   

  	
  95.375% of the VWAP

  
	
  Equal to or
  greater than $8.00 and less than $9.00

  	
   

  	
  Not to exceed $4,750,000

  	
   

  	
  95.375% of the VWAP

  
	
  Equal to or
  greater than $7.00 and less than $8.00

  	
   

  	
  Not to exceed $4,000,000

  	
   

  	
  95.125% of the VWAP

  
	
  Equal to or
  greater than $6.00 and less than $7.00

  	
   

  	
  Not to exceed $3,250,000

  	
   

  	
  94.875% of the VWAP

  
	
  Equal to or
  greater than $5.00 and less than $6.00

  	
   

  	
  Not to exceed $2,500,000

  	
   

  	
  94.625% of the VWAP

  
	
  Equal to or
  greater than $4.00 and less than $5.00

  	
   

  	
  Not to exceed $2,000,000

  	
   

  	
  94.375% of the VWAP

  
	
  Equal to or
  greater than $3.00 and less than $4.00

  	
   

  	
  Not to exceed $1,500,000

  	
   

  	
  94.125% of the VWAP

  
	
  Equal to or
  greater than $2.00 and less than $3.00

  	
   

  	
  Not to exceed $1,000,000

  	
   

  	
  93.625% of the VWAP

  

 

Anything to the
contrary in this Agreement notwithstanding, at no time shall the Investor be
required to purchase more than $8,500,000 worth of Common Stock in respect of
any Pricing

 3
 

 

Period (not including
Common Stock subject to any Optional Amount). 
The date on which the Company delivers any Fixed Request Notice in
accordance with this Section 2.2 hereinafter shall be referred to as a “Fixed
Request Exercise Date”.

Section 2.3            Share Calculation.  Subject to Section 2.6, the number of
Shares to be issued by the Company to the Investor pursuant to a Fixed Request
shall equal the aggregate sum of each quotient (calculated for each Trading Day
during the applicable Pricing Period for which the VWAP equals or exceeds the
Threshold Price) determined pursuant to the following equation (rounded to the
nearest whole Share):

N = (A x B)/C, where:

N = the number of Shares
to be issued by the Company to the Investor in respect of a Trading Day during
the applicable Pricing Period for which the VWAP equals or exceeds the
Threshold Price,

A = 0.10 (the “Multiplier”);
provided, however, that if the number of Trading Days
constituting a Pricing Period is decreased as set forth in Section 2.8
hereof, then the Multiplier correspondingly shall be increased to equal the
decimal equivalent (in 10-millionths) of a fraction, the numerator of which is
one and the denominator of which equals the number of Trading Days in the
Pricing Period as so decreased,

B = the Fixed Amount
Requested, and

C = the applicable
Discount Price.

Section 2.4            Limitation of Fixed
Requests.  The Company shall not
make more than one Fixed Request in each Pricing Period.  Not less than three (3) Trading Days
shall elapse between the end of one Pricing Period and the commencement of any
other Pricing Period during the Investment Period.  There shall be permitted a maximum of 24
Fixed Requests during the Investment Period. 
Each Fixed Request automatically shall expire immediately following the
last Trading Day of each Pricing Period.

Section 2.5            Reduction of
Commitment.  On the last Trading
Day of each Pricing Period, the Investor’s Total Commitment under this
Agreement automatically (and without the need for any amendment to this
Agreement) shall be reduced, on a dollar-for-dollar basis, by the total amount
of the Fixed Request Amount of proceeds paid to the Company and the Optional Amount
Dollar Amount of proceeds paid to the Company, if any, for such Pricing Period.

Section 2.6            Below Threshold
Price.  If the VWAP on any
Trading Day in a Pricing Period is lower than the Threshold Price, then for
each such Trading Day the total amount of the Fixed Amount Requested shall be
reduced, on a dollar-for-dollar basis, by an amount equal to the product of (x)
the Multiplier and (y) the original Fixed Amount Requested, and no Shares shall
be purchased or sold with respect to such Trading Day, except as provided
below.  If trading in the Common Stock on
NASDAQ (or any national securities exchange on which the Common Stock is then
listed) is suspended for any reason for more than three hours on any Trading
Day, the Investor may at its option deem the price of the Common Stock to be
lower than the Threshold Price for such Trading Day and, for each such Trading
Day, the total amount

 4
 

 

of the Fixed Amount
Requested shall be reduced as provided in the immediately preceding sentence,
and no Shares shall be purchased or sold with respect to such Trading Day,
except as provided below.  For each
Trading Day during a Pricing Period on which the VWAP is (or is deemed to be)
lower than the Threshold Price, the Investor may in its sole discretion elect
to purchase such U.S. dollar
amount of Shares equal to the amount by which the Fixed Amount Requested has
been reduced in accordance with this Section 2.6, at the Threshold Price
multiplied by the applicable percentage determined in accordance with the price
and share amount parameters set forth in Section 2.2.  The Investor shall inform the Company via
facsimile transmission not later than 8:00 p.m. (New York time) on the
last Trading Day of such Pricing Period as to the number of Shares, if any, the
Investor elects to purchase as provided in this Section 2.6.

Section 2.7            Settlement.  The payment for, against simultaneous
delivery of, Shares in respect of each Fixed Request shall be settled on the
second Trading Day next following the last Trading Day of each Pricing Period,
or on such other date as the parties may mutually agree (the “Settlement
Date”).  On each Settlement Date, the
Company shall deliver the Shares purchased by the Investor to the Investor or
its designees via DTC’s Deposit Withdrawal Agent Commission (DWAC) system,
against simultaneous payment therefor to the Company’s designated account by
wire transfer of immediately available funds, provided that if the Shares are
received by the Investor later than 1:00 p.m. (New York time), payment
therefor shall be made with next day funds. 
As set forth in Section 9.1(ii), a failure by the Company to
deliver such Shares shall result in the payment of liquidated damages by the
Company to the Investor.

Section 2.8            Reduction of
Pricing Period.  If during a
Pricing Period the Company elects to reduce the number of Trading Days in such
Pricing Period (and thereby amend its previously delivered Fixed Request
Notice), the Company shall so notify the Investor before 9:00 a.m. (New
York time) on any Trading Day during a Pricing Period (a “Reduction Notice”)
and the last Trading Day of such Pricing Period shall be the Trading Day
immediately preceding the Trading Day on which the Investor received such
Reduction Notice; provided, however, that if the Company delivers
the Reduction Notice later than 9:00 a.m. (New York time) on a Trading Day
during a Pricing Period, then the last Trading Day of such Pricing Period
instead shall be the Trading Day on which the Investor received such Reduction
Notice.  Further, if mutually agreed upon
in writing by the parties, the Pricing Period may be reduced at any time.

Upon receipt of a
Reduction Notice, the Investor (i) shall purchase the Shares in respect of
each Trading Day in such reduced Pricing Period for which the VWAP equals or
exceeds the Threshold Price in accordance with Section 2.3 hereof;
(ii) may elect to purchase the Shares in respect of any Trading Day in
such reduced Pricing Period for which the VWAP is (or is deemed to be) lower
than the Threshold Price in accordance with Section 2.6 hereof; and
(iii) may elect to exercise all or any portion of an Optional Amount on
any Trading Day during such reduced Pricing Period in accordance with Sections
2.10 and 2.11 hereof.

In addition, upon
receipt of a Reduction Notice, the Investor may elect to purchase such U.S.
dollar amount of additional Shares equal to the quotient determined pursuant to
the following equation:

D = A x 1/B x (B – C),
where:

 5
 

 

D = the U.S. dollar
amount of additional Shares to be purchased,

A = the Fixed Amount Requested,

B = 10 or, for purposes
of this Section 2.8, such lesser number of Trading Days as the parties may
mutually agree to, and

C = the number of Trading
Days in the reduced Pricing Period,

at a per Share price
equal to (x) the Fixed Amount Requested attributable to the reduced Pricing
Period divided by (y) the number of Shares to be purchased during such reduced
Pricing Period pursuant to clause (i) of the immediately preceding
paragraph.

The Investor may
also elect to exercise any portion of the applicable Optional Amount which was
unexercised during the reduced Pricing Period by issuing an Optional Amount
Notice to the Company not later than 10:00 a.m. (New York time) on the
first Trading Day next following the last Trading Day of the reduced Pricing Period.
The number of Shares to be issued upon exercise of such Optional Amount shall
be calculated pursuant to the equation set forth in Section 2.10 hereof,
except that “C” shall equal the greater of (i) the VWAP for the Common
Stock on the last Trading Day of the reduced Pricing Period or (ii) the
Optional Amount Threshold Price.

The payment for,
against simultaneous delivery of, Shares to be purchased and sold in accordance
with this Section 2.8 shall be settled on the second Trading Day next
following the Trading Day on which the Investor receives a Reduction Notice.

Section 2.9            Optional Amount.  With respect to any Pricing Period, the
Company may in its sole discretion grant to the Investor the right to exercise,
from time to time during the Pricing Period (but not more than once on any
Trading Day), all or any portion of an Optional Amount.  The maximum Optional Amount Dollar Amount and
the Optional Amount Threshold Price shall be set forth in the Fixed Request Notice.
Each daily Optional Amount exercise shall be aggregated during the Pricing
Period and settled on the next Settlement Date. 
The Optional Amount Threshold Price designated by the Company in its
Fixed Request Notice shall apply to each Optional Amount during the applicable
Pricing Period.

Section 2.10         Calculation of
Optional Amount Shares.  The
number of shares of Common Stock to be issued in connection with the exercise
of an Optional Amount shall be the quotient determined pursuant to the
following equation (rounded to the nearest whole Share):

O = A/(B x C), where:

O = the number of shares
of Common Stock to be issued in connection with such Optional Amount exercise,

A = the Optional Amount
Dollar Amount with respect to which the Investor has delivered an Optional
Amount Notice,

 6
 

 

B = the applicable
percentage determined in accordance with the price and shares amount parameters
set forth in Section 2.2 (with the Optional Amount Threshold Price serving
as the Threshold Price for such purposes), and

C = the greater of
(i) the VWAP for the Common Stock on the day the Investor delivers the
Optional Amount Notice or (ii) the Optional Amount Threshold Price.

Section 2.11         Exercise of Optional
Amount.  If granted by the
Company to the Investor with respect to a Pricing Period, all or any portion of
the Optional Amount may be exercised by the Investor on any Trading Day during
the Pricing Period, subject to the limitations set forth in
Section 2.9.  As a condition to each
exercise of an Optional Amount pursuant to this Section 2.11, the Investor
shall issue an Optional Amount Notice to the Company no later than
8:00 p.m. (New York time) on the day of such Optional Amount
exercise.  If the Investor does not
exercise an Optional Amount in full by 8:00 p.m. (New York time) on the
last Trading Day of the applicable Pricing Period, such unexercised portion of
the Investor’s Optional Amount with respect to that Pricing Period
automatically shall lapse and terminate.

Section 2.12         Aggregate Limit.  Notwithstanding anything to the contrary
contained in this Agreement, in no event may the Company issue a Fixed Request
Notice or grant an Optional Amount to the extent that the sale of Shares
pursuant thereto and pursuant to all prior Fixed Request Notices, Optional
Amounts and as liquidated damages pursuant to Section 9.1(ii) issued
hereunder would cause the Company to sell or the Investor to purchase Shares
which in the aggregate are in excess of the Aggregate Limit.  If the Company issues a Fixed Request Notice
or Optional Amount that otherwise would permit the Investor to purchase shares
of Common Stock which would cause the aggregate purchases by Investor hereunder
to exceed the Aggregate Limit, such Fixed Request Notice or Optional Amount
shall be void ab initio to the
extent of the amount by which the dollar value of shares or number of shares,
as the case may be, of Common Stock otherwise issuable pursuant to such Fixed
Request Notice or Optional Amount together with the dollar value of shares or
number of shares, as the case may be, of all other Common Stock purchased by
the Investor pursuant hereto would exceed the Aggregate Limit.  The Company hereby represents, warrants and
covenants that neither it nor any of its Subsidiaries (i) has effected any
transaction or series of transactions, (ii) is a party to any pending
transaction or series of transactions or (iii) shall enter into any
contract, agreement, agreement-in-principle, arrangement or understanding with
respect to, or shall effect, any Other Financing which, in any of such cases,
would be integrated with the transactions contemplated by this Agreement for
purposes of determining whether approval of the Company’s stockholders is
required under any bylaw, listed securities maintenance standards or other
rules of the Trading Market; provided, however, that the
Company shall be permitted to take any action referred to in clause
(iii) above if the Company has timely provided the Investor with an
Integration Notice as provided in Section 5.6(ii) hereof.  Further, at the Company’s sole discretion,
and effective automatically upon delivery of notice by the Company to the
Investor, this Agreement may be amended from time to time to reduce the
Aggregate Limit by an amount as shall be determined by the Company in its sole
discretion (such amount to be no greater than is necessary to meet the
Company’s registration obligations in connection with an underwritten public
offering or registered direct offering in order to effect such offering); provided,
however, any such amendment of this Agreement (and any such purported amendment)
shall be void and of no force and effect if the effect thereof would restrict,
materially delay, conflict with or impair the ability or right of the

 7
 

 

Company to perform its
obligations under this Agreement, including, without limitation, the obligation
of the Company to deliver Shares to the Investor in respect of a Fixed Request
on the applicable Settlement Date; provided, further, that at the
Company’s sole discretion, it may increase the Aggregate Limit by such amount
as it was reduced pursuant to this Section 2.12, but in no event may the
Company issue a Fixed Request Notice or grant an Optional Amount to the extent
that the sale of Shares pursuant thereto and pursuant to all prior Fixed
Request Notices, Optional Amounts and as liquidated damages pursuant to
Section 9.1(ii) issued hereunder would cause the Company to sell or
the Investor to purchase Shares which in the aggregate are in excess of the
Aggregate Limit originally set forth in Section 1.1 hereto.

ARTICLE III

REPRESENTATIONS AND WARRANTIES OF THE INVESTOR

The Investor
hereby makes the following representations and warranties to the Company:

Section 3.1            Organization and
Standing of the Investor.  The
Investor is an international business company duly organized, validly existing
and in good standing under the laws of the British Virgin Islands.

Section 3.2            Authorization and
Power.  The Investor has the
requisite corporate power and authority to enter into and perform its
obligations under this Agreement and to purchase the Shares in accordance with
the terms hereof.  The execution,
delivery and performance of this Agreement by the Investor and the consummation
by it of the transactions contemplated hereby have been duly authorized by all
necessary corporate action, and no further consent or authorization of the
Investor, its Board of Directors or stockholders is required.  This Agreement has been duly executed and
delivered by the Investor.  This
Agreement constitutes a valid and binding obligation of the Investor
enforceable against it in accordance with its terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation, conservatorship, receivership, or
similar laws relating to, or affecting generally the enforcement of, creditor’s
rights and remedies or by other equitable principles of general application.

