I. SUBSCRIPTION FOR UNITS AND REPRESENTATIONS BY AND COVENANTS OF SUBSCRIBER

II. REPRESENTATIONS BY THE COMPANY

III. TERMS OF SUBSCRIPTION

IV. CONDITIONS TO CLOSING.

V. MISCELLANEOUS

1. Appointment of Placement Agent.

2. Representations and Warranties of the Company. The Company represents and warrants to the Placement Agent and each Selected Dealer, if any, as follows, except as set forth in the disclosure schedules attached hereto:

3. Closing; Placement and Fees.

4. Covenants of the Company.

5. Indemnification.

6. Contribution.

7. Miscellaneous.

(a) “Common Stock” shall mean stock of the Company of any class, whether now or hereafter authorized, which has the right to participate in the distributions of earnings and assets of the Company without limit as to amount or percentage, which at the date hereof consists of 250,000,000 authorized shares of Common Stock.

(b) “Corporate Office” shall mean the office of the Company (or its successor) at which at any particular time its principal business shall be administered, which office is located at 25 Orinda Way, Orinda California 94563.

(c) “Exercise Date” shall mean, as to any Warrant, the date on which the Warrant Agent shall have received both (a) the certificate representing such Warrant (the “Warrant Certificate”), with the exercise form thereon duly executed by the Registered Holder thereof or his attorney duly authorized in writing, and (b) if payment is to be made in cash, cash or an official bank or certified check made payable to the Company, of an amount in lawful money of the United States of America equal to the Exercise Price.

(d) “Exercise Price” shall mean the purchase price to be paid upon exercise of each Warrant in accordance with the terms hereof, which price shall be $1.19, subject to adjustment from time to time pursuant to the provisions of Section 8 hereof and subject further to the Company’s right to reduce the Exercise Price upon notice to all Registered Holders.

(e) “Initial Warrant Exercise Date” shall mean May 24, 2002.

(f) “Registered Holder” shall mean the person in whose name any certificate representing Warrants shall be registered on the books maintained by the Warrant Agent pursuant to Section 6.

(g) “Transfer Agent” shall mean Computershare Trust Company of Canada, or its authorized successor, as such.

(h) “Warrant Agent” shall mean the Company, or its authorized successor, as such.

(i) “Warrant Expiration Date” shall mean 5:00 P.M. (New York time) on May 24, 2006; provided that if such date shall in the State of New York be a holiday or a day on which banks are authorized to close, then 5:00 P.M. (New York time) on the next following day which in the State of New York is not a holiday or a day on which banks are authorized to close. Upon notice to all warrantholders the Company shall have the right to extend the Warrant Expiration Date.

(j) “Warrant Shares” shall mean the shares of Common Stock deliverable upon exercise of the Warrants, as adjusted from time to time.

(a) A Warrant shall initially entitle the Registered Holder of the Warrant Certificate representing such Warrant to purchase one share of Common Stock upon the exercise thereof, in accordance with the terms hereof, subject to modification and adjustment as provided in Section 8.

(b) From time to time, up to the Warrant Expiration Date, the Transfer Agent shall execute and deliver stock certificates in required whole number denominations representing up to an aggregate of 120,000 shares of Common Stock, subject to adjustment as described in Section 8 hereof, upon the exercise of Warrants in accordance with this Agreement.

(c) From time to time, up to the Warrant Expiration Date, the Warrant Agent shall execute and deliver Warrant Certificates in required whole number denominations to the persons entitled thereto in connection with any transfer or exchange permitted under this Agreement; provided that no Warrant Certificates shall be issued except (i) those initially issued hereunder, (ii) those issued on or after the Initial Warrant Exercise Date, upon the exercise of fewer than all Warrants represented by any Warrant Certificate, to evidence any unexercised Warrants held by the exercising Registered Holder, (iii) those issued upon any transfer or exchange pursuant to Section 6; (iv) those issued in replacement of lost, stolen, destroyed or mutilated Warrant Certificates pursuant to Section 7; and (v) at the option of the Company, in such form as may be approved by the its Board of Directors, to reflect (a) any adjustment or change in the Exercise Price or the number of shares of Common Stock purchasable upon exercise of the Warrants, made pursuant to Section 8 hereof and (b) other modifications approved in accordance with Section 16 hereof.

(a) The Warrant Certificates shall be substantially in the form annexed hereto as Exhibit A (the provisions of which are hereby incorporated herein) and may have such letters, numbers or other marks of identification or designation and such legends, summaries or endorsements printed, lithographed, engraved or typed thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any law or with any rule or regulation made pursuant thereto or with any rule or regulation of any stock exchange on which the Warrants may be listed, or to conform to usage. The Warrant Certificates shall be dated the date of issuance thereof (whether upon initial issuance, transfer, exchange or in lieu of mutilated, lost, stolen, or destroyed Warrant Certificates) and issued in registered form. Warrants shall be numbered serially with the letters P02W.

(b) Warrant Certificates shall be executed on behalf of the Company by its Chairman of the Board, Chief Executive Officer, President or any Vice President and by its Chief Financial Officer, Secretary or an Assistant Secretary, by manual signatures or by facsimile signatures printed thereon. In case any officer of the Company who shall have signed any of the Warrant Certificates shall cease to be such officer of the Company before the date of issuance of the Warrant Certificates and issue and delivery thereof, such Warrant Certificates may nevertheless be issued and delivered with the same force and effect as though the person who signed such Warrant Certificates had not ceased to be such officer of the Company. After execution by the Company, Warrant Certificates shall be delivered by the Warrant Agent to the Registered Holder.

(a) Each Warrant may be exercised by the Registered Holder thereof at any time on or after the Initial Warrant Exercise Date, but not after the Warrant Expiration Date, upon the terms and subject to the conditions set forth herein and in the applicable Warrant Certificate. A Warrant shall be deemed to have been exercised immediately prior to the close of business on the Exercise Date and the person entitled to receive the securities deliverable upon such exercise shall be treated for all purposes as the holder upon exercise thereof as of the close of business on the Exercise Date. Within three (3) business days after the Exercise Date, the Warrant Agent shall cause to be issued and delivered by the Transfer Agent, to the person or persons entitled to receive the same, a certificate or certificates for the securities deliverable upon such exercise (plus a certificate for any remaining unexercised Warrants of the Registered Holder). Upon the exercise of any Warrant and clearance of the funds received, the Warrant Agent shall promptly remit the payment received for the Warrant to the Company or as the Company may direct in writing.

(b) The Registered Holder may, at its option, exchange this Warrant on a cashless basis, in whole or in part (a “Warrant Exchange”), into the number of Warrant Shares determined in accordance with this Section (4)(b), by surrendering the Warrant Certificate at the principal office of the Company or at the office of its stock transfer agent, accompanied by an irrevocable notice stating such Registered Holder’s intent to effect such exchange, the number of Warrant Shares to be exchanged and the date of the notice of such intent to exchange (the “Notice of Exchange”). The Registered Holder may send a Notice of Exchange to the Company prior to the Initial Warrant Exercise

Date. The Warrant Exchange shall take place on the later of (i) the date the Notice of Exchange is received by the Company or (ii) the Initial Warrant Exercise Date (the “Exchange Date”). Certificates for the shares issuable upon such Warrant Exchange and, if applicable, a new warrant of like tenor evidencing the balance of the shares remaining subject to such Warrant, shall be issued as of the Exchange Date and delivered to the Registered Holder as soon as is reasonably practicable following the Exchange Date. In connection with any Warrant Exchange, a Warrant shall represent the right to subscribe for and acquire the number of Warrant Shares (rounded to the next highest integer) equal to (i) the number of Warrant Shares specified by the Registered Holder in its Notice of Exchange (the “Total Number”) less (ii) the number of Warrant Shares equal to the quotient obtained by dividing (A) the product of the Total Number and the existing Exercise Price by (B) the current market value of a share of Common Stock. Current market value shall have the meaning set forth Section 10 hereof, except that for purposes hereof, it shall mean the highest price for the five days immediately preceding the date of the Notice of Exchange.

(a) The Company covenants that it will at all times reserve and keep available out of its authorized Common Stock, solely for the purpose of issue upon exercise of Warrants, such number of shares of Common Stock as shall then be issuable upon the exercise of all outstanding Warrants. The Company covenants that all shares of Common Stock which shall be issuable upon exercise of the Warrants and payment of the Exercise Price shall, at the time of delivery, be duly and validly issued, fully paid, nonassessable and free from all taxes, liens and charges with respect to the issue thereof (other than those which the Company shall promptly pay or discharge).

(b) The Company will use reasonable efforts to obtain appropriate approvals or registrations under state “blue sky” securities laws with respect to the exercise of the Warrants; provided, however, that the Company shall not be obligated to file any general consent to service of process or qualify as a foreign corporation in any jurisdiction. With respect to any such securities laws, however, Warrants may not be exercised by, or shares of Common Stock issued to, any Registered Holder in any state in which such exercise would be unlawful.

(c) The Company shall pay all documentary, stamp or similar taxes and other governmental charges that may be imposed with respect to the issuance of Warrants, or the issuance or delivery of any shares upon exercise of the Warrants; provided, however, that if the shares of Common Stock are to be delivered in a name other than the name of the Registered Holder of the Warrant Certificate representing any Warrant being exercised, then no such delivery shall be made unless the person requesting the same has paid to the Warrant Agent the amount of transfer taxes or charges incident thereto, if any.

(d) The Warrant Agent is hereby irrevocably authorized to requisition the Company’s Transfer Agent from time to time for certificates representing shares of Common Stock required upon exercise of the Warrants, and the Company will authorize the Transfer Agent to comply with all such proper requisitions.

(a) Warrant Certificates may be exchanged for other Warrant Certificates representing an equal aggregate number of Warrants of the same class or may be transferred in whole or in part. Warrant Certificates to be exchanged shall be surrendered to the Warrant Agent at its Corporate Office, and upon satisfaction of the terms and provisions hereof, the Company shall execute, and the Warrant Agent shall countersign, issue and deliver in exchange therefor the Warrant Certificate or Certificates which the Registered Holder making the exchange shall be entitled to receive.

(b) The Warrant Agent shall keep at its office books in which, subject to such reasonable regulations as it may prescribe, it shall register Warrant Certificates and the transfer thereof in accordance with its regular practice. Upon due presentment for registration of transfer of any Warrant Certificate at its office, the Company shall execute and the Warrant Agent shall issue and deliver to the transferee or transferees a new Warrant Certificate or Certificates representing an equal aggregate number of Warrants.

(c) With respect to all Warrant Certificates presented for registration of transfer, or for exchange or exercise, the subscription form on the reverse thereof shall be duly endorsed, or be accompanied by a written instrument or instruments of transfer and subscription, in form satisfactory to the Company, duly executed by the Registered Holder or his attorney-in-fact duly authorized in writing.

(d) The Company may require payment by such holder of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith.

(e) All Warrant Certificates surrendered for exercise or for exchange in case of mutilated Warrant Certificates shall be promptly canceled by the Warrant Agent and thereafter retained by the Warrant Agent until termination of this Agreement or resignation of the Warrant Agent, or disposed of or destroyed, at the direction of the Company.

(f) Prior to due presentment for registration of transfer thereof, the Company and the Warrant Agent may deem and treat the Registered Holder of any Warrant Certificate as the absolute owner thereof and of each Warrant represented thereby (notwithstanding any notations of ownership or writing thereon made by anyone other than a duly authorized officer of the Company or the Warrant Agent) for all purposes and shall not be affected by any notice to the contrary.

(a) Adjustment for Dividends in Other Stock and Property; Reclassifications. In case at any time or from time to time the holders of the Common Stock (or any shares of stock or other securities at the time receivable upon the exercise of the Warrants) shall have received, or, on or after the record date fixed for the determination of eligible shareholders, shall have become entitled to receive, without payment therefor,

(other than (x) additional shares of Common Stock or any other stock or securities into which such Common Stock shall have been changed, (y) any other stock or securities convertible into or exchangeable for such Common Stock or such other stock or securities or (z) any Stock Purchase Rights, issued as a stock dividend or stock-split, adjustments in respect of which shall be covered by the terms of Section 8(c), 8(d) or 8(e) ), then and in each such case the holder of a Warrant (each such holder, a “Holder”), upon the exercise hereof as provided in Section 4 hereof, shall be entitled to receive the amount of stock and other securities and property (including cash in the cases referred to in clauses (2) and (3) above) which such Holder would hold on the date of such exercise if on the Initial Warrant Exercise Date Holder had been the holder of record of the number of shares of Common Stock called for on the face of its Warrant, as adjusted in accordance with Section 8 hereof, and had thereafter, during the period from the Initial Warrant Exercise Date to and including the date of such exercise, retained such shares and/or all other or additional stock and other securities and property (including cash in the cases referred to in clause (2) and (3) above) receivable by it as aforesaid during such period, giving effect to all adjustments called for during such period by Sections 8(a) and 8(b).

(b) Adjustment for Reorganization, Consolidation and Merger. In case of any reorganization of the Company (or any other corporation the stock or other securities of which are at the time receivable on the exercise of the Warrants) after the Initial Warrant Exercise Date, or in case, after such date, the Company (or any such other corporation) shall consolidate with or merge into another corporation or entity or convey all or substantially all its assets to another corporation or entity, then and in each such case Holder, upon the exercise of its Warrant as provided in Section 4 hereof at any time after

the consummation of such reorganization, consolidation, merger or conveyance, shall be entitled to receive, in lieu of the stock or other securities and property receivable upon the exercise of its Warrant prior to such consummation, the stock or other securities or property to which such Holder would have been entitled upon such consummation if Holder had exercised its Warrant immediately prior thereto, all subject to further adjustment as provided in Sections 8(a), 8(b), 8(c), 8(d) and 8(e); in each such case, the terms of the Warrant shall be applicable to the shares of stock or other securities or property receivable upon the exercise of such Warrant after such consummation.

(c) Sale of Shares Below Exercise Price.

(d) Adjustment for Certain Dividends and Distributions. If the Company at any time or from time to time makes, or fixes a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in additional shares of Common Stock, then and in each such event

(e) Stock Split and Reverse Stock Split. If the Company at any time or from time to time effects a reverse stock split or subdivision of the outstanding Common Stock, the Exercise Price then in effect immediately before that stock split or subdivision shall be proportionately decreased and the number of shares of Common Stock theretofore receivable upon the exercise of the Warrants shall be proportionately increased. If the Company at any time or from time to time effects a reverse stock split or combines the outstanding shares of Common Stock into a smaller number of shares, the Exercise Price then in effect immediately before that reverse stock split or combination shall be proportionately increased and the number of shares of Common Stock theretofore receivable upon the exercise of the Warrants shall be proportionately decreased. Each adjustment under this Section 8(e) shall become effective at the close of business on the date the stock split, subdivision, reverse stock split or combination becomes effective.

