Document:

[FORM
      OF CONVERTIBLE NOTE]

     

    NEITHER
      THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR
      THE
      SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED
      UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES
      LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED
      (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES
      UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL,
      IN A
      FORM REASONABLY ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED
      UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER
      SAID
      ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION
      WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED
      BY THE SECURITIES. ANY TRANSFEREE OF THIS NOTE SHOULD CAREFULLY REVIEW THE
      TERMS
      OF THIS NOTE, INCLUDING SECTIONS 3(c)(iii) AND 18(a) HEREOF. THE PRINCIPAL
      AMOUNT REPRESENTED BY THIS NOTE AND, ACCORDINGLY, THE SECURITIES ISSUABLE UPON
      CONVERSION HEREOF MAY BE LESS THAN THE AMOUNTS SET FORTH ON THE FACE HEREOF
      PURSUANT TO SECTION 3(c)(iii) OF THIS NOTE.

     

    Rancher
      Energy Corp.

     

    Convertible
      Note

     

    
      	
              Issuance
                Date: December [__], 2006

            	
              Original
                Principal Amount: U.S.
                $_____________

            

    

    

    FOR
      VALUE RECEIVED,
      Rancher
      Energy Corp., a Nevada corporation (the "Company"),
      hereby promises to pay to [BUYERS] or registered assigns ("Holder")
      the
      amount set out above as the Original Principal Amount (as reduced pursuant
      to
      the terms hereof pursuant to conversion or otherwise, the "Principal")
      when
      due, whether upon the Maturity Date (as defined below), acceleration, redemption
      or otherwise (in each case in accordance with the terms hereof) and to pay
      interest ("Interest"),
      if
      any, on any outstanding Principal at the Interest Rate as may be required by
      Section 2 hereof. This Convertible Note (including all Convertible Notes issued
      in exchange, transfer or replacement hereof, this "Note")
      is one
      of an issue of Convertible Notes issued pursuant to the Securities Purchase
      Agreement (as defined below) on the Closing Date (collectively, the
      "Notes"
      and
      such other Convertible Notes, the "Other Notes").
      Certain capitalized terms used herein are defined in Section 26.

     

    (1)
      PAYMENTS
      OF PRINCIPAL.
      On the
      Maturity Date, the Company shall pay to the Holder an amount in cash
      representing all outstanding Principal, accrued and unpaid Interest, if any,
      and
      accrued and unpaid Late Charges, if any, on such Principal and Interest. The
      "Maturity Date"
      shall
      be [INSERT DATE THAT IS 120 DAYS FROM ISSUANCE DATE], as may be extended at
      the
      option of the Holder (i) in the event that, and for so long as, a Trigger Event
      (as defined in Section 4(a)) shall have occurred and be continuing on the
      Maturity Date (as may be extended pursuant to this Section 1) or any event
      that
      shall have occurred and be continuing that with the passage of time and the
      failure to cure would result in a Trigger Event, (ii) through the date that
      is
      ten (10) Business Days after the consummation of a Change of Control in the
      event that a Change of Control is publicly announced or a Change of Control
      Notice (as defined in Section 5(b)) is delivered prior to the Maturity Date
      and
      (iii) for an additional ninety (90) day period in the event that as of the
      Maturity Date the Stockholder Approval has not been obtained. Other than as
      specifically permitted by the Note, the Company may not prepay any portion
      of
      the outstanding Principal, accrued and unpaid Interest or accrued and unpaid
      Late Charges, if any, on Principal and Interest.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

       

    

    (2)
      INTEREST;
      INTEREST RATE.
      Prior
      to
      the occurrence of a Trigger Event, no Interest shall accrue on the outstanding
      Principal of this Note. From
      and
      after the occurrence and during the continuance of a Trigger Event, Interest
      shall accrue on such outstanding Principal at an interest rate equal to twelve
      percent (12.0%) per annum commencing on the date of the occurrence of such
      Trigger Event. In the event that such Trigger Event is subsequently cured,
      and
      no other Trigger Events have occurred and are continuing, Interest shall cease
      to accrue hereunder as of the date of such cure; provided that the Interest
      as
      calculated and unpaid at such interest rate during the continuance of such
      Trigger Event shall continue to apply to the extent relating to the days after
      the occurrence of such Trigger Event through and including the date of cure
      of
      such Trigger Event.
      Any
      Interest that shall accrue hereunder shall be payable upon any conversion or
      redemption of this Note in accordance with the terms set forth herein and on
      the
      Maturity Date.

     

    (3)
      CONVERSION
      OF NOTES.
      This
      Note shall be convertible into shares of the Company's common stock, par value
      $0.00001 per share (the "Common
      Stock"),
      on
      the terms and conditions set forth in this Section 3.

     

    (a)
      Conversion
      Right.
      At any
      time or times on or after the Stockholder Approval Date, the Holder shall be
      entitled to convert any portion of the outstanding and unpaid Conversion Amount
      (as defined below) into fully paid and nonassessable shares of Common Stock
      in
      accordance with Section 3(c), at the Conversion Rate (as defined below). The
      Company shall not issue any fraction of a share of Common Stock upon any
      conversion. If the issuance would result in the issuance of a fraction of a
      share of Common Stock, the Company shall round such fraction of a share of
      Common Stock up to the nearest whole share. The Company shall pay any and all
      taxes that may be payable with respect to the issuance and delivery of Common
      Stock upon conversion of any Conversion Amount; provided
      that the
      Company shall not be required to pay any tax that may be payable in respect
      of
      any issuance of Common Stock to any Person other than the converting Holder
      or
      with respect to any income tax due by the Holder with respect to such Common
      Stock.

     

    (b)
      Conversion
      Rate.
      The
      number of shares of Common Stock issuable upon conversion of any Conversion
      Amount pursuant to Section 3(a) shall be determined by dividing (x) such
      Conversion Amount by (y) the Conversion Price (the "Conversion
      Rate").

     

    (i)
      "Conversion
      Amount"
      means
      the sum of (A) the portion of the Principal to be converted, redeemed or
      otherwise with respect to which this determination is being made, (B) accrued
      and unpaid Interest with respect to such Principal, if any, and (C) accrued
      and
      unpaid Late Charges with respect to such Principal and Interest, if
      any.

     

    
      
        
        

      

      
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    (ii)
      "Conversion
      Price"
      means,
      as of any Conversion Date (as defined below) or other date of determination,
      $1.50, subject to adjustment as provided herein.

     

    (c)
      Mechanics
      of Conversion.

     

    (i)
      Optional
      Conversion.
      To
      convert any Conversion Amount into shares of Common Stock on any date (a
      "Conversion
      Date"),
      the
      Holder shall (A) transmit by facsimile (or otherwise deliver), for receipt
      on or
      prior to 11:59 p.m., New York Time, on such date, a copy of an executed notice
      of conversion in the form attached hereto as Exhibit
      I
      (the
      "Conversion
      Notice")
      to the
      Company and (B) if required by Section 3(c)(iii), surrender this Note to a
      common carrier for delivery to the Company as soon as practicable on or
      following such date (or an indemnification undertaking with respect to this
      Note
      in the case of its loss, theft or destruction). On or before the second
      (2nd)
      Trading
      Day following the date of receipt of a Conversion Notice, the Company shall
      transmit by facsimile a confirmation of receipt of such Conversion Notice to
      the
      Holder and the Company's transfer agent (the "Transfer
      Agent").
      On or
      before the third (3rd)
      Trading
      Day following the date of receipt of a Conversion Notice (the "Share
      Delivery Date"),
      the
      Company shall (X) provided that the Transfer Agent is participating in the
      Depository Trust Company ("DTC")
      Fast
      Automated Securities Transfer Program, credit such aggregate number of shares
      of
      Common Stock to which the Holder shall be entitled to the Holder's or its
      designee's balance account with DTC through its Deposit Withdrawal Agent
      Commission system or (Y) if the Transfer Agent is not participating in the
      DTC
      Fast Automated Securities Transfer Program, issue and deliver to the address
      as
      specified in the Conversion Notice, a certificate, registered in the name of
      the
      Holder or its designee, for the number of shares of Common Stock to which the
      Holder shall be entitled. If this Note is physically surrendered for conversion
      as required by Section 3(c)(iii) and the outstanding Principal of this Note
      is
      greater than the Principal portion of the Conversion Amount being converted,
      then the Company shall as soon as practicable and in no event later than three
      (3) Business Days after receipt of this Note and at its own expense, issue
      and
      deliver to the holder a new Note (in accordance with Section 16(d)) representing
      the outstanding Principal not converted. The Person or Persons entitled to
      receive the shares of Common Stock issuable upon a conversion of this Note
      shall
      be treated for all purposes as the record holder or holders of such shares
      of
      Common Stock on the Conversion Date. 

     

    (ii)
      If
      within
      five (5) Trading Days after the Company's receipt of the facsimile copy of
      a
      Conversion Notice the Company shall fail to issue and deliver a certificate
      to
      the Holder or credit the Holder's balance account with DTC for the number of
      shares of Common Stock to which the Holder is entitled upon such holder's
      conversion of any Conversion Amount (a
      "Conversion
      Failure"),
      and if
      on or after such Trading Day the Holder purchases (in an open market transaction
      or otherwise) Common Stock to deliver in satisfaction of a sale by the Holder
      of
      Common Stock issuable upon such conversion that the Holder anticipated receiving
      from the Company (a "Buy-In"),
      then
      the Company shall, within three (3) Trading Days after the Holder's request
      and
      in the Holder's discretion, either (i) pay cash to the Holder in an amount
      equal
      to the Holder's total purchase price (including brokerage commissions and other
      out-of-pocket expenses, if any) for the shares of Common Stock so purchased
      (the
"Buy-In
      Price"),
      at
      which point the Company's obligation to deliver such certificate (and to issue
      such Common Stock) shall terminate, or (ii) promptly honor its obligation to
      deliver to the Holder a certificate or certificates representing such Common
      Stock and pay cash to the Holder in an amount equal to the excess (if any)
      of
      the Buy-In Price over the product of (A) such number of shares of Common Stock,
      times (B) the Closing Bid Price on the Conversion Date.

     

    
      
        
        

      

      
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    (iii)
      Registration;
      Book-Entry.
      The
      Company shall maintain a register (the "Register")
      for
      the recordation of the names and addresses of the holders of each Note and
      the
      principal amount of the Notes held by such holders (the "Registered
      Notes").
      The
      entries in the Register shall be conclusive and binding for all purposes absent
      manifest error. The Company and the holders of the Notes shall treat each Person
      whose name is recorded in the Register as the owner of a Note for all purposes,
      including, without limitation, the right to receive payments of principal and
      interest hereunder, notwithstanding notice to the contrary. A Registered Note
      may be assigned or sold in whole or in part only by registration of such
      assignment or sale on the Register. Upon its receipt of a request to assign
      or
      sell all or part of any Registered Note by a Holder, the Company shall record
      the information contained therein in the Register and issue one or more new
      Registered Notes in the same aggregate principal amount as the principal amount
      of the surrendered Registered Note to the designated assignee or transferee
      pursuant to Section 16. Notwithstanding anything to the contrary set forth
      herein, upon conversion of any portion of this Note in accordance with the
      terms
      hereof, the Holder shall not be required to physically surrender this Note
      to
      the Company unless (A) the full Conversion Amount represented by this Note
      is
      being converted or (B) the Holder has provided the Company with prior written
      notice (which notice may be included in a Conversion Notice) requesting
      reissuance of this Note upon physical surrender of this Note. The Holder and
      the
      Company shall maintain records showing the Principal, Interest and Late Charges,
      if any, converted and the dates of such conversions or shall use such other
      method, reasonably satisfactory to the Holder and the Company, so as not to
      require physical surrender of this Note upon conversion.

     

    (iv)
      Pro
      Rata Conversion; Disputes.
      In the
      event that the Company receives a Conversion Notice from more than one holder
      of
      Notes for the same Conversion Date and the Company can convert some, but not
      all, of such portions of the Notes submitted for conversion, the Company shall
      convert from each holder of Notes electing to have Notes converted on such
      date
      a pro rata amount of such holder's portion of its Notes submitted for conversion
      based on the principal amount of Notes submitted for conversion on such date
      by
      such holder relative to the aggregate principal amount of all Notes submitted
      for conversion on such date. In the event of a dispute as to the number of
      shares of Common Stock issuable to the Holder in connection with a conversion
      of
      this Note, the Company shall issue to the Holder the number of shares of Common
      Stock not in dispute and resolve such dispute in accordance with Section
      21.

     

    (v)
      Automatic
      Conversion.
      On the
      Stockholder Approval Date all of the Conversion Amount then remaining under
      this
      Note shall be converted into fully paid, validly issued and nonassessable shares
      of Common Stock in accordance with Section 3(c) hereof at the Conversion Rate
      as
      of the Mandatory Conversion Date (as defined below) with respect to the
      Conversion Amount (the "Automatic
      Conversion").
      The
      Company shall deliver, within not more than one (1) Trading Day following
      the Stockholder Approval Date, a
      written
      notice thereof by facsimile and overnight courier to all, but not less than
      all,
      of the holders of Notes and the Transfer Agent (the "Automatic
      Conversion Notice"
      and the
      date all of the holders received such notice is referred to as the "Automatic
      Conversion Notice Date").
      The
      Mandatory Conversion Notice shall state (1) the aggregate Conversion Amount of
      the Notes that shall be subject to the Automatic Conversion pursuant hereto
      (and
      analogous provisions under the Other Notes) and (2) the number of shares of
      Common Stock to be issued to the Holder on the applicable Conversion Date.
      The
      mechanics of conversion set forth in Section 3(c) shall apply to the Automatic
      Conversion as if the Company and the Transfer Agent had received from the Holder
      on the Stockholder Approval Date a Conversion Notice with respect to the
      Conversion Amount remaining under this Note. 

     

    
      
        
        

      

      
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    (4)
      RIGHTS
      UPON TRIGGER EVENT.

     

    (a)
      Trigger
      Event.
      Each of
      the following events shall constitute a "Trigger
      Event":

     

    (i)
      the
      failure of the applicable Registration Statement required to be filed pursuant
      to the Registration Rights Agreement to be declared effective by the SEC on
      or
      prior to the date that is sixty (60) days after the applicable Effectiveness
      Deadline (as defined in the Registration Rights Agreement), or, while the
      applicable Registration Statement is required to be maintained effective
      pursuant to the terms of the Registration Rights Agreement, the effectiveness
      of
      the applicable Registration Statement lapses for any reason (including, without
      limitation, the issuance of a stop order) or is unavailable to any holder of
      the
      Notes for sale of all of such holder's Registrable Securities (as defined in
      the
      Registration Rights Agreement) in accordance with the terms of the Registration
      Rights Agreement, and such lapse or unavailability continues for a period of
      ten
      (10) consecutive days or for more than an aggregate of thirty (30) days in
      any
      365-day period (other than days during an Allowable Grace Period (as defined
      in
      the Registration Rights Agreement));

     

    (ii)
      the
      suspension from trading or failure of the Common Stock to be listed on the
      Principal Market or an Eligible Market for a period of five (5) consecutive
      Trading Days or for more than an aggregate of ten (10) Trading Days in any
      365-day period;

     

    (iii)
      the
      Company's (A) failure to cure a Conversion Failure by delivery of the required
      number of shares of Common Stock within ten (10) Trading Days after the
      applicable Conversion Date or (B) notice, written or oral, to any holder of
      the
      Notes, including by way of public announcement or through any of its agents,
      at
      any time, of its intention not to comply with a request for conversion of any
      Notes into shares of Common Stock that is tendered in accordance with the
      provisions of the Notes;

     

    (iv)
      at
      any
      time following the tenth (10th)
      consecutive Business Day that the Holder's Authorized Share Allocation is less
      than the number of shares of Common Stock that the Holder would be entitled
      to
      receive upon a conversion of the full Conversion Amount of this Note (without
      regard to any limitations on conversion);

     

    
      
        
        

      

      
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    (v)
      the
      Company's failure to pay to the Holder any amount of Principal (including,
      without limitation, any redemption payments), Interest, Late Charges or other
      amounts when and as due under this Note or any other Transaction Document (as
      defined in the Securities Purchase Agreement) or any other agreement, document,
      certificate or other instrument delivered in connection with the transactions
      contemplated hereby and thereby to which the Holder is a party, except, in
      the
      case of a failure to pay any Interest and Late Charges when and as due, in
      which
      case only if such failure continues for a period of at least five (5) Business
      Days;

     

    (vi)
      A)
      any
      payment default or other default occurs under any Indebtedness of the Company
      or
      any of its Subsidiaries (as defined in Section 3(a) of the Securities Purchase
      Agreement) (other than Permitted Senior Indebtedness) that results in a
      redemption of or acceleration prior to maturity of $1,000,000 or more of such
      Indebtedness in the aggregate, (B) any material default occurs under any
      Indebtedness of the Company (other than Permitted Senior Indebtedness) or any
      of
      its Subsidiaries having an aggregate outstanding balance in excess of $1,000,000
      and such default continues uncured for more than ten (10) Business Days, other
      than, in each case (A) or (B) above, a default with respect to any Other Notes,
      or (C) any "event of default" occurs under the Permitted Senior
      Indebtedness;

     

    (vii)
      the
      Company or any of its Subsidiaries, pursuant to or within the meaning of Title
      11, U.S. Code, or any similar Federal, foreign or state law for the relief
      of
      debtors (collectively, "Bankruptcy
      Law"),
      (A)
      commences a voluntary case, (B) consents to the entry of an order for relief
      against it in an involuntary case, (C) consents to the appointment of a
      receiver, trustee, assignee, liquidator or similar official (a "Custodian"),
      (D)
      makes a general assignment for the benefit of its creditors or (E) admits in
      writing that it is generally unable to pay its debts as they become
      due;

     

    (viii)
      a
      court
      of competent jurisdiction enters an order or decree under any Bankruptcy Law
      that (A) is for relief against the Company or any of its Subsidiaries in an
      involuntary case, (B) appoints a Custodian of the Company or any of its
      Subsidiaries or (C) orders the liquidation of the Company or any of its
      Subsidiaries;

     

    (ix)
      a
      final
      judgment or judgments for the payment of money aggregating in excess of
      $1,000,000 are rendered against the Company or any of its Subsidiaries and
      which
      judgments are not, within sixty (60) days after the entry thereof, bonded,
      discharged or stayed pending appeal, or are not discharged within sixty (60)
      days after the expiration of such stay; provided, however, that any judgment
      which is covered by insurance or an indemnity from a credit worthy party shall
      not be included in calculating the $1,000,000 amount set forth above so long
      as
      the Company provides the Holder a written statement from such insurer or
      indemnity provider (which written statement shall be reasonably satisfactory
      to
      the Holder) to the effect that such judgment is covered by insurance or an
      indemnity and the Company will receive the proceeds of such insurance or
      indemnity within thirty (30) days of the issuance of such judgment;

     

    (x)
      the
      Company breaches any representation, warranty, covenant or other term or
      condition of any Transaction Document, except, in the case of a breach of a
      covenant which is curable, only if such breach continues for a period of at
      least ten (10) consecutive Business Days;

     

    
      
        
        

      

      
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    (xi)
      any
      breach or failure in any respect to comply with Section 12 of this Note;
      or

     

    (xii)
      any
      Trigger Event (as defined in the Other Notes) occurs with respect to any Other
      Notes.

     

    (b)
      Redemption
      Right.
      Upon
      the occurrence of a Trigger Event with respect to this Note or any Other Note,
      the Company shall within (1) Business Day deliver written notice thereof via
      facsimile or e-mail and overnight courier (a "Trigger
      Event Notice")
      to the
      Holder. At any time after the earlier of the Holder's receipt of a Trigger
      Event
      Notice and the Holder becoming aware of a Trigger Event, the Holder may require
      the Company to redeem all or any portion of this Note by delivering written
      notice thereof (the "Trigger
      Event Redemption Notice")
      to the
      Company, which Trigger Event Redemption Notice shall indicate the portion of
      this Note the Holder is electing to redeem. Each portion of this Note subject
      to
      redemption by the Company pursuant to this Section 4(b) shall be redeemed by
      the
      Company at a price equal to the Conversion Amount to be redeemed (the
      "Trigger
      Event Redemption
      Price").
      Redemptions required by this Section 4(b) shall be made in accordance with
      the
      provisions of Section 10. To the extent redemptions required by this Section
      4(b) are deemed or determined by a court of competent jurisdiction to be
      prepayments of the Note by the Company, such redemptions shall be deemed to
      be
      voluntary prepayments. The parties hereto agree that in the event of the
      Company's redemption of any portion of the Note under this Section 4(b), the
      Holder's damages would be uncertain and difficult to estimate because of the
      parties' inability to predict future interest rates and the uncertainty of
      the
      availability of a suitable substitute investment opportunity for the Holder.
      Accordingly, any Redemption Premium due under this Section 4(b) is intended
      by
      the parties to be, and shall be deemed, a reasonable estimate of the Holder's
      actual loss of its investment opportunity and not as a penalty.

     

    (5)
      RIGHTS
      UPON FUNDAMENTAL TRANSACTION AND CHANGE OF CONTROL.

     

    (a)
      Assumption.
      The
      Company shall not enter into or be party to a Fundamental Transaction unless
      (i)  the Successor Entity assumes in writing all of the obligations of the
      Company under this Note and the other Transaction Documents in accordance with
      the provisions of this Section 5(a) pursuant to written agreements in form
      and
      substance satisfactory to the Required Holders and approved by the Required
      Holders prior to such Fundamental Transaction, including agreements to deliver
      to each holder of Notes in exchange for such Notes a security of the Successor
      Entity evidenced by a written instrument substantially similar in form and
      substance to the Notes, including, without limitation, having a principal amount
      and interest rate equal to the principal amounts then outstanding and the
      interest rates of the Notes held by such holder, having similar conversion
      rights as the Notes and having similar ranking to the Notes, and satisfactory
      to
      the Required Holders and (ii) the Successor Entity (including its Parent
      Entity) is a publicly traded corporation whose common stock is quoted on or
      listed for trading on an Eligible Market. Upon the occurrence of any Fundamental
      Transaction, the Successor Entity shall succeed to, and be substituted for
      (so
      that from and after the date of such Fundamental Transaction, the provisions
      of
      this Note referring to the "Company" shall refer instead to the Successor
      Entity), and may exercise every right and power of the Company and shall assume
      all of the obligations of the Company under this Note with the same effect
      as if
      such Successor Entity had been named as the Company herein. Upon consummation
      of
      the Fundamental Transaction, the Successor Entity shall deliver to the Holder
      confirmation that there shall be issued upon conversion or redemption of this
      Note at
      any
      time after the consummation of the Fundamental Transaction, in lieu of the
      shares of the Company's Common Stock (or
      other
      securities, cash, assets or other property) issuable
      upon the conversion or redemption of the Notes prior to such Fundamental
      Transaction,
      such
      shares of the publicly traded common stock (or their equivalent) of the
      Successor Entity (including its Parent Entity), as adjusted in accordance with
      the provisions of this Note. The
      provisions of this Section shall apply similarly and equally to successive
      Fundamental Transactions and shall be applied without regard to any limitations
      on the conversion or redemption of this Note.