Section 3.3            No Conflicts.  The execution, delivery and performance by
the Investor of this Agreement and the consummation by the Investor of the
transactions contemplated herein do not and shall not (i) result in a
violation of such Investor’s charter documents, bylaws or other applicable
organizational instruments, (ii) conflict with, constitute a default (or
an event which, with notice or lapse of time or both, would become a default)
under, or give rise to any rights of termination, amendment, acceleration or
cancellation of, any material agreement, mortgage, deed of trust, indenture,
note, bond, license, lease agreement, instrument or obligation to which the
Investor is a party or is bound, (iii) create or impose any lien, charge
or encumbrance on any property of the Investor under any agreement or any
commitment to which the Investor is party or under which the Investor is bound
or under which any of its properties or assets are bound, or (iv) result
in a violation of any federal, state, local or foreign statute, rule, or
regulation, or any order, judgment or decree of any court or governmental
agency applicable to the Investor or by which any of its properties or assets are
bound or affected, except, in the case of clauses (ii), (iii) and (iv),
for such conflicts, defaults, terminations, amendments, acceleration,
cancellations and violations as would not, individually or in the aggregate,
prohibit or otherwise interfere with the

 8
 

 

ability of the Investor
to enter into and perform its obligations under this Agreement in any material
respect.  The Investor 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 governmental agency in order for it to execute, deliver or
perform any of its obligations under this Agreement or to purchase the Shares
in accordance with the terms hereof.

Section 3.4            Information.  The Investor and its advisors have been
afforded the opportunity to ask questions of representatives of the Company and
to receive materials relating to the business, financial condition, management
and operations of the Company and materials relating to the offer and sale of
the Shares.  The Investor has sought such
accounting, legal and tax advice as it has considered necessary to make an
informed investment decision with respect to its acquisition of the Shares.  The Investor understands that it (and not the
Company) shall be responsible for its own tax liabilities that may arise as a
result of this investment or the transactions contemplated by this Agreement.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

Except as set
forth in the disclosure schedule delivered by the Company to the Investor
(which is hereby incorporated by reference in, and constitutes an integral part
of, this Agreement) (the “Disclosure Schedule”), the Company hereby
makes the following representations and warranties to the Investor:

Section 4.1            Organization, Good
Standing and Power.  The Company
is a corporation duly organized, validly existing and in good standing under
the laws of the State of California and has the requisite corporate power and
authority to own, lease and operate its properties and assets and to conduct
its business as it is now being conducted. 
The Company and each such Subsidiary is duly qualified as a foreign
corporation to do business and is in good standing in every jurisdiction in
which the nature of the business conducted or property owned by it makes such
qualification necessary, except for any jurisdiction in which the failure to be
so qualified would not have a Material Adverse Effect.

Section 4.2            Authorization,
Enforcement.  The Company has the
requisite corporate power and authority to enter into and perform this
Agreement and to issue and sell the Shares in accordance with the terms
hereof.  Except for approvals of the
Company’s Board of Directors or a committee thereof as may be required in
connection with any issuance and sale of Shares to the Investor hereunder
(which approvals shall be obtained prior to the delivery of any Fixed Request
Notice), the execution, delivery and performance by the Company of this
Agreement and the consummation by it of the transactions contemplated hereby
have been duly and validly authorized by all necessary corporate action and no
further consent or authorization of the Company or its Board of Directors or
stockholders is required This Agreement has been duly executed and delivered by
the Company and constitutes a valid and binding obligation of the Company
enforceable against the Company in accordance with its terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium, liquidation, conservatorship, receivership or similar laws relating
to, or affecting generally the enforcement of, creditor’s rights and remedies
or by other equitable principles of general application.

 9
 

 

Section 4.3            Capitalization.  The authorized capital stock of the Company
and the shares thereof issued and outstanding as of the dates set forth in the
Commission Documents are as set forth in the Commission Documents.  All of the outstanding shares of Common Stock
have been duly authorized and validly issued, and are fully paid and
nonassessable.  Except as set forth in
the Commission Documents, as of the Effective Date, no shares of Common Stock
were entitled to preemptive rights or registration rights and there were no
outstanding options, warrants, scrip, rights to subscribe to, call or
commitments of any character whatsoever relating to, or securities or rights
convertible into or exchangeable for, any shares of capital stock of the
Company.  Except as set forth in the
Commission Documents, there were no contracts, commitments, understandings, or
arrangements by which the Company is or may become bound to issue additional
shares of the capital stock of the Company or options, securities or rights
convertible into or exchangeable for any shares of capital stock of the
Company.  Except for customary transfer
restrictions contained in agreements entered into by the Company to sell
restricted securities or as set forth in the Commission Documents, as of the
Effective Date, the Company was not a party to, and it had no knowledge of, any
agreement restricting the voting or transfer of any shares of the capital stock
of the Company.  Except as set forth in
the Commission Documents, the offer and sale of all capital stock, convertible
or exchangeable securities, rights, warrants or options of the Company issued
prior to the Effective Date complied with all applicable federal and state
securities laws, and no stockholder has any right of rescission or damages or
any “put” or similar right with respect thereto which would have a Material
Adverse Effect.  The Company has
furnished or made available to the Investor via the Electronic Data Gathering,
Analysis, and Retrieval System (“EDGAR”) true and correct copies of the
Company’s Certificate of Incorporation as in effect on the Effective Date (the
“Charter”), and the Company’s Bylaws as in effect on the Effective Date
(the “Bylaws”), and true and correct copies (redacted as appropriate) of
all executed resolutions of the Company’s Board of Directors (and committees
thereof) relating to the capital stock of the Company (and transactions in
respect thereof) since December 31, 2005 (except with respect to issuances
of shares of capital stock of the Company to directors or employees of the
Company as fees or compensation that were duly approved by the Company’s Board
of Directors or a committee thereof).

Section 4.4            Issuance of Shares.  The Shares to be issued under this Agreement
have been or will be duly authorized by all necessary corporate action and, when
paid for or issued in accordance with the terms hereof, the Shares shall be
validly issued and outstanding, fully paid and nonassessable, and the Investor
shall be entitled to all rights accorded to a holder and beneficial owner of
Common Stock.

Section 4.5            No Conflicts.  The execution, delivery and performance by
the Company of this Agreement and the consummation by the Company of the
transactions contemplated herein do not and shall not (i) result in a
violation of any provision of the Company’s Charter or Bylaws,
(ii) conflict with, constitute a default (or an event which, with notice
or lapse of time or both, would become a default) under, or give rise to any
rights of termination, amendment, acceleration or cancellation of, any material
agreement, mortgage, deed of trust, indenture, note, bond, license, lease
agreement, instrument or obligation to which the Company or any of its
Significant Subsidiaries is a party or is bound (including, without limitation,
any listing agreement with the Trading Market), (iii) create or impose a
lien, charge or encumbrance on any property of the Company or any of its
Significant Subsidiaries under any agreement or any commitment to which the
Company or any of its Significant Subsidiaries is a party or under

 10

 

which the Company or any
of its Significant Subsidiaries is bound or under which any of their respective
properties or assets are bound, or (iv) result in a violation of any federal,
state, local or foreign statute, rule, regulation, order, judgment or decree
applicable to the Company or any of its Subsidiaries or by which any property
or asset of the Company or any of its Subsidiaries are bound or affected,
except, in the case of clauses (ii), (iii) and (iv), for such conflicts,
defaults, terminations, amendments, acceleration, cancellations and violations
as would not, individually or in the aggregate, have a Material Adverse
Effect.  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 governmental agency in order for it to execute, deliver or perform
any of its obligations under this Agreement, or to issue and sell the Shares to
the Investor in accordance with the terms hereof (other than any filings which
may be required to be made by the Company with the Commission, the National
Association of Securities Dealers, Inc. (the “NASD”) or the Trading
Market subsequent to the Effective Date, including but not limited to a
Prospectus Supplement under Sections 1.4 and 5.9 of this Agreement, the NASD
Filing under Section 5.1 of this Agreement and any registration statement,
prospectus or prospectus supplement which has been or may be filed pursuant to
this Agreement).

Section
4.6            Commission Documents,
Financial Statements. 
(a)  The Common Stock is
registered pursuant to Section 12(b) or 12(g) of the Exchange Act and, except
as disclosed in the Commission Documents, as of the Effective Date the Company
had timely filed (giving effect to permissible extensions in accordance with
Rule 12b-25 under the Exchange Act) all Commission Documents.  The Company has delivered or made available
to the Investor via EDGAR true and complete copies of the Commission Documents
filed with the Commission prior to the Effective Date (including, without
limitation, the 2005 Form 10-K) and has delivered or made available to the
Investor via EDGAR true and complete copies of all of the Commission Documents
heretofore incorporated by reference in the Registration Statement and the
Prospectus.  The Company has not provided
to the Investor any information which, according to applicable law, rule or
regulation, was required to have been disclosed publicly by the Company but
which has not been so disclosed, other than with respect to the transactions
contemplated by this Agreement.  As of
its filing date, each Commission Document filed with the Commission and
incorporated by reference in the Registration Statement and the Prospectus
(including, without limitation, the 2005 Form 10-K) complied in all material
respects with the requirements of the Securities Act or the Exchange Act, as
applicable, and other federal, state and local laws, rules and regulations
applicable to it, and, as of its filing date, such Commission Document did not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not misleading.  Each Commission Document to be filed with the
Commission after the Effective Date and incorporated by reference in the
Registration Statement, the Prospectus and any Prospectus Supplement required
to be filed pursuant to Sections 1.4 and 5.9 hereof during the Investment
Period (including, without limitation, the Current Report), when such document
becomes effective or is filed with the Commission, as the case may be, shall
comply in all material respects with the requirements of the Securities Act or
the Exchange Act, as applicable, and other federal, state and local laws, rules
and regulations applicable to it, and shall not contain any untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.

  
 11
 

 

(b)           The financial statements, together
with the related notes and schedules, of the Company included in the Commission
Documents comply as to form in all material respects with all applicable
accounting requirements and the published rules and regulations of the
Commission and all other applicable rules and regulations with respect
thereto.  Such financial statements,
together with the related notes and schedules, have been prepared in accordance
with GAAP applied on a consistent basis during the periods involved (except (i)
as may be otherwise indicated in such financial statements or the notes thereto
or (ii) in the case of unaudited interim statements, to the extent they may not
include footnotes or may be condensed or summary statements), and fairly
present, subject to normal year-end adjustments, in all material respects the
financial condition of the Company and its consolidated Subsidiaries as of the
dates thereof and the results of operations and cash flows for the periods then
ended (subject, in the case of unaudited statements, to normal year-end audit
adjustments).

(c)           The Company has timely filed with the
Commission and made available to the Investor via EDGAR all certifications and
statements required by (x) Rule 13a-14 or Rule 15d-14 under the Exchange Act or
(y) 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002 (“SOXA”))
with respect to all relevant Commission Documents.  The Company is in compliance in all material
respects with the provisions of SOXA applicable to it as of the date
hereof.  The Company maintains disclosure
controls and procedures required by Rule 13a-15 or Rule 15d-15 under the
Exchange Act; except as disclosed in the Commission Documents, such controls
and procedures are effective to ensure that all material information concerning
the Company and its Subsidiaries is made known on a timely basis to the
individuals responsible for the timely and accurate preparation of the Company’s
Commission filings and other public disclosure documents.  As used in this Section 4.6(c), the term “file”
shall be broadly construed to include any manner in which a document or
information is furnished, supplied or otherwise made available to the
Commission.

(d)           Ernst & Young LLP, who have
expressed their opinions on the audited financial statements and related
schedules included or incorporated by reference in the Registration Statement
and the Base Prospectus is, with respect to the Company, an independent
registered public accounting firm as required by the rules of the Public
Company Accounting Oversight Board.

Section 4.7            Subsidiaries.  The 2005 Form 10-K sets forth each Subsidiary
of the Company as of the Effective Date, showing its jurisdiction of
incorporation or organization and the percentage of the Company’s ownership of
the outstanding capital stock or other ownership interests of such  Subsidiary, and the Company does not have any
other Subsidiaries as of the Effective Date.

 

Section 4.8            No Material Adverse Effect.  Since September 30, 2006, the Company has not
experienced or suffered any Material Adverse Effect, and there exists no
current state of facts, condition or event which would have a Material Adverse
Effect, except (i) as disclosed in any Commission Documents filed since
September 30, 2006 or (ii) continued losses from operations.

 

Section 4.9            Indebtedness.  The Company’s Quarterly Report on Form 10-Q
for the fiscal quarter ended September 30, 2006 sets forth, as of September 30,
2006, all outstanding 

  
 12
 

 

secured and unsecured Indebtedness of the Company or any Subsidiary, or
for which the Company or any Subsidiary has commitments through such date.  For the purposes of this Agreement, “Indebtedness”
shall mean (a) any liabilities for borrowed money or amounts owed in excess of
$10,000,000 (other than trade accounts payable incurred in the ordinary course
of business), (b) all guaranties, endorsements, indemnities and other
contingent obligations in respect of Indebtedness of others in excess of
$10,000,000, whether or not the same are or should be reflected in the Company’s
balance sheet (or the notes thereto), except guaranties by endorsement of
negotiable instruments for deposit or collection or similar transactions in the
ordinary course of business; and (c) the present value of any lease payments in
excess of $10,000,000 due under leases required to be capitalized in accordance
with GAAP.  There is no existing or
continuing default or event of default in respect of any Indebtedness of the
Company or any of its Subsidiaries.

 

Section 4.10         Title To Assets.  Each of the Company and its Subsidiaries has
good and marketable title to all of their respective real and personal property
reflected in the Commission Documents, free of mortgages, pledges, charges,
liens, security interests or other encumbrances, except for those indicated in
the Commission Documents or those that would not have a Material Adverse
Effect.  To the Company’s knowledge, all
real property leases of the Company are valid and subsisting and in full force
and effect in all material respects.

 

Section 4.11         Actions Pending.  There is no action, suit, claim,
investigation or proceeding pending, or to the knowledge of the Company
threatened in writing, against the Company or any Subsidiary which questions
the validity of this Agreement or the transactions contemplated hereby or any
action taken or to be taken pursuant hereto or thereto.  Except as set forth in the Commission
Documents, there is no action, suit, claim, investigation or proceeding
pending, or to the knowledge of the Company threatened in writing, against or
involving the Company, any Subsidiary or any of their respective properties or
assets, or involving any officers or directors of the Company or any of its
Subsidiaries, including, without limitation, any securities class action
lawsuit or stockholder derivative lawsuit, in each case which, if determined
adversely to the Company, its Subsidiary or any officer or director of the Company
or its Subsidiaries, would have a Material Adverse Effect.

 

Section 4.12         Compliance With Law.  The business of the Company and the
Subsidiaries has been and is presently being conducted in compliance with all
applicable federal, state, local and foreign governmental laws, rules,
regulations and ordinances, except as set forth in the Commission Documents and
except for such non-compliance which, individually or in the aggregate, would
not have a Material Adverse Effect.

 

Section 4.13         Certain
Fees.  Except for
the placement fee payable by the Company to Reedland Capital Partners, an
Institutional Division of the Financial West Group, Member NASD/SIPC (“Reedland”),
which shall be set forth in a separate placement agency agreement between the
Company and Reedland (a true and complete fully executed copy of which has
heretofore been provided to the Investor), no brokers, finders or financial
advisory fees or commissions shall be payable by the Company or any Subsidiary
(or any of their respective affiliates) with respect to the transactions
contemplated by this Agreement.  Except
as set forth in this Section 4.13 or as disclosed in Section 4.13 of the
Disclosure Schedule or in the Registration Statement, the Prospectus or the
Current Report, there are no contracts, agreements or 

  
 13
 

 

understandings between the Company and any person that would give rise
to a valid claim against the Company, the Investor or the Broker-Dealer for a
brokerage commission, finder’s fee or other like payment in connection with the
transactions contemplated by this Agreement or, to the Company’s knowledge, any
arrangements, agreements, understandings, payments or issuance with respect to
the Company or any of its officers, directors, stockholders, partners,
employees, Subsidiaries or affiliates that may affect the NASD’s determination
of the amount of compensation to be received by any NASD member (including,
without limitation, those NASD members set forth on Schedule 4.13 of the
Disclosure Schedule) or person associated with any NASD member in connection
with the transactions contemplated by this Agreement.  Except as set forth in this Section 4.13 or
as disclosed in Section 4.13 of the Disclosure Schedule or in the Registration
Statement, the Prospectus or the Current Report, no “items of value” (within
the meaning of Rule 2710 of the NASD’s Conduct Rules) have been received, and
no arrangements have been entered into for the future receipt of any items of
value, from the Company or any of its officers, directors, stockholders,
partners, employees, Subsidiaries or affiliates by any NASD member (including,
without limitation, those NASD members set forth on Schedule 4.13 of the
Disclosure Schedule) or person associated with any NASD member, during the
period commencing 180 days immediately preceding the Effective Date and ending
on the date this Agreement is terminated in accordance with Article VII, that
may affect the NASD’s determination of the amount of compensation to be
received by any NASD member or person associated with any NASD member in
connection with the transactions contemplated by this Agreement.  The Company hereby acknowledges and agrees
that the Investor may rely on the representations and warranties contained in
this Section 4.13 and elsewhere in this Agreement in connection with its
preparation of the NASD Filing.