(f) No Impairment. The Company will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company but will at all times in good faith assist in the carrying out of all the provisions of this Section 8 and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holders of the Warrants against impairment.

(g) Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of the Exercise Price pursuant to this Section 8, the Company at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of a Warrant a certificate setting forth such adjustment

or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Company shall, upon the written request at any time of any holder of a Warrant, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustments and readjustments, (ii) the Exercise Price at the time in effect, and (iii) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the exercise of the Warrant.

(h) Nasdaq Limitation on Adjustments. Under applicable guidelines and policies of the Nasdaq Stock Market, no adjustment in the Exercise Price may be made under this Section 8 if, as a result of such adjustment, the Placement would be deemed to result in the issuance of securities representing more than 19.9% of the Company’s issued and outstanding Common Stock (the “Issuance Limitation”). Accordingly, if consummation of an issuance or transaction would result in an adjustment in the exercise price which would exceed the Issuance Limitation, the Company covenants that it will obtain the required stockholder approval to permit the adjustment to the exercise price otherwise called for by this Section 8 prior to consummating the issuance or transaction, or portion thereof, that would trigger the Issuance Limitation. The Company agrees that it will not consummate any such issuance or transaction unless stockholder approval is obtained or the Issuance Limitation is no longer applicable to the Company.

(a) If the Common Stock is listed on a national securities exchange or admitted to unlisted trading privileges on such exchange or listed for trading on Nasdaq, the current market value shall be the average of the last reported sale prices of the Common Stock on such exchange for the 10 trading days prior to the date of exercise of such Warrant; provided that if no such sale is made on a day within such period or no closing sale price is quoted, that day’s market value shall be the average of the closing bid and asked prices for such day on such exchange or system; or

(b) If the Common Stock is listed in the over-the-counter market (other than on Nasdaq) or admitted to unlisted trading privileges, the current market value shall be the mean of the last reported bid and asked prices reported by the National Quotation Bureau, Inc. for the 10 trading days prior to the date of the exercise of such Warrant; or

(c) If the Common Stock is not so listed or admitted to unlisted trading privileges and bid and asked prices are not so reported, the current market value shall be

an amount, not less than book value thereof as at the end of the most recent fiscal year of the Company ending prior to such business day, determined in a reasonable manner by the Board of Directors of the Company.

(a) The Warrants are transferable only on the registry books of the Warrant Agent by the Registered Holder thereof in person or by his attorney duly authorized in writing and only if the Warrant Certificates representing such Warrants are surrendered at the office of the Warrant Agent, duly endorsed or accompanied by a proper instrument of transfer satisfactory to the Warrant Agent and the Company in their sole discretion, together with payment of any applicable transfer taxes; and

(b) The Company may deem and treat the person in whose name the Warrant Certificate is registered as the holder and as the absolute, true and lawful owner of the Warrants represented thereby for all purposes, and the Company shall not be affected by any notice or knowledge to the contrary, except as otherwise expressly provided in Section 7 hereof.

(a) The Warrant Agent, if other than the Company, acts hereunder as agent and in a ministerial capacity for the Company, and its duties shall be determined solely by the provisions hereof. The Warrant Agent shall not, by issuing and delivering Warrant Certificates or by any other act hereunder be deemed to make any representations as to the validity, value or authorization of the Warrant Certificates or the Warrants represented thereby or of any securities or other property delivered upon exercise of any Warrant or whether any stock issued upon exercise of any Warrant is fully paid and nonassessable.

(b) The Warrant Agent shall account promptly to the Company with respect to Warrants exercised and concurrently pay the Company, as provided in Section 4, all moneys received by the Warrant Agent upon the exercise of such Warrants. The Warrant Agent shall, upon request of the Company from time to time, deliver to the Company such complete reports of registered ownership of the Warrants and such complete records of transactions with respect to the Warrants and the shares of Common Stock as the Company may request. The Warrant Agent shall also make available to the Company for inspection by its agents or employees, from time to time as it may request, such original books of accounts and record (including original Warrant Certificates surrendered to the Warrant Agent upon exercise of Warrants) as may be maintained by the Warrant Agent in connection with the issuance and exercise of Warrants hereunder, such inspections to occur at the Warrant Agent’s office as specified in Section 17, during normal business hours.

(c) The Warrant Agent shall not at any time be under any duty or responsibility to any holder of Warrant Certificates to make or cause to be made any adjustment of the Exercise Price provided in this Agreement, or to determine whether any fact exists which may require any such adjustments, or with respect to the nature or extent of any such adjustment, when made, or with respect to the method employed in making the same. It shall not (i) be liable for any recital or statement of facts contained herein or for any action taken, suffered or omitted by it in reliance on any Warrant Certificate or other document or instrument believed by it in good faith to be genuine and to have been signed or presented by the proper party or parties, (ii) be responsible for any failure on the part of the Company to comply with any of its covenants and obligations contained in this Agreement or in any Warrant Certificate, or (iii) be liable for any act or omission in connection with this Agreement except for its own negligence or willful misconduct.

(d) Any notice, statement, instruction, request, direction, order or demand of the Company shall be sufficiently evidenced by an instrument signed by the Chairman of the Board, Chief Executive Officer, President, any Vice President, its Secretary, or any Assistant Secretary (unless other evidence in respect thereof is herein specifically prescribed). The Warrant Agent shall not be liable for any action taken, suffered or omitted by it in accordance with such notice, statement, instruction, request, direction, order or demand believed by it to be genuine.

(e) The Company agrees to pay the Warrant Agent reasonable compensation for its services hereunder and to reimburse it for its reasonable expenses hereunder; it further agrees to indemnify the Warrant Agent and save it harmless against any and all losses, expenses and liabilities, including judgments, costs and counsel fees, for anything done or omitted by the Warrant Agent in the execution of its duties and powers hereunder except losses, expenses and liabilities arising as a result of the Warrant Agent’s negligence or wilful misconduct.

(f) The Warrant Agent may resign its duties and be discharged from all further duties and liabilities hereunder (except liabilities arising as a result of the Warrant Agent’s own negligence or wilful misconduct), after giving 30 days’ prior written notice to the Company. At least 15 days prior to the date such resignation is to become effective, the Warrant Agent shall cause a copy of such notice of resignation to be mailed to the Registered Holder of each Warrant Certificate at the Company’s expense. Upon such resignation, or any inability of the Warrant Agent to act as such hereunder, the Company shall appoint a new warrant agent in writing. If the Company shall fail to make such appointment within a period of 15 days after it has been notified in writing of such resignation by the resigning Warrant Agent, then the Registered Holder of any Warrant Certificate may apply to any court of competent jurisdiction for the appointment of a new warrant agent. Any new warrant agent, whether appointed by the Company or by such a court, shall be a bank or trust company having a capital and surplus, as shown by its last published report to its stockholders, of not less than $10,000,000 or a stock transfer company. After acceptance in writing of such appointment by the new warrant agent is received by the Company, such new warrant agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named herein as the Warrant Agent, without any further assurance, conveyance, act or deed; but if for any reason it shall be necessary or expedient to execute and deliver any further assurance, conveyance, act or deed, the same shall be done at the expense of the Company and shall be legally and validly executed and delivered by the resigning Warrant Agent. Not later than the effective date of any such appointment the Company shall file notice thereof with the resigning Warrant Agent and shall forthwith cause a copy of such notice to be mailed to the Registered Holder of each Warrant Certificate.

(g) Any corporation into which the Warrant Agent or any new warrant agent may be converted or merged or any corporation resulting from any consolidation to which the Warrant Agent or any new warrant agent shall be a party or any corporation succeeding to the trust business of the Warrant Agent shall be a successor warrant agent under this Agreement without any further act, provided that such corporation is eligible for appointment as successor to the Warrant Agent under the provisions of the preceding paragraph. Any such successor warrant agent shall promptly cause notice of its succession as warrant agent to be mailed to the Company and to the Registered Holder of each Warrant Certificate.

(h) The Warrant Agent, its subsidiaries and affiliates, and any of its or their officers or directors, may buy and hold or sell Warrants or other securities of the Company and otherwise deal with the Company in the same manner and to the same extent and with like effects as though it were not Warrant Agent. Nothing herein shall preclude the Warrant Agent from acting in any other capacity for the Company or for any other legal entity.

1.1 The term “Holder” means Commonwealth or an Investor and any transferee or assignee thereof to whom Commonwealth or an Investor, as applicable, assigns its rights under this Agreement and who agrees to become bound by the provisions of this Agreement in accordance with Section 6.2.

1.2 The term “Person” means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization, a government or any department or agency thereof.

1.3 The term “Prospectus” means the Prospectus included in any Registration Statement (including without limitation, a Prospectus that discloses information previously omitted from a Prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under the Securities Act of 1933, as amended (the “1933 Act”)), as amended or supplemented by any amendment or Prospectus supplement, including post-effective amendments, and all materials incorporated by reference or explicitly deemed to be incorporated by reference in such Prospectus.

1.4 The terms “Register,” “Registered,” and “Registration” refer to a registration effected by preparing and filing one or more Registration Statements (as defined below) or similar document in compliance with the 1933 Act and Rule 415 thereunder or any successor rule providing for the offering for resale of securities on a continuous or delayed basis (“Rule 415”), and the declaration or ordering of effectiveness of such Registration Statement or document by the United States Securities and Exchange Commission (the “SEC”).

1.5 The term “Registrable Securities” means (a) the Warrant Shares and any other securities of the Company issuable upon the exercise of the Warrants, (b) the Shares, (c) the Agent’s Shares and any other securities of the Company issuable upon the exercise of the Warrants held by the Agent or its transferee or assignee, and (d) any shares of capital stock or other securities issued or issuable with respect to the Warrant Shares, the Shares or the Agent’s Shares as a result of any stock split, stock dividend, recapitalization, exchange or similar event or otherwise, without regard to any limitations on the exercise of the Warrants; provided, however, that any securities deemed Registrable Securities in accordance herewith shall cease to be Registrable Securities (i) upon the sale of such securities pursuant to a Registration Statement, (ii) upon the sale of such securities pursuant to Rule 144 promulgated under the 1933 Act, or (iii) on the date on which such securities become available for sale under Rule 144(k).

1.6 The term “Registration Statement” means a registration statement on Form S-1 or Form S-3 or any similar or successor form then appropriate for or applicable to the offer and sale of the Registrable Securities and filed under the 1933 Act.

2.1 Right to Include Registrable Stock. If the Company proposes to register any of its securities under the 1933 Act in connection with the public offering of such securities solely for cash (other than a registration on Form S-4, Form S-8, or any successor or similar forms, the registration statement covering the shares underlying the Company’s Series A Preferred Stock and Series B Preferred Stock outstanding on the date hereof, or a registration statement filed pursuant to the Registration Rights Agreement dated August 31, 2001 by and among the Company, Commonwealth and the investors listed therein to cover the shares underlying warrants issued by the Company) (a “Piggyback Registration”), whether for the account of the Company or otherwise, it will promptly, but not later than thirty (30) days before the anticipated date of filing such Registration Statement, give written notice to each Holder. Upon the written request of any of the Holders made within fifteen (15) days after the receipt of any such notice (which request shall specify the Registrable Securities intended to be disposed of by such Holders and the intended method of distribution thereof), the Company will use its reasonable best efforts to effect the registration under the 1933 Act of all Registrable Securities which the Company has been requested to register by any of the Holders in accordance with the intended methods of distribution specified in such request; provided, however, that (a) if, at any time after giving written notice of its intention to register any securities and prior to the effective date of the Registration Statement filed in connection with such registration, the Company determines for any reason not to proceed with such registration, the Company may, at its election, give written notice of such determination to the Holders and, thereupon, will be relieved of its obligation to register any Registrable Securities in connection with such registration, and (b) in case of a determination by the Company to delay registration of its securities, the Company will be permitted to delay the registration of Registrable Securities for the same period as the delay in

registering such other securities; provided, however, that the provisions of this Article II will not be deemed to limit or otherwise restrict the rights of the Holders under Article III.

2.2 Mandatory Registration;Liquidated Damages.

2.3 Priority. If the managing underwriter for a registration (other than with respect to a Registration Statement filed pursuant to Section 2.2) involving an underwritten offering advises the Company in writing that, in its opinion, the number of securities of the Company (including without limitation, Registrable Securities) requested to be included in such registration by the holders thereof

exceeds the number of securities of the Company (the “Sale Number”) which can be sold in an orderly manner in such offering within a price range acceptable to the Company, the Company will include (a) first, all securities of the Company that the Company proposes to register for its own account, and (b) second, to the extent that the number of securities of the Company to be included by the Company is less than the Sale Number, a number of the Registrable Securities equal to the number derived by multiplying (i) the difference between the Sale Number and the securities proposed to be sold by the Company, and (ii) a fraction the numerator of which is the number of Registrable Securities originally requested to be registered by the Holders, and the denominator of which shall be the aggregate number of all securities requested to be registered by all holders of the Company’s securities (other than securities being registered by the Company itself). The Company hereby agrees that it will not grant registration rights to any other holder that are more favorable to such holder than the registration rights granted hereunder.

2.4 Legal Counsel. Subject to Section 6.1 hereof, the Investors holding a majority of the Registrable Securities shall have the right to select one legal counsel to review and oversee any offering pursuant to this Article II (“Legal Counsel”), which shall be Loeb & Loeb LLP or such other counsel as thereafter designated by the holders of a majority of the Registrable Securities. The Company shall reasonably cooperate with Legal Counsel in performing the Company’s obligations under this Agreement.

2.5 Ineligibility of Form S-3. In the event that Form S-3 is not available for the registration of the resale of Registrable Securities hereunder, the Company shall (a) register the resale of the Registrable Securities on another appropriate form, and (b) undertake to register the resale of the Registrable Securities on Form S-3 as soon as such form is available; provided, however, that the Company shall maintain the effectiveness of the Registration Statement then in effect until such time as a Registration Statement on Form S-3 covering the Registrable Securities has been declared effective by the SEC.