     

    
      
        
        

      

      
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    (b)
      Redemption
      Right.
      No
      sooner than fifteen (15) days nor later than ten (10) days prior to the
      consummation of a Change of Control, but not prior to the public announcement
      of
      such Change of Control, the Company shall deliver written notice thereof via
      facsimile and overnight courier to the Holder (a "Change
      of Control Notice").
      At
      any time during the period beginning on the date of the Holder's receipt of
      a
      Change of Control Notice and ending twenty (20) Trading Days after the
      consummation of such Change of Control, the Holder may require the Company
      to
      redeem all or any portion of this Note by delivering written notice thereof
      ("Change
      of Control Redemption Notice")
      to the
      Company, which Change of Control Redemption Notice shall indicate the Conversion
      Amount the Holder is electing to redeem. The portion of this Note subject to
      redemption pursuant to this Section 5 shall be redeemed by the Company in cash
      at a price equal to the greater of (i) the product of (x) the Conversion Amount
      being redeemed and (y) the quotient determined by dividing (A) the greater
      of
      the Closing Sale Price of the Common Stock immediately prior to the consummation
      of the Change of Control, the Closing Sale Price immediately following the
      public announcement of such proposed Change of Control and the Closing Sale
      Price of the Common Stock immediately prior to the public announcement of such
      proposed Change of Control by (B) the Conversion Price and (ii) 125% of the
      Conversion Amount being redeemed (the "Change
      of Control Redemption Price").
      Redemptions required by this Section 5 shall be made in accordance with the
      provisions of Section 10 and shall have priority to payments to stockholders
      in
      connection with a Change of Control. To the extent redemptions required by
      this
      Section 5(b) are deemed or determined by a court of competent jurisdiction
      to be
      prepayments of the Note by the Company, such redemptions shall be deemed to
      be
      voluntary prepayments. Notwithstanding anything to the contrary in this Section
      5, until the Change of Control Redemption Price is paid in full, the Conversion
      Amount submitted for redemption under this Section 5(c) may be converted, in
      whole or in part, by the Holder into Common Stock pursuant to Section 3. The
      parties hereto agree that in the event of the Company's redemption of any
      portion of the Note under this Section 5(b), the Holder's damages would be
      uncertain and difficult to estimate because of the parties' inability to predict
      future interest rates and the uncertainty of the availability of a suitable
      substitute investment opportunity for the Holder. Accordingly, any redemption
      premium due under this Section 5(b) is intended by the parties to be, and shall
      be deemed, a reasonable estimate of the Holder's actual loss of its investment
      opportunity and not as a penalty.

     

    
      
        
        

      

      
        8

        
          

        

      

      
        
        

      

       

    

    (6)
      RIGHTS
      UPON ISSUANCE OF PURCHASE RIGHTS AND OTHER CORPORATE EVENTS.

     

    (a)
      Purchase
      Rights.
      If at
      any time the Company grants, issues or sells any Options, Convertible Securities
      or rights to purchase stock, warrants, securities or other property pro rata
      to
      the record holders of any class of Common Stock (the "Purchase
      Rights"),
      then
      the Holder will be entitled to acquire, upon the terms applicable to such
      Purchase Rights, the aggregate Purchase Rights which the Holder could have
      acquired if the Holder had held the number of shares of Common Stock acquirable
      upon complete conversion of this Note (without taking into account any
      limitations or restrictions on the convertibility of this Note) immediately
      before the date on which a record is taken for the grant, issuance or sale
      of
      such Purchase Rights, or, if no such record is taken, the date as of which
      the
      record holders of Common Stock are to be determined for the grant, issue or
      sale
      of such Purchase Rights.

     

    (b)
      Other
      Corporate Events.
      In
      addition to and not in substitution for any other rights hereunder, prior to
      the
      consummation of any Fundamental Transaction pursuant to which holders of shares
      of Common Stock are entitled to receive securities or other assets with respect
      to or in exchange for shares of Common Stock (a "Corporate
      Event"),
      the
      Company shall make appropriate provision to insure that the Holder will
      thereafter have the right to receive upon a conversion of this Note, (i) in
      addition to the shares of Common Stock receivable upon such conversion, such
      securities or other assets to which the Holder would have been entitled with
      respect to such shares of Common Stock had such shares of Common Stock been
      held
      by the Holder upon the consummation of such Corporate Event (without taking
      into
      account any limitations or restrictions on the convertibility of this Note)
      or
      (ii) in lieu of the shares of Common Stock otherwise receivable upon such
      conversion, such securities or other assets received by the holders of shares
      of
      Common Stock in connection with the consummation of such Corporate Event in
      such
      amounts as the Holder would have been entitled to receive had this Note
      initially been issued with conversion rights for the form of such consideration
      (as opposed to shares of Common Stock) at a conversion rate for such
      consideration commensurate with the Conversion Rate. Provision made pursuant
      to
      the preceding sentence shall be in a form and substance satisfactory to the
      Required Holders. The provisions of this Section shall apply similarly and
      equally to successive Corporate Events and shall be applied without regard
      to
      any limitations on the conversion or redemption of this Note.

     

    (7)
      ADJUSTMENT
      OF CONVERSION PRICE UPON SUBDIVISION OR COMBINATION OF COMMON
      STOCK.
      If the
      Company at any time on or after the Subscription Date subdivides (by any stock
      split, stock dividend, recapitalization or otherwise) one or more classes of
      its
      outstanding shares of Common Stock into a greater number of shares, the
      Conversion Price in effect immediately prior to such subdivision will be
      proportionately reduced. If the Company at any time on or after the Subscription
      Date combines (by combination, reverse stock split or otherwise) one or more
      classes of its outstanding shares of Common Stock into a smaller number of
      shares, the Conversion Price in effect immediately prior to such combination
      will be proportionately increased.

     

    (8)
      NONCIRCUMVENTION.
      The
      Company hereby covenants and agrees that the Company will not, by amendment
      of
      its Certificate of Incorporation, Bylaws or through any reorganization, transfer
      of assets, consolidation, merger, scheme of arrangement, dissolution, issue or
      sale of securities, or any other voluntary action, avoid or seek to avoid the
      observance or performance of any of the terms of this Note, and will at all
      times in good faith carry out all of the provisions of this Note and take all
      action as may be required to protect the rights of the Holder of this Note.
      

     

    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

       

    

    (9)
      RESERVATION
      OF AUTHORIZED SHARES.

     

    (a)
      Reservation.
      Following the Stockholder Approval Date, so long as any of the Notes are
      outstanding, the Company shall take all action necessary to reserve and keep
      available out of its authorized and unissued Common Stock, solely for the
      purpose of effecting the conversion of the Notes, 130% of the number of shares
      of Common Stock as shall from time to time be necessary to effect the conversion
      of all of the Notes then outstanding; provided that at no time shall the number
      of shares of Common Stock so reserved be less than the number of shares required
      to be reserved by the previous sentence (without regard to any limitations
      on
      conversions) (the "Required
      Reserve Amount").
      The
      number of shares of Common Stock reserved for conversions of the Notes and
      each
      increase in the number of shares so reserved shall be allocated pro rata among
      the holders of the Notes based on the principal amount of the Notes held by
      each
      holder at the Closing (as defined in the Securities Purchase Agreement) or
      increase in the number of reserved shares, as the case may be (the "Authorized
      Share Allocation").
      In
      the event that a holder shall sell or otherwise transfer any of such holder's
      Notes, each transferee shall be allocated a pro rata portion of such holder's
      Authorized Share Allocation. Any shares of Common Stock reserved and allocated
      to any Person which ceases to hold any Notes shall be allocated to the remaining
      holders of Notes, pro rata based on the principal amount of the Notes then
      held
      by such holders.

     

    (b)
      Insufficient
      Authorized Shares.
      If at
      any time following the Stockholder Approval Date while any of the Notes remain
      outstanding the Company does not have a sufficient number of authorized and
      unreserved shares of Common Stock to satisfy its obligation to reserve for
      issuance upon conversion of the Notes at least a number of shares of Common
      Stock equal to the Required Reserve Amount (an "Authorized
      Share Failure"),
      then
      the Company shall immediately take all action necessary to increase the
      Company's authorized shares of Common Stock to an amount sufficient to allow
      the
      Company to reserve the Required Reserve Amount for the Notes then outstanding.
      Without limiting the generality of the foregoing sentence, as soon as
      practicable after the date of the occurrence of an Authorized Share Failure,
      but
      in no event later than sixty (60) days after the occurrence of such Authorized
      Share Failure, the Company shall hold a meeting of its stockholders for the
      approval of an increase in the number of authorized shares of Common Stock.
      In
      connection with such meeting, the Company shall provide each stockholder with
      a
      proxy statement and shall use its best efforts to solicit its stockholders'
      approval of such increase in authorized shares of Common Stock and to cause
      its
      board of directors to recommend to the stockholders that they approve such
      proposal.

     

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

       

    

    (10)
      HOLDER'S
      REDEMPTIONS.

     

    (a)
      Mechanics.
      The
      Company shall deliver the applicable Trigger Event Redemption Price to the
      Holder within five (5) Business Days after the Company's receipt of the Holder's
      Trigger Event Redemption Notice. If the Holder has submitted a Change of Control
      Redemption Notice in accordance with Section 5(b), the Company shall deliver
      the
      applicable Change of Control Redemption Price to the Holder concurrently with
      the consummation of such Change of Control if such notice is received prior
      to
      the consummation of such Change of Control and within five (5) Business Days
      after the Company's receipt of such notice otherwise. In the event of a
      redemption of less than all of the Conversion Amount of this Note, the Company
      shall promptly cause to be issued and delivered to the Holder a new Note (in
      accordance with Section 16(d)) representing the outstanding Principal which
      has
      not been redeemed. In the event that the Company does not pay the applicable
      Redemption Price to the Holder within the time period required, at any time
      thereafter and until the Company pays such unpaid Redemption Price in full,
      the
      Holder shall have the option, in lieu of redemption, to require the Company
      to
      promptly return to the Holder all or any portion of this Note representing
      the
      Conversion Amount that was submitted for redemption and for which the applicable
      Redemption Price (together with any Late Charges thereon) has not been paid.
      Upon the Company's receipt of such notice, (x) the Redemption Notice shall
      be
      null and void with respect to such Conversion Amount, (y) the Company shall
      immediately return this Note, or issue a new Note (in accordance with Section
      16(d)) to the Holder representing such Conversion Amount and (z) the Conversion
      Price of this Note or such new Notes shall be adjusted to the lesser of (A)
      the
      Conversion Price as in effect on the date on which the Redemption Notice is
      voided and (B) the lowest Closing Bid Price of the Common Stock during the
      period beginning on and including the date on which the Redemption Notice is
      delivered to the Company and ending on and including the date on which the
      Redemption Notice is voided. The Holder's delivery of a notice voiding a
      Redemption Notice and exercise of its rights following such notice shall not
      affect the Company's obligations to make any payments of Late Charges which
      have
      accrued prior to the date of such notice with respect to the Conversion Amount
      subject to such notice.

    
       

    

    (b)  Redemption
      by Other Holders.
      Upon
      the Company's receipt of notice from any of the holders of the Other Notes
      for
      redemption or repayment as a result of an event or occurrence substantially
      similar to the events or occurrences described in Section 4(b) or Section 5(b)
      (each, an "Other
      Redemption Notice"),
      the
      Company shall immediately, but no later than one (1) Business Day of its receipt
      thereof, forward to the Holder by facsimile a copy of such notice. If the
      Company receives a Redemption Notice and one or more Other Redemption Notices,
      during the seven (7) Business Day period beginning on and including the date
      which is three (3) Business Days prior to the Company's receipt of the Holder's
      Redemption Notice and ending on and including the date which is three (3)
      Business Days after the Company's receipt of the Holder's Redemption Notice
      and
      the Company is unable to redeem all principal, interest and other amounts
      designated in such Redemption Notice and such Other Redemption Notices received
      during such seven (7) Business Day period, then the Company shall redeem a
      pro
      rata amount from each holder of the Notes (including the Holder) based on the
      principal amount of the Notes submitted for redemption pursuant to such
      Redemption Notice and such Other Redemption Notices received by the Company
      during such seven (7) Business Day period.

     

    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

       

    

    (11)
      VOTING
      RIGHTS.
      The
      Holder shall have no voting rights as the holder of this Note, except
      as
      required by law, including, but not limited to, Chapter 78 of the Nevada Revised
      Statutes, and as expressly provided in this Note.

     

    (12)
      COVENANTS.

     

    (a)
      Rank.All
      payments due under this Note (A) shall rank pari
      passu
      with all
      Other Notes and (B) shall be senior to all other Indebtedness of the Company
      and
      its Subsidiaries, other than Permitted Senior Indebtedness.

     

    (b)
      Incurrence
      of Indebtedness.
      So long
      as this Note is outstanding, the Company shall not, and the Company shall not
      permit any of its Subsidiaries to, directly or indirectly, incur or guarantee,
      assume or suffer to exist any Indebtedness, other than (i) the Indebtedness
      evidenced by this Note and the Other Notes and (ii) other Permitted
      Indebtedness.

     

    (c)
      Existence
      of Liens.
      So long
      as this Note is outstanding, the Company shall not, and the Company shall not
      permit any of its Subsidiaries to, directly or indirectly, allow or suffer
      to
      exist any mortgage, lien, pledge, charge, security interest or other encumbrance
      upon or in any property or assets (including accounts and contract rights)
      owned
      by the Company or any of its Subsidiaries (collectively, "Liens")
      other
      than Permitted Liens. 

     

    (d)
      Restricted
      Payments.
      The
      Company shall not, and the Company shall not permit any of its Subsidiaries
      to,
      directly or indirectly, redeem, defease, repurchase, repay or make any payments
      in respect of, by the payment of cash or cash equivalents (in whole or in part,
      whether by way of open market purchases, tender offers, private transactions
      or
      otherwise), all or any portion of any Permitted Indebtedness (other than this
      Note and the Other Notes), whether by way of payment in respect of principal
      of
      (or premium, if any) or interest on such Indebtedness, if at the time such
      payment is due or is otherwise made or, after giving effect to such payment,
      an
      event constituting, or that with the passage of time and without being cured
      would constitute, a Trigger Event has occurred and is continuing.

     

    (e)
      Restriction
      on Redemption and Cash Dividends.
      Until
      all of the Notes have been converted, redeemed or otherwise satisfied in
      accordance with their terms, the Company shall not, directly or indirectly,
      redeem, repurchase or declare or pay any cash dividend or distribution on its
      capital stock without the prior express written consent of the Required
      Holders.

     

    (13)
      PARTICIPATION.
      The
      Holder, as the holder of this Note, shall be entitled to receive such dividends
      paid and distributions made to the holders of Common Stock to the same extent
      as
      if the Holder had converted this Note into Common Stock (without regard to
      any
      limitations on conversion herein or elsewhere) and had held such shares of
      Common Stock on the record date for such dividends and distributions. Payments
      under the preceding sentence shall be made concurrently with the dividend or
      distribution to the holders of Common Stock. 

     

    (14)
      VOTE
      TO ISSUE, OR CHANGE THE TERMS OF, NOTES.
      The
      affirmative vote at a meeting duly called for such purpose or the written
      consent without a meeting of the Required Holders shall be required for any
      change or amendment to this Note or the Other Notes. No
      consideration shall be offered or paid to any holder of Notes to amend or
      consent to a waiver or modification of the Notes unless the same consideration
      also is offered to all of the holders of Notes.

     

    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

       

    

    (15)
      TRANSFER.
      This
      Note may be offered, sold, assigned or transferred by the Holder without the
      consent of the Company, subject only to the provisions of Section 2(f) of the
      Securities Purchase Agreement.

     

    (16)
      REISSUANCE
      OF THIS NOTE.

     

    (a)
      Transfer.
      If this
      Note is to be transferred, the Holder shall surrender this Note to the Company,
      whereupon the Company will forthwith issue and deliver upon the order of the
      Holder a new Note (in accordance with Section 16(d)), registered as the Holder
      may request, representing the outstanding Principal being transferred by the
      Holder and, if less then the entire outstanding Principal is being transferred,
      a new Note (in accordance with Section 16(d)) to the Holder representing the
      outstanding Principal not being transferred. The Holder and any assignee, by
      acceptance of this Note, acknowledge and agree that, by reason of the provisions
      of Section 3(c)(iii) following conversion or redemption of any portion of this
      Note, the outstanding Principal represented by this Note may be less than the
      Principal stated on the face of this Note.

     

    (b)
      Lost,
      Stolen or Mutilated Note.
      Upon
      receipt by the Company of evidence reasonably satisfactory to the Company of
      the
      loss, theft, destruction or mutilation of this Note, and, in the case of loss,
      theft or destruction, of any indemnification undertaking by the Holder to the
      Company in customary form and, in the case of mutilation, upon surrender and
      cancellation of this Note, the Company shall execute and deliver to the Holder
      a
      new Note (in accordance with Section 16(d)) representing the outstanding
      Principal.

     

    (c)
      Note
      Exchangeable for Different Denominations.
      This
      Note is exchangeable, upon the surrender hereof by the Holder at the principal
      office of the Company, for a new Note or Notes (in accordance with Section
      16(d)
      and in principal amounts of at least $100,000) representing in the aggregate
      the
      outstanding Principal of this Note, and each such new Note will represent such
      portion of such outstanding Principal as is designated by the Holder at the
      time
      of such surrender.

     

    (d)
      Issuance
      of New Notes.
      Whenever the Company is required to issue a new Note pursuant to the terms
      of
      this Note, such new Note (i) shall be of like tenor with this Note, (ii) shall
      represent, as indicated on the face of such new Note, the Principal remaining
      outstanding (or in the case of a new Note being issued pursuant to Section
      16(a)
      or Section 16(c), the Principal designated by the Holder which, when added
      to
      the principal represented by the other new Notes issued in connection with
      such
      issuance, does not exceed the Principal remaining outstanding under this Note
      immediately prior to such issuance of new Notes), (iii) shall have an issuance
      date, as indicated on the face of such new Note, which is the same as the
      Issuance Date of this Note, (iv) shall have the same rights and conditions
      as
      this Note, and (v) shall represent accrued and unpaid Interest and Late Charges
      on the Principal and Interest of this Note, if any, from the Issuance
      Date.

     

    (17)
      REMEDIES,
      CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE
      RELIEF.
      The
      remedies provided in this Note shall be cumulative and in addition to all other
      remedies available under this Note and any of the other Transaction Documents
      at
      law or in equity (including a decree of specific performance and/or other
      injunctive relief), and nothing herein shall limit the Holder's right to pursue
      actual and consequential damages for any failure by the Company to comply with
      the terms of this Note. Amounts set forth or provided for herein with respect
      to
      payments, conversion and the like (and the computation thereof) shall be the
      amounts to be received by the Holder and shall not, except as expressly provided
      herein, be subject to any other obligation of the Company (or the performance
      thereof). The Company acknowledges that a breach by it of its obligations
      hereunder will cause irreparable harm to the Holder and that the remedy at
      law
      for any such breach may be inadequate. The Company therefore agrees that, in
      the
      event of any such breach or threatened breach, the Holder shall be entitled,
      in
      addition to all other available remedies, to an injunction restraining any
      breach, without the necessity of showing economic loss and without any bond
      or
      other security being required.

     

    
      
        
        

      

      
        13

        
          

        

      

      
        
        

      

       

    

    (18)
      PAYMENT
      OF COLLECTION, ENFORCEMENT AND OTHER COSTS.
      If (a)
      this Note is placed in the hands of an attorney for collection or enforcement
      or
      is collected or enforced through any legal proceeding or the Holder otherwise
      takes action to collect amounts due under this Note or to enforce the provisions
      of this Note or (b) there occurs any bankruptcy, reorganization, receivership
      of
      the Company or other proceedings affecting Company creditors' rights and
      involving a claim under this Note, then the Company shall pay the costs incurred
      by the Holder for such collection, enforcement or action or in connection with
      such bankruptcy, reorganization, receivership or other proceeding, including,
      but not limited to, financial advisory fees and attorneys' fees and
      disbursements.

     

    (19)
      CONSTRUCTION;
      HEADINGS.
      This
      Note shall be deemed to be jointly drafted by the Company and all the Purchasers
      and shall not be construed against any person as the drafter hereof. The
      headings of this Note are for convenience of reference and shall not form part
      of, or affect the interpretation of, this Note.

     

    (20)
      FAILURE
      OR INDULGENCE NOT WAIVER.
      No
      failure or delay on the part of the Holder in the exercise of any power, right
      or privilege hereunder shall operate as a waiver thereof, nor shall any single
      or partial exercise of any such power, right or privilege preclude other or
      further exercise thereof or of any other right, power or privilege.