 

Section 4.14         Operation of Business.  (a) 
The Company or one or more of its Subsidiaries possesses such permits,
licenses, approvals, consents and other authorizations (including licenses,
accreditation and other similar documentation or approvals of any local health
departments) (collectively, “Governmental Licenses”) issued by the
appropriate federal, state, local or foreign regulatory agencies or bodies,
including, without limitation, the United States Food and Drug Administration (“FDA”),
necessary to conduct the business now operated by it, except where the failure
to possess such Governmental Licenses, individually or in the aggregate, would
not have a Material Adverse Effect.  The
Company and its Subsidiaries are in compliance with the terms and conditions of
all such Governmental Licenses and all applicable FDA rules and regulations,
guidelines and policies, and all applicable rules and regulations, guidelines
and policies of any governmental authority exercising authority comparable to
that of the FDA (including any non-governmental authority whose approval or
authorization is required under foreign law comparable to that administered by
the FDA), except where the failure to so comply, individually or in the
aggregate, would not have a Material Adverse Effect.  All of the Governmental Licenses are valid
and in full force and effect, except where the invalidity of such Governmental
Licenses or the failure of such Governmental Licenses to be in full force and
effect, individually or in the aggregate, would not have a Material Adverse
Effect.  As to each product that is
subject to FDA regulation or similar legal provisions in any foreign
jurisdiction that is developed, manufactured, tested, packaged, labeled, marketed,
sold, distributed and/or commercialized by the Company or any of its
Subsidiaries, each such product is being developed, manufactured, tested,
packaged, labeled, marketed, sold, distributed and/or commercialized in
compliance with all applicable requirements of the FDA (and any
non-governmental authority whose approval or authorization is required under
foreign law

  
 14
 

 

comparable to that administered by the FDA), including, but not limited
to, those relating to investigational use, investigational device exemption,
premarket notification, premarket approval, good clinical practices, good
manufacturing practices, record keeping, filing of reports, and patient privacy
and medical record security, except where such non-compliance, individually or
in the aggregate, would not have a Material Adverse Effect.  As to each product or product candidate of
the Company or any of its Subsidiaries subject to FDA regulation or similar
legal provision in any foreign jurisdiction, all manufacturing facilities of
the Company and its Subsidiaries are operated in compliance with the FDA’s
Quality System Regulation requirements at 21 C.F.R. Part 820, as applicable,
except where such non-compliance, individually or in the aggregate, would not
have a Material Adverse Effect.  Except
as set forth in the Commission Documents or the Registration Statement, neither
the Company nor any of its Subsidiaries has received any notice of proceedings
relating to the revocation or modification of any such Governmental Licenses or
relating to a potential violation of, failure to comply with, or request to
produce additional information under, any FDA rules and regulations, guidelines
or policies which, if the subject of any unfavorable decision, ruling or
finding, individually or in the aggregate, would have a Material Adverse
Effect.  Except as set forth in the
Commission Documents or the Registration Statement, neither the Company nor any
of its Subsidiaries has received any correspondence, notice or request from the
FDA, including, without limitation, notice that any one or more products or
product candidates of the Company or any of its Subsidiaries failed to receive
approval from the FDA for use for any one or more indications, and neither the
Company nor any of its Subsidiaries knows of any basis therefor.  This Section 4.14 does not relate to
environmental matters, such items being the subject of Section 4.15.

 

(b)           To the Company’s knowledge, the
Company or one or more of its Subsidiaries owns or possesses adequate patents,
patent rights, licenses, inventions, copyrights, know-how (including trade
secrets and other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures), trademarks, service marks, trade names,
trade dress, logos, copyrights and other intellectual property, including,
without limitation, all of the intellectual property described in the
Commission Documents as being owned or licensed by the Company (collectively, “Intellectual
Property”), necessary to carry on the business now operated by it.  Except as set forth in the Commission
Documents, there are no actions, suits or judicial proceedings pending, or to
the Company’s knowledge threatened, relating to patents or proprietary
information to which the Company or any of its Subsidiaries is a party or of
which any property of the Company or any of its Subsidiaries is subject, and
neither the Company nor any of its Subsidiaries has received any notice or is
otherwise aware of any infringement of or conflict with asserted rights of
others with respect to any Intellectual Property or of any facts or
circumstances which could render any Intellectual Property invalid or
inadequate to protect the interest of the Company and its Subsidiaries therein,
and which infringement or conflict (if the subject of any unfavorable decision,
ruling or finding) or invalidity or inadequacy, individually or in the
aggregate, would have a Material Adverse Effect.

(c)           All clinical trials conducted,
supervised or monitored by, or on behalf of, the Company or any of its
Subsidiaries have been conducted in compliance with all applicable federal,
state, local and foreign laws, and the regulations and requirements of any
applicable governmental entity, including, but not limited to, FDA good
clinical practice and good laboratory practice requirements, except where such
failure would not have a Material Adverse Effect.  Except as set forth in the Registration
Statement or the Commission Documents, neither 

  
 15
 

 

the Company nor
any of its Subsidiaries has received any notices or correspondence from the FDA
or any other governmental agency requiring the termination, suspension, delay
or modification of any pre-clinical or clinical trials conducted by, or on
behalf of, the Company or any of its Subsidiaries or in which the Company or
any of its Subsidiaries has participated that are described in the Registration
Statement or the Commission Documents, if any, or the results of which are
referred to in the Registration Statement or the Commission Documents, in each
case except as would not have a Material Adverse Effect.

Section 4.15         Environmental Compliance.  Except as disclosed in the Commission
Documents, the Company and each of its Subsidiaries has obtained all material
approvals, authorization, certificates, consents, licenses, orders and permits
or other similar authorizations of all governmental authorities, or from any
other person, that are required under any Environmental Laws, except for any
approvals, authorization, certificates, consents, licenses, orders and permits
or other similar authorizations the failure of which to obtain does not or
would not have a Material Adverse Effect. 
“Environmental Laws” shall mean all applicable laws relating to
the protection of the environment including, without limitation, all
requirements pertaining to reporting, licensing, permitting, controlling,
investigating or remediating emissions, discharges, releases or threatened
releases of hazardous substances, chemical substances, pollutants, contaminants
or toxic substances, materials or wastes, whether solid, liquid or gaseous in
nature, into the air, surface water, groundwater or land, or relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of hazardous substances, chemical substances, pollutants,
contaminants or toxic substances, material or wastes, whether solid, liquid or
gaseous in nature.  Except for such
instances as would not, individually or in the aggregate, have a Material
Adverse Effect, to the best of the Company’s knowledge, there are no past or
present events, conditions, circumstances, incidents, actions or omissions
relating to or in any way affecting the Company or its Subsidiaries that
violate or could reasonably be expected to violate any Environmental Law after
the Effective Date or that could reasonably be expected to give rise to any
environmental liability, or otherwise form the basis of any claim, action,
demand, suit, proceeding, hearing, study or investigation (i) under any
Environmental Law, or (ii) based on or related to the manufacture, processing,
distribution, use, treatment, storage (including without limitation underground
storage tanks), disposal, transport or handling, or the emission, discharge,
release or threatened release of any hazardous substance.

 

Section 4.16         Material Agreements.  Except as set forth in the Commission
Documents or as otherwise disclosed to Investor, neither the Company nor any
Subsidiary of the Company is a party to any written or oral contract,
instrument, agreement commitment, obligation, plan or arrangement, a copy of
which would be required to be filed with the Commission as an exhibit to an
annual report on Form 10-K (collectively, “Material Agreements”).  Except as set forth in the Commission
Documents, the Company and each of its Subsidiaries have performed in all
material respects all the obligations required to be performed by them under
the Material Agreements, have received no notice of default or an event of
default by the Company or any of its Subsidiaries thereunder and are not aware
of any basis for the assertion thereof, and neither the Company or any of its
Subsidiaries nor, to the knowledge of the Company, any other contracting party
thereto are in default under any Material Agreement now in effect, the result
of which would have a Material Adverse Effect. 
Except as set forth in the Commission Documents, each of the Material
Agreements is in full force and effect, and constitutes a legal, valid and 

  
 16
 

 

binding obligation enforceable in accordance with its terms against the
Company and/or any of its Subsidiaries, except as such enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium,
liquidation, conservatorship, receivership or similar laws relating to, or
affecting generally the enforcement of, creditor’s rights and remedies or by
other equitable principles of general application.

 

Section 4.17         Transactions With Affiliates.  Except as set forth in the Commission
Documents, there are no loans, leases, agreements, contracts, royalty
agreements, management contracts, service arrangements or other continuing
transactions exceeding $120,000 between (a) the Company or any Subsidiary, on
the one hand, and (b) any person or entity who would be covered by Item 404(a)
of Regulation S-K, on the other hand. 
Except as disclosed in the Commission Documents, there are no
outstanding amounts payable to or receivable from, or advances by the Company
or any of its Subsidiaries to, and neither the Company nor any of its
Subsidiaries is otherwise a creditor of or debtor to, any beneficial owner of
more than 5% of the outstanding shares of Common Stock, or any director,
employee or affiliate of the Company or any of its Subsidiaries, other than (i)
reimbursement for reasonable expenses incurred on behalf of the Company or any
of its Subsidiaries or (ii) as part of the normal and customary terms of such
persons’ employment or service as a director with the Company or any of its
Subsidiaries.

 

Section 4.18         Securities Act.  The Company has complied with all applicable
federal and state securities laws in connection with the offer, issuance and
sale of the Shares hereunder.

 

(i)            The Company has prepared and filed
with the Commission in accordance with the provisions of the Securities Act the
Registration Statement, including the Base Prospectus, relating to the
Shares.  The Registration Statement was
declared effective by order of the Commission on November 2, 2006.  As of the date hereof, no stop order
suspending the effectiveness of the Registration Statement has been issued by
the Commission or is continuing in effect under the Securities Act and no
proceedings therefor are pending before or, to the Company’s knowledge,
threatened by the Commission.  No order
preventing or suspending the use of the Prospectus or any Permitted Free
Writing Prospectus has been issued by the Commission.

(ii)           The Company meets the requirements
for the use of Form S-3 under the Securities Act.  The Commission has not notified the Company
of any objection to the use of the form of the Registration Statement.  The Registration Statement complied in all
material respects on the date on which it was declared effective by the
Commission and on the Effective Date of this Agreement, and will comply in all
material respects on each applicable Fixed Request Exercise Date and on each
applicable Settlement Date, with the requirements of the Securities Act and the
Registration Statement (including the documents incorporated by reference
therein) did not as of the Effective Date and shall not on each applicable
Fixed Request Exercise Date and on each applicable Settlement Date contain an
untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading; provided that this representation and warranty does not
apply to statements in or omissions from the Registration Statement made in
reliance upon and in conformity with information relating to the Investor
furnished to the Company in writing by or on behalf of the Investor expressly
for use therein. The Registration Statement, as of the Effective Date, meets
the requirements set forth in Rule 415(a)(1)(x) under the Securities Act.  The Prospectus 

  
 17
 

 

complied in all material
respects on its date and on the Effective Date, and will comply in all material
respects on each applicable Fixed Request Exercise Date and on each applicable
Settlement Date, with the requirements of the Securities Act and did not on its
date and on the Effective Date and shall not on each applicable Fixed Request
Exercise Date and on each applicable Settlement Date contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided that
this representation and warranty does not apply to statements in or omissions
from the Prospectus made in reliance upon and in conformity with information
relating to the Investor furnished to the Company in writing by or on behalf of
the Investor expressly for use therein.

(iii)          Each Prospectus Supplement required to
be filed pursuant to Sections 1.4 and 5.9 hereof, when filed with the
Commission under Rule 424(b) under the Securities Act and on the applicable
Settlement Date, shall comply in all material respects with the provisions of
the Securities Act and shall not when filed or on the Settlement Date contain
an untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in the light
of the circumstances under which they are made, not misleading, except that
this representation and warranty does not apply to statements in or omissions
from any Prospectus Supplement made in reliance upon and in conformity with
information relating to the Investor furnished to the Company in writing by or
on behalf of the Investor expressly for use therein.

(iv)          At the earliest time after the filing
of the Registration Statement that the Company or another offering participant
made a bona fide offer (within the meaning of Rule 164(h)(2) under the
Securities Act) relating to the Shares, the Company was not and is not an
Ineligible Issuer (as defined in Rule 405 under the Securities Act), without
taking account of any determination by the Commission pursuant to Rule 405 that
it is not necessary that the Company be considered an Ineligible Issuer.  Each Permitted Free Writing Prospectus (a)
shall conform in all material respects to the requirements of the Securities
Act on the date of its first use, (b) when considered together with the
Prospectus on each applicable Fixed Request Exercise Date and on each
applicable Settlement Date, shall not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they are made, not misleading, and (c) shall not include any
information that conflicts with the information contained in the Registration
Statement, including any document incorporated by reference therein and any
Prospectus Supplement deemed to be a part thereof that has not been superseded
or modified.  The immediately preceding
sentence does not apply to statements in or omissions from any Permitted Free
Writing Prospectus made in reliance upon and in conformity with information
relating to the Investor furnished to the Company in writing by or on behalf of
the Investor expressly for use therein.

(v)           Prior to the Effective Date, the
Company has not distributed any offering material in connection with the
offering and sale of the Shares.  From
and after the Effective Date and prior to the completion of the distribution of
the Shares, the Company shall not distribute any offering material in
connection with the offering and sale of the Shares, other than the
Registration Statement, the Base Prospectus as supplemented by any Prospectus
Supplement or a Permitted Free Writing Prospectus.

  
 18
 

 

Section 4.19         Employees.  As of the Effective Date, neither the Company
nor any Subsidiary of the Company has any collective bargaining arrangements or
agreements covering any of its employees, except as set forth in the Commission
Documents.  As of the Effective Date,
except as disclosed in the Registration Statement or the Commission Documents,
no officer, consultant or key employee of the Company or any Subsidiary whose
termination, either individually or in the aggregate, would reasonably be
expected to have a Material Adverse Effect, has terminated or, to the knowledge
of the Company, has any present intention of terminating his or her employment
or engagement with the Company or any Subsidiary.

 

Section 4.20         Use of Proceeds.  The proceeds from the sale of the Shares
shall be used by the Company and its Subsidiaries as set forth in the Base
Prospectus and any Prospectus Supplement filed pursuant to Sections 1.4 and
5.9.