2.6 Sufficient Number of Shares Registered. In the event the number of shares available under a Registration Statement filed pursuant to Section 2.2 is insufficient to cover all of the Registrable Securities which such Registration Statement is required to cover, the Company shall amend the Registration Statement, or file a new Registration Statement (on the short form available therefor, if applicable), or both, so as to cover at least 100% of the Registrable Securities, in each case, as soon as practicable, but in any event not later than fifteen (15) business days after the necessity therefor arises. The Company shall cause such amendment and/or new Registration Statement to become effective as soon as practicable following the filing thereof. For purposes of the foregoing provision, the number of shares available under a Registration Statement shall be deemed “insufficient to cover all of the Registrable Securities” if the number of Registrable Securities issued or issuable upon exercise of the Warrants covered by such Registration Statement is greater than the number of shares of Common Stock available for resale under the Registration Statement to cover shares issued or issuable upon exercise of the Warrants. For purposes of the calculation set forth in the foregoing sentence, any restrictions on the exercise of the Warrants shall be disregarded and such calculation shall assume that the Warrants are then exercisable for or convertible into shares of Common Stock at the then prevailing applicable Exercise Price (as defined in the Warrants).

3.1 Registration Statement. The Company shall promptly prepare and file with the SEC a Registration Statement with respect to the Registrable Securities (but in no event later than the Filing Deadline) and use its best efforts to cause such Registration Statement to become effective (but in no event later than the applicable Effectiveness Deadline). The Company will use its reasonable best efforts to keep such Registration Statement effective for up to three (3) years from its effective date, but not in any event after such securities cease being Registrable Securities (the “Registration Period”). The Registration Statement (including any amendments or supplements thereto and Prospectuses contained therein) shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein, or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading. The Company shall submit to the SEC, within two (2) business days, unless Legal Counsel withholds approval as provided in 3.3, after the Company learns that no review of a particular Registration Statement will be made by the staff of the SEC or that the staff has no further comments on the Registration Statement, as the case may be, a request for acceleration of effectiveness of such Registration Statement to a time and date not later than 2 business days after the submission of such request. Within three (3) business days after the Registration Statement which includes Registrable Securities is ordered effective by the SEC, the Company shall deliver, and shall cause legal counsel selected by the Company to deliver, to the transfer agent for the Registrable Securities (with copies to the Investors whose Registrable Securities are included in such Registration Statement), an opinion of such counsel in the form attached hereto as Exhibit A.

3.2 Registration Statement Amendments and Supplements. The Company shall prepare and file with the SEC such amendments and supplements to such Registration Statement and the Prospectus used in connection with such Registration Statement as may be necessary to comply with the provisions of the 1933 Act with respect to the disposition of all Registrable Securities covered by such Registration Statement until such time as all of such Registrable Securities shall have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof as set forth in such Registration Statement. In the case of amendments and supplements to a Registration Statement which are required to be filed pursuant to this Agreement (including pursuant to this Section 3.2) by reason of the Company filing a report on Form 10-K, Form 10-Q or Form 8-K or any analogous report under the Securities Exchange Act of 1934, as amended (the “1934 Act”), the Company shall have incorporated such report by reference into the Registration Statement, if applicable, or shall file such amendments or supplements with the SEC on the same day on which the 1934 Act report is filed which created the requirement for the Company to amend or supplement the Registration Statement.

3.3 Legal Counsel. The Company shall (a) permit Legal Counsel to review and comment upon (i) those sections of a Registration Statement relating to the Investors at least five (5) business days prior to its filing with the SEC, and (ii) all other sections of a Registration Statement and all amendments and supplements to all Registration Statements, which are applicable to the Investors (except for Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any similar or successor report and registration statements on Form S-8) at least four (4) business days prior to their filing with the SEC, and (b) not file any document in a form to which Legal Counsel reasonably objects. The Company shall not submit a request for acceleration of the

effectiveness of a Registration Statement or any amendment or supplement thereto without the prior approval of Legal Counsel, which consent shall not be unreasonably withheld. The Company shall furnish to Legal Counsel, without charge, (a) any correspondence from the SEC or the staff of the SEC to the Company or its representatives relating to any Registration Statement, (b) promptly after the same is prepared and filed with the SEC, one copy of any Registration Statement and any amendment(s) thereto, including financial statements and schedules and all exhibits and (c) upon the effectiveness of any Registration Statement, one copy of the Prospectus included in such Registration Statement and all amendments and supplements thereto. The Company shall reasonably cooperate with Legal Counsel in performing the Company’s obligations pursuant to this Article III.

3.4 Notification. Within two (2) business days after the Company’s receipt of notice of the following, give notice to the Holders and Legal Counsel (a) when the Registration Statement or any post-effective amendment has been declared effective, (b) of the issuance by the SEC or any other federal or state governmental authority of any stop order or other suspension of the effectiveness of the Registration Statement, or the suspension of the qualification of any of the Registrable Securities for sale in any jurisdiction, or the initiation or threatening of any proceedings for that purpose, (c) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose, (d) of the occurrence of (but not the nature of or details concerning) a Material Event (defined in Section 3.7), and (e) of the determination by the Company that a post-effective amendment to the Registration Statement will be filed with the SEC, which notice may, at the discretion of the Company (or as required pursuant to Section 3.7), state that it constitutes a Deferral Notice, in which event the provisions of Section 3.7 shall apply.

3.5 Prospectuses. The Company shall deliver to each Holder in connection with any sale of Registrable Securities pursuant to the Registration Statement, without charge, as many copies of the Prospectus or Prospectuses relating to such Registrable Securities (including each preliminary Prospectus) and any amendment or supplement thereto as such Holder may reasonably request, and the Company hereby consents (except during such periods that a Deferral Notice is outstanding and has not been revoked) to the use of such Prospectus or each amendment or supplement thereto by each Holder in connection with any offering and sale of the Registrable Securities covered by such Prospectus or any amendment or supplement thereto in the manner set forth therein.

3.6 Blue Sky Laws. The Company shall, prior to any public offering of the Registrable Securities pursuant to the Registration Statement, register or qualify or cooperate with the Holders in connection with the registration or qualification (or exemption from such registration or qualification) of such Registrable Securities for offer and sale under the securities or “Blue Sky” laws of such jurisdictions within the United States as any Holder reasonably requests in writing, and keep each such registration or qualification (or exemption therefrom) effective during the Registration Period in connection with such Holder’s offer and sale of Registrable Securities pursuant to such registration or qualification (or exemption therefrom) and do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of such Registrable Securities in the manner set forth in the Registration Statement and the related Prospectus; provided, however, that the Company will not be required to (a) qualify as a foreign corporation or as a dealer in securities in any jurisdiction where it would not otherwise be required to qualify but for this Agreement, or (b) take any action that would subject it to general service of process in suits or to taxation in any such jurisdiction where it is not

6 then so subject. The Company shall promptly notify Legal Counsel and each Holder who holds Registrable Securities of the receipt by the Company of any notification with respect to the suspension of the registration or qualification of any of the Registrable Securities for sale under the securities or “Blue Sky” laws of any jurisdiction in the United States or its receipt of actual notice of the initiation or threat of any proceeding for such purpose.

3.7 Stop Orders; Material Events. The Company shall use commercially reasonable efforts to prevent the issuance of any stop order or other suspension of effectiveness of a Registration Statement, or the suspension of the qualification of any of the Registrable Securities for sale in any jurisdiction. Upon (a) any issuance by the SEC of a stop order or other suspension of the effectiveness of the Registration Statement, or the suspension of the qualification of any of the Registrable Securities for sale in any jurisdiction despite the Company’s commercially reasonable efforts to prevent such stop order or suspension, or the initiation of proceedings with respect to the Registration Statement under Section 8(d) or 8(e) of the 1933 Act; (b) the occurrence of any event or the existence of any fact (a “Material Event”) as a result of which the Registration Statement shall contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, or any Prospectus shall contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; or (c) the occurrence or existence of any pending corporate development, public filing with the SEC or other similar event with respect to the Company that, in the reasonable discretion of the Company, makes it appropriate to suspend the availability of the Registration Statement and the related Prospectus, the Company shall (i) in the case of clause (b) above, subject to the next sentence, as promptly as practicable prepare and file, if necessary pursuant to applicable law, a post-effective amendment to such Registration Statement or a supplement to the related Prospectus or any document incorporated therein by reference or file any other required document that would be incorporated by reference into such Registration Statement and Prospectus so that such Registration Statement does not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and such Prospectus does not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, and, in the case of a post-effective amendment to a Registration Statement, subject to the next sentence, use its reasonable efforts to cause it to be declared effective as promptly as is practicable; and (ii) give notice to the Holders and Legal Counsel that the availability of the Registration Statement is suspended (a “Deferral Notice”) and, upon receipt of any Deferral Notice, each Holder agrees not to sell any Registrable Securities pursuant to the Registration Statement until such Holder’s receipt of copies of the supplemented or amended Prospectus provided for in clause (i) above, or until it is advised in writing by the Company that the Prospectus may be used, and has received copies of any additional or supplemental filings that are incorporated or deemed incorporated by reference in such Prospectus. The Company will use commercially reasonable efforts to ensure that the use of the Prospectus may be resumed (x) in the case of clause (a) above, as promptly as is practicable, (y) in the case of clause (b) above, as soon as, in the sole judgment of the Company, public disclosure of such Material Event would not be prejudicial to or contrary to the interests of the Company or, if necessary to avoid unreasonable burden or expense, as soon as practicable thereafter, and (z) in the case of clause (c) above, as soon as, in the discretion of the Company, such suspension is no longer appropriate (such period, during which the availability of the Registration Statement and any Prospectus is suspended being a

“Deferral Period”). Notwithstanding the foregoing, no Deferral Period instituted pursuant to clause (b) or clause (c) above shall last for a period of time in excess of thirty (30) days from the date of the Material Event or other occurrence or state of facts on account of which such Deferral Period is instituted, and the Company shall institute no more than one (1) Deferral Period in the aggregate pursuant to clause (b) or clause (c) above in any consecutive twelve (12) month period. The Company shall use commercially reasonable efforts to obtain the withdrawal of any order suspending the effectiveness of a Registration Statement or the lifting of any suspension of the qualification (or exemption from qualification) of any of the Registrable Securities for sale in any jurisdiction in which they have been qualified for sale, in either case as promptly as practicable.

3.8 Accountants Letters and Legal Opinions. At the reasonable request of any Holder and at the expense of the Company the Company shall furnish to such Holder, on the date of the effectiveness of the Registration Statement and thereafter from time to time on such dates as any of the Holders may reasonably request (if the offering contemplated by such Registration Statement is an underwritten offering) (a) a letter, dated such date, from the Company’s independent certified public accountants in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, and (b) an opinion, dated as of such date, of counsel representing the Company for purposes of such Registration Statement, in form, scope and substance as is customarily given to underwriters in an underwritten public offering, addressed to the Holders.

3.9 Listing or Quotation. The Company shall use its reasonable best efforts to either (a) cause all the Registrable Securities covered by a Registration Statement to be listed on each securities exchange on which securities of the same class or series issued by the Company are then listed, if any, if the listing of such Registrable Securities is then permitted under the rules of such exchange, or (b) secure designation and quotation of all the Registrable Securities covered by the Registration Statement on the Nasdaq National Market or The New York Stock Exchange, Inc., or, if the Company is unsuccessful in satisfying the preceding clause (a) or (b), (c) the Company shall secure the inclusion for quotation on The American Stock Exchange, Inc., or The Nasdaq SmallCap Market, for such Registrable Securities and, without limiting the generality of the foregoing, to arrange for at least two (2) market makers to register with the National Association of Securities Dealers, Inc. (“NASD”) as such with respect to such Registrable Securities. The Company shall pay all fees and expenses in connection with satisfying its obligation under this Section 3.9.

3.10 Access to Information. The Company shall make documents, files, books, records, officers, directors and employees of the Company reasonably available to any Holder, Legal Counsel and one firm of accountants or other agents retained by the Holders and provided the underwriters, if any, shall have agreed to be bound by the provisions of this Section 3.10, to such underwriters (collectively the “Inspectors”), and make such other accommodations as are reasonably necessary for the Inspectors, if any, to perform a due diligence review of the Company; provided, however, that all such information (“Confidential Information”) will be kept confidential and not utilized by the Inspectors except as contemplated herein and except as required by law or court order. The term “Confidential Information” does not include information that (a) is already in possession of such other party (other than that which is subject to another confidentiality agreement), (b) becomes generally available to the public, or (c) becomes available on a non-confidential basis from a source other than the Company. Each Holder agrees that it shall, upon learning that disclosure of such Confidential Information is sought in or by a court or governmental body of competent jurisdiction or

through other means, give prompt notice to the Company and allow the Company, at its expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, the information deemed confidential.

3.11 Non-Disclosure. The Company shall hold in confidence and not make any disclosure of information concerning any Holder provided to the Company unless (a) disclosure of such information is necessary to comply with federal or state securities laws, (b) the disclosure of such information is necessary to avoid or correct a misstatement or omission in any Registration Statement, (c) the release of such information is ordered pursuant to a subpoena or other final, non-appealable order from a court or governmental body of competent jurisdiction, (d) such information has been made generally available to the public other than by disclosure in violation of this Agreement or any other agreement, or (e) such Holder consents to the form and content of any such disclosure. The Company agrees that it shall, upon learning that disclosure of such information concerning any Holder is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt written notice to such Holder and allow such Holder, at the Holder’s expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, such information.

3.12 Certificates. The Company shall cooperate with each of the Holders who hold Registrable Securities being offered, and to the extent applicable, to facilitate the timely preparation and delivery of certificates (not bearing any restrictive legend) representing the Registrable Securities to be offered pursuant to a Registration Statement and enable such certificates to be in such denominations or amounts, as the case may be, as the Holders may reasonably request and registered in such names as the Holders may request.

3.13 Transfer Agent and Registrar. The Company shall provide a transfer agent and registrar of all such Registrable Securities not later than the effective date of such Registration Statement.

3.14 Amendments and Supplements Requested by Holders. If requested by any Holder, the Company shall (a) as soon as practicable incorporate in a Prospectus supplement or post-effective amendment such information as such Holder requests to be included therein relating to the sale and distribution of Registrable Securities, including without limitation, information with respect to the number of Registrable Securities being offered or sold, the purchase price being paid therefor and any other terms of the offering of the Registrable Securities to be sold in such offering, (b) as soon as practicable make all required filings of such Prospectus supplement or post-effective amendment after being notified of the matters to be incorporated in such Prospectus supplement or post-effective amendment, and (c) supplement or make amendments to any Registration Statement if reasonably requested by any Holder of such Registrable Securities.

3.15 Additional Registrations and Approvals. The Company shall use its best efforts to cause the Registrable Securities covered by the applicable Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to consummate the disposition of such Registrable Securities.