     

    (21)
      DISPUTE
      RESOLUTION.
      In the
      case of a dispute as to the determination of the Closing Bid Price, the Closing
      Sale Price or the Weighted Average Price or the arithmetic calculation of the
      Conversion Rate or any Redemption Price, the Company shall submit the disputed
      determinations or arithmetic calculations via facsimile within one (1) Business
      Day of receipt, or deemed receipt, of the Conversion Notice or Redemption Notice
      or other event giving rise to such dispute, as the case may be, to the Holder.
      If the Holder and the Company are unable to agree upon such determination or
      calculation within one (1) Business Day of such disputed determination or
      arithmetic calculation being submitted to the Holder, then the Company shall,
      within one (1) Business Day submit via facsimile (a) the disputed determination
      of the Closing Bid Price, the Closing Sale Price or the Weighted Average Price
      to an independent, reputable investment bank selected by the Company and
      approved by the Holder or (b) the disputed arithmetic calculation of the
      Conversion Rate or any Redemption Price to the Company's independent, outside
      accountant. The Company, at the Company's expense, shall cause the investment
      bank or the accountant, as the case may be, to perform the determinations or
      calculations and notify the Company and the Holder of the results no later
      than
      five (5) Business Days from the time it receives the disputed determinations
      or
      calculations. Such investment bank's or accountant's determination or
      calculation, as the case may be, shall be binding upon all parties absent
      demonstrable error.

     

    
      
        
        

      

      
        14

        
          

        

      

      
        
        

      

       

    

    (22)
      NOTICES;
      PAYMENTS.

     

    (a)
      Notices.
      Whenever notice is required to be given under this Note, unless otherwise
      provided herein, such notice shall be given in accordance with Section 9(f)
      of
      the Securities Purchase Agreement. The Company shall provide the Holder with
      prompt written notice of all actions taken pursuant to this Note, including
      in
      reasonable detail a description of such action and the reason therefore. Without
      limiting the generality of the foregoing, the Company will give written notice
      to the Holder (i) immediately upon any adjustment of the Conversion Price,
      setting forth in reasonable detail, and certifying, the calculation of such
      adjustment and (ii) at least twenty (20) days prior to the date on which the
      Company closes its books or takes a record (A) with respect to any dividend
      or
      distribution upon the Common Stock, (B) with respect to any pro rata
      subscription offer to holders of Common Stock or (C) for determining rights
      to
      vote with respect to any Fundamental Transaction, dissolution or liquidation,
      provided in each case that such information shall be made known to the public
      prior to or in conjunction with such notice being provided to the
      Holder.

     

    (b)
      Payments.
      Whenever any payment of cash is to be made by the Company to any Person pursuant
      to this Note, such payment shall be made in lawful money of the United States
      of
      America by a check drawn on the account of the Company and sent via overnight
      courier service to such Person at such address as previously provided to the
      Company in writing (which address, in the case of each of the Purchasers, shall
      initially be as set forth on the Schedule of Buyers attached to the Securities
      Purchase Agreement); provided that the Holder may elect to receive a payment
      of
      cash via wire transfer of immediately available funds by providing the Company
      with prior written notice setting out such request and the Holder's wire
      transfer instructions. Whenever any amount expressed to be due by the terms
      of
      this Note is due on any day which is not a Business Day, the same shall instead
      be due on the next succeeding day which is a Business Day and, in the case
      of
      any Interest Date which is not the date on which this Note is paid in full,
      the
      extension of the due date thereof shall not be taken into account for purposes
      of determining the amount of Interest due on such date. Any amount of Principal
      or other amounts due under the Transaction Documents which is not paid when
      due
      shall result in a late charge being incurred and payable by the Company in
      an
      amount equal to interest on such amount at the rate of twelve percent (12%)
      per
      annum from the date such amount was due until the same is paid in full
      ("Late
      Charge").

     

    (23)
      CANCELLATION.
      After
      all Principal, accrued Interest and other amounts at any time owed on this
      Note
      have been paid in full, this Note shall automatically be deemed canceled, shall
      be surrendered to the Company for cancellation and shall not be
      reissued.

     

    (24)
      WAIVER
      OF NOTICE.
      To the
      extent permitted by law, the Company hereby waives demand, notice, protest
      and
      all other demands and notices in connection with the delivery, acceptance,
      performance, default or enforcement of this Note and the Securities Purchase
      Agreement.

     

    
      
        
        

      

      
        15

        
          

        

      

      
        
        

      

       

    

    (25)
      GOVERNING
      LAW; JURISDICTION;
      SEVERABILITY; JURY TRIAL.
      This
      Note shall be construed and enforced in accor-dance with, and all questions
      concerning the construction, validity, interpretation and performance of this
      Note shall be governed by, the internal laws of the State of New York, without
      giving effect to any choice of law or conflict of law provision or rule (whether
      of the State of New York or any other jurisdictions) that would cause the
      application of the laws of any jurisdictions other than the State of New York.
      The Company hereby irrevocably submits to the exclusive jurisdiction of the
      state and federal courts sitting in The City of New York, Borough of Manhattan,
      for the adjudication of any dispute hereunder or in connection herewith or
      with
      any transaction contemplated hereby or discussed herein, and hereby irrevocably
      waives, and agrees not to assert in any suit, action or proceeding, any claim
      that it is not personally subject to the jurisdiction of any such court, that
      such suit, action or proceeding is brought in an inconvenient forum or that
      the
      venue of such suit, action or proceeding is improper. Nothing contained herein
      shall be deemed to limit in any way any right to serve process in any manner
      permitted by law. In the event that any provision of this Note is invalid or
      unenforceable under any applicable statute or rule of law, then such provision
      shall be deemed inoperative to the extent that it may conflict therewith and
      shall be deemed modified to conform with such statute or rule of law. Any such
      provision which may prove invalid or unenforceable under any law shall not
      affect the validity or enforceability of any other provision of this Note.
      Nothing contained herein shall be deemed or operate to preclude the Holder
      from
      bringing suit or taking other legal action against the Company in any other
      jurisdiction to collect on the Company's obligations to the Holder, to realize
      on any collateral or any other security for such obligations, or to enforce
      a
      judgment or other court ruling in favor of the Holder. THE
      COMPANY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO
      REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN
      CONNECTION WITH OR ARISING OUT OF THIS NOTE OR ANY TRANSACTION CONTEMPLATED
      HEREBY.

     

    (26)
      CERTAIN
      DEFINITIONS.
      For
      purposes of this Note, the following terms shall have the following
      meanings:

     

    (a)
      "Approved
      Stock Plan"
      means
      any employee benefit plan which has been or hereafter is approved by the Board
      of Directors of the Company, pursuant to which the Company's securities may
      be
      issued to any employee, officer or director for services provided to the
      Company.

     

    (b)
      "Bloomberg"
      means
      Bloomberg Financial Markets.

     

    (c)
      "Business
      Day"
      means
      any day other than Saturday, Sunday or other day on which commercial banks
      in
      The City of New York or The City of Denver are authorized or required by law
      to
      remain closed.

     

    (d)
      "Change
      of Control"
      means
      any Fundamental Transaction other than (A) any reorganization, recapitalization
      or reclassification of Common Stock, in which holders of the Company's voting
      power immediately prior to such reorganization, recapitalization or
      reclassification continue after such reorganization, recapitalization or
      reclassification to hold publicly traded securities and, directly or indirectly,
      the voting power of the surviving entity or entities necessary to elect a
      majority of the members of the board of directors (or their equivalent if other
      than a corporation) of such entity or entities, or (B) pursuant to a migratory
      merger effected solely for the purpose of changing the jurisdiction of
      incorporation of the Company.

     

    
      
        
        

      

      
        16

        
          

        

      

      
        
        

      

       

    

    (e)
      "Closing
      Bid Price"
      and
      "Closing
      Sale Price"
      means,
      for any security as of any date, the last closing bid price and last closing
      trade price, respectively, for such security on the Principal Market, as
      reported by Bloomberg, or, if the Principal Market begins to operate on an
      extended hours basis and does not designate the closing bid price or the closing
      trade price, as the case may be, then the last bid price or last trade price,
      respectively, of such security prior to 4:00:00 p.m., New York Time, as reported
      by Bloomberg, or, if the Principal Market is not the principal securities
      exchange or trading market for such security, the last closing bid price or
      last
      trade price, respectively, of such security on the principal securities exchange
      or trading market where such security is listed or traded as reported by
      Bloomberg, or if the foregoing do not apply, the last closing bid price or
      last
      trade price, respectively, of such security in the over-the-counter market
      on
      the electronic bulletin board for such security as reported by Bloomberg, or,
      if
      no closing bid price or last trade price, respectively, is reported for such
      security by Bloomberg, the average of the bid prices, or the ask prices,
      respectively, of any market makers for such security as reported in the "pink
      sheets" by Pink Sheets LLC (formerly the National Quotation Bureau, Inc.).
      If
      the Closing Bid Price or the Closing Sale Price cannot be calculated for a
      security on a particular date on any of the foregoing bases, the Closing Bid
      Price or the Closing Sale Price, as the case may be, of such security on such
      date shall be the fair market value as mutually determined by the Company and
      the Holder. If the Company and the Holder are unable to agree upon the fair
      market value of such security, then such dispute shall be resolved pursuant
      to
      Section 21. All such determinations to be appropriately adjusted for any stock
      dividend, stock split, stock combination or other similar transaction during
      the
      applicable calculation period.

     

    (f)
      "Closing
      Date"
      shall
      have the meaning set forth in the Securities Purchase Agreement, which date
      is
      the date the Company initially issued Notes pursuant to the terms of the
      Securities Purchase Agreement.

     

    (g)
      "Contingent
      Obligation"
      means,
      as to any Person, any direct or indirect liability, contingent or otherwise,
      of
      that Person with respect to any indebtedness, lease, dividend or other
      obligation of another Person if the primary purpose or intent of the Person
      incurring such liability, or the primary effect thereof, is to provide assurance
      to the obligee of such liability that such liability will be paid or discharged,
      or that any agreements relating thereto will be complied with, or that the
      holders of such liability will be protected (in whole or in part) against loss
      with respect thereto.

     

    (h)
      "Convertible
      Securities"
      means
      any stock or securities (other than Options) directly or indirectly convertible
      into or exercisable or exchangeable for Common Stock.

     

    (i)
      "Eligible
      Market"
      means
      The New York Stock Exchange, Inc., the American Stock Exchange, The NASDAQ
      Global Select Market, The NASDAQ Global Market or The NASDAQ Capital
      Market.

     

    
      
        
        

      

      
        17

        
          

        

      

      
        
        

      

       

    

    (j)
      "Effective
      Date"
      has the
      meaning ascribed to such term in the Registration Rights Agreement.

     

    (k)
      "Excluded
      Securities"
      means
      any Common Stock issued or issuable: (i) in connection with any Approved Stock
      Plan; (ii) upon conversion of the Notes or the exercise of the Warrants; (iii)
      upon conversion of any Options or Convertible Securities which are outstanding
      on the day immediately preceding the Subscription Date, provided that the terms
      of such Options or Convertible Securities are not amended, modified or changed
      on or after the Subscription Date; (iv) in connection with mergers,
      acquisitions, strategic business partnerships or joint ventures, in each case
      with non-affiliated third parties and otherwise on an arm's-length basis, the
      primary purpose of which is not to raise additional capital and (v) upon the
      issuance of Options or the exercise of any Options issued to financial
      institutions in connection with commercial credit agreements or issuance of
      non-convertible debt by the Company.

     

    (l)
      "Fundamental
      Transaction"
      means
      that the Company shall, directly or indirectly, in one or more related
      transactions, (i) consolidate or merge with or into (whether or not the Company
      is the surviving corporation) another Person or Persons, or (ii) sell, assign,
      transfer, convey or otherwise dispose of all or substantially all of the
      properties or assets of the Company to another Person, or (iii) allow another
      Person to make a purchase, tender or exchange offer that is accepted by the
      holders of more than the 50% of the outstanding shares of Voting Stock (not
      including any shares of Voting Stock held by the Person or Persons making or
      party to, or associated or affiliated with the Persons making or party to,
      such
      purchase, tender or exchange offer), or (iv) consummate a stock purchase
      agreement or other business combination (including, without limitation, a
      reorganization, recapitalization, spin-off or scheme of arrangement) with
      another Person whereby such other Person acquires more than the 50% of the
      outstanding shares of Voting Stock (not including any shares of Voting Stock
      held by the other Person or other Persons making or party to, or associated
      or
      affiliated with the other Persons making or party to, such stock purchase
      agreement or other business combination), (v) reorganize, recapitalize or
      reclassify its Common Stock or (vi) any "person" or "group" (as these terms
      are
      used for purposes of Sections 13(d) and 14(d) of the Exchange Act) is or shall
      become the "beneficial owner" (as defined in Rule 13d-3 under the Exchange
      Act),
      directly or indirectly, of 50% of the aggregate ordinary voting power
      represented by issued and outstanding Common Stock.

     

    (m)
      "GAAP"
      means
      United States generally accepted accounting principles, consistently
      applied.

     

    (n)
      "Indebtedness"
      of any
      Person means, without duplication (i) all indebtedness for borrowed money,
      (ii)
      all obligations issued, undertaken or assumed as the deferred purchase price
      of
      property or services, including (without limitation) "capital leases" in
      accordance with generally accepted accounting principles (other than trade
      payables entered into in the ordinary course of business), (iii) all
      reimbursement or payment obligations with respect to letters of credit, surety
      bonds and other similar instruments, (iv) all obligations evidenced by notes,
      bonds, debentures or similar instruments, including obligations so evidenced
      incurred in connection with the acquisition of property, assets or businesses,
      (v) all indebtedness created or arising under any conditional sale or other
      title retention agreement, or incurred as financing, in either case with respect
      to any property or assets acquired with the proceeds of such indebtedness (even
      though the rights and remedies of the seller or bank under such agreement in
      the
      Trigger Event are limited to repossession or sale of such property), (vi) all
      monetary obligations under any leasing or similar arrangement which, in
      connection with generally accepted accounting principles, consistently applied
      for the periods covered thereby, is classified as a capital lease, (vii) all
      indebtedness referred to in clauses (i) through (vi) above secured by (or for
      which the holder of such Indebtedness has an existing right, contingent or
      otherwise, to be secured by) any mortgage, lien, pledge, charge, security
      interest or other encumbrance upon or in any property or assets (including
      accounts and contract rights) owned by any Person, even though the Person which
      owns such assets or property has not assumed or become liable for the payment
      of
      such indebtedness, and (viii) all Contingent Obligations in respect of
      indebtedness or obligations of others of the kinds referred to in clauses (i)
      through (vii) above.

     

    
      
        
        

      

      
        18

        
          

        

      

      
        
        

      

       

    

    (o)
      "Options"
      means
      any rights, warrants or options to subscribe for or purchase shares of Common
      Stock or Convertible Securities.

     

    (p)
      "Parent
      Entity"
      of a
      Person means an entity that, directly or indirectly, controls the applicable
      Person and whose common stock or equivalent equity security is quoted or listed
      on an Eligible Market, or, if there is more than one such Person or Parent
      Entity, the Person or Parent Entity with the largest public market
      capitalization as of the date of consummation of the Fundamental
      Transaction.

     

    (q)
      "Permitted
      Indebtedness"
      means
      (i) the Indebtedness evidenced by this Note and the Other Notes and (ii)
      Permitted Senior Indebtedness and (iii) bonds required to be posted by the
      company to obtain regulatory permits, licenses or insurance as part of
      conducting its business.

     

    (r)
      "Permitted
      Senior Indebtedness"
      the
      principal of (and premium, if any), interest on, and all fees and other amounts
      (including, without limitation, any reasonable out-of-pocket costs, enforcement
      expenses (including reasonable out-of-pocket legal fees and disbursements),
      collateral protection expenses and other reimbursement or indemnity obligations
      relating thereto) payable by Company and/or its Subsidiaries under or in
      connection with (1) debt financing with one or more lenders to be obtained
      for
      the primary purpose of funding the acquisition, exploration and/or development
      of oil and gas properties, including construction of gathering, compression
      and
      fluid infrastructure, and working capital and (2) debt financing with one or
      more lenders that is secured by revenues from oil and gas production from the
      Company's properties; provided, however, that the aggregate amount of
      Indebtedness outstanding at any time under clause (2) of the foregoing does
      not
      exceed $7,500,000.

     

    (s)
      "Permitted
      Liens"
      means
      (i) any Lien for taxes not yet due or delinquent or being contested in good
      faith by appropriate proceedings for which adequate reserves have been
      established in accordance with GAAP, (ii) any statutory Lien arising in the
      ordinary course of business by operation of law with respect to a liability
      that
      is not yet due or delinquent, (iii) any Lien created by operation of law, such
      as materialmen's liens, mechanics' liens and other similar liens, arising in
      the
      ordinary course of business with respect to a liability that is not yet due
      or
      delinquent or that are being contested in good faith by appropriate proceedings,
      (iv) Liens (A) upon or in any equipment acquired or held by the Company or
      any
      of its Subsidiaries to secure the purchase price of such equipment or
      indebtedness incurred solely for the purpose of financing the acquisition or
      lease of such equipment, or (B) existing on such equipment at the time of its
      acquisition, provided that the Lien is confined solely to the property so
      acquired and improvements thereon, and the proceeds of such equipment, (v)
      Liens
      incurred in connection with the extension, renewal or refinancing of the
      indebtedness secured by Liens of the type described in clauses (i) and (iv)
      above, provided that any extension, renewal or replacement Lien shall be limited
      to the property encumbered by the existing Lien and the principal amount of
      the
      Indebtedness being extended, renewed or refinanced does not increase, (vi)
      leases or subleases and licenses and sublicenses granted to others in the
      ordinary course of the Company's business, not interfering in any material
      respect with the business of the Company and its Subsidiaries taken as a whole,
      (vii) Liens in favor of customs and revenue authorities arising as a matter
      of law to secure payments of custom duties in connection with the importation
      of
      goods, (viii)
      Liens
      arising from judgments, decrees or attachments in circumstances not constituting
      a Trigger Event under Section 4(a)(vii), and (ix) Liens securing Permitted
      Senior Indebtedness.

     

    
      
        
        

      

      
        19

        
          

        

      

      
        
        

      

       

    

    (t)
      "Person"
      means
      an individual, a limited liability company, a partnership, a joint venture,
      a
      corporation, a trust, an unincorporated organization, any other entity and
      a
      government or any department or agency thereof. 

     

    (u)
      "Principal
      Market"
      means
      the NASD OTC Bulletin Board.

     

    (v)
      "Redemption
      Notices"
      means,
      collectively, the Trigger Event Redemption Notices and the Change of Control
      Redemption Notices, each of the foregoing, individually, a Redemption
      Notice.

     

    (w)
      "Redemption
      Premium"
      means
      (i) in the case of the Trigger Events described in Section 4(a)(i) - (vi) and
      (ix) - (xii), 125% or (ii) in the case of the Trigger Events described in
      Section 4(a)(vii) - (viii), 100%.

     

    (x)"Redemption
      Prices"
      means,
      collectively, the Trigger Event Redemption Price and the Change of Control
      Redemption Price, each of the foregoing, individually, a Redemption
      Price.

     

    (y)
      "Registration
      Rights Agreement"
      means
      that certain registration rights agreement dated as of the Subscription Date
      by
      and among the Company and the initial holders of the Notes relating to, among
      other things, the registration of the resale of the Common Stock issuable upon
      conversion of the Notes and exercise of the Warrants.

     

    (z)
      "Required
      Holders"
      means
      the holders of Notes representing at least two-thirds (2/3rd)
      of the
      aggregate principal amount of the Notes then outstanding.

     

    (aa)
      "SEC"
      means
      the United States Securities and Exchange Commission. 

     

    (bb)
      "Securities
      Purchase Agreement"
      means
      that certain securities purchase agreement dated as of the Subscription Date
      by
      and among the Company and the initial holders of the Notes pursuant to which
      the
      Company issued the Notes. 

     

    
      
        
        

      

      
        20

        
          

        

      

      
        
        

      

       

    

    (cc)
      "Stockholder
      Approval"
      has the
      meaning ascribed to such term in the Securities Purchase Agreement.

     

    (dd)
      "Stockholder
      Approval Date"
      has the
      meaning ascribed to such term in the Securities Purchase Agreement.

     

    (ee)
      "Subscription
      Date"
      means
      December [__], 2006.

     

    (ff)
      "Subsidiary"
      means
any
      entity in which the Company, directly or indirectly, owns any of the capital
      stock or holds an equity or similar interest. 

     

    (gg)
      "Successor
      Entity"
      means
      the Person, which may be the Company, formed by, resulting from or surviving
      any
      Fundamental Transaction or the Person with which such Fundamental Transaction
      shall have been made, provided that if such Person is not a publicly traded
      entity whose common stock or equivalent equity security is quoted or listed
      for
      trading on an Eligible Market, Successor Entity shall mean such Person's Parent
      Entity.

     

    (hh)
      "Trading
      Day"
      means
      any day on which the Common Stock is traded on the Principal Market, or, if
      the
      Principal Market is not the principal trading market for the Common Stock,
      then
      on the principal securities exchange or securities market on which the Common
      Stock is then traded; provided that "Trading Day" shall not include any day
      on
      which the Common Stock is scheduled to trade on such exchange or market for
      less
      than 4.5 hours or any day that the Common Stock is suspended from trading during
      the final hour of trading on such exchange or market (or if such exchange or
      market does not designate in advance the closing time of trading on such
      exchange or market, then during the hour ending at 4:00:00 p.m., New York
      Time).

     

    (ii)
      "Voting
      Stock"
      of a
      Person means capital stock of such Person of the class or classes pursuant
      to
      which the holders thereof have the general voting power to elect, or the general
      power to appoint, at least a majority of the board of directors, managers or
      trustees of such Person (irrespective of whether or not at the time capital
      stock of any other class or classes shall have or might have voting power by
      reason of the happening of any contingency).

     

    (jj)
      "Warrants"
      has the
      meaning ascribed to such term in the Securities Purchase Agreement, and shall
      include all warrants issued in exchange therefor or replacement
      thereof.