 

Section 4.21         Public Utility Holding Company Act
and Investment Company Act Status.  The Company is not a “holding company” or a “public
utility company” as such terms are defined in the Public Utility Holding
Company Act of 1935, as amended. The Company is not, and as a result of the
consummation of the transactions contemplated by this Agreement and the
application of the proceeds from the sale of the Shares as set forth in the
Base Prospectus and any Prospectus Supplement shall not be, an “investment
company” or a company “controlled” by an “investment company,” within the
meaning of the Investment Company Act of 1940, as amended.

 

Section 4.22         ERISA.  No liability to the Pension Benefit Guaranty
Corporation has been incurred with respect to any Plan by the Company or any of
its Subsidiaries which has had or would have a Material Adverse Effect.  No “prohibited transaction” (as defined in
Section 406 of ERISA or Section 4975 of the Code) or “accumulated funding
deficiency” (as defined in Section 203 of ERISA) or any of the events set forth
in Section 4043(b) of ERISA has occurred with respect to any Plan which has had
or would have a Material Adverse Effect, and the execution and delivery of this
Agreement and the issuance and sale of the Shares hereunder shall not result in
any of the foregoing events.  Each Plan
is in compliance in all material respects with applicable law, including ERISA
and the Code; the Company has not incurred and does not expect to incur
liability under Title IV of ERISA with respect to the termination of, or
withdrawal from, any Plan; and each Plan for which the Company would have any
liability that is intended to be qualified under Section 401(a) of the Code is
so qualified in all material respects and nothing has occurred, whether by
action or failure to act, which would cause the loss of such qualifications.  As used in this Section 4.22, the term “Plan”
shall mean an “employee pension benefit plan” (as defined in Section 3
of ERISA) which is or has been established or maintained, or to which
contributions are or have been made, by the Company or any Subsidiary or by any
trade or business, whether or not incorporated, which, together with the
Company or any Subsidiary, is under common control, as described in
Section 414(b) or (c) of the Code.

 

Section 4.23         Taxes.  The Company (i) has filed all necessary
federal, state and foreign income and franchise tax returns or has duly
requested extensions thereof, except for those the failure of which to file
would not have a Material Adverse Effect, (ii) has paid all federal, state,
local and foreign taxes due and payable for which it is liable, except to the
extent that any such taxes are being contested in good faith and by appropriate
proceedings, except for such taxes the 

  
 19
 

 

failure of which to pay would not have a Material Adverse Effect, and
(iii) does not have any tax deficiency or claims outstanding or assessed or, to
the best of the Company’s knowledge, proposed against it which would have a
Material Adverse Effect.

 

Section 4.24         Insurance.  The Company carries, or is covered by,
insurance in such amounts and covering such risks as the Company deems adequate
for the conduct of its and its Subsidiaries’ businesses and the value of their
respective properties and as is customary for companies engaged in similar
businesses in similar industries.

 

Section 4.25         Acknowledgement Regarding Investor’s
Purchase of Shares. 
The Company acknowledges and agrees that the Investor is acting solely
in the capacity of an arm’s length purchaser with respect to this Agreement and
the transactions contemplated hereunder. The Company further acknowledges that
the Investor is not acting as a financial advisor or fiduciary of the Company
(or in any similar capacity) with respect to this Agreement and the
transactions contemplated hereunder, and any advice given by the Investor or
any of its representatives or agents in connection with this Agreement and the
transactions contemplated hereunder is merely incidental to the Investor’s
purchase of the Shares.

 

ARTICLE V

COVENANTS

The Company covenants with the Investor, and the
Investor covenants with the Company, as follows, which covenants of one party
are for the benefit of the other party, during the Investment Period:

Section 5.1            Securities Compliance;NASD Filing.

 

(i)            The Company shall notify the
Commission and the Trading Market, as applicable, in accordance with their
respective rules and regulations, of the transactions contemplated by this
Agreement, and shall take all necessary action, undertake all proceedings and
obtain all registrations, permits, consents and approvals for the legal and
valid issuance of the Shares to the Investor in accordance with the terms of
this Agreement.

(ii)           As promptly as practicable, the
Investor shall prepare and, no later than 24 hours after the Effective Date,
file with the NASD’s Corporate Financing Department via CobraDesk all documents
and information required to be filed with the NASD pursuant to Rule 2710 of the
NASD’s Conduct Rules with regard to the transactions contemplated by this
Agreement (the “NASD Filing”).  In
connection therewith, on the Effective Date, the Company shall pay to the NASD
by wire transfer of immediately available funds the applicable filing fee with
respect to the NASD Filing, and the Company shall be solely responsible for
payment of such fee.  The Company hereby
agrees to provide the Investor all requisite information and otherwise to
assist the Investor in a timely fashion in order for the Investor to complete
the preparation and submission of the NASD Filing in accordance with this
Section 5.1(ii) and to promptly respond to any inquiries or requests from NASD
or its staff.  Each party hereto shall
(A) promptly notify the other party of any communication to that party or its
affiliates from the NASD, including, without limitation, any request from the
NASD or its staff for amendments or supplements to or additional information in
respect of the NASD Filing and permit the other

  
 20

 

 

party to review in advance any proposed written communication to the
NASD and (B) furnish the other party with copies of all written correspondence,
filings and communications between them and their affiliates and their
respective representatives and advisors, on the one hand, and the NASD or
members of its staff, on the other hand, with respect to this Agreement or the
transactions contemplated hereby.  Each
of the parties hereto agrees to use its commercially reasonable efforts to
take, or cause to be taken, all actions, and to do, or cause to be done, and to
assist and cooperate with the other party in doing, all things necessary,
proper or advisable to obtain as promptly as practicable (but in no event later
than 60 days after the Effective Date) written confirmation from the NASD to
the effect that the NASD’s Corporate Financing Department has determined not to
raise any objection with respect to the fairness and reasonableness of the
terms of this Agreement or the transactions contemplated hereby; provided,
however, that the Investor shall not be required to (x) disclose to the
NASD or to any other governmental agency, person or entity any business,
financial or other information that the Investor deems, in its sole and
absolute discretion, to be proprietary, confidential or otherwise sensitive
information, (y) amend, modify or change any of the terms or conditions of this
Agreement or (z) otherwise take any other action, including, without
limitation, modifying the Discount Price thresholds referred to in Section 2.2
or the amount of fees and commissions to be paid to the Broker-Dealer in
connection with the transactions contemplated by this Agreement, in each case,
in such a manner that would, in the Investor’s sole and absolute discretion,
render the terms and conditions of this Agreement and the transactions
contemplated hereby to be no longer advisable to the Investor.  Notwithstanding anything to the contrary
contained in this Agreement, the Company shall not be permitted to deliver any
Fixed Request Notice to the Investor, and the Investor shall not be obligated
to purchase any Shares pursuant to a Fixed Request Notice, unless and until the
parties hereto shall have received written confirmation from the NASD to the
effect that the NASD’s Corporate Financing Department has determined not to
raise any objection with respect to the fairness and reasonableness of the
terms of this Agreement or the transactions contemplated hereby.

Section 5.2            Registration and Listing.  The Company shall take all action necessary
to cause the Common Stock to continue to be registered as a class of securities
under Sections 12(b) or 12(g) of the Exchange Act, shall comply with its
reporting and filing obligations under the Exchange Act, and shall not take any
action or file any document (whether or not permitted by the Securities Act) to
terminate or suspend such registration or to terminate or suspend its reporting
and filing obligations under the Exchange Act or Securities Act, except as
permitted herein. The Company shall take all action necessary to continue the
listing and trading of its Common Stock and the listing of the Shares purchased
by Investor hereunder on the Trading Market, and shall comply with the Company’s
reporting, filing and other obligations under the bylaws, listed securities
maintenance standards and other rules of the Trading Market.

Section 5.3            Compliance
with Laws.

(i)            The Company shall comply, and cause
each Subsidiary to comply, (a) with all laws, rules, regulations and orders
applicable to the business and operations of the Company and its Subsidiaries
except as would not have a Material Adverse Effect and (b) with all applicable
provisions of the Securities Act, the Exchange Act, the rules and regulations
of the NASD and the listing standards of the Trading Market.  Without limiting the generality of the
foregoing, neither the Company nor any of its officers, directors or affiliates
has taken or will

 21
 

 

take, directly or
indirectly, any action designed or intended to stabilize or manipulate the
price of any security of the Company, or which caused or resulted in, or which
would in the future reasonably be expected to cause or result in, stabilization
or manipulation of the price of any security of the Company.

(ii)           The Investor shall comply with all laws,
rules, regulations and orders applicable to the performance by it of its
obligations under this Agreement and its investment in the Shares, except as
would not, individually or in the aggregate, prohibit or otherwise interfere
with the ability of the Investor to enter into and perform its obligations
under this Agreement in any material respect. Without limiting the foregoing,
the Investor shall comply with all applicable provisions of the Securities Act
and the Exchange Act.

Section 5.4            Keeping of Records and
Books of Account; Foreign Corrupt Practices Act.

(i)            The Company shall keep and cause
each Subsidiary to keep adequate records and books of account, in which
complete entries shall be made in accordance with GAAP consistently applied,
reflecting all financial transactions of the Company and its Subsidiaries, and
in which, for each fiscal year, all proper reserves for depreciation,
depletion, obsolescence, amortization, taxes, bad debts and other purposes in
connection with its business shall be made. 
The Company shall maintain a system of internal accounting controls
which are sufficient to provide reasonable assurance that (a) transactions are
executed with management’s authorization; (b) transactions are recorded as
necessary to permit preparation of the consolidated financial statements of the
Company and to maintain accountability for the Company’s consolidated assets;
(c) access to the Company’s assets is permitted only in accordance with
management’s authorization; and (d) the reporting of the Company’s assets is
compared with existing assets at regular intervals.

(ii)           Neither the Company, nor any of its
Subsidiaries, nor to the knowledge of the Company, any of their respective
directors, officers, agents, employees or any other persons acting on their
behalf shall, in connection with the operation of their respective businesses,
(a) use any corporate funds for unlawful contributions, payments, gifts or
entertainment or to make any unlawful expenditures relating to political
activity to government officials, candidates or members of political parties or
organizations, (b) pay, accept or receive any unlawful contributions, payments,
expenditures or gifts, or (c) violate or operate in noncompliance with any
export restrictions, anti-boycott regulations, embargo regulations or other
applicable domestic or foreign laws and regulations.

(iii)          Subject
to the requirements of Section 5.12 hereof, from time to time from and after
the period beginning with the third Trading Day immediately preceding each Fixed
Request Exercise Date through and including the applicable Settlement Date, the
Company shall make available for inspection and review by the Investor,
customary documentation allowing the Investor and/or its appointed counsel or
advisors to conduct due diligence.

Section 5.5            Limitations on Holdings
and Issuances.  At no time
during the term of this Agreement shall the Investor directly or indirectly own
more than 9.9% of the then issued and outstanding shares of Common Stock. The
Company shall not be obligated to issue and the

 22
 

 

Investor shall not be obligated to purchase any shares of Common Stock
which would result in the issuance under this Agreement to the Investor at any
time of Shares which, when aggregated with all other shares of Common Stock then
owned beneficially by the Investor, would result in the beneficial ownership by
the Investor of more than 9.9% of the then issued and outstanding shares of the
Common Stock.

Section 5.6            Other
Agreements and Other Financings.

(i)            The Company shall not enter into,
announce or recommend to its stockholders any agreement, plan, arrangement or
transaction in or of which the terms thereof would restrict, materially delay,
conflict with or impair the ability or right of the Company or any Subsidiary
to deliver Shares to the Investor in respect of a Fixed Request on the
applicable Settlement Date (notwithstanding any early termination thereof by
the Company and/or the Investor in accordance with the terms of this
Agreement).

(ii)           The Company shall notify the Investor,
within 48 hours, if it enters into any agreement, plan, arrangement or
transaction with a third party, the principal purpose of which is to obtain
during a Pricing Period an Other Financing not constituting an Acceptable
Financing (an “Other Financing Notice”); provided, however,
that the Company shall notify the Investor as promptly as practicable, but in
no event later than 24 hours after (an “Integration Notice”) if it
enters into any agreement, plan, arrangement or transaction with a third party,
the principal purpose of which is to obtain an Other Financing which would be
integrated with the transactions contemplated by this Agreement for purposes of
determining whether approval of the Company’s stockholders, in order for the
Company to make Fixed Request Notice(s) hereunder, is required under any bylaw,
listed securities maintenance standards or other rules of the Trading Market
and, if required under applicable law, including, without limitation,
Regulation FD promulgated by the Commission, or under the applicable rules and
regulations of the Trading Market, the Company shall publicly disclose such
information in accordance with Regulation FD and the applicable rules and
regulations of the Trading Market. For purposes of this Section 5.6(ii), any press
release issued by, or Commission Document filed by, the Company shall
constitute sufficient notice, provided that it is issued or filed, as the case
may be, within the time requirements set forth in the first sentence of this
Section 5.6(ii) for an Other Financing Notice or an Integration Notice, as
applicable.  For greater certainty, the
entry by the Company into any agreement, plan, arrangement or transaction with
a third party to obtain an Other Financing outside of a Pricing Period shall
not trigger any requirement for the Company to deliver an Other Financing
Notice.  During any Pricing Period in
which the Company is required to provide notice pursuant to the first sentence
of this Section 5.6(ii), the Investor shall (i) have the option to purchase the
Shares subject to the Fixed Request at (x) the price therefor in accordance
with the terms of this Agreement or (y) the third party’s per share purchase
price in connection with the Other Financing, net of such third party’s
discounts, Warrant Value and fees, or (ii) the Investor may elect to not
purchase any Shares subject to the Fixed Request for that Pricing Period. An “Other
Financing” shall mean (x) the issuance of Common Stock for a purchase price
less than, or the issuance of securities convertible into or exchangeable for
Common Stock at an exercise or conversion price (as the case may be) less than,
the then Current Market Price of the Common Stock (in each case, after all
fees, discounts, Warrant Value and commissions associated with the transaction)
(a “Below Market Offering”); (y) the implementation by the Company of
any mechanism in respect of any securities convertible into

 23
 

 

or exchangeable for
Common Stock for the reset of the purchase price of the Common Stock to below
the then Current Market Price of the Common Stock (including, without
limitation, any antidilution or similar adjustment provisions in respect of any
Company securities); or (z) the issuance of options, warrants or similar rights
of subscription in each case not constituting an Acceptable Financing. “Acceptable
Financing” shall mean the issuance by the Company of: (1) shares of Common
Stock or securities convertible into or exchangeable for Common Stock other
than in connection with a Below Market Offering; (2) shares of Common Stock or
securities convertible into or exchangeable for Common Stock in connection with
awards under the Company’s benefit and equity plans and arrangements, stock
holder rights plans or pursuant to consulting or other vendor agreements and
the issuance of shares of Common Stock upon the conversion, exercise or
exchange thereof; (3) shares of Common Stock issuable upon the conversion or
exchange of equity awards or convertible or exchangeable securities outstanding
as of the Effective Date; (4) shares of Common Stock and/or warrants or similar
rights to subscribe for the purchase of shares of Common Stock in connection
with technology sharing, licensing, research and joint development agreements
(or amendments thereto) with third parties, and the issuance of shares of
Common Stock upon the exercise thereof; and (5) shares of Common Stock and/or
warrants or similar rights to subscribe for the purchase of shares of Common
Stock issued in connection with equipment financings and/or real property
leases (or amendments thereto) and the issuance of shares of Common Stock upon
the exercise thereof.