3.16 Earnings Statements. The Company shall make generally available to its security holders as soon as practical, but not later than ninety (90) days after the close of the period covered thereby, an earnings statement (in form complying with the provisions of Rule 158 under the 1933 Act) covering

a twelve (12) month period beginning not later than the first day of the Company’s fiscal quarter next following the effective date of the Registration Statement, provided that the Company shall be deemed to satisfy its obligations under this Section 3.16 if it timely makes all required filings under the 1934 Act and does not change its fiscal year.

3.17 SEC Compliance. The Company shall otherwise comply with all applicable rules and regulations of the SEC in connection with any registration hereunder.

3.18 Confirmation of Registration. Within two (2) business days after a Registration Statement which covers applicable Registrable Securities is ordered effective by the SEC, the Company shall deliver, and shall cause legal counsel for the Company to deliver, to the transfer agent for such Registrable Securities (with copies to the Holders whose Registrable Securities are included in such Registration Statement and to Legal Counsel) confirmation that such Registration Statement has been declared effective by the SEC in the form attached hereto as Exhibit B.

3.19 Actions for Public Offering. The Company shall provide such opinions, certifications, indemnifications, and take such other actions, including without limitation, entering into such agreements (including underwriting agreements), as are reasonably required and appropriate, to permit the Holders to make a public offering of the Registrable Securities requested to be registered.

3.20 Rule 144 Requirements. For so long as the Registrable Securities are outstanding, the Company covenants that it shall file the reports required to be filed by it under the 1933 Act and the 1934 Act, and the rules and regulations adopted by the SEC thereunder, provided, however, the Company may delay any such filing but only pursuant to Rule 12b-25 under the 1934 Act, and the Company shall take such further action as any Holder of Registrable Securities may reasonably request (including without limitation, promptly obtaining any required legal opinions from Company counsel necessary to effect the sale of Registrable Securities under Rule 144 and paying the related fees and expenses of such counsel), all to the extent required from time to time to enable such Holder to sell Registrable Securities without registration under the 1933 Act within the limitation of the exemptions provided by (a) Rule 144 under the Act, as such Rule may be amended from time to time, or (b) any similar rule or regulation hereafter adopted by the SEC. Upon the request of any Holder of Registrable Securities, the Company will deliver to such Holder a written statement as to whether it has complied with such requirements. If the Company fails to satisfy its covenants and obligations under this Section 3.20, then it shall be in breach of this Agreement (such a breach being a “Rule 144 Default”).

4.1 Furnish Information. The Company’s obligation to cause any Registration Statement to become effective in connection with distribution of any Registrable Securities pursuant to this Agreement is contingent upon each Holder, with reasonable promptness, furnishing to the Company such information regarding itself, the Registrable Securities held by it, and the intended method of disposition of such securities, as is required pursuant to Regulation S-K promulgated under the 1933 Act, to effect the registration of the Registrable Securities. Each Holder agrees, by acquisition of the Registrable Securities, that it shall not be entitled to sell any of such Registrable Securities pursuant to the Registration Statement or to receive a Prospectus relating thereto, unless such Holder has furnished the Company with all information required to be disclosed in order to make the information

previously furnished to the Company by such Holder not misleading in a material respect and any other information regarding such Holder and the distribution of such Registrable Securities as the Company may from time to time reasonably request. Any sale of any Registrable Securities by any Holder shall constitute a representation and warranty by such Holder that the information relating to such Holder and its plan of distribution is as set forth in the Prospectus delivered by such Holder in connection with such disposition, that such Prospectus does not as of the time of such sale contain any untrue statement of a material fact relating to or provided by such Holder or relating to its plan of distribution and that such Prospectus does not as of the time of such sale omit to state any material fact relating to or provided by such Holder or relating to its plan of distribution necessary to make the statements in such Prospectus, in the light of the circumstances under which they were made, not misleading.

5.1 Indemnification by the Company. The Company will indemnify and hold harmless each Holder and its officers, directors, partners and affiliates (and their officers, directors and partners), any underwriter (as defined in the 1933 Act) for each Holder and each person (and its officers, directors, partners and affiliates), if any, who controls any Holder or underwriter within the meaning of the 1933 Act or the 1934 Act (each a “Company Indemnified Person”), against any losses, claims, damages, expenses or liabilities, joint or several, or actions in respect thereof (“Losses”) to which they may become subject under the 1933 Act, the 1934 Act, or other federal or state law, insofar as such Losses arise out of or are based upon any of the following statements, omissions or violations (collectively a “Violation”): (a) any untrue statement or alleged untrue statement of a material fact contained in such Registration Statement, including any preliminary Prospectus or final Prospectus contained therein or any amendments or supplements thereto, (b) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, or (c) any violation or alleged violation by the Company of the 1933 Act, the 1934 Act, any state securities law, or any rule or regulation promulgated under the 1933 Act, the 1934 Act, or any state securities law, and the Company will pay to each such Company Indemnified Person, as incurred, any legal or other expenses reasonably incurred by or on behalf of him in connection with investigating or defending any such Loss; provided, however, that the indemnity agreement contained in this Section 5.1 shall not apply to amounts paid in settlement of any such Loss if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor will the Company be liable in any such case for any such Loss to the extent that it arises out of or is based upon (a) a Violation which occurs solely as the result of the written information furnished by any Holder, underwriter or controlling person seeking indemnification hereunder, as applicable, expressly for inclusion in the Registration Statement, or (b) with respect to any underwriter and controlling person of such underwriter (and their respective officers and directors), a Violation which results from the fact that there was not sent or given to a person who bought Registrable Securities, at or prior to the written confirmation of the sale, a copy of the final Prospectus, as then amended or supplemented, if the Company had previously furnished copies of such Prospectus hereunder and such Prospectus corrected the misstatement or omission forming the basis of the Violation.

5.2 Indemnification by Holders. Each Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the Registration Statement, each person, if any, who controls the Company within the meaning of the 1933 Act, any underwriter and any controlling person of any such underwriter or other holder (each a “Holder Indemnified Person”), against any Losses to which any of the foregoing persons may become subject, under the 1933 Act, the 1934 Act, or other federal or state law, insofar as such Losses arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs solely as a result of the written information furnished by each Holder expressly for inclusion in the applicable Registration Statement, and such Holder will pay, as incurred, any legal or other expenses reasonably incurred by any Holder Indemnified Person intended to be indemnified pursuant to this Section 5.2, in connection with investigating or defending any such Loss; provided, however, that any Holder’s liability pursuant to this Section 5.2 shall be limited to the amount of the net proceeds received by such Holder from the sale of the Registrable Securities sold by it, and further provided that the indemnity agreement contained in this Section 5.2 does not apply to amounts paid in settlement of any such Loss if such settlement is effected without the consent of such Holder, which consent shall not be unreasonably withheld.

5.3 Indemnification Procedures. Promptly after receipt by an indemnified party under this Article V of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Article V, deliver to the indemnifying party a written notice of the commencement of such action and the indemnifying party will have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party (together with all other indemnified parties which may be represented without conflict by one counsel) will have the right to retain one separate counsel, with the fees and expenses to be paid by the indemnifying party, if representation of the indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between the indemnified party and any other party represented by such counsel in the same proceeding. If the indemnifying party shall fail to defend the action, or conducts a defense which is not reasonably adequate in light of the circumstances, the indemnified party may conduct its own defense and shall be entitled to reimbursement for the costs of such defense. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall not relieve such indemnifying party of any liability to the indemnified party under this Agreement, except to the extent that the indemnifying party is materially prejudiced by such failure. The omission so to deliver written notice to the indemnifying party does not relieve it of any liability that it may have to any indemnified party otherwise than under this Agreement. No indemnifying party under this Agreement will enter into any settlement or consent to any entry of judgment without the indemnified party’s written consent which does not include as an unconditional term thereof the giving by the claimant or plaintiff to the indemnified party of a release from all liability in respect of such claim or litigation.

5.4 Contribution. If the indemnification provided for in this Article V is held by a court of competent jurisdiction to be unavailable to an indemnified party or is insufficient to indemnify an indemnified party with respect to any Loss, then the indemnifying party, in lieu of or in addition to, as appropriate, indemnifying such indemnified party hereunder, will contribute to the amount paid or payable by such indemnified party as a result of such Loss in such proportion as is appropriate to

reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions that resulted in such Loss as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party will be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties’ relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. The obligation of any Holder to make a contribution pursuant to this Section 5.4 shall be limited to the net proceeds received by such Holder from the sale of the Registrable Securities sold by it, less any amounts paid pursuant to Section 5.2. To the extent any indemnification by an indemnifying party is prohibited or limited by law, the indemnifying party agrees to make the maximum contribution with respect to any amounts for which it would otherwise be liable under Article V to the fullest extent permitted by law; provided, however, that: (a) no seller of Registrable Securities guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any seller of Registrable Securities who was not guilty of fraudulent misrepresentation, and (b) contribution by any seller of Registrable Securities shall be limited in amount to the net amount of proceeds received by such seller from the sale of such Registrable Securities pursuant to such Registration Statement.

5.5 Survival. The indemnity and contribution provisions contained in this Article V shall remain operative and in full force and effect regardless of (a) any termination of this Agreement, (b) any investigation made by or on behalf of any Holder or any person controlling any Holder, or the Company, or the Company’s officers or directors or any person controlling the Company, and (c) the sale of any Registrable Securities by any Holder.

6.1 Expenses. The Company shall bear all fees and expenses incurred in connection with the performance by the Company of its obligations under this Agreement (including without limitation, all registration and filing fees, fees with respect to filings required to be made with the National Association of Securities Dealers, Inc., fees and expenses of compliance with securities or “Blue Sky” laws, printing expenses, messenger, telephone and distribution expenses associated with the preparation and distribution of any Registration Statement, all fees and expenses associated with the listing of any Registrable Securities on any securities exchange or exchanges, the fees and disbursements of counsel for the Company and its accountants, any underwriting fees and the reasonable fees and expenses of one counsel to the Holders, not to exceed an amount equal to $25,000, whether or not the Registration Statement is declared effective, and transfer agent fees. Notwithstanding the provisions of this Section 6.1, each seller of Registrable Securities shall pay all underwriting fees and expenses, selling commissions and stock transfer and documentary stamp taxes, if any, applicable to any Registrable Securities registered and sold by such seller and all registration expenses to the extent the Company is prohibited from paying such expenses under applicable law.

6.2 Assignment of Registration Rights. The rights under this Agreement shall be automatically assignable by any Holder to any transferee of all or any portion of Registrable Securities if: (a) such Holder agrees in writing with the transferee or assignee to assign such rights, and a copy of such agreement is furnished to the Company within a reasonable time after such assignment; (b) the

13 Company is, within a reasonable time after such transfer or assignment, furnished with written notice of (i) the name and address of such transferee or assignee, and (ii) the securities with respect to which such registration rights are being transferred or assigned; (c) immediately following such transfer or assignment the further disposition of such securities by the transferee or assignee is restricted under the 1933 Act and applicable state securities laws; (d) at or before the time the Company receives the written notice contemplated by clause (b) of this sentence the transferee or assignee agrees in writing with the Company to be bound by all of the provisions contained herein and (e) at least 100,000 shares of Common Stock (or the equivalent number of Warrants that are exercisable for that number of shares of Common Stock) are transferred by such Holder to the transferee of the Registrable Securities contemplated by this Section 6.2.

7.1 Notice. Any notices, consents, waivers or other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered: (a) upon receipt, when delivered personally, (b) upon receipt, when sent by facsimile (provided confirmation of transmission is mechanically or electronically generated and kept on file by the sending party), or (c) one (1) business day after deposit with an overnight courier service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be:

7.2 Owner of Registrable Securities. A Person is deemed to be a holder of Registrable Securities whenever such Person owns or is deemed to be owner of record of such Registrable Securities. If the Company receives conflicting instructions, notices or elections from two or more Persons with respect to the same Registrable Securities, the Company shall act upon the basis of instructions, notice or election received from the registered owner of such Registrable Securities.

7.3 Consents. All consents and other determinations to be made by the Holders pursuant to this Agreement shall be made, unless otherwise specified in this Agreement, by Holders holding a majority of the Registrable Securities, determined as if all the Warrants then outstanding have been exercised for Registrable Securities without regard for any limitations on exercise of the Warrants.

7.4 Additional Rights. From and after the date of this Agreement, the Company shall not without the prior written consent of holders of majority of the outstanding Registrable Securities enter into any agreement with any holder or prospective holder of any securities of the Company providing for the grant to such holder of rights superior to those granted herein.

7.5 Specific Performance. Each of the parties hereto acknowledges and agrees that the breach of this Agreement would cause irreparable damage to the other parties hereto and that the other parties hereto will not have an adequate remedy at law. Therefore, the obligations of each of the parties hereto under this Agreement shall be enforceable by a decree of specific performance issued by any court of competent jurisdiction, and appropriate injunctive relief may be applied for and granted in connection therewith. Such remedies shall, however, be cumulative and not exclusive and shall be in addition to any other remedies which any party may have under this Agreement or otherwise.

7.6 Entire Agreement; Amendment. This Agreement supersedes all other prior oral or written agreements among the parties, their affiliates and persons acting on their behalf with respect to the matters discussed herein, and this Agreement and the instruments referenced herein contain the entire understanding of the parties with respect to the matters covered herein and therein. No provision of this Agreement may be amended or waived other than by an instrument in writing signed by the Company and the Holders of at least a majority of the Registrable Securities then outstanding. Notwithstanding the foregoing, a waiver or consent to depart from the provisions hereof with respect to a matter that relates exclusively to the rights of Holders of Registrable Securities whose securities are being sold pursuant to the Registration Statement and that does not directly or indirectly affect the rights of other Holders of Registrable Securities may be given by Holders of at least a majority of the Registrable Securities being sold by such Holders pursuant to such Registration Statement. Each Holder of Registrable Securities outstanding at the time of any such amendment, modification, supplement, waiver or consent or thereafter shall be bound by any such amendment, modification, supplement, waiver or consent effected pursuant to this Section 7.6, whether or not any notice, writing or marking indicating such amendment, modification, supplement, waiver or consent appears on the Registrable Securities or is delivered to such Holder.

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

remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction.

7.8 Termination. This Agreement and the obligations of the parties hereunder shall terminate as of the end of the Registration Period except for Article V hereof which shall survive and remain in full force and effect in accordance with its terms.

7.9 Governing Law; Jurisdiction. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to principles of conflicts of laws. Any action or proceeding seeking to enforce any provision of, or based on any right arising out of, this Agreement must be brought against any of the parties in the courts of the State of New York or, if it has or can acquire jurisdiction, in the United States District Court for the Southern District of New York, and each of the parties consents to the jurisdiction of such courts (and of the appropriate appellate courts) in any such action or proceeding and waives any objection to venue laid therein. Process in any action or proceeding referred to in the preceding sentence may be served on any party anywhere in the world.