     

    
      
        
        

      

      
        21

        
          

        

      

      
        
        

      

       

    

    (kk)
      "Weighted
      Average Price"
      means,
      for any security as of any date, the dollar volume-weighted average price for
      such security on the Principal Market during the period beginning at 9:30:01
      a.m., New York Time (or such other time as the Principal Market publicly
      announces is the official open of trading), and ending at 4:00:00 p.m., New
      York
      Time (or such other time as the Principal Market publicly announces is the
      official close of trading) as reported by Bloomberg through its "Volume at
      Price" functions, or, if the foregoing does not apply, the dollar
      volume-weighted average price of such security in the over-the-counter market
      on
      the electronic bulletin board for such security during the period beginning
      at
      9:30:01 a.m., New York Time (or such other time as such market publicly
      announces is the official open of trading), and ending at 4:00:00 p.m., New
      York
      Time (or such other time as such market publicly announces is the official
      close
      of trading) as reported by Bloomberg, or, if no dollar volume-weighted average
      price is reported for such security by Bloomberg for such hours, the average
      of
      the highest closing bid price and the lowest closing ask price of any of the
      market makers for such security as reported in the "pink sheets" by Pink Sheets
      LLC (formerly the National Quotation Bureau, Inc.). If the Weighted Average
      Price cannot be calculated for a security on a particular date on any of the
      foregoing bases, the Weighted Average Price of such security on such date shall
      be the fair market value as mutually determined by the Company and the Holder.
      If the Company and the Holder are unable to agree upon the fair market value
      of
      such security, then such dispute shall be resolved pursuant to Section 21.
      All
      such determinations to be appropriately adjusted for any stock dividend, stock
      split, stock combination or other similar transaction during the applicable
      calculation period.

     

    (27)
      DISCLOSURE.
      Upon
      receipt or delivery by the Company of any notice in accordance with the terms
      of
      this Note, unless the Company has in good faith determined that the matters
      relating to such notice do not constitute material, nonpublic information
      relating to the Company or its Subsidiaries, the Company shall within four
      (4)
      Business Days after any such receipt or delivery publicly disclose such
      material, nonpublic information on a Current Report on Form 8-K or otherwise.
      In
      the event that the Company believes that a notice contains material, nonpublic
      information, relating to the Company or its Subsidiaries, the Company shall
      indicate to the Holder contemporaneously with delivery of such notice, and
      in
      the absence of any such indication, the Holder shall be allowed to presume
      that
      all matters relating to such notice do not constitute material, nonpublic
      information relating to the Company or its Subsidiaries.

     

    [Signature
      Page Follows]

     

    
      
        
        

      

      
        22

        
          

        

      

      
        
        

      

    

    IN
      WITNESS WHEREOF, the Company has caused this Note to be duly executed as of
      the
      Issuance Date set out above.

     

    
      	 	 	 
	 	
              RANCHER
                ENERGY CORP.

            
	 
 	 
 	 
 
	 	By:  	 
	 	
              Name:

            
	 	
              Title:

            

    

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    EXHIBIT
      I

     

    RANCHER
      ENERGY CORP.

     

    CONVERSION
      NOTICE

     

    Reference
      is made to the Convertible Note (the "Note")
      issued
      to the undersigned by Rancher Energy Corp. (the "Company").
      In
      accordance with and pursuant to the Note, the undersigned hereby elects to
      convert the Conversion Amount (as defined in the Note) of the Note indicated
      below into shares of Common Stock par value $0.00001 per share (the
      "Common
      Stock")
      of the
      Company, as of the date specified below.

     

     

    
      	
              Date
                of Conversion: 

            	 
	 	 
	
              Aggregate
                Conversion Amount to be converted: 

            	 
	 	 
	
              Please
                confirm the following information: 

            	 
	 	 
	
              Conversion
                Price: 

            	 
	 	 
	
              Number
                of shares of Common Stock to be issued: 

            	 
	 	 
	
              Please
                issue the Common Stock into which the Note is being converted in
                the
                following name and to the following address: 

            
	 	 
	
              Issue
                to: 

            	 
	 	 
	 	 
	 	 
	 	 
	 	 
	
              Facsimile
                Number: 

            	 
	 	 
	
              Authorization: 

            	 
	 	 
	
              By: 

            	 
	 	 
	
              Title: 

            	 
	 	 
	
              Dated: 

            	 
	 	 
	
              Account
                Number: 

            	 
	
              (if
                electronic book entry transfer) 

            	 
	 	 
	
              Transaction
                Code Number: 

            	 
	
              (if
                electronic book entry transfer) 

            	 

    

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    ACKNOWLEDGMENT

     

    The
      Company hereby acknowledges this Conversion Notice and hereby directs Pacific
      Stock Transfer Company to issue the above indicated number of shares of Common
      Stock in accordance with the Transfer Agent Instructions dated November __,
      2006
      from the Company and acknowledged and agreed to by Pacific Stock Transfer
      Company.

     

    
      	 	 	 
	 	
              RANCHER
                ENERGY CORP.

            
	 
 	 
 	 
 
	 	By:  	 
	 	
              Name:

            
	 	
              Title:Exhibit
      10.1

     

    SECURITIES
      PURCHASE AGREEMENT

     

    This
      SECURITIES PURCHASE AGREEMENT (this “Agreement”)
      is
      dated as of the 8th day of January, 2007 (the “Effective
      Date”)
      by and
      between Targeted Genetics Corporation, a Washington corporation, with its
      principal office at 1100 Olive Way Suite 100, Seattle, WA 98101 (the
“Company”),
      and
      the several purchasers identified in the attached Exhibit A
      (individually, a “Purchaser”
and
      collectively, the “Purchasers”).

     

    WHEREAS,
      the Company desires to issue and sell to the Purchasers an aggregate of
      (i) approximately 2,180,000 shares (the “Shares”)
      of the
      authorized but unissued shares of common stock, $0.01 par value per share,
      of
      the Company (the “Common
      Stock”);
      and
      (ii) warrants in the form attached as Exhibit B
      to
      purchase an aggregate of approximately 763,000 shares of Common Stock (each,
      a
“Warrant,”
and
      collectively, the “Warrants”);
      and

     

    WHEREAS,
      the Purchasers, severally, wish to purchase the Shares and the Warrants on
      the
      terms and subject to the conditions set forth in this Agreement.

     

    NOW,
      THEREFORE, in consideration of the mutual agreements, representations,
      warranties and covenants herein contained, the parties hereto agree as
      follows:

     

    1.  Definitions.
      As used
      in this Agreement, the following terms shall have the following respective
      meanings:

     

    (a)  “Affiliate”
of
      a
      party means any corporation or other business entity controlled by, controlling
      or under common control with such party. For this purpose “control”
shall
      mean direct or indirect beneficial ownership of fifty percent (50%) or more
      of the voting or income interest in such corporation or other business
      entity.

     

    (b)  “Agreement”
means
      this Securities Purchase Agreement.

     

    (c)  “Closing
      Date”
means
      the date of the Closing.

     

    (d)  “Exchange
      Act”
means
      the Securities Exchange Act of 1934, as amended, and all of the rules and
      regulations promulgated thereunder.

     

    (e)  “Registration
      Rights Agreement”
shall
      mean that certain Registration Rights Agreement, dated as of the date hereof,
      among the Company and the Purchasers.

     

    (f)  “Operative
      Agreements”
shall
      mean the Registration Rights Agreement and the Warrant together with this
      Agreement.

     

    (g)  “Supermajority
      Purchasers”
shall
      mean Purchasers which, at any given time, hold greater than sixty-six and
      two-thirds percent (66 2/3%) of the voting power of the outstanding Shares,
      that have not been resold pursuant to an effective registration statement under
      the Securities Act or Rule 144 under the Securities Act.

     

    
      
        
        

      

      
        -1-

        
          

        

      

      
        
        

      

       

    

    (h)  Material
      Adverse Effect shall mean a material adverse change in the assets, liabilities
      (contingent or other), affairs, operations or financial condition of the
      Company.

     

    (i)  “Rules
      and Regulations”
shall
      mean the rules and regulations of the SEC.

     

    (j)  “SEC”
shall
      mean the Securities and Exchange Commission.

     

    (k)  “SEC
      Documents”
shall
      have the meaning set forth in Section 3.27 below.

     

    (l)  “Securities”
shall
      mean the Shares, the Warrants and the Underlying Shares.

     

    (m)  “Securities
      Act”
shall
      mean the Securities Act of 1933, as amended, and all of the rules and
      regulations promulgated thereunder.

     

    (n)  “Underlying
      Shares”
shall
      mean the shares of Common Stock issuable upon exercise of the
      Warrants.

     

    2.  Purchase
      and Sale of Securities.

     

    2.1  Purchase
      and Sale.
      Subject
      to and upon the terms and conditions set forth in this Agreement, the Company
      agrees to issue and sell to each Purchaser, and each Purchaser, severally,
      hereby agrees to purchase from the Company, at the Closing (as defined below),
      (i) the number of shares of Common Stock set forth opposite the name of such
      Purchaser under the heading “Number
      of Shares to be Purchased”
on
      Exhibit A
      hereto,
      at a purchase price of $4.00 per share and (ii) a Warrant to purchase .35
      share of Common Stock for every one Share purchased by the Purchaser at a
      purchase price per Underlying Share of $0.0 and having an exercise price of
      $5.41 per Underlying Share. The total purchase price payable by each Purchaser
      for the Securities that such Purchaser is hereby agreeing to purchase is set
      forth opposite the name of such Purchaser under the heading “Aggregate
      Purchase Price”
on
      Exhibit A
      hereto.
      The aggregate purchase price payable by the Purchasers to the Company for all
      of
      the Securities shall be approximately $8,720,000.

     

    2.2  Closing.
      The
      purchase and sale of the Securities to be sold pursuant to this Agreement shall
      take place at the offices of Orrick, Herrington & Sutcliffe LLP, counsel to
      the Company, at 719 Second Avenue, Suite 900, Seattle, Washington 98104, at
      10:00 a.m., on January 11, 2007, or at such other time and place as the Company
      and the Supermajority Purchasers agree upon orally or in writing (which time
      and
      place are designated as the “Closing”).
      At
      the Closing, the Company shall deliver to each Purchaser a single stock
      certificate and a single Warrant representing the number of Securities purchased
      by such Purchaser, each to be registered in the name of such Purchaser, or
      in
      such nominee’s or nominees’ name(s) as designated by such Purchaser in writing
      in the form of the Investor Questionnaire attached hereto as Appendix I,
      against
      payment of the purchase price therefor by wire transfer of immediately available
      funds to such account or accounts as the Company shall designate in
      writing.

     

    
      
        
        

      

      
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    3.  Representations
      and Warranties of the Company.
      Except
      as otherwise described in the SEC Documents (as defined below), the Company
      hereby represents and warrants to each of the Purchasers as
      follows:

     

    3.1  Incorporation.
      The
      Company is a corporation duly organized, validly existing under the laws of the
      state of Washington and is qualified to do business and in good standing (with
      respect to jurisdictions that recognize such concept) in each jurisdiction
      in
      which the character of its properties or the nature of its business requires
      such qualification, except where the failure to so qualify or be in good
      standing would not have a Material Adverse Effect. Except for short-term
      investments, the Company does not own any shares of stock or any other equity
      or
      long-term debt securities of any corporation or have any equity interest in
      any
      firm, partnership, limited liability company, joint venture, association or
      other entity. Complete and correct copies of the Company’s Amended and Restated
      Articles of Incorporation (the “Restated
      Articles”)
      and
      its Amended and Restated Bylaws (the “Bylaws”)
      as in
      effect on the date hereof have been filed by the Company with the SEC. The
      Company has all requisite corporate power and authority to carry on its business
      as now conducted.

     

    3.2  Authority.
      The
      Company has all requisite corporate power and authority to enter into this
      Agreement and the other Operative Agreements and to perform the transactions
      contemplated hereby and thereby. The Operative Agreements have been duly
      authorized, executed and delivered by the Company and are valid and binding
      agreements on the part of the Company, enforceable in accordance with their
      terms, except as may be limited by applicable bankruptcy, insolvency,
      reorganization, moratorium or other similar laws relating to or affecting
      creditors’ rights generally or by general equitable principles. The execution
      and delivery of the Operative Agreements by the Company and the consummation
      of
      the transactions contemplated thereby will not conflict with or result in any
      violation of or default (with or without notice or lapse of time, or both)
      under, or give rise to a right of termination, cancellation or acceleration
      of
      any obligation or to a loss of a material benefit under (i) any provision
      of the Restated Articles or Bylaws, (ii) any material bond, debenture, note
      or other evidence of indebtedness, or any material lease, contract, indenture,
      mortgage, deed of trust, loan agreement, joint venture or other agreement or
      instrument to which the Company is a party or by which it or its property is
      bound or (iii) except as would not have a Material Adverse Effect, any
      judgment, order, statute, law, ordinance, rule or regulation applicable to
      the
      Company or its properties or assets. No consent, approval, authorization or
      order of or qualification with any Government Entity is required for the
      execution and delivery of this Agreement or the other Operative Agreements
      and
      the consummation by the Company of the transactions herein and therein
      contemplated, except such consents (i) that will be obtained prior to the
      Closing Date and (ii) as may be required under the Securities Act, the Exchange
      Act (if applicable), the Rules and Regulations, or under state or other
      securities or blue sky laws or the National Association of Securities Dealers,
      Inc. (the “NASD”),
      all
      of which requirements will be satisfied in all material respects at or prior
      to
      the Closing Date.

     

    
      
        
        

      

      
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    3.3  Absence
      of Litigation or Proceeding.
      There
      is no action, suit or proceeding or, to the Company’s knowledge, any
      investigation, pending, or to the Company’s knowledge, threatened by or before
      any court, governmental body or regulatory agency against the Company that
      is
      required to be disclosed in the SEC Documents and is not so disclosed. The
      Company has not received any written or oral notification of, or request for
      information in connection with, any formal or informal inquiry, investigation
      or
      proceeding from the SEC or the NASD.

     

    3.4  Capitalization.
      All
      outstanding shares of capital stock of the Company have been duly authorized
      and
      validly issued and are fully paid and nonassessable, have been issued in
      compliance with all federal and state securities laws, and have not been issued
      in violation of or subject to any preemptive rights or other rights to subscribe
      for or purchase securities. The authorized capital stock of the Company consists
      of (i) 18,000,000 shares of Common Stock, of which approximately 10,921,736
      shares are outstanding on the date hereof and (ii) 600,000 shares of
      preferred stock, none of which no shares are outstanding on the date hereof.
      Except for options to purchase Common Stock or other equity awards issued to
      employees and consultants of the Company pursuant to the employee benefit plans
      disclosed in the SEC Documents and outstanding warrants to purchase Common
      Stock
      disclosed in the SEC Documents, there are no existing options, warrants, calls,
      preemptive (or similar) rights, subscriptions or other rights, agreements,
      arrangements or commitments of any character obligating the Company to issue,
      transfer or sell, or cause to be issued, transferred or sold, any shares of
      the
      capital stock of the Company or other equity interests in the Company or any
      securities convertible into or exchangeable for such shares of capital stock
      or
      other equity interests, and there are no outstanding contractual obligations
      of
      the Company to repurchase, redeem or otherwise acquire any shares of its capital
      stock or other equity interests. There are no voting agreements or other similar
      arrangements with respect to the Common Stock to which the Company is a party.
      

     

    3.5  Valid
      Issuance of Securities.
      The
      Securities being purchased by the Purchasers hereunder will, upon issuance
      pursuant to the terms hereof, be duly authorized and validly issued, and the
      Shares will, upon issuance pursuant to the terms hereof, be fully paid and
      nonassessable. The Underlying Shares have been duly and validly authorized
      and
      reserved for issuance and, upon exercise of the Warrants in accordance with
      their terms, including payment of the exercise price therefore, the Underlying
      Shares will be validly issued, fully paid and nonassessable. Except
      as
      disclosed in the SEC Documents, the Company has granted no preemptive
      rights,
      co-sale rights, rights of first refusal or other similar rights to subscribe
      for
      or to purchase the Company’s capital stock exist with respect to the issuance
      and sale of the Securities by the Company pursuant to this Agreement and the
      terms of the Warrants. No shareholder of the Company has any right (which has
      not been waived or has not expired by reason of lapse of time) to require the
      Company to register the sale of any shares owned by such stockholder under
      the
      Securities Act in the registration statement to be filed by the Company pursuant
      to the Registration Rights Agreement (the “Registration
      Statement”).

     

    
      
        
        

      

      
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    3.6  Accountants.
      Ernst
& Young LLP, whose report on the financial statements of the Company is
      filed with the SEC in the Company’s Annual Report on Form 10-K for the year
      ended December 31, 2005, are independent registered public accountants as
      required by the Securities Act and the Rules and Regulations. Except as
      described in the SEC Documents and as preapproved in accordance with the
      requirements set forth in Section 10A of the Exchange Act, to the Company’s
      knowledge, Ernst & Young LLP has not engaged in any “prohibited activities”
(as defined in Section 10A of the Exchange Act) on behalf of the
      Company.

     

    3.7  Financial
      Statements.
      The
      financial statements of the Company, together with the related schedules and
      notes: (i) present fairly, in all material respects, the financial position
      of
      the Company as of the dates indicated and the results of operations and cash
      flows of the Company for the periods specified; (ii) have been prepared in
      compliance with requirements of the Securities Act and the Rules and Regulations
      and in conformity with generally accepted accounting principles in the United
      States applied on a consistent basis during the periods presented and the
      schedules included in the Registration Statement present fairly, in all material
      respects, the information required to be stated therein (provided, however,
      that
      the statements that are unaudited are subject to normal year-end adjustments
      and
      do not contain certain footnotes required by generally accepted accounting
      principles); (iii) comply with the antifraud provisions of the federal
      securities laws; and (iv) describe accurately, in all material respects, the
      controlling principles used to form the basis for their presentation. There
      are
      no financial statements (historical or pro forma) and/or related schedules
      and
      notes that are required to be included in the SEC Documents that are not
      included as required by the Securities Act, the Exchange Act and/or the Rules
      and Regulations. 

     

    3.8  No
      Changes.
      Except
      as disclosed in the SEC Documents, subsequent to September 30, 2006 there has
      not been (i) any change, development or event that might reasonably be expected
      to result, individually or in the aggregate, in a Material Adverse Effect,
      (ii)
      any transaction that is material to the Company, (iii) any obligation, direct
      or
      contingent, that is material to the Company, incurred by the Company, (iv)
      any
      change in the capital stock or outstanding indebtedness of the Company that
      is
      material to the Company, (v) any dividend or distribution of any kind declared,
      paid or made on the capital stock of the Company or (vi) any loss or damage
      (whether or not insured) to the property of the Company that has been sustained
      or will have been sustained that could reasonably be expected to have,
      individually or in the aggregate, a Material Adverse Effect. 

     

    3.9  Property.

     

    (a)  Except
      as
      set forth in the SEC Documents: (i) the Company has good and marketable title
      to
      all properties and assets described in the SEC Documents as owned by it free
      and
      clear of any pledge, lien, security interest, encumbrance, claim or equitable
      interest, whether imposed by agreement, contract, understanding, law, equity
      or
      otherwise, except for Permitted Liens (as defined below) or where any failure
      to
      have good and marketable title to such properties and assets, individually
      or in
      the aggregate, would not reasonably be expected to have, individually or in
      the
      aggregate, a Material Adverse Effect; and (ii) the Company has valid and
      enforceable leases, including without limitation any leases that are the subject
      of any sale and leaseback arrangement, for all properties described in the
      SEC
      Documents as leased by it, except as the enforcement thereof may be limited
      by
      applicable bankruptcy, insolvency, reorganization, moratorium or other similar
      laws relating to or affecting creditors’ rights generally or by general
      equitable principles. Except as set forth in the SEC Documents, the Company
      owns
      or leases all such properties as are necessary to its operations as now
      conducted or as proposed to be conducted. A “Permitted
      Lien”
shall
      mean (i) liens for taxes not yet due, (ii) mechanics liens and similar liens
      for
      labor, materials or supplies incurred in the ordinary course of business for
      amounts that are not delinquent and (iii) any liens that individually or in
      the
      aggregate are not material. 

     

    
      
        
        

      

      
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    (b)  The
      Company owns or has valid, binding and enforceable licenses or other rights
      to
      use the patents and patent applications, inventions, copyrights, trademarks,
      service marks, trade names, service names, technology and know-how (including
      trade secrets and other unpatented and/or unpatentable proprietary rights and
      excluding generally commercially available “off the shelf” software programs
      licensed pursuant to shrink wrap or “click and accept” licenses) necessary to
      conduct its business in the manner described in the SEC Documents (collectively,
      the “Company
      Intellectual Property”),
      except for any Company Intellectual Property the absence of which, individually
      or in the aggregate, would not have a Material Adverse Effect. The Company
      Intellectual Property is free and clear of any pledge, lien, security interest,
      encumbrance, claim or equitable interest, whether imposed by agreement,
      contract, understanding, law, equity or otherwise, except for Permitted Liens
      or
      where any failure to have such adequate licenses or other rights of use to
      such
      Intellectual Property, individually or in the aggregate, would not reasonably
      be
      expected to have, individually or in the aggregate, a Material Adverse Effect.
      The Company is not obligated to pay a royalty, grant a license or provide other
      consideration to any third party in connection with the Company Intellectual
      Property other than as disclosed in the SEC Documents. Except as disclosed
      in
      the SEC Documents or as would not have a Material Adverse Effect, (i) the
      Company has not received any notice of infringement or conflict with asserted
      rights of others with respect to any Company Intellectual Property, (ii) the
      conduct of the business of the Company in the manner described in the SEC
      Documents does not and will not, to the knowledge of the Company, infringe,
      interfere or conflict with any valid issued patent claim or other intellectual
      property right of any third party and (iii) no third party, including any
      academic or governmental organization, possesses or could obtain rights to
      the
      Company Intellectual Property which, if exercised, could enable such party
      to
      develop products competitive to those of the Company. Except as disclosed in
      the
      SEC Documents, the Company has not received any notice or has any knowledge
      of
      (i) any potential infringement or misappropriation by others of the Company
      Intellectual Property or (ii) any intellectual property of others that
      potentially conflicts or interferes with the Company Intellectual Property,
      that
      might reasonably be expected to have, individually or in the aggregate, a
      Material Adverse Effect. To the Company’s knowledge, no claim of any patent or
      patent application (assuming the claims of patent applications issue as
      currently pending) included in the Company Intellectual Property is
      unenforceable or invalid, except for such unenforceability or invalidity that
      would not reasonably be expected to result, individually or in the aggregate,
      in
      a Material Adverse Effect. Each former and current employee and independent
      contractor of the Company has signed and delivered one or more written contracts
      with the Company pursuant to which such employee or independent contractor
      assigns to the Company all of his, her or its rights in and to any inventions,
      discoveries, improvements, works of authorship, know-how or information made,
      conceived, reduced to practice, authored or discovered in the course of
      employment by or performance of services for the Company and any and all patent
      rights, copyrights, trademark and other intellectual property rights therein
      or
      thereto.