Section 5.7            Stop Orders.  The Company shall advise the Investor
immediately and shall confirm such advice in writing: (i) of the Company’s
receipt of notice of any request by the Commission for amendment of or a
supplement to the Registration Statement, the Prospectus, any Permitted Free
Writing Prospectus or for any additional information; (ii) of the Company’s
receipt of notice of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of the suspension
of qualification of the Shares for offering or sale in any jurisdiction or the
initiation of any proceeding for such purpose; and (iii) of the Company
becoming aware of the happening of any event, which makes any statement of a
material fact made in the Prospectus or any Permitted Free Writing Prospectus
untrue or which requires the making of any additions to or changes to the
statements then made in the Prospectus or any Permitted Free Writing Prospectus
in order to state a material fact required by the Securities Act to be stated
therein or necessary in order to make the statements then made therein, in
light of the circumstances under which they were made, not misleading, or of
the necessity to amend the Registration Statement or supplement the Prospectus
or any Permitted Free Writing Prospectus to comply with the Securities Act or
any other law. If at any time the Commission shall issue any stop order
suspending the effectiveness of the Registration Statement, the Company shall
use commercially reasonable efforts to obtain the withdrawal of such order at
the earliest possible time.  The Company
shall also advise the Investor immediately and shall confirm such advice in
writing of the Company becoming aware of the happening of any event, which
makes any statement made in the NASD Filing untrue or which requires the making
of any additions to or changes to the statements then made in the NASD Filing
in order to comply with Rule 2710 of the NASD’s Conduct Rules.

 24
 

 

Section 5.8            Amendments to the
Registration Statement; Prospectus Supplements; Free Writing Prospectuses.

(i)            Except as provided in this Agreement
and other than periodic reports required to be filed pursuant to the Exchange
Act, the Company shall not file with the Commission any amendment to the
Registration Statement that relates to the Investor, the Agreement or the
transactions contemplated hereby or file with the Commission any Prospectus
Supplement that relates to the Investor, this Agreement or the transactions
contemplated hereby with respect to which (a) the Investor shall not previously
have been advised, (b) the Company shall not have given due consideration to
any comments thereon received from the Investor or its counsel, or (c) the
Investor shall reasonably object after being so advised, unless it is necessary
to amend the Registration Statement or make any supplement to the Prospectus to
comply with the Securities Act or any other applicable law or regulation, in
which case the Company shall immediately so inform the Investor, the Investor
shall be provided with a reasonable opportunity to review and comment upon any
disclosure relating to the Investor and the Company shall expeditiously furnish
to the Investor an electronic copy thereof. In addition, for so long as, in the
reasonable opinion of counsel for the Investor, the Prospectus (or in lieu
thereof, the notice referred to in Rule 173(a) under the Securities Act) is
required to be delivered in connection with any purchase of Shares by the
Investor, the Company shall not file any Prospectus Supplement with respect to
the Shares without delivering or making available a copy of such Prospectus
Supplement, together with the Base Prospectus, to the Investor promptly.

(ii)           The Company agrees that, unless it
obtains the prior written consent of the Investor, it has not made and will not
make an offer relating to the Shares that would constitute an Issuer Free
Writing Prospectus or that would otherwise constitute a Free Writing Prospectus
required to be filed by the Company or the Investor with the Commission or
retained by the Company or the Investor under Rule 433 under the Securities
Act.  The Investor agrees that, unless it
obtains the prior written consent of the Company, it has not made and will not
make an offer relating to the Shares that would constitute a Free Writing
Prospectus required to be filed by the Company with the Commission or retained
by the Company under Rule 433 under the Securities Act.  Any such Issuer Free Writing Prospectus or
other Free Writing Prospectus consented to by the Investor or the Company is
referred to in this Agreement as a “Permitted Free Writing Prospectus.”  The Company agrees that (x) it has treated
and will treat, as the case may be, each Permitted Free Writing Prospectus as
an Issuer Free Writing Prospectus and (y) it has complied and will comply, as
the case may be, with the requirements of Rules 164 and 433 under the
Securities Act applicable to any Permitted Free Writing Prospectus, including
in respect of timely filing with the Commission, legending and record keeping.

Section 5.9            Prospectus Delivery.  The Company shall file with the Commission a
Prospectus Supplement pursuant to Rule 424(b) under the Securities Act on the
first Trading Day immediately following the last Trading Day of each Pricing
Period.  The Company shall provide the
Investor a reasonable opportunity to comment on a draft of each such Prospectus
Supplement and any Issuer Free Writing Prospectus, shall give due consideration
to all such comments and, subject to the provisions of Section 5.8 hereof,
shall deliver or make available to the Investor, without charge, an electronic
copy of each form of Prospectus Supplement, together with the Base Prospectus,
and any Permitted Free Writing Prospectus on each applicable Settlement
Date.  The Company consents to the use of
the Prospectus (and of any Prospectus Supplement thereto) in accordance with
the provisions of the Securities Act and with the securities or “blue sky” laws
of the jurisdictions in which the Shares may be sold by the Investor, in
connection with the offering and sale of the Shares and for such period of time
thereafter as the Prospectus (or in lieu

 25
 

 

thereof, the notice referred to in Rule 173(a) under the Securities
Act) is required by the Securities Act to be delivered in connection with sales
of the Shares. If during such period of time any event shall occur that in the
judgment of the Company and its counsel is required to be set forth in the
Prospectus or any Permitted Free Writing Prospectus or should be set forth
therein in order to make the statements made therein, in the light of the
circumstances under which they were made, not misleading, or if it is necessary
to supplement or amend the Prospectus or any Permitted Free Writing Prospectus
to comply with the Securities Act or any other applicable law or regulation,
the Company shall forthwith prepare and, subject to Section 5.8 above, file
with the Commission an appropriate Prospectus Supplement to the Prospectus (or
supplement to the Permitted Free Writing Prospectus) and shall expeditiously
furnish or make available to the Investor an electronic copy thereof.

Section 5.10         Selling
Restrictions.

(i)            The Investor covenants that from and
after the date hereof through and including the 90th day next following the termination of this
Agreement (the “Restricted Period”), neither the Investor nor any of its
affiliates (within the meaning of the Exchange Act) nor any entity managed by
the Investor shall, directly or indirectly, sell any securities of the Company,
except the Shares that it owns or has the right to purchase as provided in a
Fixed Request Notice.  During the
Restricted Period, neither the Investor or any of its affiliates nor any entity
managed or controlled by the Investor shall sell any shares of Common Stock of
the Company it does not “own” or have the unconditional right to receive under
the terms of this Agreement (within the meaning of Rule 200 of Regulation SHO
promulgated by the Commission under the Exchange Act), including Shares in any
account of the Investor or in any account directly or indirectly managed or
controlled by the Investor or any of its affiliates or any entity managed or
controlled by the Investor.  Without
limiting the generality of the foregoing, prior to and during the Restricted
Period, neither the Investor nor any of its affiliates nor any entity managed
or controlled by the Investor or any of its affiliates shall enter into a short
position with respect to shares of Common Stock of the Company, including in
any account of the Investor’s or in any account directly or indirectly managed
or controlled by the Investor or any of its Affiliates or any entity managed or
controlled by the Investor, except that the Investor may sell Shares that it is
obligated to purchase under a pending Fixed Request Notice but has not yet
taken possession of so long as the Investor (or the Broker-Dealer, as
applicable) covers any such sales with the Shares purchased pursuant to such
Fixed Request Notice; provided, however, that the Investor (or
the Broker-Dealer, as applicable) shall not be required to cover any such sales
with the Shares purchased pursuant to such Fixed Request Notice if (a) the
Fixed Request is terminated by mutual agreement of the Company and the Investor
and, as a result of such termination, no Shares are delivered to the Investor
under this Agreement or (b) the Company otherwise fails to deliver such Shares
to the Investor on the applicable Settlement Date upon the terms and subject to
the provisions of this Agreement.  Prior
to and during the Restricted Period, the Investor shall not grant any option to
purchase or acquire any right to dispose or otherwise dispose for value of any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for, or warrants to purchase, any shares of Common Stock, or enter
into any swap, hedge or other agreement that transfers, in whole or in part,
the economic risk of ownership of the Common Stock, except for such sales
expressly permitted by this Section 5.10(i).

 26
 

 

(ii)           In addition to the foregoing, in
connection with any sale of the Company’s securities (including any sale
permitted by paragraph (i) above), the Investor shall comply in all respects
with all applicable laws, rules, regulations and orders, including, without
limitation, the requirements of the Securities Act and the Exchange Act.

Section 5.11         Effective Registration
Statement.  During the
Investment Period, the Company shall use its best efforts to maintain the
continuous effectiveness of the Registration Statement under the Securities
Act.

Section 5.12         Non-Public Information.  Neither the Company nor any of its directors,
officers or agents shall disclose any material non-public information about the
Company to the Investor, unless a timely public announcement thereof is made by
the Company in the manner contemplated by Regulation FD.

Section 5.13         Broker/Dealer.  The Investor shall use one or more
broker-dealers to effectuate all sales, if any, of the Shares that it may
purchase from the Company pursuant to this Agreement which (or whom) shall be
unaffiliated with the Investor and not then currently engaged or used by the
Company (collectively, the “Broker-Dealer”).  The Investor shall provide the Company with
all information regarding the Broker-Dealer reasonably requested by the
Company.  The Investor shall be solely
responsible for all fees and commissions of the Broker-Dealer.

Section 5.14         Update of Disclosure Schedule.  During the Investment Period, the Company
shall from time to time update the Disclosure Schedule as may be required to
satisfy the condition set forth in Section 6.3(i).  For purposes of this Section 5.14, any
disclosure made in a schedule to the Compliance Certificate shall be deemed to
be an update of the Disclosure Schedule. 
Notwithstanding anything in this Agreement to the contrary, no update to
the Disclosure Schedule pursuant to this Section 5.14 shall cure any breach of
a representation or warranty of the Company contained in this Agreement and
shall not affect any of the Investor’s remedies with respect thereto.

ARTICLE VI

OPINION OF COUNSEL AND CERTIFICATE; CONDITIONS TO THE SALE AND

PURCHASE OF THE SHARES

Section 6.1            Opinion of Counsel and
Certificate.  Simultaneously
with the execution and delivery of this Agreement, the Investor has received
and relied upon (i) an opinion of outside counsel to the Company, dated the
Effective Date, in the form mutually agreed to by the parties hereto, and (ii)
a certificate from the Company, dated the Effective Date, in the form of Exhibit
C hereto.

Section 6.2            Conditions Precedent to the
Obligation of the Company.  The obligation hereunder of the Company to
issue and sell the Shares to the Investor under any Fixed Request Notice or
Optional Amount is subject to the satisfaction or (to the extent permitted by
applicable law) waiver of each of the conditions set forth below. These
conditions are for the Company’s sole benefit and (to the extent permitted by
applicable law) may be waived by the Company at any time in its sole
discretion.

 27
 

 

(i)            Accuracy of the Investor’s
Representations and Warranties. 
The representations and warranties of the Investor contained in this
Agreement (i) that are not qualified by “materiality” shall have been true and
correct in all material respects when made and shall be true and correct in all
material respects as of the applicable Fixed Request Exercise Date and the
applicable Settlement Date with the same force and effect as if made on such dates,
except to the extent such representations and warranties are as of another
date, in which case, such representations and warranties shall be true and
correct in all material respects as of such other date and (ii) that are
qualified by “materiality” shall have been true and correct when made and shall
be true and correct as of the applicable Fixed Request Exercise Date and the
applicable Settlement Date with the same force and effect as if made on such
dates, except to the extent such representations and warranties are as of
another date, in which case, such representations and warranties shall be true
and correct as of such other date.

(ii)           Registration Statement.  The Registration Statement is effective and
neither the Company nor the Investor shall have received notice that the
Commission has issued or intends to issue a stop order with respect to the
Registration Statement.  The Company
shall have a maximum dollar amount of Shares registered under the Registration
Statement which are in an amount not less than the maximum dollar amount worth
of Shares issuable pursuant to all Fixed Request Notices and Optional Amounts
during the Investment Period.  The
Current Report shall have been filed with the Commission, as required pursuant
to Section 1.4, and all Prospectus Supplements shall have been filed with the
Commission, as required pursuant to Sections 1.4 and 5.9 hereof, to disclose
the sale of the Shares prior to each Settlement Date, as applicable.  Any other material required to be filed by
the Company or any other offering participant pursuant to Rule 433(d) under the
Securities Act shall have been filed with the Commission within the applicable
time periods prescribed for such filings by Rule 433 under the Securities Act.

(iii)          Performance by the Investor.  The Investor shall have performed, satisfied
and complied in all material respects with all covenants, agreements and
conditions required by this Agreement to be performed, satisfied or complied
with by the Investor at or prior to the applicable Fixed Request Exercise Date
and the applicable Settlement Date.

(iv)          No Injunction.  No statute, regulation, order, decree, writ,
ruling or injunction shall have been enacted, entered, promulgated, threatened
or endorsed by any court or governmental authority of competent jurisdiction
which prohibits the consummation of or which would materially modify or delay
any of the transactions contemplated by this Agreement.

(v)           No
Suspension, Etc.  Trading
in the Common Stock shall not have been suspended by the Commission or the
Trading Market (except for any suspension of trading of limited duration agreed
to by the Company, which suspension shall be terminated prior to the applicable
Fixed Request Exercise Date and applicable Settlement Date), and, at any time prior
to the applicable Fixed Request Exercise Date and applicable Settlement Date,
none of the events described in clauses (i), (ii) and (iii) or the last
sentence of Section 5.7 shall have occurred, trading in securities generally as
reported on the Trading Market shall not have been suspended or limited, nor
shall a banking moratorium have been declared either by the United States or
New York State authorities, nor shall there have occurred any material outbreak
or escalation of hostilities or other national or international calamity or
crisis of such magnitude in its effect on,

 28
 

 

or any material
adverse change in, any financial market which, in each case, in the reasonable
judgment of the Company, makes it impracticable or inadvisable to issue the
Shares.

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

(vii)         Aggregate Limit.  The issuance and sale of the Shares issuable
pursuant to such Fixed Request Notice or Optional Amount shall not violate
Sections 2.2, 2.12 and 5.5 hereof.

(viii)          No Unresolved NASD
Objection.   There shall
not exist any unresolved objection raised by the NASD’s Corporate Financing
Department with respect to the fairness and reasonableness of the terms of this
Agreement or the transactions contemplated hereby, and the parties hereto shall
have obtained written confirmation thereof from the NASD.

Section 6.3            Conditions Precedent to the
Obligation of the Investor.  The obligation hereunder of the Investor to
accept a Fixed Request or Optional Amount grant and to acquire and pay for the
Shares is subject to the satisfaction or (to the extent permitted by applicable
law) waiver, at or before each Fixed Request Exercise Date and each Settlement
Date, of each of the conditions set forth below. These conditions are for the
Investor’s sole benefit and (to the extent permitted by applicable law) may be
waived by the Investor at any time in its sole discretion.

(i)            Accuracy of the Company’s
Representations and Warranties. 
The representations and warranties of the Company contained in this
Agreement (i) that are not qualified by “materiality” or “Material Adverse
Effect” shall have been true and correct in all material respects when made and
shall be true and correct in all material respects as of the applicable Fixed
Request Exercise Date and the applicable Settlement Date with the same force
and effect as if made on such dates, except to the extent such representations
and warranties are as of another date, in which case, such representations and
warranties shall be true and correct in all material respects as of such other
date and (ii) that are qualified by “materiality” or “Material Adverse
Effect” shall have been true and correct when made and shall be true and
correct as of the applicable Fixed Request Exercise Date and the applicable
Settlement Date with the same force and effect as if made on such dates, except
to the extent such representations and warranties are as of another date, in
which case, such representations and warranties shall be true and correct as of
such other date.