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

7.11 Successors and Assigns; No Third Party Beneficiaries. Subject to Section 6.2, this Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and permitted assigns. Nothing in this Agreement shall create or be deemed to create any third-party beneficiary rights in any person not a party to this Agreement except as provided below and in Section 6.2. Upon any assignment, the references in this Agreement to any Holder shall also apply to any such assignee unless the context otherwise requires.

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

7.13 No Strict Construction. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party.

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

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

1.1 Subscription for Units. Subject to the terms and conditions hereinafter set forth, the Subscriber hereby subscribes for and agrees to purchase from the Company such number of Units as is set forth upon the signature page hereof at a price equal to $100,000 per Unit and the Company agrees to sell such Units to the Subscriber for said purchase price. The purchase price is payable by certified or bank check made payable to “First Republic Trust

Company as escrow agent for Intraware, Inc.,” by wire transfer of funds, or by cancellation of outstanding indebtedness contemporaneously with the execution and delivery of this Subscription Agreement. First Republic Trust Company (the “Escrow Agent”) shall act as such in accordance with the terms and conditions of an escrow agreement to be entered into among the Placement Agent, the Company and the Escrow Agent.

1.2 Reliance on Exemptions. The Subscriber acknowledges that the Placement has not been reviewed by the United States Securities and Exchange Commission (the “SEC”) or any state agency because of the Company’s representations that this is intended to be a nonpublic offering exempt from the registration requirements of the Securities Act of 1933, as amended (the “1933 Act”) and state securities laws. The Subscriber understands that the Company is relying in part upon the truth and accuracy of, and the Subscriber’s compliance with, the representations, warranties, agreements, acknowledgments and understandings of the Subscriber set forth herein in order to determine the availability of such exemptions and the eligibility of the Subscriber to acquire the Units.

1.3 Investment Purpose. The Subscriber represents that the Shares and the Warrants comprising the Units are being purchased for its own account, for investment purposes only and not for distribution or resale to others in contravention of the registration requirements of the 1933 Act. The Subscriber agrees that it will not sell or otherwise transfer the Shares, the Warrants or the Warrant Shares (collectively, the “Securities”) unless they are registered under the 1933 Act or unless an exemption from such registration is available.

1.4 Accredited Investor. The Subscriber represents and warrants that it is an “accredited investor” as such term is defined in Rule 501 of Regulation D promulgated under the 1933 Act, as indicated by its responses to the Questionnaire, and that it is able to bear the economic risk of any investment in the Units. The Subscriber further represents and warrants that the information furnished in the Questionnaire is accurate and complete in all material respects.

1.5 Risk of Investment. The Subscriber recognizes that the purchase of Units involves a high degree of risk in that: (i) an investment in the Company is highly speculative and only investors who can afford the loss of their entire investment should consider investing in the Company and the Securities; (ii) transferability of the Securities is limited; and (iii) the Company may require substantial additional funds to operate its business and there can be no assurance that the Maximum Offering will be completed or that any other funds will be available to the Company, in addition to all of the other risks set forth in the Company’s SEC Documents (as defined in Section 2.5 hereof).

1.6 Information. The Subscriber acknowledges that the Company has made available for its review: (a) the Company’s Annual Report on Form 10-K for the year ended February 28, 2001, (b) the Company’s Quarterly Reports on Form 10-Q for the fiscal quarters ended May 31, 2001, August 31, 2001 and November 30, 2001, (c) the Company’s Proxy Statement for the annual meeting of shareholders held on August 15, 2001, and (d) the Company’s Current Report on Form 8-K filed with the SEC on September 21, 2001, and hereby represents that: (i) the Subscriber has been furnished by the Company during the course of this transaction with all information regarding the Company which it has requested; (ii) that the

2 Subscriber has been afforded the opportunity to ask questions of and receive answers from duly authorized officers of the Company concerning the terms and conditions of the Placement, and any additional information which it has requested, if any; and (iii) the Subscriber has been given the opportunity by the Placement Agent to review the Agency Agreement if it has requested.

1.7 No Representations. The Subscriber hereby represents that, except as expressly set forth in (a) the Warrant Agreement, (b) this Subscription Agreement, (c) the Registration Rights Agreement, and (d) all exhibits, schedules and appendices which are part of the aforementioned documents (collectively, the “Offering Documents”), no representations or warranties have been made to the Subscriber by the Company or any agent, employee or affiliate of the Company, including the Placement Agent, and in entering into this transaction the Subscriber is not relying on any information other than that contained in the Offering Documents, the SEC Documents and the results of independent investigation by the Subscriber.

1.8 Tax Consequences. The Subscriber acknowledges that the Placement may involve tax consequences and that the contents of the Offering Documents do not contain tax advice or information. The Subscriber acknowledges that he must retain his own professional advisors to evaluate the tax and other consequences of an investment in the Units.

1.9 Transfer or Resale. The Subscriber understands that Rule 144 (the “Rule”) promulgated under the 1933 Act requires, among other conditions, a one-year holding period prior to the resale (in limited amounts) of securities acquired in a non–public offering without having to satisfy the registration requirements under the 1933 Act. The Subscriber understands and hereby acknowledges that the Company is under no obligation to register the securities comprising the Units under the 1933 Act, with the exception of certain registration rights covering the resale of the Shares and Warrant Shares set forth in the Registration Rights Agreement.

1.10 Placement Agent. The Subscriber agrees that neither the Placement Agent or any of its directors, officers, employees or agents shall be liable to any Subscriber for any action taken or omitted to be taken by it in connection therewith, except for willful misconduct or gross negligence.

1.11 Legends. The Subscriber understands that the certificates or other instrument representing the Securities, until such time as they have been registered under the 1933 Act, shall bear a restrictive legend in substantially the following form (and a stop-transfer order may be placed against transfer of such certificates or other instruments):

1.12 No General Solicitation. The Subscriber represents that the Subscriber was not induced to invest by any of the following: (i) any advertisement, article, notice or other communication published in any newspaper, magazine or similar media or broadcast over the news or radio; and (ii) any seminar or meeting whose attendees were invited by any general solicitation or advertising.

1.13 Validity; Enforcement. If the Subscriber is a corporation, partnership, trust or other entity, the Subscriber represents and warrants that: (a) it is authorized and otherwise duly qualified to purchase and hold the Units; and (b) that this Subscription Agreement has been duly and validly authorized, executed and delivered and constitutes the legal, binding and enforceable obligation of the undersigned.

1.14 Address. The Subscriber hereby represents that the address of Subscriber furnished by the Subscriber at the end of this Subscription Agreement is the undersigned’s principal residence if the Subscriber is an individual or its principal business address if it is a corporation or other entity.

1.15 Foreign Subscriber. If the Subscriber is not a United States person, such Subscriber hereby represents that it has satisfied itself as to the full observance of the laws of its jurisdiction in connection with any invitation to subscribe for the Securities comprising the Units or any use of this Subscription Agreement, including: (a) the legal requirements within its jurisdiction for the purchase of the Units; (b) any foreign exchange restrictions applicable to such purchase; (c) any governmental or other consents that may need to be obtained; and (d) the income tax and other tax consequences, if any, that may be relevant to the purchase, holding, redemption, sale or transfer of the Securities. Such Subscriber’s subscription and payment for, and his or her continued beneficial ownership of the Securities, will not violate any applicable securities or other laws of the Subscriber’s jurisdiction.

2.1 Securities Law Compliance. The offer, offer for sale, and sale of the Units have not been registered under the 1933 Act. The Units are to be offered, offered for sale and sold in reliance upon the exemptions from the registration requirements of Section 5 of the 1933 Act. The Company will use its best efforts to conduct the Placement in compliance with the requirements of Regulation D of the General Rules and Regulations under the 1933 Act and applicable state “blue sky” laws, and the Company will file all appropriate notices of offering

with the SEC. The Company has prepared the Offering Documents. The Offering Documents will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances in which they were made, not misleading. If at any time prior to the completion of the Placement or other termination of this Subscription Agreement any event shall occur as a result of which it might become necessary to amend or supplement the Offering Documents so that they do not include any untrue statement of any material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances then existing, not misleading, the Company will promptly notify the Subscriber and will supply the Subscriber with amendments or supplements correcting such statement or omission.

2.2 Organization and Qualification. The Company is duly organized and validly existing in good standing under the laws of the jurisdiction in which it is organized, and has the requisite power and authorization to own its properties and to carry on its business as now being conducted. The Company is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which its ownership of property or the nature of the business conducted by it makes such qualification necessary, except to the extent that the failure to be so qualified or be in good standing would not have a Material Adverse Effect. As used in this Subscription Agreement, “Material Adverse Effect” means any material adverse effect on the business, properties, assets, operations, results of operations, financial condition or prospects of the Company, or on the transactions contemplated hereby, or by the other Offering Documents or the agreements and instruments to be entered into in connection herewith or therewith, or on the authority or ability of the Company to perform its obligations under the Offering Documents. The Company does not have any operating subsidiaries other than as set forth in the Offering Documents and all of the non-operating subsidiaries are wholly-owned by the Company.

2.3 Capitalization. The authorized, issued and outstanding capital stock of the Company prior to the consummation of the transactions contemplated hereby is set forth in Schedule 2.3 to this Subscription Agreement. All of such outstanding shares have been and are, or upon issuance will be duly authorized, validly issued, fully paid and non-assessable. Except as disclosed in Schedule 2.3, (i) no shares of the Company’s capital stock are subject to preemptive rights under Delaware law or any other similar rights or any liens or encumbrances suffered or permitted by the Company; (ii) there are no outstanding debt securities issued by the Company; (iii) there are no outstanding options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into or exchangeable for, any shares of capital stock of the Company, or contracts, commitments, understandings or arrangements by which the Company is or may become bound to issue additional shares of capital stock of the Company or options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into or exchangeable for, any shares of capital stock of the Company; (iv) there are no agreements or arrangements under which the Company is obligated to register the sale of any of their securities under the 1933 Act; (v) there are no outstanding securities of the Company that contain any redemption or similar provisions, and there are no contracts, commitments, understandings or arrangements by which the Company is or may become bound to redeem a security of the Company; (vi) there are no securities or instruments containing anti-dilution or similar provisions that will be triggered by the issuance of the Securities as described in the Offering

Documents that shall not have been waived prior to the Initial Closing; and (vii) the Company does not have any stock appreciation rights or “phantom stock” plans or agreements or any similar plan or agreement. All prior sales of securities of the Company were either registered under the 1933 Act and applicable state securities laws or exempt from such registration, and, to the knowledge of the Company, no security holder has any rescission rights with respect thereto.

2.4 Subsidiaries and Investments. Other than as set forth in Schedule 2.4 to this Subscription Agreement, the Company has no subsidiaries, and the Company does not own, directly or indirectly, any capital stock or other equity ownership or proprietary interests in any other corporation, association, trust, partnership, joint venture or other entity.

2.5 SEC Documents; Financial Statements. Since the date of the Company’s last Annual Report on Form 10-K, the Company has filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC pursuant to the reporting requirements of the Exchange Act (all of the foregoing filed prior to the date hereof and all exhibits included therein and financial statements and schedules thereto and documents incorporated by reference therein being hereinafter referred to as the “SEC Documents”). The Company has made available to the Subscriber or its representatives copies of the SEC Documents. As of their respective dates, the SEC Documents complied in all material respects with the requirements of the Exchange Act and the rules and regulations of the SEC promulgated thereunder applicable to the SEC Documents, and none of the SEC Documents, at the time they were filed with the SEC, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. As of their respective dates, the financial statements of the Company included in the SEC Documents complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto. Such financial statements have been prepared in accordance with generally accepted accounting principles, consistently applied, during the periods involved (except (a) as may be otherwise indicated in such financial statements or the notes thereto, or (b) in the case of unaudited interim statements, to the extent they may exclude footnotes or may be condensed or summary statements) and fairly present in all material respects the financial position of the Company as of the dates thereof and the results of its operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments that will not be material). As of the date hereof, the Company meets the requirements for the use of Form S-3 for registration of the resale of the Shares and Warrant Shares. The Company has no reason to believe its independent auditors will withhold their consent to the inclusion of their audit opinion concerning the Company’s financial statements which are included in the Registration Statement.

2.6 Absence of Changes. Since November 30, 2001, except with respect to matters of which the Company has notified the Placement Agent in writing or publicly disclosed and other than as set forth in Schedule 2.6 to this Subscription Agreement, the Company has not (i) incurred any debts, obligations or liabilities, absolute, accrued, contingent or otherwise, whether due or to become due, except current liabilities incurred in the usual and ordinary course of business and consistent with past practices, having individually or in the aggregate a Material Adverse Effect, (ii) made or suffered any changes in its contingent obligations by way of guaranty, endorsement (other than the endorsement of checks for deposit in the usual and

6 ordinary course of business), indemnity, warranty or otherwise, (iii) discharged or satisfied any liens or paid any obligation or liability other than current liabilities shown on the balance sheet dated as of November 30, 2001, and current liabilities incurred since the date of the balance sheet dated as of November 30, 2001, in each case in the usual and ordinary course of business and consistent with past practices, (iv) mortgaged, pledged or subjected to lien any of its assets, tangible or intangible, (v) sold, transferred or leased any of its assets except in the usual and ordinary course of business and consistent with past practices, (vi) cancelled or compromised any debt or claim, or waived or released any right, of material value, (vii) suffered any physical damage, destruction or loss (whether or not covered by insurance) adversely affecting the properties, business or prospects of the Company, (viii) entered into any transaction other than in the usual and ordinary course of business except for the Agency Agreement and the Offering Documents and the related agreements referred to herein and therein, (ix) encountered any labor difficulties or labor union organizing activities, (x) made or granted any wage or salary increase or entered into any employment agreement, (xi) issued or sold any shares of capital stock or other securities or granted any options with respect thereto, or modified any equity security of the Company, (xii) declared or paid any dividends on or made any other distributions with respect to, or purchased or redeemed, any of its outstanding equity securities, (xiii) suffered or experienced any change in, or condition affecting, its condition (financial or otherwise), properties, assets, liabilities, business operations, results of operations or prospects other than changes, events or conditions in the usual and ordinary course of its business and consistent with past practices, having (either by itself or in conjunction with all such other changes, events and conditions) a Material Adverse Effect, (xiv) made any change in the accounting principles, methods or practices followed by it or depreciation or amortization policies or rates theretofore adopted, or (xv) entered into any agreement, or otherwise obligated itself, to do any of the foregoing.