     

    
      
        
        

      

      
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    3.10  Tax
      Returns.
      The
      Company has timely filed all federal, state and foreign income and franchise
      tax
      returns required to be filed by the Company on or prior to the date hereof,
      and
      has paid all taxes shown thereon as due, and there is no tax deficiency that
      has
      been or, to the Company’s knowledge, might be asserted against the Company that
      might reasonably be expected to have a Material Adverse Effect. All tax
      liabilities are adequately provided for on the books of the
      Company.

     

    3.11  Internal
      Controls.
      The
      Company has established and maintains a system of internal accounting controls
      sufficient to provide reasonable assurances that: (i) transactions are executed
      in accordance with management’s general or specific authorization; (ii)
      transactions are recorded as necessary to permit preparation of financial
      statements in conformity with generally accepted accounting principles in the
      United States and to maintain accountability for assets; (iii) access to assets
      is permitted only in accordance with management’s general or specific
      authorization; and (iv) the recorded accountability for assets is compared
      with
      existing assets at reasonable intervals and appropriate action is taken with
      respect to any differences.

     

    3.12  Audit
      Committee.
      The
      Company’s Board of Directors has validly appointed an Audit Committee whose
      composition satisfies the requirements of Rule 4350(d)(2) of the Rules of the
      National Association of Securities Dealers, Inc. (the “NASD
      Rules”)
      and
      the Board of Directors and/or the Audit Committee has adopted a charter that
      satisfies the requirements of Rule 4350(d)(1) of the NASD Rules. The Audit
      Committee has reviewed the adequacy of its charter within the past 12 months.
      

     

    3.13  Disclosure
      Controls.
      The
      Company has established and maintains disclosure controls and procedures (as
      such term is defined in Rules 13a-15 and 15d-15 under the Exchange Act). Since
      the date of the most recent evaluation of such disclosure controls and
      procedures, there have been no significant changes in internal controls or
      in
      other factors that could significantly affect internal controls, including
      any
      corrective actions with regard to significant deficiencies and material
      weaknesses. The Company is in compliance in all material respects with all
      provisions currently in effect and applicable to the Company of the
      Sarbanes-Oxley Act of 2002, and all rules and regulations promulgated thereunder
      or implementing the provisions thereof.

     

    
      
        
        

      

      
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    3.14  Insurance.
      The
      Company maintains insurance with insurers of recognized financial responsibility
      of the types and in the amounts it reasonably believes to be adequate for its
      business and consistent with insurance coverage maintained by similar companies
      in similar businesses, including, but not limited to, insurance covering the
      acts and omissions of directors and officers, real and personal property owned
      or leased by the Company against theft, damage, destruction, acts of vandalism
      and all other risks customarily insured against, all of which insurance is
      in
      full force and effect; and the Company has no reason to believe that it will
      not
      be able to renew its existing insurance coverage as and when such coverage
      expires or to obtain similar coverage from similar insurers as may be necessary
      to continue its business at a cost that might not reasonably be expected to
      have
      a Material Adverse Effect.

     

    3.15  Losses.
      The
      Company has not sustained since September 30, 2006 any losses or interferences
      with its business from fire, explosion, flood or other calamity, whether or
      not
      covered by insurance, or from any labor dispute or court or governmental action,
      order or decree, other than any losses or interferences which might not
      reasonably be expected to have, individually or in the aggregate, a Material
      Adverse Effect.

     

    3.16  Labor
      Disputes.
      No
      labor dispute with employees of the Company exists or, to the Company’s
      knowledge, is imminent which might reasonably be expected to have a Material
      Adverse Effect. No collective bargaining agreement exists with any of the
      Company’s employees and, to the Company’s knowledge, no such agreement is
      imminent.

     

    3.17  NASDAQ
      Capital Market.
      The
      Common Stock is registered pursuant to Section 12(g) of the Exchange Act and
      is
      listed on the NASDAQ Capital Market, and the Company has taken no action
      designed to, or likely to have the effect of, terminating the registration
      of
      the Common Stock under the Exchange Act or delisting the Common Stock from
      the
      NASDAQ Capital Market. The Company has not received any notification that the
      SEC or the NASDAQ Stock Market LLC is contemplating terminating such
      registration or listing. The Company has taken all actions necessary to list
      the
      Securities for quotation on the NASDAQ Capital Market. The Company is in
      compliance in all material respects with all corporate governance requirements
      of the NASDAQ Capital Market. The Company shall comply with all requirements
      of
      the NASD with respect to the issuance of the Shares and the listing of the
      Shares on the NASDAQ Capital Market.

     

    3.18  Investment
      Company Status.
      The
      Company is not and upon consummation of the sale of the Securities will not
      be
      an “investment company,” a company controlled by an “investment company” or an
“affiliated person” of, or “promoter” or “principal underwriter” for, an
“investment company” as such terms are defined in the Investment Company Act of
      1940, as amended.

     

    3.19  Offering
      Materials.
      Other
      than the SEC Documents and the Operative Agreements (collectively, the
“Offering
      Materials”),
      the
      Company has not distributed and, prior to the Closing Date, will not distribute,
      any offering materials in connection with the offering and sale of the
      Securities. The Company has not in the past nor will it hereafter take any
      action to sell, offer for sale or solicit offers to buy any securities of the
      Company which would require the offer, issuance or sale of the Shares, as
      contemplated by this Agreement, to be registered under Section 5 of the
      Securities Act.

     

    
      
        
        

      

      
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    3.20  No
      Manipulation of Stock.
      Neither
      the Company nor, to its knowledge, any of its affiliates has taken, directly
      or
      indirectly, any action designed to or which has constituted or which might
      reasonably be expected to cause or result, under the Exchange Act or otherwise,
      in the stabilization or manipulation of the price of any security of the Company
      to facilitate the sale or resale of the Securities.

     

    3.21  ERISA.
      The
      Company is in compliance in all material respects with all currently applicable
      provisions of the Employee Retirement Income Security Act of 1974, as amended,
      including the regulations and published interpretations thereunder
      (“ERISA”),
      except where a failure to so comply might not reasonably be expected to have,
      individually or in the aggregate, a Material Adverse Effect; to the Company’s
      knowledge, no unwaivable “reportable event” (as defined in ERISA) has occurred
      with respect to any “pension plan” (as defined in ERISA) for which the Company
      would have any liability; the Company has not incurred and does not expect
      to
      incur any material liability under (i) Title IV of ERISA with respect to
      termination of, or withdrawal from, any “pension plan” or (ii) Sections 412 or
      4971 of the Internal Revenue Code of 1986, as amended, including the regulations
      and published interpretations thereunder (the “Code”);
      and
      each “pension 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 by failure
      to
      act, which would cause the loss of such qualification. 

     

    3.22  Environmental.
      Except
      as set forth in the SEC Documents: (i) the Company is in material compliance
      with all rules, laws and regulations relating to the use, treatment, storage
      and
      disposal of toxic substances and protection of health or the environment
      (“Environmental
      Laws”)
      which
      are applicable to its business; (ii) the Company has not received any notice
      from any governmental authority or third party of an asserted claim under
      Environmental Laws, which claim is required to be disclosed in the SEC
      Documents; (iii), to the Company’s knowledge, the Company is not currently
      required to make future material capital expenditures to comply with
      Environmental Laws; and (iv) to the Company’s knowledge, no property that is
      owned, leased or occupied by the Company has been designated a Superfund site
      pursuant to the Comprehensive Response, Compensation and Liability Act of 1980,
      as amended (42 U.S.C. Section 9601, et seq.), or otherwise designated as a
      contaminated site under applicable state or local law.

     

    3.23  Outstanding
      Loans to Officers or Directors.
      There
      are no outstanding loans, advances (except normal advances for business expenses
      in the ordinary course of business) or guarantees of indebtedness by the Company
      to or for the benefit of any of the officers or directors of the Company or
      any
      of the members of the families of any of them.

     

    
      
        
        

      

      
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    3.24  Sales
      or Issuances.
      The
      Company has not sold or issued any shares of Common Stock during the six-month
      period preceding the Applicable Time, including any sales pursuant to Rule
      144A
      under, or Regulations D or S of, the Act, other than shares issued in a public
      offering pursuant to a valid and effective registration statement filed with
      the
      SEC or shares issued pursuant to employee benefit plans, qualified stock option
      plans or other employee compensation plans or pursuant to outstanding options,
      rights or warrants.

     

    3.25  Regulatory
      Compliance.

     

    (a)  The
      Company possess all certificates, authorizations and permits issued by the
      appropriate federal, state or foreign regulatory authorities necessary to
      conduct its business as currently conducted, including without limitation all
      such certificates, authorizations and permits required by the United States
      Food
      and Drug Administration (the “FDA”)
      or any
      other federal, state or foreign agencies or bodies engaged in the regulation
      of
      pharmaceuticals or biohazardous materials, except where the failure to so
      possess such certificates, authorizations and permits, individually or in the
      aggregate, would not result in a Material Adverse Effect. The Company has not
      received any notice of proceedings relating to the revocation or modification
      of
      any such certificate, authorization or permit which, individually or in the
      aggregate, if the subject of an unfavorable decision, ruling or finding, would
      have a Material Adverse Effect.

     

    (b)  Except
      to
      the extent disclosed in the General Disclosure Package, the Company has not
      received any written notices or statements from the FDA, the European Medicines
      Agency (the “EMEA”)
      or any
      other governmental agency, and otherwise has no knowledge or reason to believe,
      that (i) any new drug application or marketing authorization application for
      any
      product or potential product of the Company is or has been rejected or
      determined to be non-approvable or conditionally approvable; (ii) a delay in
      time for review and/or approval of a marketing authorization application or
      marketing approval application in any other jurisdiction for any product or
      potential product of the Company is or may be required, requested or being
      implemented; (iii) one or more clinical studies for any product or potential
      product of the Company shall or may be requested or required in addition to
      the
      clinical studies described in the SEC Documents as a precondition to or
      condition of issuance or maintenance of a marketing approval for such product
      or
      potential product; (iv) any license, approval, permit or authorization to
      conduct any clinical trial of or market any product or potential product of
      the
      Company has been, will be or may be suspended, revoked, modified or limited,
      except in the cases of clauses (i), (ii), (iii) and (iv) where such rejections,
      determinations, delays, requests, suspensions, revocations, modifications or
      limitations might not reasonably be expected to have, individually or in the
      aggregate, a Material Adverse Effect.

     

    (c)  To
      the
      Company’s knowledge, the preclinical and clinical testing, application for
      marketing approval of, manufacture, distribution, promotion and sale of the
      products and potential products of the Company is in compliance, in all material
      respects, with all laws, rules and regulations applicable to such activities,
      including without limitation applicable good laboratory practices, good clinical
      practices and good manufacturing practices, except for such non-compliance
      as
      would not, individually or in the aggregate, have a Material Adverse Effect.
      The
      descriptions of the results of such tests and trials contained in the SEC
      Documents are accurate in all material respects. The Company has not received
      notice of adverse finding, warning letter or clinical hold notice from the
      FDA
      or any non-U.S. counterpart of any of the foregoing, or any untitled letter
      or
      other correspondence or notice from the FDA or any other governmental authority
      or agency or any institutional or ethical review board alleging or asserting
      noncompliance with any law, rule or regulation applicable in any jurisdiction,
      except notices, letters, and correspondences and non-U.S. counterparts thereof
      alleging or asserting such noncompliance as would not, individually or in the
      aggregate, have a Material Adverse Effect. The Company has not, either
      voluntarily or involuntarily, initiated, conducted or issued, or caused to
      be
      initiated, conducted or issued, any recall, field correction, market withdrawal
      or replacement, safety alert, warning, “dear doctor” letter, investigator
      notice, or other notice or action relating to an alleged or potential lack
      of
      safety or efficacy of any product or potential product of the Company, any
      alleged product defect of any product or potential product of the Company,
      or
      any violation of any material applicable law, rule, regulation or any clinical
      trial or marketing license, approval, permit or authorization for any product
      or
      potential product of the Company, and the Company is not aware of any facts
      or
      information that would cause it to initiate any such notice or action and has
      no
      knowledge or reason to believe that the FDA, the EMEA or any other governmental
      agency or authority or any institutional or ethical review board or other
      non-governmental authority intends to impose, require, request or suggest such
      notice or action. 

     

    
      
        
        

      

      
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    3.26  Lock-Up
      Agreements.
      The
      Company has caused each executive officer listed on Schedule
      I
      hereto
      to furnish to the Purchasers, on or prior to the date of this Agreement, a
      letter or letters, in form and substance satisfactory to the Purchasers (the
      “Lock-up
      Agreements”),
      pursuant to which such person shall agree not to, directly or indirectly, for
      a
      period (the “Lock-up
      Period”)
      commencing on the date of this Agreement and ending on the close of business
      on
      the thirtieth (30th) day after the date of the effectiveness of a resale
      registration statement filed pursuant to the terms of the Registration Rights
      Agreement (the “Effective
      Date of the S-3”),
      offer, sell, pledge, contract to sell, grant any option to purchase, grant
      a
      security interest in, hypothecate or otherwise sell or dispose of (collectively,
      a “Transfer”)
      any
      shares of Common Stock (including without limitation, shares of Common Stock
      that may be deemed to be beneficially owned by such person in accordance with
      the Rules and Regulations and shares of Common Stock that may be issued upon
      the
      exercise of a stock option or warrant) or any securities convertible into,
      derivative of or exchangeable or exercisable for Common Stock (collectively,
      “Covered
      Securities”),
      owned
      directly by such person or as to which such person has the power of disposition,
      in any such case whether owned as of the date of such letter or acquired
      thereafter, except for such Transfers that are expressly permitted by the
      Lock-up Agreements. The foregoing restrictions have been expressly agreed to
      preclude the holder of the Covered Securities from engaging in any hedging
      or
      other transaction, as more fully described in the Lock-up Agreements.
      Furthermore, such person has also agreed and consented to the entry of stop
      transfer instructions with the Company’s transfer agent against the transfer of
      the Covered Securities held by such person except in compliance with this
      restriction. The Company hereby represents and warrants that it will not
      release, prior to the expiration of the Lock-up Period, any of its officers
      from
      any Lock-up Agreements currently existing or hereafter effected without the
      prior written consent of the Supermajority Purchasers.

     

    
      
        
        

      

      
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    3.27  SEC
      Documents.
      The
      Company has made available (including via EDGAR) to each Purchaser, a true
      and
      complete copy of the Company’s Annual Report on Form 10-K for the fiscal year
      ended December 31, 2005, the Company’s Quarterly Reports on Form 10-Q for
      the periods ended March 31, 2006, June 30, 2006 and September 30, 2006, the
      Company’s definitive proxy statement for the Annual Meeting held on May 8, 2006
      and the Company’s Current Reports on Form 8-K filed after December 31, 2005 and
      before the date hereof. The Company will, promptly upon the filing thereof,
      also
      make available (including via EDGAR) to each Purchaser all statements, reports
      (including, without limitation, Quarterly Reports on Form 10-Q and Current
      Reports on Form 8-K), and definitive proxy statements filed by the Company
      with
      the SEC during the period commencing on the date hereof and ending on the
      Closing Date (all such materials required to be furnished to each Purchaser
      pursuant to this sentence or pursuant to the next preceding sentence of this
      Section 3.27 being called, collectively, the “SEC
      Documents”).
      The
      Company has filed in a timely manner all documents that the Company was required
      to file under the Exchange Act during the 12 months preceding the date of this
      Agreement. As of their respective filing dates, the SEC Documents complied
      in
      all material respects with the requirements of the Exchange Act and none of
      the
      SEC Documents, as of their respective filing dates contained any untrue
      statement of a material fact or omitted to state a material fact required to
      be
      stated therein or necessary in order to make the statements made therein, in
      light of the circumstances under which they were made, not misleading, except
      to
      the extent corrected by a subsequently filed SEC Document.

     

    3.28  Brokers
      or Finders.
      Except
      for Pacific Growth Equities, Inc., the Company has not dealt with any broker
      or
      finder in connection with the transactions contemplated by this Agreement,
      and,
      except for certain fees and expenses payable by the Company to Pacific Growth
      Equities, Inc., the Company has not incurred, and shall not incur, directly
      or
      indirectly, any liability for any brokerage or finders’ fees or agents
      commissions or any similar charges in connection with this Agreement or any
      transaction contemplated hereby.

     

    3.29  No
      Integrated Offering.
      Neither
      the Company, nor any of its affiliates, nor any person acting on its or their
      behalf, has directly or indirectly made any offers or sales of any security
      or
      solicited any offers to buy any security under circumstances within the prior
      six months that would require registration under the Securities Act of the
      issuance of the Securities to the Purchasers.

     

    3.30  No
      General Solicitation.
      Neither
      the Company nor, to the knowledge of the Company, any person acting for the
      Company, has conducted any “general solicitation” (as such term is defined in
      Regulation D) with respect to any of the Securities being offered hereby. The
      Company will not distribute any offering material in connection with the sale
      of
      the Securities prior to the Closing Date, other than this Agreement, the
      Registration Rights Agreement and the SEC Documents.

     

    
      
        
        

      

      
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    4.  Representations
      and Warranties of the Purchasers.
      Each
      Purchaser severally for itself, and not jointly with the other Purchasers,
      represents and warrants to the Company as follows:

     

    4.1  Authorization.
      All
      action on the part of such Purchaser and, if applicable, its officers, directors
      and shareholders necessary for the authorization, execution, delivery and
      performance of the Operative Agreements and the consummation of the transactions
      contemplated herein and therein has been taken. When executed and delivered,
      each of the Operative Agreements will constitute the legal, valid and binding
      obligation of such Purchaser, enforceable against such Purchaser in accordance
      with its terms, except as such may be limited by bankruptcy, insolvency,
      reorganization or other laws affecting creditors’ rights generally and by
      general equitable principles. Such Purchaser has all requisite corporate power
      to enter into each of the Operative Agreements and to carry out and perform
      its
      obligations under the terms of the Operative Agreements. Such Purchaser has
      the
      knowledge and experience in financial and business matters as to be capable
      of
      evaluating the merits and risks of an investment in the Securities and has
      the
      ability to bear the economic risks of an investment in the Securities for an
      indefinite period of time. The Purchaser acknowledges that the Placement Agent
      has made no representations or warranties regarding the Company; the Purchaser
      agrees that neither the Placement Agent nor any of its controlling persons,
      Affiliates, directors, officers, employees or consultants shall have any
      liability to the Purchaser or any person asserting claims on behalf of or in
      right of the Purchaser for any losses, claims, damages, liabilities or expenses
      arising out of or relating to this Agreement or the Purchaser’s purchase of
      Securities.

     

    4.2  Purchase
      Entirely for Own Account.
      Such
      Purchaser is acquiring the Securities being purchased by it hereunder for
      investment, for its own account, and not for resale or with a view to
      distribution thereof in violation of the Securities Act. Such Purchaser has
      not
      entered into an agreement or understanding with any other party to resell or
      distribute such Securities.

     

    4.3  Investor
      Status; Etc.
      Such
      Purchaser certifies and represents to the Company that it is now, and at the
      time such Purchaser acquires any of the Securities, such Purchaser will be,
      an
“Accredited Investor” as defined in Rule 501 of Regulation D promulgated under
      the Securities Act and was not organized for the purpose of acquiring the
      Securities. Such Purchaser’s financial condition is such that it is able to bear
      the risk of holding the Securities for an indefinite period of time and the
      risk
      of loss of its entire investment. Such Purchaser has received, reviewed and
      considered all information it deems necessary in making an informed decision
      to
      make an investment in the Securities and has been afforded the opportunity
      to
      ask questions of and receive answers from the management of the Company
      concerning this investment and has sufficient knowledge and experience in
      investing in companies similar to the Company in terms of the Company’s stage of
      development so as to be able to evaluate the risks and merits of its investment
      in the Company.

     

    
      
        
        

      

      
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    4.4  Confidential
      Information.
      Each
      Purchaser understands that any information, other than the SEC Documents,
      provided to such Purchaser by the Company, including, without limitation, the
      existence and nature of all discussions and presentations, if any, regarding
      this offering and the Operative Agreements, is strictly confidential and
      proprietary to the Company and is being submitted to the Purchaser solely for
      such Purchaser’s confidential use in connection with its investment decision
      regarding the Securities. Such Purchaser agrees to use such information for
      the
      sole purpose of evaluating a possible investment in the Securities and such
      Purchaser hereby acknowledges that it is prohibited from reproducing or
      distributing such information, the Operative Agreements, or any other offering
      materials, in whole or in part, or divulging or discussing any of their contents
      except for use internally and by its legal counsel and except as required by
      law
      or legal process. Such Purchaser understands that the federal securities laws
      prohibit any person who possesses material nonpublic information about a company
      from trading in securities of such company.

     

    4.5  Shares
      Not Registered.
      Such
      Purchaser understands that the Securities have not been registered under the
      Securities Act, by reason of their issuance by the Company in a transaction
      exempt from the registration requirements of the Securities Act, and that the
      Securities must continue to be held by such Purchaser unless a subsequent
      disposition thereof is registered under the Securities Act or is exempt from
      such registration. The Purchaser understands that the exemptions from
      registration afforded by Rule 144 (the provisions of which are known to it)
      promulgated under the Securities Act depend on the satisfaction of various
      conditions, and that, if applicable, Rule 144 may afford the basis for sales
      only in limited amounts.

     

    4.6  No
      Conflict.
      The
      execution and delivery of the Operative Agreements by such Purchaser and the
      consummation of the transactions contemplated hereby and thereby will not
      conflict with or result in any violation of or default by such Purchaser (with
      or without notice or lapse of time, or both) under, or give rise to a right
      of
      termination, cancellation or acceleration of any obligation or to a loss of
      a
      material benefit under (i) any provision of the organizational documents of
      such Purchaser, (ii) any material agreement or instrument, permit,
      franchise, or license or (iii) any judgment, order, statute, law, ordinance,
      rule or regulations, applicable to such Purchaser or its respective properties
      or assets.