(ii)           Registration Statement.
The Registration Statement is effective and neither the Company nor the
Investor shall have received notice that the Commission has issued or intends
to issue a stop order with respect to the Registration Statement. The Company
shall have a maximum dollar amount certain of Shares registered under the
Registration Statement which are in an amount not less than the maximum dollar
amount worth of Shares issuable pursuant to all Fixed Request Notices and
Optional Amounts during the Investment Period. 
The Current Report shall have been filed with the Commission, as
required pursuant to Section 1.4,

 29
 

 

and all Prospectus
Supplements shall have been filed with the Commission, as required pursuant to
Sections 1.4 and 5.9 hereof, to disclose the sale of the Shares prior to each
Settlement Date, as applicable, and an electronic copy of each such Prospectus
Supplement together with the Base Prospectus shall have been delivered or made
available to the Investor in accordance with Section 5.9 hereof.  Any other material required to be filed by
the Company or any other offering participant pursuant to Rule 433(d) under the
Securities Act shall have been filed with the Commission within the applicable
time periods prescribed for such filings by Rule 433 under the Securities Act.

(iii)          No Suspension.  Trading in the Common Stock shall not have
been suspended by the Commission or the Trading Market (except for any
suspension of trading of limited duration agreed to by the Company, which
suspension shall be terminated prior to the applicable Fixed Request Exercise
Date and applicable Settlement Date), and, at any time prior to the applicable
Fixed Request Exercise Date and applicable Settlement Date, none of the events
described in clauses (i), (ii) and (iii) or the last sentence of Section 5.7
shall have occurred, trading in securities generally as reported on the Trading
Market shall not have been suspended or limited, nor shall a banking moratorium
have been declared either by the United States or New York State authorities,
nor shall there have occurred any material outbreak or escalation of
hostilities or other national or international calamity or crisis of such
magnitude in its effect on, or any material adverse change in, any financial
market which, in each case, in the reasonable judgment of the Investor, makes
it impracticable or inadvisable to purchase the Shares.

(iv)          Performance of the Company.  The Company shall have performed, satisfied
and complied in all material respects with all covenants, agreements and
conditions required by this Agreement to be performed, satisfied or complied
with by the Company at or prior to the applicable Fixed Request Exercise Date
and the applicable Settlement Date and shall have delivered to the Investor on
the applicable Settlement Date the Compliance Certificate substantially in the
form attached hereto as Exhibit D.

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

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

(vii)         Aggregate Limit.  The issuance and sale of the Shares issuable
pursuant to such Fixed Request Notice or Optional Amount shall not violate
Sections 2.2, 2.12 and 5.5 hereof.

 30

 

(viii)        Shares Authorized.  The Shares issuable pursuant to such Fixed
Request Notice or Optional Amount shall have been duly authorized by all
necessary corporate action of the Company.

(ix)           Notification of Listing of
Shares.  The Company shall
have submitted to the Trading Market a notification form of listing of
additional shares related to the Shares issuable pursuant to such Fixed Request
or Optional Amount in accordance with the bylaws, listed securities maintenance
standards and other rules of the Trading Market.

(x)            Opinions of Counsel;
Bring-Down.  Subsequent to
the filing of the Current Report pursuant to Section 1.4 and prior to the first
Fixed Request Exercise Date, the Investor shall have received an opinion from
outside counsel to the Company in the form mutually agreed to by the parties
hereto.  On each Settlement Date, the
Investor shall have received an opinion “bring down” from outside counsel to
the Company in the form mutually agreed to by the parties hereto.

(xi)           No Unresolved NASD Objection.   There shall not exist any unresolved
objection raised by the NASD’s Corporate Financing Department with respect to
the fairness and reasonableness of the terms of this Agreement or the
transactions contemplated hereby, and the parties hereto shall have obtained
written confirmation thereof from the NASD.

(xii)          Payment of Investor’s
Counsel Fees; Due Diligence Expenses.  On the Effective Date, the Company shall have
paid by wire transfer of immediately available funds to an account designated
by the Investor’s counsel, the fees and expenses of the Investor’s counsel in
accordance with the proviso to the first sentence of Section 9.1(i) of this
Agreement.  On the 30th day of the third month in each calendar
quarter during the Investment Period, the Company shall have paid by wire
transfer of immediately available funds (a) to an account designated by the
Investor, the due diligence expenses incurred by the Investor and (b) to an
account designated by the Investor’s counsel, the fees and expenses of the Investor’s
counsel, in each case, in accordance with the provisions of the second sentence
of Section 9.1(i) of this Agreement.

ARTICLE VII

TERMINATION

Section 7.1            Term,
Termination by Mutual Consent.  Unless earlier terminated as provided
hereunder, this Agreement shall terminate automatically on the earliest of (i)
the first day of the month next following the 24-month anniversary of the
Effective Date (the “Investment Period”), (ii) the date that the
aggregate dollar amount of Shares registered under the Registration Statement
have been issued and sold and (iii) the date the Investor shall have purchased
the Total Commitment of shares of Common Stock (subject in all cases to the
Trading Market Limit). The Company may terminate this Agreement effective upon three
Trading Days’ prior written notice to the Investor under Section 9.4; provided,
however, that such termination shall not occur during a Pricing Period
or prior to a Settlement Date. This Agreement may be terminated at any time (A)
by the mutual written consent of the parties, effective as of the date of such
mutual written consent unless otherwise provided in such written consent, it
being hereby acknowledged and agreed that the Investor may not consent to such
termination during a Pricing Period or prior to a Settlement Date in the event
the Investor has instructed the Broker-Dealer to

 31
 

 

effect an
open-market sale of Shares which are subject to a pending Fixed Request Notice
but which have not yet been physically delivered by the Company (and/or credited
by book-entry) to the Investor in accordance with the terms and subject to the
conditions of this Agreement, or (B) by either the Company or the Investor
effective upon written notice to the other party under Section 9.4, if the
NASD’s Corporate Financing Department has raised any objection with respect to
the fairness and reasonableness of the terms of this Agreement or the
transactions contemplated hereby, or has otherwise failed to confirm in writing
that it has determined not to raise any such objection, and such objection
shall not have been resolved, or such confirmation of no objection shall not
have been obtained, prior to (1) the 60th day immediately following the
Effective Date, in the case of an objection raised or confirmation failure
occurring prior to the first Fixed Request Exercise Date, or (2) prior to the
60th day immediately following the receipt by the Company or the Investor of
notice of such objection, in the case of an objection raised after the first
Fixed Request Exercise Date; provided  however, that (x) the party
seeking to terminate this Agreement pursuant to this clause (B) of Section 7.1
shall have used its commercially reasonable efforts to resolve such objection
and/or to obtain such confirmation of no objection in accordance with and
subject to the provisions of Section 5.1(ii) of this Agreement and (y) the
right to terminate this Agreement pursuant to this clause (B) of Section 7.1
shall not be available to any party whose action or failure to act has been a
principal cause of, or has resulted in, such objection or confirmation failure
and such action or failure to act constitutes a breach of this Agreement.

 

Section 7.2            Other Termination.  If the Company provides the Investor with an
Other Financing Notice (other than in respect of an underwritten public
offering, registered direct or other customary offering where the Issuer may
sell stock at a discount to the market price or an Acceptable Financing) or an
Integration Notice, the Investor shall have the right to terminate this
Agreement within the subsequent 30-day period (the “Event Period”),
effective upon one Trading Day’s prior written notice delivered to the Company
in accordance with Section 9.4 at any time during the Event Period.  For greater certainty, the entry by the
Company into any agreement, plan, arrangement, or transaction with a third
party to obtain an Other Financing outside of a Pricing Period shall not
trigger any requirement for the Company to deliver an Other Financing Notice
and (unless entry into such agreement, plan, arrangement or transaction
requires the delivery of an Integration Notice) shall not lead to a right of
termination in favor of the Investor. 
The Company shall notify the Investor and the Investor shall have the
right to terminate this Agreement at any time if: (i) any condition,
occurrence, state of facts or event constituting a Material Adverse Effect has
occurred; (ii) a Material Change in Ownership has occurred; or (iii) a default
or event of default has occurred and is continuing under the terms of any
agreement, contract, note or other instrument to which the Company or any of
its Subsidiaries is a party with respect to any indebtedness for borrowed money
representing more than 10% of the Company’s consolidated assets, in any such case,
upon one Trading Day’s prior written notice delivered to the Company in
accordance with Section 9.4 hereof.

 

Section 7.3            Effect
of Termination.  In the event of termination by the Company or
the Investor, written notice thereof shall forthwith be given to the other
party as provided in Section 9.4 and the transactions contemplated by this
Agreement shall be terminated without further action by either party. If this
Agreement is terminated as provided in Section 7.1 or 7.2 herein, this
Agreement shall become void and of no further force and effect, except as
provided in Section 9.9 hereof. Nothing in this Section 7.3 shall be deemed to
release the Company or the

 32
 

 

Investor from any liability for any
breach under this Agreement, or to impair the rights of the Company and the
Investor to compel specific performance by the other party of its obligations
under this Agreement.

ARTICLE VIII

INDEMNIFICATION

Section 8.1            General
Indemnity.

(i)            Indemnification by the
Company.  The Company
shall indemnify and hold harmless the Investor, the Broker-Dealer, each
affiliate, employee, representative and advisor of and to the Investor and the
Broker-Dealer, and each person, if any, who
controls the Investor or the Broker-Dealer within the meaning of Section 15 of
the Securities Act or Section 20(a) of the Exchange Act from and against all
losses, claims, damages, liabilities and expenses (including reasonable costs
of defense and investigation and all attorneys’ fees) to which the Investor,
the Broker-Dealer and each such other person may become subject, under the
Securities Act or otherwise, insofar as such losses, claims, damages,
liabilities and expenses (or actions in respect thereof) arise out of or are
based upon (i) any violation of law (including United States federal securities
laws but excluding any British Virgin Islands law) in connection with the
transactions contemplated by this Agreement by the Company or any of its
Subsidiaries, affiliates, officers, directors or employees, (ii) any untrue
statement or alleged untrue statement of a material fact contained, or
incorporated by reference, in the Registration Statement or any amendment
thereto or any omission or alleged omission to state therein, or in any
document incorporated by reference therein, a material fact required to be
stated therein or necessary to make the statements therein not misleading,
(iii) any untrue statement or alleged untrue statement of a material fact
contained, or incorporated by reference, in the Prospectus, any Issuer Free
Writing Prospectus, or in any amendment thereof or supplement thereto, or in
any “issuer information” (as defined in Rule 433 under the Securities Act) of
the Company, which “issuer information” is required to be, or is, filed with
the Commission or otherwise contained in any Free Writing Prospectus, or any
amendment or supplement thereto, or any omission or alleged omission to state
therein, or in any document incorporated by reference therein, a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, or (iv)
any untrue statement or alleged untrue statement contained in the NASD Filing,
or any amendment thereof or supplement thereto, or any omission or alleged
omission to state therein a fact necessary in order to comply with Rule 2710 of
the NASD’s Conduct Rules, but only to the extent the untrue statement, alleged
untrue statement, omission or alleged omission was made in reliance upon, and
in conformity with, information furnished by the Company to the Investor
expressly for inclusion in the NASD Filing, or any amendment thereof or
supplement thereto; provided, however, that (A) the Company shall
not be liable under this Section 8.1(i) to the extent that a court of competent
jurisdiction shall have determined by a final judgment (from which no further
appeals are available) that such loss, claim, damage, liability or expense
resulting directly and solely from any such acts or failures to act, undertaken
or omitted to be taken by the Investor or such person through its bad faith or
willful misconduct, (B) the foregoing indemnity shall not apply to any loss,
claim, damage, liability or expense to the extent, but only to the extent,
arising out of or based upon any untrue statement or alleged untrue statement
or omission or alleged omission made in reliance upon and in conformity with
written information furnished to the Company by

 33
 

 

the Investor expressly
for use in the Current Report or any Prospectus Supplement or Permitted Free
Writing Prospectus, or any amendment thereof or supplement thereto, and (C)
with respect to the Prospectus, the foregoing indemnity shall not inure to the
benefit of the Investor or any such person from whom the person asserting any
loss, claim, damage, liability or expense purchased Common Stock, if copies of
all Prospectus Supplements required to be filed pursuant to Section 1.4 and
5.9, together with the Base Prospectus, were timely delivered or made available
to the Investor pursuant hereto and a copy of the Base Prospectus, together
with a Prospectus Supplement (as applicable), was not sent or given by or on
behalf of the Investor or any such person to such person, if required by law to
have been delivered, at or prior to the written confirmation of the sale of the
Common Stock to such person, and if delivery of the Base Prospectus, together
with a Prospectus Supplement (as applicable), would have cured the defect
giving rise to such loss, claim, damage, liability or expense.

The Company shall reimburse the Investor, the
Broker-Dealer and each such controlling person promptly upon demand (with
accompanying presentation of documentary evidence) for all legal and other
costs and expenses reasonably incurred by the Investor, the Broker-Dealer or
such indemnified persons in investigating, defending against, or preparing to
defend against any such claim, action, suit or proceeding with respect to which
it is entitled to indemnification.

(ii)           Indemnification by the
Investor. The Investor shall indemnify and hold harmless the
Company, each of its directors and officers, and each person, if any, who
controls the Company within the meaning of Section 15 of the Securities Act or
Section 20(a) of the Exchange Act from and against all losses, claims, damages,
liabilities and expenses (including reasonable costs of defense and
investigation and all attorneys fees) to which the Company and each such other
person may become subject, under the Securities Act or otherwise, insofar as
such losses, claims, damages, liabilities and expenses (or actions in respect
thereof) arise out of or are based upon (i) any violation of law (including
United States federal securities laws) in connection with the transactions
contemplated by this Agreement by the Investor or any of its affiliates,
officers, directors or employees, (ii) any untrue statement or alleged untrue
statement of a material fact contained in the Current Report or any Prospectus
Supplement or Permitted Free Writing Prospectus, or in any amendment thereof or
supplement thereto, or any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, in each case, to the extent, but only to the extent, the untrue
statement, alleged untrue statement, omission or alleged omission was made in
reliance upon, and in conformity with, written information furnished by the
Investor to the Company expressly for inclusion in the Current Report or such
Prospectus Supplement or Permitted Free Writing Prospectus, or any amendment
thereof or supplement thereto, or (iii) any untrue statement or alleged untrue
statement contained in the NASD Filing, or any amendment thereof or supplement
thereto, or any omission or alleged omission to state therein a fact necessary
in order to comply with Rule 2710 of the NASD’s Conduct Rules; provided,
however, that the foregoing indemnity for statements or omissions
referred to in clause (iii) above shall not apply to any loss, claim, damage,
liability or expense to the extent, but only to the extent, arising out of or
based upon any untrue statement or alleged untrue statement or omission or
alleged omission made in reliance upon and in conformity with written
information furnished to the Investor by the Company expressly for use in the
NASD Filing, or any amendment thereof or supplement thereto.

 34
 

 

The Investor shall reimburse the Company and each such
director, officer or controlling person promptly upon demand for all legal and
other costs and expenses reasonably incurred by the Company or such indemnified
persons in investigating, defending against, or preparing to defend against any
such claim, action, suit or proceeding with respect to which it is entitled to
indemnification.