2.7 Title. Except as set forth in or contemplated by Schedule 2.7 to this Subscription Agreement, the Company has good and marketable title to all properties and assets owned by it, free and clear of all liens, charges, encumbrances or restrictions, except such as are not significant or important in relation to the Company’s business; all of the material leases and subleases under which the Company is the lessor or sublessor of properties or assets or under which the Company holds properties or assets as lessee or sublessee are in full force and effect, and the Company is not in default in any material respect with respect to any of the terms or provisions of any of such leases or subleases, and no material claim has been asserted by anyone adverse to rights of the Company as lessor, sublessor, lessee or sublessee under any of the leases or subleases mentioned above, or affecting or questioning the right of the Company to continued possession of the leased or subleased premises or assets under any such lease or sublease. The Company owns or leases all such properties as are necessary to its operations as described in the Offering Documents.

2.8 Proprietary Rights. To the Company’s knowledge after due investigation, the Company owns, or is duly licensed to use or possess, or possesses exclusive and enforceable rights to use all patents, patent applications, trademarks, service marks, copyrights, trade secrets, processes, formulations, technology or know-how used in the conduct of its business (the “Proprietary Rights”). Except as set forth on Schedule 2.8 to this Subscription Agreement, the Company has not received any notice of any claims, nor does it have any knowledge of any threatened claims, and knows of no facts which would form the basis

of any claim, asserted by any person to the effect that the sale or use of any product or process now used or offered by the Company or proposed to be used or offered by the Company infringes on any patents or infringes upon the use of any such Proprietary Rights of another person and, to the best of the Company’s knowledge, no others have infringed the Company’s Proprietary Rights.

2.9 Litigation. Except as set forth in or contemplated by Schedule 2.9 to this Subscription Agreement, there is no material action, suit, investigation, customer complaint, claim or proceeding at law or in equity by or before any arbitrator, court, governmental instrumentality or agency, self-regulatory organization or body or public board now pending or, to the knowledge of the Company, threatened against the Company of any of the Company’s officers or directors in their capacities as such (or basis therefor known to the Company), the adverse outcome of which would have a Material Adverse Effect. The Company is not subject to any judgment, order, writ, injunction or decree of any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign that have a Material Adverse Effect.

2.10 Non-Defaults; Non-Contravention.Except as set forth in or contemplated by Schedule 2.10 to this Subscription Agreement, the Company is not in violation of or default under, nor will the execution and delivery of this Subscription Agreement or any of the other Offering Documents or consummation of the transactions contemplated herein or therein result in a violation of or constitute a default in the performance or observance of any obligation under: (i) its Certificate of Incorporation, or its By-laws; or (ii) any indenture, mortgage, contract, material purchase order or other agreement or instrument to which the Company is a party or by which it or its property is bound, where such violation or default would have a Material Adverse Effect; or (iii) any material order, writ, injunction or decree of any court of any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign (including federal and state securities laws and regulations and the rules and regulations of The Nasdaq Stock Market, Inc.), where such violation or default would have a Material Adverse Effect, and there exists no condition, event or act that constitutes, nor which after notice, the lapse of time or both, could constitute a default under any of the foregoing, which in either case would have a Material Adverse Effect.

2.11 Taxes. The Company has filed all tax returns that are required to be filed by it or otherwise met its disclosure obligations to the relevant agencies and all such returns are true and correct. The Company has paid or adequately provided for all tax liabilities of the Company as reflected on such returns or pursuant to any assessments received by it or that it is obligated to withhold from amounts owing to any employee, creditor or third party. The Company has properly accrued all taxes required to be accrued by GAAP consistently applied. The income tax returns of the Company have never been audited by any government or regulatory authorities. The Company has not waived any statute of limitations with respect to taxes or agreed to any extension of time with respect to any tax assessment or deficiency.

2.12 Compliance With Laws; Licenses, Etc. The Company has not received notice of any violation of or noncompliance with any laws, ordinances, regulations and orders applicable to its business that would have a Material Adverse Effect and that has not been cured. The Company has all material licenses and permits and other governmental certificates,

authorizations and permits and approvals (collectively, “Licenses”) required by every government or regulatory body for the operation of its business as currently conducted and the use of its properties. The Licenses are in full force and effect and to the Company’s knowledge no violations currently exist in respect of any License and no proceeding is pending or threatened to revoke or limit any thereof.

2.13 Authorization; Enforcement; Validity. The Company has the requisite corporate power and authority to enter into and perform its obligations under this Subscription Agreement and the other Offering Documents, to file and perform its obligations under the Offering Documents, and to issue the Securities in accordance with the terms of the Offering Documents. The execution and delivery of the Offering Documents by the Company and the consummation by the Company of the transactions contemplated by the Offering Documents, including without limitation the issuance of the Securities, have been duly authorized by the Company’s board of directors and no further consent or authorization is required by the Company, its board of directors or its stockholders.

2.14 Authorization of Securities. The issuance, sale and delivery of the Shares and the Warrants have been duly authorized by all requisite corporate action of the Company. When so issued, sold and delivered in accordance with the Offering Documents for the consideration set forth therein, the Shares and the Warrants will be duly executed, issued and delivered and will constitute valid and legal obligations of the Company enforceable in accordance with their respective terms and, in each case, will not be subject to preemptive or any other similar rights of the stockholders of the Company or others which rights shall not have been waived prior to the Initial Closing. The issuance, sale and delivery by the Company of the common shares issuable upon exercise of the Warrants (the “Reserved Shares”) have been duly authorized by all requisite corporate action of the Company and the Reserved Shares have been duly reserved for issuance upon exercise of all or any of the Warrants and when so issued, sold, paid for and delivered for the consideration set forth in the Offering Documents, the Reserved Shares will be validly issued and outstanding, fully paid and nonassessable, and not subject to preemptive or any other similar rights of the stockholders of the Company or others which rights shall not have been waived prior to the Initial Closing.

2.15 Exemption from Registration. Assuming (i) the accuracy of the information provided by the respective Subscribers in the Subscription Agreements and (ii) that the Placement Agent has complied in all material respects with the provisions of Regulation D promulgated under the 1933 Act, the offer and sale of the Units pursuant to the terms of this Agreement are exempt from the registration requirements of the 1933 Act and the rules and regulations promulgated thereunder. The Company is not disqualified from the exemption under Regulation D by virtue of the disqualifications contained in Rule 505(b)(2)(iii) or Rule 507 promulgated thereunder.

2.16 Registration Rights. No person has any right to cause the Company to effect registration under the 1933 Act of any securities of the Company.

2.17 Brokers. Neither the Company nor any of its officers, directors, employees or stockholders has employed any broker or finder in connection with the transactions

contemplated by this Subscription Agreement other than the Placement Agent and Ladenburg Thalmann.

2.18 Title to Securities. When certificates representing the Shares and the Warrants have been duly delivered to the purchasers participating in the Placement and payment shall have been made therefor, the several purchasers shall receive from the Company good and marketable title to such securities free and clear of all liens, encumbrances and claims whatsoever (with the exception of claims arising through the acts or omissions of the purchasers and except as arising from applicable federal and state securities laws), and the Company shall have paid all taxes, if any, in respect of the original issuance thereof.

2.19 Takeover Protections; Rights Agreement. The Company and the Board have taken all necessary action, if any, in order to render inapplicable any control share acquisition, business combination, poison pill (including any distribution under a rights agreement) or other similar anti-takeover provision under the Certificate of Incorporation or the laws of the state of its incorporation which is or could become applicable to the Subscriber as a result of the transactions contemplated by this Agency Agreement, including without limitation, the Company’s issuance of the Securities and the Subscriber’s ownership of the Securities. The Company has not adopted a shareholder rights plan or similar arrangement relating to accumulations of beneficial ownership of Common Stock or a change in control of the Company.

2.20 Right of First Refusal. No person, firm or other business entity is a party to any agreement, contract or understanding, written or oral entitling such party to a right of first refusal with respect to offerings by the Company.

2.21 Exchange Listing. The Company’s Common Stock has been designated for quotation or listed on the Nasdaq National Market (“Nasdaq”) and trading in the Common Stock has not been suspended by the SEC or Nasdaq. Except as disclosed on Schedule 2.21 to this Subscription Agreement, the Company has received no communication, written or oral, from the SEC or Nasdaq regarding the suspension or delisting of the Common Stock from Nasdaq, and the Company is not in violation of the listing requirements of Nasdaq as in effect on the date hereof and has no actual knowledge of any facts which would reasonably lead to delisting or suspension of the Common Stock by Nasdaq in the foreseeable future.

2.22 Consents. Except as contemplated by this Subscription Agreement, the Company is not required to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency or any regulatory or self-regulatory agency in order for it to execute, deliver or perform any of its obligations under or contemplated by the Offering Documents. Except as otherwise provided in the Offering Documents, all consents, authorizations, orders, filings and registrations that the Company is required to obtain pursuant to the preceding sentence have been obtained or effected on or prior to the date hereof. The Company is unaware of any facts or circumstances that might prevent the Company from obtaining or effecting any of the foregoing.

2.23 No General Solicitation. None of the Company, any of its affiliates, and any person acting on its behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D under the 1933 Act) in connection with the offer or sale of the Securities.

2.24 No Integrated Offering. None of the Company, any of its affiliates, and any person acting on its behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under circumstances that would require registration of the Securities under the 1933 Act or cause the Placement to be integrated with prior offerings by the Company for purposes of the 1933 Act or any applicable stockholder approval provisions, including without limitation, under the rules and regulations of any exchange or automated quotation system on which any of the securities of the Company are listed or designated. None of the Company, its affiliates and any person acting on its behalf will take any action or steps referred to in the preceding sentence that would require registration of any of the Securities under the 1933 Act or cause the Placement to be integrated with other offerings.

2.25 Foreign Corrupt Practices. Neither the Company nor any director, officer, agent, employee or other person acting on behalf of the Company has, in the course of its actions for, or on behalf of, the Company, (i) used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expenses relating to political activity; made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds, (ii) violated or is in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977, as amended, or (iii) made any unlawful bribe, rebate, payoff, influence payment, kickback or other unlawful payment to any foreign or domestic government official or employee.

3.1 Offering Period. This Subscription Agreement will terminate at 11:59 PM Eastern time on June 7, 2002, unless extended by the Company and the Placement Agent for up to 15 days (the “Termination Date”). Provided the Minimum Offering shall have been subscribed for, funds representing the sale thereof shall have cleared, and all conditions to closing set forth in Section 4 have been satisfied or waived, the Initial Closing shall take place at the offices of counsel to the Placement Agent, Loeb & Loeb, 345 Park Avenue, New York, New York 10154, within two business days thereafter (but in no event later than two business days following the closing of the Company’s previously announced asset sale to Computer Associates). At the Initial Closing, payment for the Units issued and sold by the Company shall be made against delivery of the Shares and Warrants comprising such Units. Subsequent closings (each of which shall be deemed a “Closing” hereunder) shall take place by mutual agreement of the Company and the Placement Agent. The date of the last closing of the Placement is hereinafter referred to as the “Final Closing” and the date of any Closing hereunder is hereinafter referred to as a “Closing Date”.

3.2 Expenses; Fees. Simultaneously with payment for and delivery of the Units at the closing of the Placement and subject to the following sentence, the Company shall: (A) pay to the Placement Agent a placement agent fee equal to 6% of the gross proceeds of Units sold in the Placement (subject to reduction in certain events); and (B) issue to the Placement Agent or its designees five-year warrants in the form to be agreed to by the Company and the Placement Agent to purchase that number of Shares as equals 8% of the Shares and Warrant Shares sold in the Placement. The Company shall also reimburse the Placement Agent, upon presentation of receipts or invoices, for up to $50,000 of its accountable expenses.

3.3 Escrow. Pending the sale of the Units, all funds paid hereunder shall be deposited by the Subscribers in escrow with the Escrow Agent. If the closing conditions set forth in Section 4 shall not have been met on or before the Termination Date, then this subscription shall be void and all funds paid hereunder by the Subscriber, with interest, shall be returned to the Subscriber promptly.

3.4 Certificates. The Subscriber hereby authorizes and directs the Company, upon each Closing in the Placement, to deliver the Shares and Warrants to be issued to such Subscriber pursuant to this Subscription Agreement either (a) to the Subscriber’s address indicated in the Questionnaire, or (b) directly to the Subscriber’s account maintained with the Placement Agent, if any.

4.1 Asset Sale. The Company shall have consummated the previously announced asset sale to Computer Associates.

4.2 Officers’ Certificate. The Subscriber shall have received a certificate of the Company, signed by the Chief Executive Officer and Chief Financial Officer thereof, that the representations and warranties contained in Section 2 hereof are true and accurate in all material respects as of the Closing.

4.3 Opinion of Counsel. The Subscriber shall have received the opinion of Wilson, Sonsini, Goodrich & Rosati, Professional Corporation, counsel to the Company, in the form delivered to the Placement Agent pursuant to Section 3 of the Agency Agreement.

4.4 Material Adverse Event. There shall not have occurred, at any time prior to the closing of this subscription (i) any domestic or international event, act or occurrence that has materially disrupted, or in the Subscriber’s opinion will in the immediate future materially disrupt, the securities markets; (ii) a general suspension of, or a general limitation on prices for, trading in securities on the New York Stock Exchange or the Nasdaq - Amex Stock Exchange; (iii) any outbreak of major hostilities or other national or international calamity; (iv) any banking moratorium declared by a state or federal authority; (v) any moratorium declared in foreign exchange trading by major international banks or other persons; (vi) any material interruption in the mail service or other means of communication within the United States; (vii) any material adverse change in the business, properties, assets, results of operations, or financial condition of the Company; or (viii) any material adverse change in the market for securities in general or in political, financial, or economic conditions.

5.1 Notice. Any notices, consents, waivers or other communications required or permitted to be given under the terms of this Subscription Agreement must be in writing and will be deemed to have been delivered: (a) upon receipt, when delivered personally, (b) upon receipt, when sent by facsimile (provided confirmation of transmission is mechanically or electronically generated and kept on file by the sending party), or (c) one (1) business day after deposit with an overnight courier service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be:

5.2 Entire Agreement; Revocation; Amendment. This Subscription Agreement supersedes all other prior oral or written agreements between the Subscriber, the Company, their affiliates and persons acting on their behalf with respect to the matters discussed herein, and this Subscription Agreement and the instruments referenced herein contain the entire understanding of the parties with respect to the matters covered herein and therein and, except as specifically set forth herein or therein, neither the Company nor the Subscriber makes any representation, warranty, covenant or undertaking with respect to such matters. This Subscription Agreement is subject to revocation or reconfirmation by the Subscriber upon receipt by the Subscriber of notification of the Per Share Purchase Price and any other material information regarding the Company released after the execution of this Subscription Agreement and prior to the Closing. No provision of this Subscription Agreement may be amended or waived other than by an instrument in writing signed by the Company and the holders of at least a majority of the Securities then outstanding (or if prior to the Closing, the Subscribers purchasing at least a majority of the Units to be purchased at the Closing). No such amendment shall be effective to the extent that it applies to less than all of the holders of the Securities then outstanding.