     

    4.7  Brokers.
      Such
      Purchaser has not retained, utilized or been represented by any broker or finder
      in connection with the transactions contemplated by this Agreement.

     

    4.8  Consents.
      All
      consents, approvals, orders and authorizations required on the part of such
      Purchaser in connection with the execution, delivery or performance of this
      Agreement and the consummation of the transactions contemplated herein have
      been
      obtained and are effective as of the Closing.

     

    4.9  Acknowledgments
      Regarding Placement Agent.
      Each
      Purchaser acknowledges that Pacific Growth Equities, Inc. is acting as placement
      agent (the “Placement Agent”) for the Securities being offered hereby and will
      be compensated by the Company for acting in such capacity. Each Purchaser
      further acknowledges that the Placement Agent has acted solely as placement
      agent for the Company in connection with the offering of the Securities by
      the
      Company, that if the Placement Agent provided any information and data to such
      Purchaser in connection with the transactions contemplated hereby, that such
      information and data have not been subjected to independent verification by
      the
      Placement Agent, and that the Placement Agent makes no representation or
      warranty with respect to the accuracy or completeness of such information,
      data
      or other related disclosure material. Each Purchaser further acknowledges that
      in making its decision to enter into this Agreement and purchase the Securities
      it has relied on its own examination of the Company and the terms of, and
      consequences, of holding the Securities. Each Purchaser further acknowledges
      that the provisions of this Section 4.9 are also for the benefit of, and
      may also be enforced by, the Placement Agent.

     

    
      
        
        

      

      
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    4.10  Information.
      Each
      Purchaser and its advisors, if any, have been furnished with all materials
      relating to the business, finances and operations of the Company, and materials
      relating to the offer and sale of the Securities, if any, that have been
      requested by the Purchaser or its advisors, if any. The Purchaser and its
      advisors, if any, have been afforded the opportunity to ask questions of the
      Company. The Purchaser acknowledges and understands that its investment in
      the
      Securities involves a significant degree of risk, including the risks reflected
      in the SEC Documents.

     

    4.11  No
      Public Offering.
      Such
      Purchaser has not received any information relating to the Securities or the
      Company, and is not purchasing the Securities as a result of, any form of
      general solicitation or general advertising, including but not limited to,
      any
      advertisement, article, notice or other communication published in any
      newspaper, magazine or similar media or broadcast over television or radio
      or
      pursuant to any seminar or meeting whose attendees were invited by any general
      solicitation or general advertising.

     

    4.12  Short
      Positions.
      Such
      Purchaser will not use any of the Securities acquired pursuant to this Agreement
      to cover any short position in the Common Stock if doing so would be in
      violation of applicable securities laws.

     

    5.  Conditions
      Precedent.

     

    5.1  Conditions
      to the Obligation of the Purchasers to Consummate the Closing.
      The
      obligation of each Purchaser to consummate the Closing and to purchase and
      pay
      for the Securities being purchased by it pursuant to this Agreement is subject
      to the satisfaction of the following conditions precedent:

     

    (a)  The
      representations and warranties of the Company contained herein shall be true
      and
      correct on and as of the Closing Date with the same force and effect as though
      made on and as of the Closing Date (it being understood and agreed by each
      Purchaser that, in the case of any representation and warranty of the Company
      contained herein which is not hereinabove qualified by application thereto
      of a
      materiality standard, such representation and warranty need be true and correct
      only in all material respects in order to satisfy as to such representation
      or
      warranty the condition precedent set forth in the foregoing provisions of this
      Section 5.1(a)).

     

    
      
        
        

      

      
        -15-

        
          

        

      

      
        
        

      

       

    

    (b)  The
      Registration Rights Agreement shall have been executed and delivered by the
      Company.

     

    (c)  The
      Company shall not have suffered any Material Adverse Effect prior to the Closing
      Date; and the Company shall have performed in all material respects all
      obligations and conditions herein required to be performed or observed by the
      Company on or prior to the Closing Date.

     

    (d)  No
      proceeding challenging this Agreement or the transactions contemplated hereby,
      or seeking to prohibit, alter, prevent or materially delay the Closing, shall
      have been instituted before any court, arbitrator or governmental body, agency
      or official and shall be pending.

     

    (e)  The
      purchase of and payment for the Securities by the Purchasers shall not be
      prohibited by any law or governmental order or regulation. All necessary
      consents, approvals, licenses, permits, orders and authorizations of, or
      registrations, declarations and filings with, any governmental or administrative
      agency or of any other person with respect to any of the transactions
      contemplated hereby shall have been duly obtained or made and shall be in full
      force and effect.

     

    (f)  The
      Company shall have obtained and delivered to the Purchasers the Lock-up
      Agreements referred to in Section 3.26 hereof.

     

    (g)  The
      Company shall have received executed copies of this Agreement from Purchasers
      with respect to the purchase of Securities hereunder for an aggregate purchase
      price of at least eight million dollars ($8,000,000).

     

    (h)  The
      Secretary or other officer of the Company shall have delivered to the Purchasers
      a certificate certifying the Restated Articles, the Bylaws and resolutions
      of
      the Company’s Board of Directors approving the Operative Agreements and the
      transactions contemplated thereby.

     

    (i)  The
      Company shall have delivered to the Purchasers an irrevocable letter of
      instruction to Mellon Investor Services, LLC, as the Company’s transfer agent,
      to issue certificates in the amounts and to the Purchasers listed on
Exhibit
      A
      hereto.

     

    (j)  All
      instruments and corporate proceedings in connection with the transactions
      contemplated by this Agreement to be consummated at the Closing shall be
      satisfactory in form and substance to such Purchaser, the Purchasers shall
      have
      received an opinion of legal counsel to the Company substantially in the form
      of
Exhibit C
      attached
      hereto, and such Purchaser shall have received such certificates of the
      Company’s officers as such Purchaser may have reasonably requested in connection
      with such transactions.

     

    
      
        
        

      

      
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    5.2  Conditions
      to the Obligation of the Company to Consummate the Closing.
      The
      obligation of the Company to consummate the Closing and to issue and sell to
      each of the Purchasers the Securities to be purchased by it at the Closing
      is
      subject to the satisfaction of the following conditions precedent:

     

    (a)  The
      representations and warranties contained herein of such Purchaser shall be
      true
      and correct on and as of the Closing Date with the same force and effect as
      though made on and as of the Closing Date (it being understood and agreed by
      the
      Company that, in the case of any representation and warranty of each Purchaser
      contained herein which is not hereinabove qualified by application thereto
      of a
      materiality standard, such representation and warranty need be true and correct
      only in all material respects in order to satisfy as to such representation
      or
      warranty the condition precedent set forth in the foregoing provisions of this
      Section 5.2(a)).

     

    (b)  The
      Registration Rights Agreement shall have been executed and delivered by each
      Purchaser.

     

    (c)  Each
      Purchasers shall have performed in all material respects all obligations and
      conditions herein required to be performed or observed by the Purchasers on
      or
      prior to the Closing Date.

     

    (d)  No
      proceeding challenging this Agreement or the transactions contemplated hereby,
      or seeking to prohibit, alter, prevent or materially delay the Closing, shall
      have been instituted before any court, arbitrator or governmental body, agency
      or official and shall be pending.

     

    (e)  The
      sale
      of the Securities by the Company shall not be prohibited by any law or
      governmental order or regulation. All necessary consents, approvals, licenses,
      permits, orders and authorizations of, or registrations, declarations and
      filings with, any governmental or administrative agency or of any other person
      with respect to any of the transactions contemplated hereby shall have been
      duly
      obtained or made and shall be in full force and effect.

     

    (f)  Each
      of
      the Purchasers shall have executed and delivered to the Company an Investor
      Questionnaire, in the form attached hereto as Appendix
      I,
      pursuant to which each such Purchaser shall provide information necessary to
      confirm each such Purchaser’s status as an “accredited investor” (as such term
      is defined in Rule 501 promulgated under the Securities Act) and to enable
      the
      Company to comply with the Registration Rights Agreement.

     

    (g)  Each
      of
      the other Purchasers shall have purchased, in accordance with this Agreement,
      the number of shares of Common Stock set forth opposite its name under the
      heading “Number
      of Shares to be Purchased”
and
      the
      number of Warrants set forth opposite its name on Exhibit A.

     

    (h)  All
      instruments and corporate proceedings in connection with the transactions
      contemplated by this Agreement to be consummated at the Closing shall be
      satisfactory in form and substance to the Company, and the Company shall have
      received counterpart originals, or certified or other copies of all documents,
      including without limitation records of corporate or other proceedings, which
      it
      may have reasonably requested in connection therewith.

     

    
      
        
        

      

      
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    6.  Transfer,
      Legends.

     

    6.1  Securities
      Law Transfer Restrictions.

     

    (a)  Each
      Purchaser understands that, except as provided in the Registration Rights
      Agreement, the Securities have not been registered under the Securities Act
      or
      any state securities laws, and each Purchaser agrees that it will not sell,
      offer to sell, solicit offers to buy, dispose of, loan, pledge or grant any
      right with respect to (collectively, a “Disposition”),
      the
      Securities unless (a) the resale of the Securities is registered under the
      Securities Act, or (b) such Purchaser shall have delivered to the Company
      an opinion of counsel in form, substance and scope reasonably acceptable to
      the
      Company, to the effect that registration is not required under the Securities
      Act or any applicable state securities law due to the applicability of an
      exemption therefrom; provided that no such opinion of counsel shall be required
      in connection with a sale of the Securities pursuant to Rule 144 under the
      Securities Act. In that connection, such Purchaser is aware of Rule 144
      under the Securities Act and the restrictions imposed thereby. Such Purchaser
      acknowledges and agrees that no sales of the Securities may be made under the
      registration statement filed by the Company pursuant to the Registration Rights
      Agreement (the “Registration
      Statement”)
      and
      that the Securities are not transferable on the books of the Company unless
      the
      certificate submitted to the transfer agent evidencing the Securities is
      accompanied by a separate Purchaser’s Certificate of Subsequent Sale:
      (i) in the form of Exhibit D
      hereto;
      (ii) executed by an officer of, or other authorized person designated by,
      the Purchaser; and (iii) to the effect that (A) the shares have been
      sold in accordance with the Registration Statement, the Securities Act and
      any
      applicable state securities or blue sky laws, and (B) the requirement of
      delivering a current prospectus has been satisfied. 

     

    (b)  Each
      Purchaser acknowledges that no action has been or will be taken in any
      jurisdiction outside the United States by the Company or the Placement Agent
      that would permit an offering of the Securities, or possession or distribution
      of offering materials in connection with the issue of Securities, in any
      jurisdiction outside of the United States where action for that purpose is
      required. Each Purchaser outside the United States will comply with all
      applicable laws and regulations in each foreign jurisdiction in which it
      purchases, offers, sells or delivers Securities or has in its possession or
      distributes any offering material, in all cases at its own expense. The
      Placement Agent is not authorized to make any representation or use any
      information in connection with the issue, placement, purchase and sale of the
      Securities.

     

    (c)  Each
      Purchaser hereby covenants with the Company not to make any sale of the
      Securities without complying with the provisions of the Operative Agreements
      and
      such Purchaser acknowledges that the certificates evidencing the Shares and
      each
      Warrant will be imprinted with a legend that prohibits their transference except
      in accordance therewith. 

     

    
      
        
        

      

      
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    6.2  Legends.

     

    (a)  Each
      certificate requesting any of the Shares and each Warrant shall be endorsed
      with
      the legends set forth below, and each Purchaser covenants that, except to the
      extent such restrictions are waived by the Company, it shall not transfer the
      shares represented by any such certificate without complying with the
      restrictions on transfer described in this Agreement and the legends endorsed
      on
      such certificate:

     

    “THE
      SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
      SECURITIES ACT OF 1933 AND MAY NOT BE OFFERED, SOLD, ASSIGNED, PLEDGED,
      TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
      STATEMENT UNDER SAID ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM REGISTRATION
      UNDER SAID ACT AND, IF REQUESTED BY THE COMPANY, UPON DELIVERY OF AN OPINION
      OF
      COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT THE PROPOSED TRANSFER IS
      EXEMPT FROM SAID ACT.”

     

    (b)  After
      the
      earlier of (i) the effectiveness of the Registration Statement and receipt
      by
      the Company of a Purchaser’s written confirmation that such Securities will not
      be disposed of except in compliance with the prospectus delivery requirements
      of
      the Securities Act or (ii) Rule 144 under the Securities Act becoming available
      to a Purchaser, the Company shall, upon such Purchaser’s written request,
      promptly cause certificates evidencing the Purchaser’s Shares or the Warrant to
      be replaced with certificates, or a Warrant, as the case may be, that do not
      bear such restrictive legends. When the Company is required to cause unlegended
      certificates to replace previously issued legended certificates, if unlegended
      certificates or Warrants are not delivered to a Purchaser within three (3)
      business days following submission by that Purchaser of legended certificate(s)
      or Warrants to the Company’s transfer agent together with a representation
      letter in customary form, the Company shall be liable to the Purchaser for
      liquidated damages in an amount equal to 1.5% of the aggregate purchase price
      of
      the Shares evidenced by such certificate(s) or Warrant for each thirty (30)
      day
      period or portion thereof (on a pro rata basis following the first such thirty
      (30) day period) beyond such three (3) business day period that the unlegended
      certificates have not been so delivered. The Company’s obligation to issue
      unlegended certificates or Warrants pursuant to this Section 6.2(b) shall
      be excused if (i) the SEC promulgates any rule or interpretation expressly
      prohibiting removal of legends in such circumstances, (ii) the SEC or other
      regulatory authority instructs the Company or its transfer agent not to remove
      such legends or (iii) the SEC makes it a condition to the effectiveness of
      the
      Registration Statement to that the Company continue to keep such legends in
      place.

     

    (c)  Notwithstanding
      the removal of legends as provided in Section 6.2(b), until a Purchaser’s
      Shares are sold pursuant to the Registration Statement or Rule 144 becomes
      available to the Purchaser, the Purchaser shall continue to hold such shares
      in
      the form of a definitive stock certificate and shall not hold the shares in
      street name or in book-entry form with a securities depository.

     

    
      
        
        

      

      
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    7.  Termination;
      Liabilities Consequent Thereon.
      This
      Agreement may be terminated and the transactions contemplated hereunder
      abandoned at any time prior to the Closing only as follows:

     

    (a)  by
      each
      Purchaser, upon notice to the Company if the conditions set forth in Section
      5.1
      shall not have been satisfied on or prior to January 11, 2007; or

     

    (b)  by
      the
      Company, upon notice to the Purchasers if the conditions set forth in Section
      5.2 shall not have been satisfied on or prior to January 11, 2007;
      or

     

    (c)  at
      any
      time by mutual agreement of the Company and the Purchasers; or

     

    (d)  by
      the
      Purchasers, if there has been any breach of any representation or warranty
      or
      any material breach of any covenant of the Company contained herein and the
      same
      has not been cured within 15 days after notice thereof (it being understood
      and
      agreed by each Purchaser that, in the case of any representation or warranty
      of
      the Company contained herein which is not hereinabove qualified by application
      thereto of a materiality standard, such representation or warranty will be
      deemed to have been breached for purposes of this Section 7(d) only if such
      representation or warranty was not true and correct in all material respects
      at
      the time such representation or warranty was made by the Company);
      or

     

    (e)  by
      the
      Company, if there has been any breach of any representation, warranty or any
      material breach of any covenant of any Purchaser contained herein and the same
      has not been cured within 15 days after notice thereof (it being understood
      and
      agreed by the Company that, in the case of any representation and warranty
      of
      the Purchaser contained herein which is not hereinabove qualified by application
      thereto of a materiality standard, such representation or warranty will be
      deemed to have been breached for purposes of this Section 7(e) only if such
      representation or warranty was not true and correct in all material respects
      at
      the time such representation or warranty was made by such
      Purchaser).

     

    Any
      termination pursuant to this Section 7 shall be without liability on the part
      of
      any party, unless such termination is the result of a material breach of this
      Agreement by a party to this Agreement in which case such breaching party shall
      remain liable for such breach notwithstanding any termination of this
      Agreement.

     

    8.  Agreements
      of the Company.
      The
      Company agrees not to, for a period commencing on the date of this Agreement
      and
      ending on the sixtieth (60th)
      day
      after the Effective Date of the S-3, without the prior written consent of the
      Supermajority Purchasers, offer, sell or otherwise dispose of any Covered
      Securities, other than the sale of Securities hereunder; provided that nothing
      in this Agreement shall prevent the Company’s issuance of (i) equity securities
      under the Company’s currently authorized equity incentive plans, or upon
      exercise of outstanding equity awards granted pursuant to such plans, (ii)
      securities issued or sold in connection with any corporate strategic development
      or similar transaction (including, but not limited to, joint venture, technology
      licensing or development activities) or (iii) any merger or acquisition
      transaction approved by the Company’s Board of Directors.

     

    
      
        
        

      

      
        -20-

        
          

        

      

      
        
        

      

       

    

    9.  Miscellaneous
      Provisions.

     

    9.1  Public
      Statements or Releases.
      The
      Company shall, by 8:30 a.m. Eastern time on the business day following the
      date
      of this Agreement, file a Current Report on Form 8-K, disclosing the
      transactions contemplated hereby and make such other filings and notices in
      the
      manner and time required by the SEC. Prior to the issuance by the Company of
      a
      press release announcing the transaction contemplated by this Agreement, no
      Purchaser shall make, issue, or release any announcement, whether to the public
      generally, or to any of its suppliers or customers, with respect to this
      Agreement or the transactions provided for herein, or make any statement or
      acknowledgment of the existence of, or reveal the status of, this Agreement
      or
      the transactions provided for herein, without the prior consent of the Company.
      As of the time of the issuance of the press release, no Purchaser shall be
      in
      possession of any material, nonpublic information received from the Company
      or
      any of its respective officers, directors, employees or agents, that is not
      disclosed in the press release. Except as expressly provided in the foregoing
      sentence, the Company shall not, and shall cause its officers, directors,
      employees and agents, not to, provide any Purchaser with any material, nonpublic
      information regarding the Company from and after the filing of the press release
      without the express written consent of such Purchaser.

     

    9.2  Further
      Assurances.
      Each
      party agrees to cooperate fully with the other party and to execute such further
      instruments, documents and agreements and to give such further written
      assurances, as may be reasonably requested by the other party to better evidence
      and reflect the transactions described herein and contemplated hereby, and
      to
      carry into effect the intents and purposes of this Agreement.

     

    9.3  Rights
      Cumulative.
      Each
      and all of the various rights, powers and remedies of the parties shall be
      considered to be cumulative with and in addition to any other rights, powers
      and
      remedies which such parties may have at law or in equity in the event of the
      breach of any of the terms of this Agreement. The exercise or partial exercise
      of any right, power or remedy shall neither constitute the exclusive election
      thereof nor the waiver of any other right, power or remedy available to such
      party.

     

    9.4  Pronouns.
      All
      pronouns or any variation thereof shall be deemed to refer to the masculine,
      feminine or neuter, singular or plural, as the identity of the person, persons,
      entity or entities may require.

     

    9.5  Notices.
      Any
      notice required or permitted by this Agreement shall be in writing and shall
      be
      sufficient upon receipt, when delivered personally or by courier, overnight
      delivery service or confirmed facsimile, or three (3) business days after being
      deposited in the regular mail as certified or registered mail (airmail if sent
      internationally) with postage prepaid, if such notice is addressed to the party
      to be notified at such party’s address or facsimile number as set forth
      below:

     

    
      
        
        

      

      
        -21-

        
          

        

      

      
        
        

      

       

    

    (a)  All
      correspondence to the Company shall be addressed as follows:

     

    1100
      Olive Way Suite 100

    Seattle,
      WA 98101

    Attention:
       H.
      Stewart Parker

    CEO
&
      President

    Facsimile:
       (206)
      623-7064

     

    with
      a
      copy to:

     

    Orrick,
      Herrington & Sutcliffe LLP

    719
      Second Avenue, Suite 900

    Seattle,
      WA 98104

    Attention:
       Stephen
      M. Graham

    Facsimile: (206)
      839-4301

     

    (b)  All
      correspondence to any Purchaser shall be sent to such Purchaser at the address
      set forth in Exhibit A.

     

    (c)  Any
      entity may change the address to which correspondence to it is to be addressed
      by written notification as provided for herein.

     

    9.6  Captions.
      The
      captions and paragraph headings of this Agreement are solely for the convenience
      of reference and shall not affect its interpretation.

     

    9.7  Severability.
      Should
      any part or provision of this Agreement be held unenforceable or in conflict
      with the applicable laws or regulations of any jurisdiction, the invalid or
      unenforceable part or provisions shall be replaced with a provision which
      accomplishes, to the extent possible, the original business purpose of such
      part
      or provision in a valid and enforceable manner, and the remainder of this
      Agreement shall remain binding upon the parties hereto.

     

    9.8  Governing
      Law.
      This
      Agreement shall be governed by and construed in accordance with the internal
      and
      substantive laws of the State of New York and without regard to any conflicts
      of
      laws concepts which would apply the substantive law of some other
      jurisdiction.

     

    9.9  Amendments.
      This
      Agreement may not be amended or modified except pursuant to an instrument in
      writing signed by the Company and the Supermajority Purchasers.

     

    9.10  Waiver.
      No
      waiver of any term, provision or condition of this Agreement, whether by conduct
      or otherwise, in any one or more instances, shall be deemed to be, or be
      construed as, a further or continuing waiver of any such term, provision or
      condition or as a waiver of any other term, provision or condition of this
      Agreement.

     

    
      
        
        

      

      
        -22-

        
          

        

      

      
        
        

      

       

    

    9.11  Expenses.
      Each
      party will bear its own costs and expenses in connection with this
      Agreement.

     

    9.12  Assignment.
      The
      rights and obligations of the parties hereto shall inure to the benefit of
      and
      shall be binding upon the authorized successors and permitted assigns of each
      party. No party may assign its rights or obligations under this Agreement or
      designate another person (i) to perform all or part of its obligations
      under this Agreement or (ii) to have all or part of its rights and benefits
      under this Agreement, in each case without the prior written consent of the
      other party. In the event of any assignment in accordance with the terms of
      this
      Agreement, the assignee shall specifically assume and be bound by the provisions
      of the Agreement by executing and agreeing to an assumption agreement reasonably
      acceptable to the other party.