Section 8.2            Indemnification
Procedures.  Promptly after a person receives notice of a
claim or the commencement of an action for which the person intends to seek
indemnification under Section 8.1, the person will notify the indemnifying party
in writing of the claim or commencement of the action, suit or proceeding; provided,
however, that failure to notify the indemnifying party will not relieve
the indemnifying party from liability under Section 8.1, except to the extent
it has been materially prejudiced by the failure to give notice.  The indemnifying party will be entitled to
participate in the defense of any claim, action, suit or proceeding as to which
indemnification is being sought, and if the indemnifying party acknowledges in
writing the obligation to indemnify the party against whom the claim or action
is brought, the indemnifying party may (but will not be required to) assume the
defense against the claim, action, suit or proceeding with counsel satisfactory
to it.  After an indemnifying party
notifies an indemnified party that the indemnifying party wishes to assume the
defense of a claim, action, suit or proceeding, the indemnifying party will not
be liable for any legal or other expenses incurred by the indemnified party in connection
with the defense against the claim, action, suit or proceeding except that if,
in the opinion of counsel to the indemnifying party, one or more of the
indemnified parties should be separately represented in connection with a
claim, action, suit or proceeding, the indemnifying party will pay the
reasonable fees and expenses of one separate counsel for the indemnified
parties.  Each indemnified party, as a
condition to receiving indemnification as provided in Section 8.1, will
cooperate in all reasonable respects with the indemnifying party in the defense
of any action or claim as to which indemnification is sought.  No indemnifying party will be liable for any
settlement of any action effected without its prior written consent.  Notwithstanding the foregoing sentence, if at
any time an indemnified party shall have requested (by written notice provided
in accordance with Section 9.4) an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, such indemnifying party agrees
that it shall be liable for any settlement of the nature contemplated hereby
effected without its written consent if (i) such settlement is entered into
more than 45 days after receipt by such indemnifying party of the aforesaid
request, (ii) such indemnifying party shall have received written notice of the
terms of such settlement at least 30 days prior to such settlement being
entered into and (iii) such indemnifying party shall not have reimbursed such
indemnified party in accordance with such request prior to the date of such
settlement.  No indemnifying party will,
without the prior written consent of the indemnified party, effect any
settlement of a pending or threatened action with respect to which an indemnified
party is, or is informed that it may be, made a party and for which it would be
entitled to indemnification, unless the settlement includes an unconditional
release of the indemnified party from all liability and claims which are the
subject matter of the pending or threatened action.

If for
any reason the indemnification provided for in this Agreement is not available
to, or is not sufficient to hold harmless, an indemnified party in respect of
any loss or liability referred to in Section 8.1 as to which such indemnified
party is entitled to indemnification thereunder, each indemnifying party shall,
in lieu of indemnifying the indemnified party, contribute to the amount paid or
payable by the indemnified party as a result of such loss or liability, (i) in
the

 35
 

 

proportion which is appropriate to reflect the
relative benefits received by the indemnifying party, on the one hand, and by
the indemnified party, on the other hand, from the sale of Shares which is the
subject of the claim, action, suit or proceeding which resulted in the loss or
liability or (ii) if the allocation provided by clause (i) is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above, but also the relative fault
of the indemnifying party, on the one hand, and the indemnified party, on the
other hand, with respect to the statements or omissions which are the subject
of the claim, action, suit or proceeding that resulted in the loss or
liability, as well as any other relevant equitable considerations.

The remedies provided for in Section 8.1 and this
Section 8.2 are not exclusive and shall not limit any rights or remedies which
may otherwise be available to any Indemnified Person at law or in equity.

ARTICLE IX

MISCELLANEOUS

Section 9.1            Fees
and Expenses.

(i)            Each party shall bear its own fees
and expenses related to the transactions contemplated by this Agreement; provided,
however, that the Company shall pay, by wire transfer of immediately
available funds (A) to the NASD, on or prior to the Effective Date, the
applicable filing fee with respect to the NASD Filing and (B) to an account
designated by the Investor’s counsel, promptly following the receipt of an
invoice therefor, (1) all reasonable attorneys’ fees and expenses (exclusive of
disbursements and out-of-pocket expenses) incurred by the Investor, up to an
aggregate of $35,000, in connection with the preparation, negotiation,
execution and delivery of this Agreement, legal due diligence of the Company
and review of the Registration Statement, the Base Prospectus, the Current
Report, any Permitted Free Writing Prospectus and all other related transaction
documentation and (2) all reasonable fees and expenses (exclusive of
disbursements and out-of-pocket expenses) incurred by the Investor, up to an
aggregate of $15,000, in connection with the preparation and submission to the
NASD of the NASD Filing and related services. 
In addition, the Company shall pay, on the 30th day of the third month in each calendar
quarter during the Investment Period (in each case following the receipt of an
invoice), up to $12,500, representing (x) the due diligence expenses incurred
by the Investor during the Investment Period and (y) the attorneys’ fees and
expenses incurred by the Investor in connection with ongoing legal due
diligence of the Company, any amendments, modifications or waivers of this
Agreement, any amendments of or supplements to the NASD Filing and review of
Prospectus Supplements, Permitted Free Writing Prospectuses, opinion “bring
downs” and all other related documents to be delivered by the Company and its
counsel in connection with a Fixed Request Exercise Date and the applicable
Settlement Date; provided, however, that the Company shall not be
required to pay any such fee in any calendar quarter in which the Investor has
purchased shares under this Agreement. The Company shall pay all U.S. federal,
state and local stamp and other similar transfer taxes and duties levied in
connection with issuance of the Shares pursuant hereto.

(ii)           If the Company issues a Fixed Request
Notice and fails to deliver the Shares to the Investor on the applicable
Settlement Date and such failure continues for 10

 36
 

 

Trading Days, the Company
shall pay the Investor, in cash (or, at the option of the Investor, in shares
of Common Stock which have not been registered under the Securities Act), as
liquidated damages for such failure and not as a penalty, an amount equal to
2.0% of the payment required to be paid by the Investor on such Settlement Date
(i.e., the sum of the Fixed Amount Requested and the Optional Amount Dollar
Amount) for the initial 30 days following such Settlement Date until the Shares
have been delivered, and an additional 2.0% for each additional 30-day period
thereafter until the Shares have been delivered, which amount shall be prorated
for such periods less than thirty 30 days (subject in all cases to the Trading
Market Limit).

Section 9.2            Specific
Enforcement, Consent to Jurisdiction, Waiver of Jury Trial.

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

(ii)           Each of the Company and the Investor
(a) hereby irrevocably submits to the jurisdiction of the United States
District Court and other courts of the United States sitting in the City and
State of New York, Borough of Manhattan, for the purposes of any suit, action
or proceeding arising out of or relating to this Agreement, and (b) hereby
waives, and agrees not to assert in any such suit, action or proceeding, any
claim that it is not personally subject to the jurisdiction of such court, that
the suit, action or proceeding is brought in an inconvenient forum or that the
venue of the suit, action or proceeding is improper. Each of the Company and
the Investor consents to process being served in any such suit, action or
proceeding by mailing a copy thereof to such party at the address in effect for
notices to it under this Agreement and agrees that such service shall
constitute good and sufficient service of process and notice thereof. Nothing
in this Section 9.2 shall affect or limit any right to serve process in any
other manner permitted by law.

(iii)          Each
of the Company and the Investor hereby waives to the fullest extent permitted
by applicable law, any right it may have to a trial by jury in respect to any
litigation directly or indirectly arising out of, under or in connection with
this Agreement or the transactions contemplated hereby or disputes relating
hereto. Each of the Company and the Investor (a) certifies that no
representative, agent or attorney of any other party has represented, expressly
or otherwise, that such other party would not, in the event of litigation, seek
to enforce the foregoing waiver and (b) acknowledges that it and the other
parties hereto have been induced to enter into this Agreement by, among other
things, the mutual waivers and certifications in this Section 9.2.

Section 9.3            Entire
Agreement; Amendment.  This Agreement, together with the exhibits
referred to herein and the Disclosure Schedule, represents the entire agreement
of the parties with respect to the subject matter hereof, and there are no
promises, undertakings, representations or warranties by either party relative
to subject matter hereof not expressly set forth herein. No provision of this
Agreement may be amended other than by a written instrument

 37
 

 

signed
by both parties hereto.  The Disclosure
Schedule and all exhibits to this Agreement are hereby incorporated by
reference in, and made a part of, this Agreement as if set forth in full
herein.

Section 9.4            Notices.  Any notice,
demand, request, waiver or other communication required or permitted to be
given hereunder shall be in writing and shall be effective (a) upon hand
delivery or facsimile (with facsimile machine confirmation of delivery
received) at the address or number designated below (if delivered on a business
day during normal business hours where such notice is to be received), or the
first business day following such delivery (if delivered other than on a
business day during normal business hours where such notice is to be received) or
(b) on the second business day following the date of mailing by express courier
service, fully prepaid, addressed to such address, or upon actual receipt of
such mailing, whichever shall first occur. The address for such communications
shall be:

	
  If to the Company:

  	
   

  	
  Depomed, Inc.

  
	
   

  	
   

  	
  1360 O’Brien Drive

  
	
   

  	
   

  	
  Menlo Park, CA
  94025

  
	
   

  	
   

  	
  Telephone
  Number: (650) 462-5900

  
	
   

  	
   

  	
  Fax: (650)
  462-9993

  
	
   

  	
   

  	
  Attention:
  President

  
	
   

  	
   

  	
   

  
	
  With copies to:

  	
   

  	
  Heller Ehrman LLP

  
	
   

  	
   

  	
  4350 La Jolla
  Village Drive

  
	
   

  	
   

  	
  7th Floor

  
	
   

  	
   

  	
  San Diego, CA
  92122

  
	
   

  	
   

  	
  Telephone
  Number: (858) 450-8425

  
	
   

  	
   

  	
  Fax: (858)
  587-5924

  
	
   

  	
   

  	
  Attention: Ryan
  Murr

  
	
   

  	
   

  	
   

  
	
  If to the
  Investor:

  	
   

  	
  Azimuth Opportunity Ltd.

  
	
   

  	
   

  	
  c/o Fortis Prime
  Fund Solutions (BVI) Limited

  
	
   

  	
   

  	
  P.O. Box 761, 1st Floor

  
	
   

  	
   

  	
  James Frett Building

  
	
   

  	
   

  	
  Road Town,
  Tortola

  
	
   

  	
   

  	
  British Virgin
  Islands

  
	
   

  	
   

  	
  Telephone
  Number: (284) 494-6046

  
	
   

  	
   

  	
  Fax: (284)
  494-6898

  
	
   

  	
   

  	
  Attention:
  Rebecca McGinnis

  
	
   

  	
   

  	
   

  
	
  With copies to:

  	
   

  	
  Greenberg Traurig, LLP

  
	
   

  	
   

  	
  The MetLife
  Building

  
	
   

  	
   

  	
  200 Park Avenue

  
	
   

  	
   

  	
  New York, NY
  10166

  
	
   

  	
   

  	
  Telephone
  Number: (212) 801-9200

  
	
   

  	
   

  	
  Fax: (212)
  801-6400

  
	
   

  	
   

  	
  Attention:

  	
  Clifford E.
  Neimeth, Esq.

  
	
   

  	
   

  	
   

  	
  Anthony J. Marsico, Esq.

  

 

 38
 

 

Either party hereto may from time to time change its address for
notices by giving at least 10 days advance written notice of such changed
address to the other party hereto.

Section 9.5            Waivers.  No waiver
by either party of any default with respect to any provision, condition or
requirement of this Agreement shall be deemed to be a continuing waiver in the
future or a waiver of any other provisions, condition or requirement hereof nor
shall any delay or omission of any party to exercise any right hereunder in any
manner impair the exercise of any such right accruing to it thereafter. No
provision of this Agreement may be waived other than in a written instrument
signed by the party against whom enforcement of such waiver is sought.

Section 9.6            Headings.  The
article, section and subsection headings in this Agreement are for convenience
only and shall not constitute a part of this Agreement for any other purpose
and shall not be deemed to limit or affect any of the provisions hereof.

Section 9.7            Successors
and Assigns.  The Investor may not assign this Agreement to
any person without the prior consent of the Company, in the Company’s sole
discretion. This Agreement shall be binding upon and inure to the benefit of
the parties and their successors and assigns. The assignment by a party to this
Agreement of any rights hereunder shall not affect the obligations of such
party under this Agreement.

Section 9.8            Governing
Law. 
This Agreement shall be governed by and construed in accordance with the
internal procedural and substantive laws of the State of New York, without
giving effect to the choice of law provisions of such state.

Section 9.9            Survival.  The
representations and warranties of the Company and the Investor contained in
Articles III and IV and the covenants contained in Article V shall survive the
execution and delivery hereof until the termination of this Agreement, and the
agreements and covenants set forth in Article VIII of this Agreement shall
survive the execution and delivery hereof.

Section 9.10         Counterparts.  This
Agreement may be executed in counterparts, all of which taken together shall
constitute one and the same original and binding instrument and shall become
effective when all counterparts have been signed by each party and delivered to
the other parties hereto, it being understood that all parties hereto need not
sign the same counterpart. In the event any signature is delivered by facsimile
transmission, the party using such means of delivery shall cause four
additional executed signature pages to be physically delivered to the other
parties within five days of the execution and delivery hereof.

Section 9.11         Publicity.  On or after
the Effective Date, the Company may issue a press release or otherwise make a
public statement or announcement with respect to this Agreement or the
transactions contemplated hereby or the existence of this Agreement (including,
without limitation, by filing a copy of this Agreement with the Commission); provided,
however, that prior to issuing any such press release, or making any
such public statement or announcement, the Company shall consult with the
Investor on the form and substance of such press release or other disclosure.

 39
 

 

Section 9.12         Severability.  The
provisions of this Agreement are severable and, in the event that any court of
competent jurisdiction shall determine that any one or more of the provisions
or part of the provisions contained in this Agreement shall, for any reason, be
held to be invalid, illegal or unenforceable in any respect, such invalidity,
illegality or unenforceability shall not affect any other provision or part of
a provision of this Agreement, and this Agreement shall be reformed and
construed as if such invalid or illegal or unenforceable provision, or part of
such provision, had never been contained herein, so that such provisions would
be valid, legal and enforceable to the maximum extent possible.

Section 9.13         Further
Assurances.  From and after the date of this Agreement,
upon the request of the Investor or the Company, each of the Company and the
Investor shall execute and deliver such instrument, documents and other
writings as may be reasonably necessary or desirable to confirm and carry out
and to effectuate fully the intent and purposes of this Agreement.

[Signature Page Follows]

 40
 

 

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

	
  

  	
   

  	
  DEPOMED, INC.:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  /s/ John W. Fara

  	
   

  
	
   

  	
   

  	
   

  	
  Name: John W. Fara, Ph.D.

  
	
   

  	
   

  	
   

  	
  Title: President and Chief Executive Officer

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  AZIMUTH OPPORTUNITY LTD.:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  /s/ Anthony L.M. Inder Rieden

  	
   

  
	
   

  	
   

  	
   

  	
  Name: Anthony L.M. Inder Rieden

  
	
   

  	
   

  	
   

  	
  Title: Director

  

 

 41

 

ANNEX A TO THE

COMMON STOCK PURCHASE AGREEMENT

DEFINITIONS

(a)           “Acceptable Financing” shall
have the meaning assigned to such term in Section 5.6(ii) hereof.

(b)           “Aggregate Limit” shall have
the meaning assigned to such term in Section 1.1 hereof.

(c)           “Base Prospectus” shall mean
the Company’s prospectus, dated the Effective Date, a preliminary form of which
is included in the Registration Statement.

(d)           “Below Market Offering” shall
have the meaning assigned to such term in Section 5.6(ii) hereof.