5.3 Severability. If any provision of this Subscription Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect

the validity or enforceability of the remainder of this Subscription Agreement in that jurisdiction or the validity or enforceability of any provision of this Subscription Agreement in any other jurisdiction.

5.4 Governing Law; Jurisdiction; Jury Trial. All questions concerning the construction, validity, enforcement and interpretation of this Subscription Agreement 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. Each party hereby irrevocably submits to the exclusive jurisdiction of the federal courts sitting in the Southern District of New York, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address for such notices to it under this Subscription Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. Each party hereby 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 Subscription Agreement or any transaction contemplated hereby.

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

5.6 Successors And Assigns. This Subscription Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns, including any purchasers of the Shares and the Warrants. The Company shall not assign this Subscription Agreement or any rights or obligations hereunder without the prior written consent of the holders of at least a majority the Securities then outstanding, except by merger or consolidation. The Subscriber may assign some or all of its rights hereunder without the consent of the Company, provided, however, that any such assignment shall not release the Subscriber from its obligations hereunder unless such obligations are assumed by such assignee and the Company has consented to such assignment and assumption, which consent shall not be unreasonably withheld.

5.7 No Third Party Beneficiaries. This Subscription Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other person.

5.8 Survival. The representations and warranties of the Company and the Subscriber contained in Articles I and II and the agreements set forth this Article V shall survive the Final Closing for a period of two years.

5.9 Further Assurances. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other

agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Subscription Agreement and the consummation of the transactions contemplated hereby.

5.10 No Strict Construction. The language used in this Subscription Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party.

5.11 Legal Representation. The Subscriber acknowledges that: (a) it has read this Subscription Agreement and the exhibits hereto; (b) it understands that the Company has been represented in the preparation, negotiation, and execution of this Subscription Agreement by Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel to the Company; (c) it understands that the Placement Agent has been represented by Loeb & Loeb LLP, counsel to the Placement Agent, and that such counsel has not represented and is not representing the Subscriber; (d) it has either been represented in the preparation, negotiation, and execution of this Subscription Agreement by legal counsel of its own choice, or has chosen to forgo such representation by legal counsel after being advised to seek such legal representation; and (e) it understands the terms and consequences of this Subscription Agreement and is fully aware of its legal and binding effect.

5.12 Expenses of Enforcement. The Company shall pay all fees and expenses (including reasonable fees and expenses of counsel and other professionals) incurred by the Subscriber or any successor holder of Securities in enforcing any of its rights and remedies under this Subscription Agreement.

5.13 Confidentiality; Required Press Release. The Subscriber agrees that it shall keep confidential and not divulge, furnish or make accessible to anyone, the confidential information concerning or relating to the business or financial affairs of the Company, if any, contained in the Offering Documents to which it becomes privy until such information has been publicly disclosed by the Company or until such information is no longer material. The Company agrees that within two business days after the closing of this subscription, it shall either file a Current Report on Form 8-K or issue a press release, either or both of which shall set forth all of the material terms of the Placement, including pricing. In the event this Subscription Agreement is filed as an exhibit to a Current Report on Form 8-K, the signature pages and all references to the names of the Subscribers shall be redacted.

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

(a) Commonwealth is hereby appointed exclusive Placement Agent of the Company (subject to subsection (f) below and the Placement Agent’s right to have selected dealers (“Selected Dealers”) which are in good standing with the National Association of Securities Dealers (“NASD”) participate in the Placement) for the purposes of assisting the Company in finding qualified Subscribers for the Placement. The Company agrees that Ladenburg Thalmann or its affiliates may act as Selected Dealers in connection with the Placement. The offering period (the “Offering Period”) shall continue until the earlier to occur of: (i) the sale of the Maximum Offering; (ii) June 30, 2002 or (iii) such date that the Company and the Placement Agent mutually agree upon. The day that the Offering Period terminates is hereinafter referred to as the “Termination Date.” The Termination Date may be extended for up to 30 days by mutual agreement of the Placement Agent and the Company.

(b) Subject to the performance by the Company of all of its obligations to be performed under this Agreement and to the completeness and accuracy of all representations and warranties of the Company contained in this Agreement, the Placement Agent hereby accepts such agency and agrees to use its best efforts to assist the Company in finding qualified Subscribers for the Placement. Except for the foregoing, it is understood that the Placement Agent has no commitment to sell the Units.

(c) Commonwealth’s agency hereunder is not terminable by the Company except upon termination of the Offering Period, because the Per Share Purchase Price will be less than $1.00, or upon a material breach by Commonwealth of its obligations hereunder, provided further, that the sole remedy for Commonwealth in the event the Company terminates Commonwealth’s agency hereunder in violation of this provision shall be the Break-Up Fees provided for in Section 4(c) hereof.

(d) Subscriptions for Units shall be evidenced by the execution by Subscribers of the Subscription Agreement. No Subscription Agreement shall be effective unless and until it is accepted by the Company. The Placement Agent shall not have any obligation to independently verify the accuracy or completeness of any information contained in any Subscription Agreement or the authenticity, sufficiency, or validity of any check delivered by any prospective investor in payment for Units.

(e) The Placement Agent and/or its affiliates and ComVest Venture Partners, L.P. may be investors in the Placement.

(f) The Company may enter into agreements with Ladenburg Thalmann or its affiliates to serve as co-placement agent(s) on terms not more favorable than those of the Placement.

(a) Securities Law Compliance. The offer, offer for sale, and sale of the Units have not been registered under the 1933 Act. The Units are to be offered, offered for sale and sold in reliance upon the exemptions from the registration requirements of Section 5 of the 1933 Act. The Company will use its best efforts to conduct the Placement in compliance with the requirements of Regulation D of the General Rules and Regulations under the 1933 Act, and the Company will file all appropriate notices of offering with the United States Securities and Exchange Commission (the “SEC”). The Company has prepared the Offering Documents. The Offering Documents will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances in which they were made, not misleading. If at any time prior to the completion of the Placement or other termination of this Agreement any event shall occur as a result of which it might become necessary to amend or supplement the Offering Documents so that they do not include any untrue statement of any material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances then existing, not misleading, the Company will promptly notify the Placement Agent and will supply the Placement Agent with amendments or supplements correcting such statement or omission. The Company will also provide to the Placement Agent for delivery to all offerees and purchasers and their representatives, if any, any information, documents and instruments which the Placement Agent deems reasonably necessary to comply with applicable state and federal law.

(b) Organization. The Company is duly organized and validly existing in good standing under the laws of the jurisdiction in which it was organized, and has the requisite power and authorization to own its properties and to carry on its business as now being conducted. The Company is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which its ownership of property or the nature of the business conducted by it makes such qualification necessary, except to the extent that the failure to be so qualified or be in good standing would not have a Material Adverse Effect. As used in this Agreement, “Material Adverse Effect” means any event or change in circumstance, whether or not directly or indirectly caused by management or arising independently of management’s control, that has or could reasonably be deemed by the Placement Agent to have in the future, a material adverse effect on the business, properties, assets, operations, results of operations, financial condition or prospects of the Company or on the transactions contemplated hereby, or on the other Transaction Documents or the agreements and instruments to be entered into in connection herewith or therewith, or on the authority or ability of the Company to perform its obligations under the Transaction Documents. The Company does not have any operating subsidiaries and all of the non-operating subsidiaries are wholly-owned by the Company.

(c) Capitalization. The authorized, issued and outstanding capital stock of the Company prior to the consummation of the transactions contemplated hereby is set forth in Schedule 2(c). All of such outstanding shares have been and are, or upon issuance will be duly authorized, validly issued, fully paid and non-assessable. Except as disclosed in Schedule 2(c), (i) no shares of the Company’s capital stock are subject to preemptive rights under Delaware law or any other similar rights or any liens or encumbrances suffered or permitted by the Company; (ii) there are no outstanding debt securities issued by the Company; (iii) there are no outstanding options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into or exchangeable for, any shares of capital stock of the Company, or contracts, commitments, understandings or arrangements by which the

Company is or may become bound to issue additional shares of capital stock of the Company or options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into or exchangeable for, any shares of capital stock of the Company; (iv) there are no agreements or arrangements under which the Company is obligated to register the sale of any of their securities under the 1933 Act; (v) there are no outstanding securities of the Company that contain any redemption or similar provisions, and there are no contracts, commitments, understandings or arrangements by which the Company is or may become bound to redeem a security of the Company; (vi) there are no securities or instruments containing anti-dilution or similar provisions that will be triggered by the issuance of the Securities as described in the Transaction Documents that shall not have been waived prior to the Initial Closing; and (vii) the Company does not have any stock appreciation rights or “phantom stock” plans or agreements or any similar plan or agreement. All prior sales of securities of the Company were either registered under the 1933 Act and applicable state securities laws or exempt from such registration, and, to the knowledge of the Company, no security holder has any rescission rights with respect thereto.

(d) Subsidiaries and Investments. Other than as set forth in Schedule 2(d) to this Agreement, the Company has no subsidiaries, and the Company does not own, directly or indirectly, any capital stock or other equity ownership or proprietary interests in any other corporation, association, trust, partnership, joint venture or other entity.

(e) SEC Documents; Financial Statements. Since November 30, 2001, the Company has filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC pursuant to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “1934 Act”) (all of the foregoing filed prior to the date hereof and all exhibits included therein and financial statements and schedules thereto and documents incorporated by reference therein being hereinafter referred to as the “SEC Documents”). The Company has made available to the Subscriber or its representatives copies of the SEC Documents. As of their respective dates, the SEC Documents complied in all material respects with the requirements of the 1934 Act and the rules and regulations of the SEC promulgated thereunder applicable to the SEC Documents, and none of the SEC Documents, at the time they were filed with the SEC, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. As of their respective dates, the financial statements of the Company included in the SEC Documents complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto. Such financial statements have been prepared in accordance with generally accepted accounting principles, consistently applied, during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto, or (ii) in the case of unaudited interim statements, to the extent they may exclude footnotes or may be condensed or summary statements) and fairly present in all material respects the financial position of the Company as of the dates thereof and the results of its operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments that will not be material). As of the date hereof, the Company meets the requirements for the use of Form S-3 for registration of the resale of the Shares and the Warrant Shares.

(f) Absence of Changes. Since November 30, 2001, except with respect to matters of which the Company has notified the Placement Agent in writing or publicly disclosed and other than as set forth in Schedule 2(f) to this Agreement, the Company has not (i) incurred any debts, obligations or liabilities, absolute, accrued, contingent or otherwise, whether due or to become due, except current liabilities incurred in the usual and ordinary course of business and consistent with past practices, having individually or in the aggregate a Material Adverse Effect, (ii) made or suffered any changes in its contingent obligations by way of guaranty, endorsement (other than the endorsement of checks for deposit in the usual and ordinary course of business), indemnity, warranty or otherwise, (iii) discharged or satisfied any liens or paid any obligation or liability other than current liabilities shown on the balance sheet dated as of November 30, 2001, and current liabilities incurred since the date of the balance sheet dated as of November 30, 2001, in each case in the usual and ordinary course of business and consistent with past practices, (iv) mortgaged, pledged or subjected to lien any of its assets, tangible or intangible, (v) sold, transferred or leased any of its assets except in the usual and ordinary course of business and consistent with past practices, (vi) cancelled or compromised any debt or claim, or waived or released any right, of material value, (vii) suffered any physical damage, destruction or loss (whether or not covered by insurance) adversely affecting the properties, business or prospects of the Company, (viii) entered into any transaction other than in the usual and ordinary course of business except for this Agency Agreement, the other Transaction Documents and the related agreements referred to herein and therein, (ix) encountered any labor difficulties or labor union organizing activities, (x) made or granted any wage or salary increase or entered into any employment agreement, (xi) issued or sold any shares of capital stock or other securities or granted any options with respect thereto, or modified any equity security of the Company, (xii) declared or paid any dividends on or made any other distributions with respect to, or purchased or redeemed, any of its outstanding equity securities, (xiii) suffered or experienced any change in, or condition affecting, its condition (financial or otherwise), properties, assets, liabilities, business operations, results of operations or prospects other than changes, events or conditions in the usual and ordinary course of its business and consistent with past practices, having (either by itself or in conjunction with all such other changes, events and conditions) a Material Adverse Effect, (xiv) made any change in the accounting principles, methods or practices followed by it or depreciation or amortization policies or rates theretofore adopted, or (xv) entered into any agreement, or otherwise obligated itself, to do any of the foregoing.

(g) Title. Except as set forth in or contemplated by Schedule 2(g) to this Agreement, the Company has good and marketable title to all properties and assets owned by it, free and clear of all liens, charges, encumbrances or restrictions, except such as are not significant or important in relation to the Company’s business; all of the material leases and subleases under which the Company is the lessor or sublessor of properties or assets or under which the Company holds properties or assets as lessee or sublessee are in full force and effect, and the Company is not in default in any material respect with respect to any of the terms or provisions of any of such leases or subleases, and no material claim has been asserted by anyone adverse to rights of the Company as lessor, sublessor, lessee or sublessee under any of the leases or subleases mentioned above, or affecting or questioning the right of the Company to continued possession of the leased or subleased premises or assets under any such lease or sublease. The Company owns or leases all such properties as are necessary to its operations as described in the Offering Documents.

(h) Proprietary Rights. To the Company’s knowledge after due investigation, the Company owns, or is duly licensed to use or possess, or possesses exclusive and enforceable rights to use all patents, patent applications, trademarks, service marks, copyrights, trade secrets, processes, formulations, technology or know-how used in the conduct of its business (the “Proprietary Rights”). Except as set forth on Schedule 2(h) to this Agreement, the Company has not received any notice of any claims, nor does it have any knowledge of any threatened claims, and knows of no facts which would form the basis of any claim, asserted by any person to the effect that the sale or use of any product or process now used or offered by the Company or proposed to be used or offered by the Company infringes on any patents or infringes upon the use of any such Proprietary Rights of another person and, to the best of the Company’s knowledge, no others have infringed the Company’s Proprietary Rights.