     

    9.13  Survival.
      The
      respective representations and warranties given by the parties hereto, and
      the
      other covenants and agreements contained herein, shall survive the Closing
      Date
      and the consummation of the transactions contemplated herein for a period of
      two
      years, without regard to any investigation made by any party.

     

    9.14  Counterpart.
      This
      Agreement may be executed in two or more counterparts, each of which shall
      be
      deemed an original and all of which together shall constitute one
      instrument.

     

    9.15  Entire
      Agreement.
      This
      Agreement and the Registration Rights Agreement constitute the entire agreement
      between the parties hereto respecting the subject matter hereof and supersede
      all prior agreements, negotiations, understandings, representations and
      statements respecting the subject matter hereof, whether written or oral. No
      modification, alteration, waiver or change in any of the terms of this Agreement
      shall be valid or binding upon the parties hereto unless made in writing and
      duly executed by the Company and the Supermajority Purchasers.

     

    9.16  Independent
      Nature of Purchasers' Obligations and Rights. The obligations of each
      Purchaser under any Operative Agreement are several and not joint with the
      obligations of any other Purchaser, and no Purchaser shall be responsible in
      any
      way for the performance of the obligations of any other Purchaser under any
      Operative Agreement. Nothing contained herein or in any other Operative
      Agreement, and no action taken by any Purchaser pursuant hereto or thereto,
      shall be deemed to constitute the Purchasers as a partnership, an association,
      a
      joint venture or any other kind of entity, or create a presumption that the
      Purchasers are in any way acting in concert or as a group with respect to such
      obligations or the transactions contemplated by the Operative Agreements and
      the
      Company acknowledges that the Purchasers are not acting in concert or as a
      group
      with respect to such obligations or the transactions contemplated by the
      Operative Agreements. Each Purchaser confirms that it has independently
      participated in the negotiation of the transaction contemplated hereby with
      the
      advice of its own counsel and advisors. Each Purchaser shall be entitled to
      independently protect and enforce its rights, including, without limitation,
      the
      rights arising out of this Agreement or out of any other Operative Agreement,
      and it shall not be necessary for any other Purchaser to be joined as an
      additional party in any proceeding for such purpose.

     

     

    [Signature
      Page to Follow]

     

    
      
        
        

      

      
        -23-

        
          

        

      

      
        
        

      

    

    

    IN
      WITNESS WHEREOF, the parties hereto have executed this Securities Purchase
      Agreement as of the day and year first above written.

    
      	 	 	 
	 	TARGETED
              GENETICS CORPORATION
	 
 	 
 	 
 
	 	By:  	/s/ H.
              Stewart Parker
	 	
              

              Name:
                H. Stewart Parker

              Title:
                Chief Executive Officer & President

            
	 	
            

    

     

    THE
      PURCHASER’S SIGNATURE TO THE INVESTOR QUESTIONNAIRE DATED OF EVEN DATE HEREWITH
      SHALL CONSTITUTE THE PURCHASER’S SIGNATURE TO THIS SECURITIES PURCHASE
      AGREEMENT.

     

    
      
        
        

      

      
        -24-

        
          

        

      

      
        
        

      

    

    Exhibit
      A

     

    SCHEDULE
      OF PURCHASERS

    

      
        	
                Purchaser
                  Name and Address

              	 	
                Number
                  of Shares to 

                be
                  Purchased

              	 	
                Number
                  of Warrants to 

                be
                  Purchased

              	 	
                Aggregate
                  Purchase 

                Price

              

      

       

        
          	
                  SRB
                    Greenway Capital, L.P.

                  Attn:
                    Steve Becker

                  
                    300
                      Crescent Court, Suite 1111

                    Dallas,
                      TX 75201

                  

                	 	
                  63,000

                	 	
                  22,050

                	 	
                  $252,000

                
	 	 	 	 	 	 	 
	
                  SRB
                    Greenway Capital, Q.P.,
                    L.P.

                  Attn:
                    Steve Becker

                  
                    300
                      Crescent Court, Suite 1111

                    Dallas,
                      TX 75201

                  

                	 	
                  616,000

                	 	
                  215,600

                	 	
                  $2,464,000

                
	 	 	 	 	 	 	 
	
                  SRB
                    Greenway Capital International

                  Attn:
                    Steve Becker

                  
                    300
                      Crescent Court, Suite 1 l 1 l

                    Dallas,
                      TX 75201

                  

                	 	
                  21,000

                	 	
                  7,350

                	 	
                  $84,000

                
	
                   

                	 	 	 	 	 	 
	
                  Millennium
                    Partners, L.P.

                  c/o
                    Millennium Management, L.L.C.

                  666
                    Fifth Avenue, 8th Floor

                  New
                    York, NY 10103

                  
                    Attention:
                      Terry Feeney

                    Fax:
                      (212) 841-4141

                  

                	 	
                  250,000

                	 	
                  87,500

                	 	
                  $1,000,000

                
	
                   

                	 	 	 	 	 	 
	
                  Pacific
                    Growth Equity Management, LLC

                  One
                    Bush Street, Suite 1700

                  San
                    Francisco, CA 94104

                  
                    Attn:
                      Howard Bernstein

                  

                	 	
                  80,000

                	 	
                  28,000

                	 	
                  $320,000

                
	
                   

                	 	 	 	 	 	 
	
                  Special
                    Situations Fund III, Q.P.,
                    L.P.

                  Attn:
                    Austin Marxe

                  527
                    Madison Avenue

                  
                    Suite
                      2600

                    New
                      York, NY 10022

                  

                	 	
                  525,000

                	 	
                  183,750

                	 	
                  $2,100,000

                
	 	 	 	 	 	 	 
	
                  Special
                    Situations Life Sciences Fund, L.P.

                  Attn:
                    Austin Marxe

                  527
                    Madison Avenue

                  
                    Suite
                      2600

                    New
                      York, NY 10022

                  

                	 	
                  375,000

                	 	
                  131,250

                	 	
                  $1,500,000

                
	
                   

                	 	 	 	 	 	 
	
                  Tang
                    Capital Partners, L.P.

                  Attn:
                    Kevin Tang

                  
                    4401
                      Eastgate Mall

                    San
                      Diego, CA 92121

                  

                	 	
                  250,000

                	 	
                  87,500

                	 	
                  $1,000,000

                

        

      

      
         

      

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

         

      

    

    Exhibit
      B

     

    FORM
      OF WARRANT

     

    
      THIS
        WARRANT AND THE SECURITIES REPRESENTED BY THIS WARRANT HAVE NOT BEEN REGISTERED
        UNDER THE SECURITIES ACT OF 1933 (THE “ACT”) AND MAY NOT BE OFFERED, SOLD,
        ASSIGNED, PLEDGED, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF
        AN
        EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT OR PURSUANT TO AN AVAILABLE
        EXEMPTION FROM REGISTRATION UNDER SAID ACT AND, IF REQUESTED BY THE COMPANY,
        UPON DELIVERY OF AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY
        THAT THE PROPOSED TRANSFER IS EXEMPT FROM SAID ACT.

       

      
        	WARRANT NO. ______ 	 	
                NUMBER
                  OF SHARES: ___________

              
	DATE OF ISSUANCE: January 11, 2007	 	
                (subject
                  to
                  adjustment)

              

      

       

      WARRANT
        TO PURCHASE SHARES

      OF
        COMMON
        STOCK OF

      

      TARGETED
        GENETICS CORPORATION

       

      This
        Warrant is issued to [_____________], or its registered assigns (the
“Purchaser”),
        pursuant to that certain Securities Purchase Agreement, dated as of January
        8,
        2007, among Targeted Genetics Corporation (the “Company”),
        the
        Purchaser and certain other purchasers thereunder (the “Purchase
        Agreement”)
        and is
        subject to the terms and conditions of the Purchase Agreement.

       

      1.  EXERCISE
        OF WARRANT.

       

      (a)  Method
        of Exercise.
        Subject
        to the terms and conditions herein set forth, upon surrender of this Warrant
        at
        the principal office of the Company and upon payment of the Warrant Price
        (as
        defined below) by wire transfer to the Company or cashier’s check drawn on a
        United States bank made to the order of the Company, or exercise of the right
        to
        credit the Warrant Price against the fair market value of the Warrant Stock
        (as
        defined below) at the time of exercise (the “Net
        Exercise Right”)
        pursuant to Section 1(b), Purchaser is entitled to purchase from the Company,
        at
        any time after the date that is six (6) months after the date of issuance
        of this Warrant and on or before the date that is five (5) years from the
        Date
        of Issuance set forth above (the “Expiration
        Date”),
        up to
        [______] shares (as adjusted from time to time pursuant to the provisions
        of
        this Warrant) of Common Stock of the Company (the “Warrant
        Stock”),
        at a
        purchase price of $5.41 per share (the “Warrant
        Price”).
        

       

      (b)  Net
        Exercise Right.
        If the
        Company shall receive written notice from the holder of this Warrant at the
        time
        of exercise of this Warrant that the holder elects to exercise the Net Exercise
        Right, the Company shall deliver to such holder (without payment by the
        Purchaser of any exercise price in cash) that number of fully paid and
        nonassessable shares of Common Stock, par value $0.01 per share, of the Company
        (“Common
        Stock”)
        equal
        to the quotient obtained by dividing (y) the value of this Warrant (or the
        specified portion thereof) on the date of exercise, which value shall be
        determined by subtracting (1) the aggregate Warrant Price of the Warrant
        Stock
        (or the specified portion thereof) immediately prior to the exercise of this
        Warrant from (2) the Aggregate Fair Market Value (as defined below) of the
        Warrant Stock (or the specified portion thereof) issuable upon exercise of
        this
        Warrant (or specified portion thereof) on the date of exercise by (z) the
        Fair
        Market Value (as defined below) of one share of Common Stock on the date
        of
        exercise. The “Fair
        Market Value”
of
        a
        share of Common Stock shall mean the last reported sale price and, if there
        are
        no sales, the last reported bid price, of the Common Stock on the business
        day
        prior to the date of exercise as reported by the NASDAQ Global Market or
        such
        other principal exchange or quotation system on which the Common Stock is
        then
        traded or, if the Common Stock is not publicly traded, the price determined
        in
        good faith by the Company’s Board of Directors. The “Aggregate
        Fair Market Value”
of
        the
        Warrant Stock shall be determined by multiplying the number of shares of
        Warrant
        Stock by the Fair Market Value of one share of Warrant Stock.

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

      2.  CERTAIN
        ADJUSTMENTS.

       

      (a)  Mergers
        or Consolidations.
        If at
        any time after the date hereof there shall be a capital reorganization (other
        than a combination or subdivision of Warrant Stock otherwise provided for
        herein) (a “Reorganization”),
        or a
        merger or consolidation of the Company with another corporation (other than
        a
        merger with another corporation in which the Company is a continuing corporation
        and which does not result in any reclassification or change of outstanding
        securities issuable upon exercise of this Warrant or a merger effected
        exclusively for the purpose of changing the domicile of the Company) (a
“Merger”),
        then,
        as a part of such Reorganization or Merger, lawful provision shall be made
        so
        that the Purchaser shall thereafter be entitled to receive upon exercise
        of this
        Warrant, and upon payment of the Warrant Price, the number of shares of stock
        or
        other securities, cash or property of the Company or the successor corporation
        resulting from such Reorganization or Merger, to which a holder of the Common
        Stock deliverable upon exercise of this Warrant would have been entitled
        under
        the provisions of the agreement in such Reorganization or Merger if this
        Warrant
        had been exercised immediately before that Reorganization or Merger. At the
        effective time of any such Reorganization or Merger, this Warrant (and the
        right
        to purchase securities upon exercise hereof) will terminate. 

       

      (b)  Splits
        and Subdivisions; Dividends.
        In the
        event the Company should at any time, or from time to time, fix a record
        date
        for the effectuation of a split or subdivision of the outstanding shares
        of
        Common Stock or the determination of the holders of Common Stock entitled
        to
        receive a dividend or other distribution payable in additional shares of
        Common
        Stock or other securities or rights convertible into, or entitling the holder
        thereof to receive directly or indirectly, additional shares of Common Stock
        (hereinafter referred to as the “Common
        Stock Equivalents”)
        without payment of any consideration by such holder for the additional shares
        of
        Common Stock or Common Stock Equivalents (including the additional shares
        of
        Common Stock issuable upon conversion or exercise thereof), then, as of such
        record date (or the date of such distribution, split or subdivision if no
        record
        date is fixed), the per share Warrant Price shall be appropriately decreased
        and
        the number of shares of Warrant Stock shall be appropriately increased in
        proportion to such increase (or potential increase) of outstanding
        shares.

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

      (c)  Combination
        of Shares.
        If the
        number of shares of Common Stock outstanding at any time after the date hereof
        is decreased by a combination of the outstanding shares of Common Stock,
        the per
        share Warrant Price shall be appropriately increased and the number of shares
        of
        Warrant Stock shall be appropriately decreased in proportion to such decrease
        in
        outstanding shares.

       

      (d)  Adjustments
        for Other Distributions.
        In the
        event the Company shall declare a distribution payable in securities of other
        persons, evidences of indebtedness issued by the Company or other persons,
        assets (excluding cash dividends paid out of net profits) or options or rights
        not referred to in Section 2(b), then, in each such case for the purpose
        of this
        Section 2(d), upon exercise of this Warrant the holder hereof shall be entitled
        to a proportionate share of any such distribution as though such holder was
        the
        holder of the number of shares of Common Stock into which this Warrant may
        be
        exercised as of the record date fixed for the determination of the holders
        of
        Common Stock entitled to receive such distribution.

       

      3.  NO
        FRACTIONAL SHARES. No fractional shares of Warrant Shares will be issued
        in
        connection with any exercise of this Warrant. In lieu of any fractional shares
        which would otherwise be issuable, the Company shall pay cash equal to the
        product of such fraction multiplied by the Fair Market Value of one share
        of
        Warrant Stock.

       

      4.  NO
        STOCKHOLDER RIGHTS. Until the exercise of this Warrant or any portion of
        this
        Warrant, the Purchaser shall not have nor exercise any rights by virtue hereof
        as a stockholder of the Company (including without limitation the right to
        notification of stockholder meetings or the right to receive any notice or
        other
        communication concerning the business and affairs of the Company).

       

      5.  RESERVATION
        OF STOCK. The Company covenants that during the period this Warrant is
        exercisable, the Company will reserve from its authorized and unissued Common
        Stock a sufficient number of shares of Common Stock (or other securities,
        if
        applicable) to provide for the issuance of Warrant Stock (or other securities)
        upon the exercise of this Warrant. The Company agrees that its issuance of
        this
        Warrant shall constitute full authority to its officers who are charged with
        the
        duty of executing stock certificates to execute and issue the necessary
        certificates for the Warrant Stock upon the exercise of this
        Warrant.

       

      6.  MECHANICS
        OF EXERCISE. This Warrant may be exercised by the holder hereof, in whole
        or in
        part, by the surrender of this Warrant and the Notice of Exercise attached
        hereto as Exhibit
        A
        duly
        completed and executed on behalf of the holder hereof, at the principal office
        of the Company together with payment in full of the Warrant Price then in
        effect
        (or an election in the Notice of Exercise to net exercise) with respect to
        the
        number of shares of Warrant Stock as to which the Warrant is being exercised.
        This Warrant shall be deemed to have been exercised immediately prior to
        the
        close of business on the date of its surrender for exercise as provided above,
        and the person entitled to receive the Warrant Stock issuable upon such exercise
        shall be treated for all purposes as the holder of such shares of record
        as of
        the close of business on such date. Within three (3) days after such date,
        the
        Company at its expense shall cause to be issued and delivered to the person
        or
        persons entitled to receive the same a certificate or certificates for the
        number of full shares of Warrant Stock issuable upon such exercise, together
        with cash in lieu of any fraction of a share as provided above. The shares
        of
        Warrant Stock issuable upon exercise hereof shall, upon their issuance, be
        validly issued, fully paid and nonassessable, and free from all preemptive
        rights, taxes, liens and charges with respect to the issue thereof. In the
        event
        that this Warrant is exercised in part, the Company at its expense will execute
        and deliver a new Warrant of like tenor exercisable for the number of shares
        for
        which this Warrant may then be exercised.

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

      7.  CERTIFICATE
        OF ADJUSTMENT. Whenever the Warrant Price or number or type of securities
        issuable upon exercise of this Warrant is adjusted, as herein provided, the
        Company shall, at its expense, promptly deliver to the record holder of this
        Warrant a certificate of an officer of the Company setting forth the nature
        of
        such adjustment and showing in detail the facts upon which such adjustment
        is
        based.

       

      8.  REPRESENTATIONS
        OF PURCHASER. As of the date hereof, the Purchaser hereby confirms the
        representations and warranties made by the Purchaser in Section 4 of the
        Purchase Agreement.

       

      9.  TRANSFER
        RESTRICTIONS.

       

      (a)  Unregistered
        Security.
        The
        holder of this Warrant acknowledges that this Warrant and the Warrant Stock
        have
        not been registered under the Securities Act of 1933, as amended (the
“Securities
        Act”)
        or
        applicable state securities laws (collectively, the “Acts”),
        and
        agrees not to sell, encumber or otherwise transfer this Warrant or any Warrant
        Stock issued upon its exercise unless (i) there is an effective registration
        statement under the Acts covering the transaction, (ii) the Company receives
        an
        opinion of counsel satisfactory to the Company that such registration is
        not
        required under the Acts; provided that no such opinion of counsel shall be
        required in connection with a sale of the Securities pursuant to Rule 144
        under
        the Securities Act, or (iii) the Company otherwise satisfies itself that
        registration is not required under the Acts. Each certificate or other
        instrument for Warrant Stock issued upon the exercise of this Warrant shall
        bear
        a legend substantially to the foregoing effect.

       

      (b)  No
        Transfer.
        This
        Warrant is not transferable without the Company’s prior written consent;
        provided, however, such consent shall not be required in connection with
        the
        transfer by the Purchaser of such Warrant (but only with all related
        obligations) without consideration to a Qualifying Holder (as such term is
        defined in the Registration Rights Agreement between the Company and the
        Purchaser entered into in connection with the Purchase Agreement dated as
        of
        even date herewith), provided that (i) written notice (in the form of
Exhibit
        B
        as
        attached hereto) is provided to the Company at least five (5) business days
        prior to any such transfer, (ii) the transferee is an “accredited investor” as
        defined in Rule 501(a) of Regulation D promulgated under the Securities Act
        and
        (iii) the transferee agrees in writing to be bound by all of the provisions
        of
        this Warrant.

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

      10.  NOTICES
        OF RECORD DATE. In the event of:

       

      (a)  any
        taking by the Company of a record of the holders of any class of securities
        for
        the purpose of determining the holders thereof who are entitled to receive
        any
        dividend (other than a cash dividend payable out of earned surplus of the
        Company) or other distribution, or any right to subscribe for, purchase or
        otherwise acquire any shares of stock of any class or any other securities
        or
        property, or to receive any other right; or 

       

      (b)  any
        Reorganization or Merger; or

       

      (c)  any
        voluntary or involuntary dissolution, liquidation or winding-up of the
        Company,

       

      then
        and
        in each such event the Company will mail or cause to be mailed to the Purchaser
        (or a permitted transferee pursuant to Section 9(b) above) a notice
        specifying (i) the date on which any such record is to be taken for the purpose
        of such dividend, distribution or right, and stating the amount and character
        of
        such dividend, distribution or right, and (ii) the date on which any such
        Reorganization, Merger, dissolution, liquidation or winding-up is to take
        place,
        and the time, if any, as of which the holders of record of Common Stock (or
        other securities) shall be entitled to exchange their shares of Common Stock
        (or
        other securities) for securities or other property deliverable upon such
        Reorganization, Merger, dissolution, liquidation or winding-up. Such notice
        shall be mailed at least ten (10) business days prior to the date therein
        specified.

       

      11.  REPLACEMENT
        OF WARRANTS. On receipt of evidence reasonably satisfactory to the Company
        of
        the loss, theft, destruction or mutilation of this Warrant and, in the case
        of
        any such loss, theft, destruction or mutilation of this Warrant, on delivery
        of
        an indemnity agreement or security reasonably satisfactory in form and amount
        to
        the Company or, in the case of any such mutilation, on surrender and
        cancellation of such Warrant, the Company at its expense will execute and
        deliver, in lieu thereof, a new Warrant of like tenor.

       

      12.  NO
        IMPAIRMENT. Except to the extent as may be waived by the holder of this Warrant,
        the Company will not, by amendment of its charter or through a Reorganization,
        Merger, dissolution, sale of assets or any other voluntary action, avoid
        or seek
        to avoid the observance or performance of any of the terms of this Warrant,
        but
        will at all times in good faith assist in the carrying out of all such terms
        and
        in the taking of all such action as may be necessary or appropriate in order
        to
        protect the rights of the holder of this Warrant against
        impairment.

       

      13.  SATURDAYS,
        SUNDAYS, HOLIDAYS, ETC. If the last or appointed day for the taking of any
        action or the expiration of any right required or granted herein shall be
        a
        Saturday or Sunday or shall be a legal U.S. holiday, then such action may
        be
        taken or such right may be exercised on the next succeeding day not a Saturday,
        Sunday or legal U.S. holiday.

       

      14.  MISCELLANEOUS.
        This Warrant shall be governed by the laws of the State of New York. The
        headings in this Warrant are for purposes of convenience and reference only,
        and
        shall not be deemed to constitute a part hereof. Neither this Warrant nor
        any
        term hereof may be changed, waived, discharged or terminated orally but only
        by
        an instrument in writing signed by the Company and the Purchaser. All notices
        and other communications from the Company to the Purchaser shall be sufficient
        if in writing and delivered (i) personally, (ii) by facsimile transmission
        (receipt verified), (iii) by registered or certified mail (return receipt
        requested), postage prepaid, or (iv) sent by express courier service (receipt
        verified), to the address furnished to the Company in writing by the Purchaser.
        All such notices and communications to the Company shall be effective if
        delivered (i) personally, (ii) by facsimile transmission (receipt verified),
        (iii) by registered or certified mail (return receipt requested), postage
        prepaid, or (iv) sent by express courier service (receipt verified), at 1100
        Olive Way Suite 100, Seattle, WA 98101, H.
        Stewart Parker, CEO & President, fax: (206) 623-7064, with a copy to Orrick,
        Herrington & Sutcliffe LLP, 719 Second Avenue, Suite 900, Seattle, WA 98104,
        Stephen M. Graham, Esq. fax: (206) 839-4301. The invalidity or unenforceability
        of any provision hereof shall in no way affect the validity or enforceability
        of
        any other provisions.