(e)           “Broker-Dealer” shall have the
meaning assigned to such term in Section 5.13 hereof.

(f)            “Bylaws” shall have the
meaning assigned to such term in Section 4.3 hereof.

(g)           “Charter” shall have the
meaning assigned to such term in Section 4.3 hereof.

(h)           “Code” shall mean the Internal
Revenue Code of 1986, as amended.

(i)            “Commission” shall mean the
Securities and Exchange Commission or any successor entity.

(j)            “Commission Documents” shall
mean (1) all reports, schedules, registrations, forms, statements, information
and other documents filed by the Company with the Commission pursuant to the
reporting requirements of the Exchange Act, including all filings pursuant to
Section 13(a) or 15(d) of the Exchange Act, which have been filed by the
Company since January 1, 2006 and which hereafter shall be filed by the Company
during the Investment Period, including, without limitation, the Current Report
and the Form 10-K filed by the Company for its fiscal year ended December 31,
2005 (the “2005 Form 10-K”), (2) the Registration Statement, as
the same may be amended from time to time, the Prospectus and each Prospectus
Supplement, and each Permitted Free Writing Prospectus and (3) all information
contained in such filings and all documents and disclosures that have been and
heretofore shall be incorporated by reference therein.

(k)           “Common Stock” shall have the
meaning assigned to such term in the Recitals.

(l)            “Current Market Price” means,
with respect to any particular measurement date, the closing price of a share
of Common Stock as reported on the Trading Market for the Trading Day
immediately preceding such measurement date.

(m)          “Current Report” shall have the
meaning assigned to such term in Section 1.4 hereof.

 

(n)           “Discount Price” shall have
the meaning assigned to such term in Section 2.2 hereof.

(o)           “Effective Date” shall mean
the date of this Agreement.

(p)           “Environmental Laws” shall
have the meaning assigned to such term in Section 4.15 hereof.

(q)           “ERISA” shall mean the
Employee Retirement Income Security Act of 1974, as amended.

(r)            “Event Period” shall have the
meaning assigned to such term in Section 7.2 hereof.

(s)           “Exchange Act” shall mean the
Securities Exchange Act of 1934, as amended, and the rules and regulations of
the Commission thereunder.

(t)            “FDA” shall have the meaning
assigned to such term in Section 4.14(a) hereof.

(u)           “Fixed Amount Requested” shall
mean the amount of a Fixed Request requested by the Company in a Fixed Request
Notice delivered pursuant to Section 2.1 hereof.

(v)           “Fixed Request” means the
transactions contemplated under Sections 2.1 through 2.8 of this Agreement.

(w)          “Fixed Request Amount” means
the actual amount of proceeds received by the Company pursuant to a Fixed
Request under this Agreement.

(x)            “Fixed Request Exercise Date”
shall have the meaning assigned to such term in Section 2.2 hereof.

(y)           “Fixed Request Notice” shall
have the meaning assigned to such term in Section 2.1 hereof.

(z)            “Free Writing Prospectus”
shall mean a “free writing prospectus” as defined in Rule 405 promulgated under
the Securities Act.

(aa)         “GAAP” shall mean generally
accepted accounting principles in the United States of America as applied by
the Company.

(bb)         “Governmental Licenses” shall
have the meaning assigned to such term in Section 4.14(a) hereof.

(cc)         “Indebtedness” shall have the
meaning assigned to such term in Section 4.9 hereof.

(dd)         “Integration Notice” shall have
the meaning assigned to such term in Section 5.6(ii) hereof.

 

(ee)         “Intellectual Property” shall
have the meaning assigned to such term in Section 4.14(b) hereof.

(ff)           “Investment Period” shall have
the meaning assigned to such term in Section 7.1 hereof.

(gg)         “Issuer Free Writing Prospectus”
shall mean an “issuer free writing prospectus” as defined in Rule 433
promulgated under the Securities Act.

(hh)         “Market Capitalization” shall be
calculated on the Trading Day preceding the applicable Pricing Period and shall
be the product of (x) the number of shares of Common Stock outstanding and (y)
the closing bid price of the Common Stock, both as determined by Bloomberg
Financial LP using the DES and HP functions.

(ii)           “Material Adverse Effect”
shall mean any condition, occurrence, state of facts or event, having, or
insofar as reasonably can be foreseen would likely have, any effect on the
business, operations, properties or condition (financial or otherwise) of the
Company that is material and adverse to the Company and its Subsidiaries, taken
as a whole, and/or any condition, occurrence, state of facts or event that
would prohibit or otherwise materially interfere with or delay the ability of
the Company to perform any of its obligations under this Agreement.

(jj)           “Material Agreements” shall
have the meaning assigned to such term in Section 4.16 hereof.

(kk)         “Material Change in Ownership”
shall mean the occurrence of any one or more of the following: (i) the
acquisition by any person, including any syndicate or group deemed to be a “person”
under Section 13(d)(3) of the Exchange Act, of beneficial ownership, directly
or indirectly, through a purchase, merger or other acquisition transaction or
series of transactions, of shares of capital stock or other securities of the
Company entitling such person to exercise, upon an event of default or default
or otherwise, 50% or more of the total voting power of all series and classes
of capital stock and other securities of the Company entitled to vote generally
in the election of directors, other than any such acquisition by the Company,
any Subsidiary of the Company or any employee benefit plan of the Company; (ii)
any consolidation or merger of the Company with or into any other person, any
merger of another person into the Company, or any conveyance, transfer, sale,
lease or other disposition of all or substantially all of the properties and assets
of the Company to another person, other than (a) any such transaction (x) that
does not result in any reclassification, conversion, exchange or cancellation
of outstanding shares of capital stock of the Company and (y) pursuant to which
holders of capital stock of the Company immediately prior to such transaction
have the entitlement to exercise, directly or indirectly, 50% or more of the
total voting power of all shares of capital stock of the Company entitled to
vote generally in the election of directors of the continuing or surviving
person immediately after such transaction or (b) any merger which is effected
solely to change the jurisdiction of incorporation of the Company and results
in a reclassification, conversion or exchange of outstanding shares of Common
Stock solely into shares of common stock of the surviving entity; or (iii) the
Company is liquidated or dissolved or a resolution is passed by the Company’s
stockholders approving a plan of liquidation or dissolution of the Company.
Beneficial ownership shall be determined in accordance with Rule 13d-3
promulgated by the SEC under the Exchange Act. The term 

 

“person” shall include
any syndicate or group which would be deemed to be a “person” under Section
13(d)(3) of the Exchange Act.

(ll)           “Multiplier” shall have the
meaning assigned to such term in Section 2.3 hereof.

(mm)       “NASD” shall have the meaning
assigned to such term in Section 4.5 hereof.

(nn)         “NASD Filing” shall have the
meaning assigned to such term in Section 5.1 hereof.

(oo)         “NASDAQ” means the NASDAQ Global
Market or any successor thereto.

(pp)         “Optional Amount” means the
transactions contemplated under Sections 2.9 through 2.11 of this Agreement.

(qq)         “Optional Amount Dollar Amount”
shall mean the actual amount of proceeds received by the Company pursuant to
the exercise of an Optional Amount under this Agreement.

(rr)           “Optional Amount Notice” shall
mean a notice sent to the Company with regard to the Investor’s election to
exercise all or any portion of an Optional Amount, as provided in Section 2.11
hereof and substantially in the form attached hereto as Exhibit B.

(ss)         “Optional Amount Threshold Price”
shall have the meaning assigned to such term in Section 2.1 hereof.

(tt)           “Other Financing” shall have
the meaning assigned to such term in Section 5.6(ii) hereof.

(uu)         “Other Financing Notice” shall
have the meaning assigned to such term in Section 5.6(ii) hereof.

(vv)         “Permitted Free Writing Prospectus”
shall have the meaning assigned to such term in Section 5.8(ii) hereof.

(ww)       “Plan” shall have the meaning
assigned to such term in Section 4.22 hereof.

(xx)          “Pricing Period shall mean a
period of 10 consecutive Trading Days commencing on the day of delivery of a
Fixed Request Notice (or, if the Fixed Request Notice is delivered after 9:30
a.m. (New York time), on the next Trading Day), or such other period mutually
agreed upon by the Investor and the Company.

(yy)         “Prospectus” shall mean the Base
Prospectus, together with any final prospectus filed with the Commission
pursuant to Rule 424(b), as supplemented by any Prospectus Supplement.

(zz)          “Prospectus Supplement” shall
mean any prospectus supplement to the Base Prospectus filed with the Commission
pursuant to Rule 424(b) under the Securities Act, including the documents
incorporated by reference therein.

 

(aaa)       “Reduction Notice” shall have the
meaning assigned to such term in Section 2.8 hereof.

(bbb)      “Registration Statement” shall mean
the registration statement on Form S-3, Commission File Number
333-130510, filed by the Company with the Commission under the Securities Act
for the registration of the Shares, as such Registration Statement may be
amended and supplemented from time to time.

(ccc)       “Restricted Period” shall have the
meaning assigned to such term in Section 5.10 hereof.

(ddd)      “Securities Act” shall mean the
Securities Act of 1933, as amended, and the rules and regulations of the
Commission thereunder.

(eee)       “Settlement Date” shall have the
meaning assigned to such term in Section 2.7 hereof.

(fff)         “Shares” shall mean shares of
Common Stock issuable to the Investor upon exercise of a Fixed Request and
shares of Common Stock issuable to the Investor upon exercise of an Optional
Amount.

(ggg)      “Significant Subsidiary” means any
Subsidiary of the Company that would constitute a Significant Subsidiary of the
Company within the meaning of Rule 1-02 of Regulation S-X of the Commission.

(hhh)      “SOXA” shall have the meaning
assigned to such term in Section 4.6(c) hereof.

(iii)          “Subsidiary” shall mean any
corporation or other entity of which at least a majority of the securities or
other ownership interest having ordinary voting power (absolutely or
contingently) for the election of directors or other persons performing similar
functions are at the time owned directly or indirectly by the Company and/or
any of its other Subsidiaries.

(jjj)          “Total Commitment” shall have
the meaning assigned to such term in Section 1.1 hereof.

(kkk)       “Threshold Price” is the lowest
price (except to the extent otherwise provided in Section 2.6) at which the
Company may sell Shares during the applicable Pricing Period as set forth in a
Fixed Request Notice (not taking into account the applicable percentage
discount during such Pricing Period determined in accordance with Section 2.2);
provided, however, that at no time shall the Threshold Price be
lower than $2.00 per share unless the Company and the Investor mutually shall
agree.

(lll)          “Trading Day” shall mean a full
trading day (beginning at 9:30 a.m., New York City time, and ending at 4:00
p.m., New York City time) on the NASDAQ.

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

 

(nnn)      “Trading Market Limit” means that
number of shares which is one less than 20.0% of the issued and outstanding
shares of the Company’s Common Stock as of the Effective Date.

(ooo)      “VWAP” shall mean the daily volume
weighted average price (based on a Trading Day from 9:30 p.m. to 4:00 p.m. (New
York time)) of the Company on the NASDAQ as reported by Bloomberg Financial
L.P. using the AQR function.

(ppp)      “Warrant Value” shall mean the fair
value of all warrants, options and other similar rights issued to a third party
in connection with an Other Financing, determined by using a standard
Black-Scholes option-pricing model using an expected volatility percentage as
shall be mutually agreed by the Investor and the Company.  In the case of a dispute relating to such
expected volatility assumption, the Investor shall obtain applicable volatility
data from three investment banking firms of nationally recognized reputation,
and the parties hereto shall use the average thereof for purposes of
determining the expected volatility percentage in connection with the
Black-Scholes calculation referred to in the immediately preceding sentence.Exhibit 10.1

 

iParty
Corp.

OPTION
CANCELLATION AGREEMENT

THIS AGREEMENT,
made as of the eighth day of December, 2006 (the “Cancellation Date”), between
iParty Corp., a Delaware corporation (“iParty”), and Sal Perisano (the “Grantee”).

WHEREAS, there are
approximately 300,000 shares available for future issuance under the iParty
Amended and Restated 1998 Stock Incentive and Nonqualified Stock Option Plan
(the “Plan”), which iParty’s Board of Directors (the “Board”) has determined to
be an insufficient number of shares for future issuance in respect of iParty’s
anticipated needs regarding employee, management, executive, and director
compensation;

WHEREAS, iParty has granted Grantee, among other stock
option grants, (i) a stock option on January 18, 1999 exercisable for 25,000
shares of iParty’s common stock at an exercise price of $5.38 per share, (ii) a
stock option on March 29, 1999 exercisable for 337,500 shares of iParty’s
common stock at an exercise price of $3.75 per share; and (iii) a stock option
on August 25, 1999 exercisable for 434,730 shares of iParty’s common stock at
an exercise price of $2.00 per share;

WHEREAS, the Grantee has offered to cancel the three
stock option grants described above exercisable for an aggregate of 797,230
shares with an exercise price equal to or greater than $2.00 per share without
any further consideration apart from that that would inure or arise from the
fact that iParty would thereby be afforded the ability and opportunity to
increase the number of shares available for future issuance under the Plan in
respect of iParty’s anticipated requirements for employee, management,
executive, and director compensation; and

WHEREAS, the Grantee and iParty hereby acknowledge and
recognize that while the Grantee shall remain eligible for consideration for
future grants to be made by iParty under the Plan, each of the Grantee and
iParty, by executing and delivering this Agreement, also hereby explicitly
acknowledge and recognize that no agreement, understanding, or arrangement between
them currently exists regarding future grants, if any, to the Grantee under the
Plan.

NOW, THEREFORE, in
consideration of good and adequate consideration, the receipt and sufficiency
of which are hereby acknowledged, iParty and the Grantee mutually agree as
follows:

1.             Cancellation of Option.

iParty and the Grantee
each hereby agree that any and all rights and options of the Grantee to
purchase all or any part of the aggregate of 797,230 shares of iParty common
stock pursuant to the three stock option grants described in the recitals above
shall cease and be terminated effective as of the Cancellation Date and that
each of such options to purchase said aggregate of 797,230 shares of iParty
common stock shall be deemed cancelled in full and of no further force and
effect.

 

2.             Modification and
Termination of Prior Agreement.

This Agreement shall be
deemed to have the effect of immediately modifying and terminating as of the
Cancellation Date any prior agreement by and between iParty and the Grantee in
respect of the subject matter hereof.

3.             Governing Law.

The validity,
interpretation, construction and performance of this Agreement shall be
governed by the laws of the State of Delaware without giving effect to the
conflicts of laws principles thereof.

4.             Successors in Interest.

This Agreement shall
inure to the benefit of and be binding upon any successor to iParty. This
Agreement shall inure to the benefit of and be binding upon the Grantee’s legal
representatives. All obligations imposed upon and all rights released and
relinquished by the Grantee and all rights granted to iParty under this
Agreement shall be final, binding and conclusive upon the Grantee’s heirs,
executors, administrators and successors.

5.             Resolution of Disputes.

Any dispute or
disagreement which may arise under, or as a result of, or in any way relate to,
the interpretation, construction or application of this Agreement shall be
determined by the Board. Any determination made hereunder shall be final,
binding and conclusive on the Grantee and Corporation for all purposes.

	
  

  	
  iPARTY CORP.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   /s/ PATRICK FARRELL

  	
   

  
	
   

  	
   

  	
  Patrick Farrell

  
	
   

  	
   

  	
  President & CFO

  
	
   

  	
   

  
	
  Acknowledged and
  Accepted by:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  /s/ SAL PERISANO

  	
   

  	
   

  
	
  Sal Perisano

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