       

      [Signature
        Page Follows]

       

      

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

      

      IN
        WITNESS WHEREOF, this Common Stock Purchase Warrant is issued effective as
        of
        the Date of Issuance first set forth above.

       

      
        	 	 	 
	 	TARGETED
                GENETICS CORPORATION
	 
 	 
 	 
 
	 	By:  	 
	 	
                
Name:
                H. Stewart Parker
	 	Title:
                Chief Executive Officer & President

      

       

       

            

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      EXHIBIT
        A

      

      NOTICE
        OF
        INTENT TO EXERCISE

      (To
        be
        signed only upon exercise of Warrant)

      

      

      

      To:
        Targeted Genetics Corporation

      

      The
        undersigned, the Purchaser of the attached Warrant, hereby irrevocably elects
        to
        exercise the purchase right represented by such Warrant for, and to purchase
        thereunder, ______________ (________) shares of Common Stock of Targeted
        Genetics Corporation and (choose one)

       

      __________
        herewith makes payment of __________________ Dollars ($_________)
        thereof

       

      or

       

      __________
        exercises the Net Exercise Right pursuant to Section 1(b) thereof and requests
        that the certificates for such shares be issued in the name of, and delivered
        to
        ___________________________, whose address is
        ____________________________________________________________________________________________________.

       

      

       

      DATED:
        ______________________

       

      
        
          	 	 	
                  (Signature
                    must conform in all

                  respects
                    to name of the Purchaser

                  as
                    specified on the face of the

                  Warrant)

                  

                  ___________________________________

                  ___________________________________

                  (Address)

                

        
 

      

      

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

      
      

      EXHIBIT
        B

      

      NOTICE
        OF
        ASSIGNMENT FORM

      

      

      FOR
        VALUE
        RECEIVED, ______________________ (the “Assignor”)
        hereby
        sells, assigns and transfers all of the rights of the undersigned Assignor
        under
        the attached Warrant with respect to the number of shares of common stock
        of
        Targeted Genetics Corporation (the “Company”)
        covered thereby set forth below, to the following “Assignee”
and,
        in
        connection with such transfer, represents and warrants to the Company that
        (i)
        such Assignee is a Qualifying Holder (as such term is defined in the
        Registration Rights Agreement between the Company and the Purchaser entered
        into
        in connection with the Purchase Agreement dated as of even date herewith)
        of the
        Assignor and (ii) the transfer is otherwise in compliance with Section 9(b)
        of
        the Warrant:

       

      
        	
                NAME
                  OF ASSIGNEE

              	 	
                ADDRESS/FAX
                  NUMBER

              
	 	 	 
	 	 	 
	
                Dated:
                  ______________________________

              	 	
                Signature:
                  ______________________________

                Witness:  
                  ______________________________

              

      

      

       

      ASSIGNEE
        ACKNOWLEDGMENT

      

       

      The
        undersigned Assignee acknowledges that it has reviewed the attached Warrant
        and
        by its signature below it hereby represents and warrants that it is a Qualifying
        Holder and an “accredited investor” as defined in Rule 501(a) of Regulation D
        promulgated under the Securities Act of 1933, as amended, and agrees to be
        bound
        by the terms and conditions of the attached Warrant as of the date
        hereof.

       

      
        	 	 	
                Signature:
                  ______________________________

                 

                By:
                  ____________________________________

                Its:
                  ____________________________________

                Address:
                  ________________________________

              
	 	 	 

      

    

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    

    Exhibit
      C

     

    LEGAL
      OPINION

     

    1. The
      Company is a corporation duly incorporated, validly existing under the laws
      of
      the State of Washington and has all corporate power and authority necessary
      to
      own and lease its properties and to conduct its business as described in the
      SEC
      Documents, except as would not have a material adverse effect upon the Company
      taken as a whole. 

     

    2. The
      Company has the requisite corporate power and authority to execute, deliver
      and
      perform its obligations under the Operative Agreements. The Company has taken
      all necessary corporate action to authorize its execution, delivery and
      performance of each of the Operative Agreements.

    

    3. Each
      of
      the Operative Agreements has been duly executed and delivered by the Company
      and
      constitutes a legal, valid and binding obligation of the Company and is
      enforceable against the Company in accordance with its terms except as limited
      by (a) bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer
      or similar laws of general application now or hereafter in effect affecting
      the
      rights and remedies of creditors; (b) general principles of equity (regardless
      of whether enforceability is considered in a proceeding at law or in equity);
      (c) the effect of judicial decisions which have held that certain provisions
      are
      unenforceable when their enforcement would violate the implied covenant of
      good
      faith and fair dealing, or would be commercially unreasonable, or where their
      breach is not material; or (d) the discretion of the court before which any
      proceeding therefor may be brought, and except as the right to indemnification
      or contribution set forth in the Operative Agreements may be limited by public
      policy or applicable securities laws.

    

    4. The
      issuance and sale of the Shares and Warrants by the Company pursuant to the
      terms of the Purchase Agreement on the date hereof, and the reservation and
      issuance of the Underlying Shares, have been duly approved by the date hereof,
      and the reservation and issuance of the Underlying Shares, have been duly
      approved by the Board of Directors of the Company. When issued and delivered
      in
      accordance with the terms of the Purchase Agreement, the Shares will be validly
      issued, full paid and nonassessable. The Underlying Shares, when issued in
      accordance with the terms of the respective Warrants, will be validly issued,
      fully paid and nonassessable.

    

    5. The
      execution, deliver and performance of the Operative Agreements do not, and
      the
      issuance and sale of the Shares and Warrants on the date hereof as contemplated
      by the Purchase Agreement will not, (a) conflict with or violate the Company’s
      Amended and Restated Articles of Incorporation, or its Amended and Restated
      Bylaws, (b) conflict with or violated any judgment, order or decree of any
      court
      or governmental authority of which we have knowledge applicable to the Company
      or any of its properties, (c) result in a material violation, or conflict with,
      any statute, rule or regulation known to us to be applicable to the Company
      or
      its properties or (d) result in a material default by the Company under any
      of the contracts or agreements filed as exhibits to the SEC
      Documents.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

       

    

    6. No
      consent, approval or authorization of or designation, declaration or filing
      with, any federal or state governmental authority on the part of the Company
      is
      required in connection with the valid execution, delivery and performance of
      the
      Operative Agreements, or the offer, sale or issuance of the Shares or the
      Warrants, other than (a) such as have been made or obtained; (b) compliance
      with
      the Blue Sky laws or federal securities laws applicable to the offering of
      the
      Shares, the Warrants and the Underlying Shares; and (c) the filing of a
      registration statement in accordance with the requirements of the Registration
      Rights Agreement.

    

    7. Assuming
      (i) the accuracy and completeness of the representations and warranties of
      each
      of the Investors set forth in the Purchase Agreement and (ii) that neither
      the
      Company nor any other person (including, without limitation, any placement
      agent
      for the transactions contemplated by the Purchase Agreement) has engaged in
      any
      activity that would be deemed a “general solicitation” under the provisions of
      Regulation D under the Securities Act, the offer, issuance and sale of the
      Securities being purchased by the Purchasers at the Closing on the terms and
      conditions contemplated by the Purchase Agreement constitute transactions exempt
      from the registration requirements of Section 5 of the Securities
      Act.

    

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    Exhibit
      D

     

    PURCHASER’S
      CERTIFICATE OF SUBSEQUENT SALE

    

      
        	
                Attention:

              	
                Targeted
                  Genetics Corporation

                Chief
                  Financial Officer

              

      

    

     

    The
      undersigned, [an officer of, or other person duly authorized by]
      ___________________________________________________________ [fill in official
      name of individual or institution] hereby certifies that he/she [said
      institution] is the Purchaser of the Securities evidenced by the attached
      certificate, and as such, sold such shares on _____________________ in
      accordance with the Registration Statement number ________________________
      [fill
      in the number of or otherwise identify Registration Statement] and the
      requirement of delivering or deemed delivery of a current prospectus forming
      a
      part of such Registration Statement has been complied with in connection with
      such sale.

     

    Print
      or
      Type:

    
      

      
        	
                Name
                  of Purchaser

                (Individual
                  or Institution):

              	
                    

              	 
	 	 	 
	
                Name
                  of Individual 

                Representing
                  Purchaser

                (if
                  an institution):

              	
                    
                  

              	 
	 	 	 
	
                Title
                  of Individual

                Representing
                  Purchaser

                (if
                  an institution):

              	
                  
                  

              	 

      

       

      Signature
        by:

       

      
        	
                Individual
                  Purchaser

                or
                  Individual Representing

                Purchaser:

              	
                  
                  

              	 

      

      

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

    

     

    Schedule
      I

    

    SCHEDULE
      OF LOCK-UP AGREEMENTS

    

    1. H.
      Stewart Parker

    

    2. David
      J.
      Poston

    

    3. Barrie
      J.
      Carter, Ph.D.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    Appendix
      I

    

    FORM
      OF INVESTOR QUESTIONNAIRE

     

    
      INVESTOR
        QUESTIONNAIRE

       

      INSTRUCTIONS

       

      The
        purpose of this Questionnaire is to determine whether you meet the investor
        suitability standards imposed by Regulation D promulgated under the Securities
        Act of 1933, as amended the (“Act”),
        and
        generally to assist Targeted Genetics Corporation, a Washington corporation,
        (the “Company”) in complying with the requirements of the Act and any applicable
        state securities laws. The securities being offered have not been, and will
        not
        be, except pursuant to the Registration Rights Agreement, registered under
        the
        Act and are being sold in reliance upon an exemption from the registration
        requirements of the Act and exemptions from applicable state securities laws.
        The information furnished herein will be relied upon in connection with the
        offering and sale of securities in compliance with the aforesaid exemption.
        This
        Questionnaire will also be used by the Company to prepare a registration
        statement registering the securities being offered for resale. The information
        contained in this Questionnaire about you may be included in the registration
        statement and will be relied upon by the Company in preparing the registration
        statement and filing the registration statement with the Securities and Exchange
        Commission.

       

      Please
        direct any questions regarding this Questionnaire to Lewis S. Malakoff at
        Orrick, Herrington & Sutcliffe LLP, the Company’s counsel, telephone: (206)
        839-4340.

       

      All
        information supplied will be treated in confidence, except that this
        Questionnaire may be provided to such parties as deemed appropriate or necessary
        to establish the availability of an exemption from registration under the
        Act
        and under state securities laws.

       

      Please
        complete, sign and date this questionnaire and return it to the attention
        of:

       

      
        
          

        

        
          

        

        
          
 

      

      A
        pre-paid Federal Express envelope has been enclosed for your convenience.
        

       

      PLEASE
        ANSWER EACH
        QUESTION.
        (Please print or type.) If the answer to any question is “None” or “Not
        Applicable,” please so state.

       

      
        	
                Name
                  of Investor:

              	 	
              
	
                Citizenship:

              	 	 
	
                Residence
                  or Business Address:

              	 	 
	
                Social
                  Security Number

                or
                  Tax identification Number:

              	 	 
	
                Occupation
                  or Business:

              	 	 
	
                Telephone
                  Number:

              	 	 
	
                Fax
                  Number:

              	 	 

      

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

      

      
        	1.  	
                Individuals
                  please respond to the following questions by placing an “X” next to the
                  appropriate answer.

              

      

       

      
        	(a)  	
                Did
                  your individual
                  income
                  (without regard to that of your spouse) exceed $200,000 in each
                  of the
                  last two full calendar years, and do you reasonably expect such
                  individual
                  income to exceed $200,000 in the current year? For the purpose
                  of this
                  question, income includes earned income, as well as other items
                  of
                  ordinary income, such as dividends, interest, and royalties, but
                  excludes
                  capital gains.

              

      

       

      Yes
o  No
o

       

      
        	(b)  	
                Did
                  your joint
                  income
                  with your spouse exceed $300,000 in each of the last two full calendar
                  years, and do you reasonably expect such joint income to exceed
                  $300,000
                  in the current year? For the purpose of this question, income includes
                  earned income, as well as other items of ordinary income, such
                  as
                  dividends, interest, and royalties, but excludes capital
                  gains.

              

      

       

      
        Yes
o  No
o

         

      

      
        	(c)  	
                Does
                  your net worth or joint net worth with that of your spouse exceed
                  $1,000,000?

              

      

       

      
        Yes
o  No
o

         

      

      
        	(d)  	
                Are
                  you a broker dealer, registered pursuant to Section 15 of the
                  Securities Exchange Act of 1934?

              

      

       

      
        Yes
o  No
o

         

      

      
        	(e)  	
                Set
                  forth in the space provided below the state(s), if any, in the
                  United
                  States in which you maintained your residence during the past two
                  years
                  and the dates during which you resided in each
                  state:

              

      

      
        	 	
              

      

      
        	 	 

      

       

      
        	(f)  	
                Are
                  you a director or executive officer of the
                  Company?

              

      

       

      
        Yes
o  No
o

         

        
          
            
            

          

          
            
            

            
              

            

          

          
            
            

          

        

         

      

      
        	2.  	
                Corporations,
                  partnerships, limited liability companies and investors other than
                  individuals,
                  please answer the following
                  questions:

              

      

       

      
        	(a)  	
                Under
                  the laws of what jurisdiction were you
                  formed?______________________________________________________

              

      

       

      
        	(b)  	
                Were
                  you formed for the purpose of investing in the securities being
                  offered?

              

      

       

      
        Yes
o  No
o

         

      

      
        	(c)  	
                Are
                  you a national bank or a banking institution organized under the
                  laws of
                  any state or any territory of the United States or the District
                  of
                  Columbia?

              

      

       

      
        Yes
o  No
o

         

      

      
        	(d)  	
                Are
                  you a savings and loan association, building and loan association,
                  cooperative bank, homestead association, or similar institution,
                  which is
                  supervised and examined by any state or federal authority having
                  supervision over such institution?

              

      

       

      
        Yes
o  No
o

         

      

      
        	(e)  	
                Are
                  you a broker dealer registered pursuant to Section 15 of the
                  Securities Exchange Act of 1934?

              

      

       

      
        Yes
o  No
o

         

      

      
        	(f)  	
                Are
                  you a company (i) whose primary and predominant business is the
                  writing of insurance or the reinsuring of risks underwritten by
                  insurance
                  companies and who is subject to the supervision by a regulatory
                  agency
                  under the laws of any state or territory, or
                  (ii) registered as an investment company under the Investment Company
                  Act of 1940, or
                  (iii) a Small Business Investment Company licensed by the U.S. Small
                  Business Administration?

              

      

       

      
        Yes
o  No
o

         

      

      
        	(g)  	
                Are
                  you a private business development company within the meaning of
                  the
                  Investment Advisers Act of 1940?

              

      

       

      
        Yes
o  No
o

      

       

      
        	(h)  	
                Are
                  you an employee benefit plan under the Employee Retirement Income
                  Security
                  Act of 1974 (a “Plan”)
                  with assets in excess of
                  $5,000,000?

              

      

       

      
        Yes
o  No
o

         

      

      If
        you
        are such a Plan, but if the Plan’s total assets do not exceed $5,000,000, are
        investment decisions for the Plan made by a bank, savings and loan association,
        insurance company or registered investment adviser acting as
        fiduciary?

       

      Yes
o  No
o

       

      If
        Yes, please specify the name of the
        fiduciary: __________________________________________________

            

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      If
        you
        are a self-directed Plan, but if the Plan’s total assets do not exceed
        $5,000,000, are investment decisions made solely by persons or entities that
        are
        accredited investors, (i.e.,
        can
        answer yes to one or more of the questions under paragraphs (a) - (d) of
        Item 1, or (c) - (k) under this Item 2)?

       

      
        Yes
o  No
o

         

      

      If
        Yes,
        please specify the applicable Item and Paragraph:
        __________________________________________________  

       

      
        	(i)  	
                Are
                  you (A)(i) a tax exempt organization which is qualified under Section
                  501(c)(3) of the Internal Revenue Code of 1986 as amended, or (ii) a
                  corporation, or (iii) a Massachusetts or similar business trust, or
                  (iv) partnership, not formed for the specific purpose of acquiring
                  the securities offered, and
                  (B) which has assets in excess of
                  $5,000,000?

              

      

       

      
        Yes
o  No
o

         

      

      
        	(j)  	
                Are
                  you a trust, with total assets in excess of $5,000,000, not formed
                  for the
                  specific purpose of acquiring the securities offered, whose purchase
                  is
                  directed by a person who has such knowledge and experience in financial
                  and business matters that he is capable of evaluating the merits
                  and risks
                  of the prospective investment?

              

      

       

      
        Yes
o  No
o

         

      

      If
        yes,
        please attach a memorandum describing such person’s educational background,
        professional memberships or licenses, current employment, principal business
        and
        professional activities during the last five years, and experience as an
        investor in securities. Include any additional information evidencing that
        such
        person has sufficient knowledge and experience in financial matters that
        such
        person would be capable of evaluating the merits and risks of investing in
        the
        securities being offered.

       

      
        	(k)  	
                Are
                  you an entity in which all of the equity owners are persons who
                  are either
                  (i) entities described in paragraphs (c) through (j) above;
                  (ii) individuals whose net worth, or joint net worth with their
                  spouses, exceeds $1,000,000; (iii) individuals whose income without
                  regard to that of their spouses exceeded $200,000 or whose joint
                  income
                  with their spouses exceeded $300,000, in each of the last two years
                  and
                  who reasonably expect such individual income to exceed $200,000
                  or such
                  joint income to exceed $300,000 this year; or (iv) individuals who
                  are broker dealers registered pursuant to Section 15 of the
                  Securities Exchange Act of 1934?

              

      

       

      
        Yes
o  No
o

         

      

      If
        an
        equity owner is an entity described in paragraphs (h) or (j) under this
        item 2, please provide the information required by such paragraph.

       

      
        	(l)  	
                Set
                  forth in the space provided below the (i) the state(s), if any, in
                  the United States in which you maintained your principal office
                  during the
                  past two years and the dates during which you maintained your office
                  in
                  each state, (ii) the state(s), if any, in which you are incorporated
                  or otherwise organized, and (iii) the state(s), if any, in which you
                  pay income taxes:

              

      

       

        
          

          

          

        

      

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      
        	3.  	
                All
                  investors please
                  respond to the following questions:

              

      

       

      
        	(a)  	
                Are
                  you the beneficial owner of any other securities of the
                  Company?

              

      

       

      
        Yes
o  No
o

         

      

      If
        Yes,
        please describe the nature and amount of such ownership:

       

      
        
 

      
        	(b)  	
                Have
                  you held any position or office, or had any other material relationship
                  in
                  the past three years with the Company or any of its predecessors
                  or
                  affiliates?

              

      

       

      
        Yes
o  No
o

         

      

      If
        Yes,
        please describe the nature of such relationship:

       

      
        
 

      
        	(c)  	
                Have
                  you made or are you aware of any arrangements relating to the distribution
                  of the shares?

              

      

       

      
        Yes
o  No
o

         

      

      If
        Yes,
        please describe such arrangement:

       

      
        

      

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

      

         

      

      The
        undersigned hereby represents that all the information supplied herein is
        true,
        correct and complete as of the date hereof. The undersigned agrees to notify
        the
        Company promptly of any material change in the foregoing answers.

       

      The
        undersigned understands and acknowledges that the undersigned’s signature to
        this Investor Questionnaire shall constitute the undersigned’s signature page to
        the Securities Purchase Agreement and the Registration Rights Agreements,
        each
        dated as of January 8, 2007, and if accepted by the Company, will constitute
        a
        legally binding obligation of the undersigned; provided, however, if the
        Company
        does not accept the following signature page, the following signature page
        shall
        be void.

       

      

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      The
        undersigned Purchaser hereby executes the Investor Questionnaire, Securities
        Purchase Agreement and the Registration Rights Agreement with Targeted Genetics
        Corporation, a Washington corporation (the “Company”)
        and
        hereby authorizes this signature page to be attached to a counterpart of
        such
        documents executed by a duly authorized officer of the Company.

       

      
        	Number
                of Shares	 	_____________________________________________
	to be Purchased:________________________________	 	Name of
                Purchaser
	 	 	(PLEASE TYPE OR
                PRINT)
	 	 	 
	U.S. Taxpayer ID No., if
                any:	 	 
	 	 	 
	_____________________________________________	 	By:_____________________________________________
	 	 	Name
                (print):_____________________________________
	 	 	Title:____________________________________________
	 	 	Address:
                ________________________________________
	 	 	________________________________________________

      

       

      Please
        set out below your registration requirements.
        If
        shares are to be registered in the name of more than one entity, provide
        the
        information requested below for each entity. (Please use multiple pages,
        one for
        each entity.)

      

      Name
        in which Securities

      are
        to be registered:____________________________________________________________

      

      Number
        of Shares to

      be
        purchased:_________________________________________________________________

      

      Number
        of Warrants to

      be
        purchased:_________________________________________________________________

      

      Address
        of registered holder

      (if
        different from above):________________________________________________________

      

      ________________________________________________________

      

      Number
        of Shares of the Company’s

      Common
        Stock currently held by the above named entity:____________________________

      

      Contact
        name and telephone

      number
        regarding settlement

      and
        registration: _______________________________________________________________

      Name

      _______________________________________________________________

      Telephone
        Number

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

      

       

      Certificate
        Delivery Instructions

      

      Exact
        address Certificates and Warrants are to be physically delivered
        to:

      

      __________________________________________________

      __________________________________________________

      __________________________________________________

      __________________________________________________

      

      Contact
        at delivery address: _________________________________________________

      Phone:
        __________________________

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