(i) Litigation. Except as set forth in or contemplated by Schedule 2(i) to this Agreement, there is no material action, suit, investigation, customer complaint, claim or proceeding at law or in equity by or before any arbitrator, court, governmental instrumentality or agency, self-regulatory organization or body or public board now pending or, to the knowledge of the Company, threatened against the Company of any of the Company’s officers or directors in their capacities as such (or basis therefor known to the Company), the adverse outcome of which would have a Material Adverse Effect. The Company is not subject to any judgment, order, writ, injunction or decree of any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign that have a Material Adverse Effect.

(j) Non-Defaults; Non-Contravention. Except as set forth in or contemplated by Schedule 2(j) to this Agreement, the Company is not in violation of or default under, nor will the execution and delivery of this Agreement or any of the Transaction Documents or consummation of the transactions contemplated herein or therein result in a violation of or constitute a default in the performance or observance of any obligation under: (i) its Certificate of Incorporation, or its By-laws; or (ii) any indenture, mortgage, contract, material purchase order or other agreement or instrument to which the Company is a party or by which it or its property is bound, where such violation or default would have a Material Adverse Effect; or (iii) any material order, writ, injunction or decree of any court of any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, where such violation or default would have a Material Adverse Effect, and there exists no condition, event or act that constitutes, nor which after notice, the lapse of time or both, could constitute a default under any of the foregoing, which in either case would have a Material Adverse Effect.

(k) Taxes. The Company has filed all tax returns that are required to be filed by it or otherwise met its disclosure obligations to the relevant agencies and all such returns are true and correct. The Company has paid or adequately provided for all tax liabilities of the Company as reflected on such returns or pursuant to any assessments received by it or that it is obligated to withhold from amounts owing to any employee, creditor or third party. The Company has properly accrued all taxes required to be accrued by GAAP consistently applied. The income tax returns of the Company have never been audited by any government or regulatory authorities. The Company has not waived any statute of limitations with respect to taxes or agreed to any extension of time with respect to any tax assessment or deficiency.

(l) Compliance With Laws; Licenses, Etc. The Company has not received notice of any violation of or noncompliance with any laws, ordinances, regulations and orders applicable to its business that would have a Material Adverse Effect and that has not been cured. The Company has all material licenses and permits and other governmental certificates, authorizations and permits and approvals (collectively, “Licenses”) required by every government or regulatory body for the operation of its business as currently conducted and the use of its properties. The Licenses are in full force and effect and to the Company’s knowledge no violations currently exist in respect of any License and no proceeding is pending or threatened to revoke or limit any thereof.

(m) Authorization of Agreement, Etc. The Company has the requisite corporate power and authority to enter into and perform its obligations under this Agreement and the other Transaction Documents. The execution and delivery of the Transaction Documents by the Company and the consummation by the Company of the transactions contemplated by the Transaction Documents have been duly authorized by the Board and no further consent or authorization is required by the Company, the Board or the Company’s stockholders. The Transaction Documents have been duly executed and delivered by the Company, and constitute valid and binding obligations of the Company enforceable against the Company in accordance with their terms, except as such enforceability may be limited by general principles of equity or applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally, the enforcement of creditors’ rights and remedies.

(n) Authorization of Securities. The issuance, sale and delivery of the Notes, the Shares, the Warrants, and the Agent’s Warrants (as defined herein) shall, prior to the Initial Closing, have been duly authorized by all requisite corporate action of the Company. When so issued, sold and delivered in accordance with the Transaction Documents for the consideration set forth therein, the Notes, the Shares, the Warrants, and the Agent’s Warrants will be duly executed, issued and delivered and will constitute valid and legal obligations of the Company enforceable in accordance with their respective terms and, in each case, will not be subject to preemptive or any other similar rights of the stockholders of the Company or others which rights shall not have been waived prior to the Initial Closing.

(o) Authorization of Reserved Shares. The issuance, sale and delivery by the Company of the common shares issuable upon exercise of the Warrants and the Agent’s Warrants (the “Reserved Shares”) shall, prior to the Initial Closing, have been duly authorized by all requisite corporate action of the Company, and the Reserved Shares shall (to the extent permissible out of the authorized capital of the Company), prior to the Initial Closing, have been duly reserved for issuance upon exercise of all or any of the Warrants and Agent’s Warrants and when so issued, sold, paid for and delivered for the consideration set forth in the Transaction Documents, the Reserved Shares will be validly issued and outstanding, fully paid and nonassessable, and not subject to preemptive or any other similar rights of the stockholders of the Company or others which rights shall not have been waived prior to the Initial Closing.

(p) Exemption from Registration. Assuming (i) the accuracy of the information provided by the respective Subscribers in the Subscription Documents and (ii) that the Placement Agent has complied in all material respects with the provisions of Regulation D promulgated under the 1933 Act, the offer and sale of the Units pursuant to the terms of this

Agreement are exempt from the registration requirements of the 1933 Act and the rules and regulations promulgated thereunder. The Company is not disqualified from the exemption under Regulation D by virtue of the disqualifications contained in Rule 505(b)(2)(iii) or Rule 507 promulgated thereunder.

(q) Registration Rights. Except as set forth in or contemplated by Schedule 2(c) to this Agreement, no person has any right to cause the Company to effect registration under the 1933 Act of any securities of the Company.

(r) Brokers. Neither the Company nor any of its officers, directors, employees or stockholders has employed any broker or finder in connection with the transactions contemplated by this Agreement other than the Placement Agent, and Ladenburg Thalmann.

(s) Title to Securities. When certificates representing the Notes, the Shares and the Warrants have been duly delivered to the purchasers participating in the Placement and payment shall have been made therefor, the several purchasers shall receive from the Company good and marketable title to such securities free and clear of all liens, encumbrances and claims whatsoever (with the exception of claims arising through the acts or omissions of the purchasers and except as arising from applicable federal and state securities laws), and the Company shall have paid all taxes, if any, in respect of the original issuance thereof.

(t) Application of Takeover Protections; Rights Agreement. The Company and the Board have taken all necessary action, if any, in order to render inapplicable any control share acquisition, business combination, poison pill (including any distribution under a rights agreement) or other similar anti-takeover provision under the Certificate of Incorporation or the laws of the state of its incorporation which is or could become applicable to the Subscriber as a result of the transactions contemplated by this Agency Agreement, including without limitation, the Company’s issuance of the Securities and the Subscriber’s ownership of the Securities. The Company has not adopted a shareholder rights plan or similar arrangement relating to accumulations of beneficial ownership of Common Stock or a change in control of the Company.

(u) Right of First Refusal. No person, firm or other business entity is a party to any agreement, contract or understanding, written or oral entitling such party to a right of first refusal with respect to offerings by the Company.

(v) Exchange Listing. The Company’s Common Stock has been designated for quotation or listed on the Nasdaq National Market (“Nasdaq”), trading in the Common Stock has not been suspended by the SEC or Nasdaq and the Company has received no communication, written or oral, from the SEC or Nasdaq regarding the suspension or delisting of the Common Stock from Nasdaq. Except as disclosed on Schedule 2(v), the Company is not in violation of the listing requirements of Nasdaq as in effect on the date hereof and has no actual knowledge of any facts which would reasonably lead to delisting or suspension of the Common Stock by Nasdaq in the foreseeable future.

(w) Consents. Except as contemplated by this Agreement, the Company is not required to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency or any regulatory or self-regulatory agency in order for it to

execute, deliver or perform any of its obligations under or contemplated by the Transaction Documents. Except as otherwise provided in the Transaction Documents, all consents, authorizations, orders, filings and registrations that the Company is required to obtain pursuant to the preceding sentence have been obtained or effected on or prior to the date hereof. The Company is unaware of any facts or circumstances that might prevent the Company from obtaining or effecting any of the foregoing.

(x) No General Solicitation. None of the Company, any of its affiliates, and any person acting on its behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D under the 1933 Act) in connection with the offer or sale of the Securities.

(y) No Integrated Offering. None of the Company, any of its affiliates, and any person acting on its behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under circumstances that would require registration of the Securities under the 1933 Act or cause the Placement to be integrated with prior offerings by the Company for purposes of the 1933 Act or any applicable stockholder approval provisions, including without limitation, under the rules and regulations of any exchange or automated quotation system on which any of the securities of the Company are listed or designated. None of the Company, its affiliates and any person acting on its behalf will take any action or steps referred to in the preceding sentence that would require registration of any of the Securities under the 1933 Act or cause the Placement to be integrated with other offerings.

(z) Foreign Corrupt Practices. Neither the Company nor any director, officer, agent, employee or other person acting on behalf of the Company has, in the course of its actions for, or on behalf of, the Company, (i) used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expenses relating to political activity; made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds, (ii) violated or is in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977, as amended, or (iii) made any unlawful bribe, rebate, payoff, influence payment, kickback or other unlawful payment to any foreign or domestic government official or employee.

(a) Closing of the Placement. Provided the Minimum Offering shall have been subscribed for and funds representing the sale thereof shall have cleared, the Initial Closing of the Placement shall take place at the offices of the Placement Agent, 830 Third Avenue, New York, New York no later than three business days following the Termination Date, which closing date may be accelerated or adjourned by agreement between the Company and the Placement Agent (the “Closing Date”). In addition, subsequent closings of the Placement (if applicable) may be scheduled at the discretion of the Company and Placement Agent, each of which shall be deemed a “Closing” hereunder. At each Closing, payment for the Units issued and sold by the Company shall be made against delivery of the Shares and Warrants comprising the Share Units or the Notes and Warrants comprising the Note Units.

(b) Conditions to Placement Agent’s Obligations. The obligations of the Placement Agent hereunder with respect to the Placement will be subject to the accuracy of the representations and warranties of the Company herein contained as of the date hereof and as of each Closing, to the performance by the Company of its obligations hereunder and to the following additional conditions:

(c) Conditions to Company’s Obligations. The obligations of the Company hereunder with respect to the Placement will be subject to the following conditions:

(d) Blue Sky. Counsel to the Placement Agent will prepare and file the necessary documents so that offers and sales of the securities to be offered in the Placement may be made in certain jurisdictions. It is understood that such filings may be based on or rely upon: (i) the representations of each Subscriber set forth in the Subscription Agreement delivered by such Subscriber; (ii) the representations, warranties and agreements of the Company set forth in Section 2 of this Agreement; and (iii) the representations of the Company set forth in the

13 certificate to be delivered at each closing pursuant to paragraph (vi) of Section 3(b). Counsel to the Placement Agent shall advise the Company as to which jurisdictions offers and sales of the Securities have been made.

(e) Placement Fee and Expenses.

(f) Bring–Down Opinions and Certificates. If there is more than one Closing, then at each such Closing there shall be delivered to the Placement Agent updated opinions and certificates as described in (v) and (vi) of Section 3(b) above, respectively.

(g) No Adverse Changes. There shall not have occurred, at any time prior to the applicable Closing (i) any domestic or international event, act or occurrence that has

14 materially disrupted, or in the Placement Agent’s opinion will in the immediate future materially disrupt, the securities markets; (ii) a general suspension of, or a general limitation on prices for, trading in securities on the New York Stock Exchange, the Nasdaq - Amex Stock Exchange or the TSE; (iii) any outbreak of major hostilities or other national or international calamity; (iv) any banking moratorium declared by a state or federal authority; (v) any moratorium declared in foreign exchange trading by major international banks or other persons; (vi) any material interruption in the mail service or other means of communication within the United States; (vii) any material adverse change in the business, properties, assets, results of operations, or financial condition of the Company; or (viii) any change in the market for securities in general or in political, financial, or economic conditions which, in the Placement Agent’s reasonable judgment, makes it inadvisable to proceed with the Placement.

(a) Use of Proceeds. The net proceeds of the Placement will be used for general working capital purposes. Other than as set forth on Schedule 4(a) to this Agreement, the Company shall not use any of the proceeds from the Placement to repay any indebtedness of the Company (other than trade payables in the ordinary course), including but not limited to indebtedness to any current executive officers, directors or principal stockholders of the Company.

(b) Expenses of Offering. The Company shall be responsible for, and shall bear all expenses directly incurred in connection with, the Placement, including, but not limited to, (A) legal fees of the Company’s counsel relating to the costs of preparing the Offering Documents and all amendments, supplements and exhibits thereto and preparing and delivering all Placement Agent and selling documents, Share and Warrant certificates; and (B) blue sky fees, filing fees and the reasonable fees and disbursements of Placement Agent’s counsel in connection with blue sky matters (the “Company Expenses”). The Company shall also be responsible for its own expenses incurred in connection with the Placement, including, without limitation, legal and accounting fees and travel and lodging expenses in connection with the roadshow or other investor presentations, and shall also be responsible for all printing expenses for the executive overview and other supporting documents. In addition, the Company shall reimburse the Placement Agent, upon presentation of appropriate receipts or invoices, for up to $50,000 of its reasonable out-of-pocket expenses incurred in connection with the Placement, including, without limitation, the Placement Agent’s mailing, printing, copying, telephone, travel, background searches, due diligence investigations, legal and consulting fees or other similar expenses (the “Placement Agent Expenses”).

(c) Break-Up Fee. If the Company decides not to proceed with the Placement for any reason (other than the Placement Agent’s failure to complete the Minimum Offering prior to the Minimum Deadline (as defined below) or because the Per Share Purchase Price will be less than $1.00) or if the Placement Agent decides not to proceed with the Placement because of a material breach by the Company of its representations, warranties, or covenants in this Agreement, the Company will be obligated to pay the Placement Agent liquidated damages of $350,000, payable at the Company’s option (the “Payment Option”) either in cash or in shares of Common Stock valued at the average closing price of the Common Stock for the 20 consecutive trading days immediately prior to the decision not to proceed and to reimburse the Placement

Agent for the Placement Agent Expenses (collectively, the “Break-Up Fee”); provided, however, that if the Company decides not to proceed with the Placement and either prior thereto or within 90 days thereafter completes a Sale Transaction, the Company shall be obligated to pay the Placement Agent the Break-Up Fee in cash irregardless of the Per Share Purchase Price or the Placement Agent’s ability to complete the Minimum Offering prior to the Minimum Deadline. The Company must exercise the Payment Option within 24 hours after the decision not to proceed with the Placement. In the event the Company fails to notify the Placement Agent of its option with the 24-hour time period, the method of payment of the break-up fee shall be at the sole discretion of the Placement Agent. The Placement Agent shall have no liability to the Company for any reason should the Placement Agent choose not to proceed with the Placement. For purposes of the Break-Up Fee only, the closing of the Minimum Offering shall take place no later than (x) two (2) business days after the closing of the Sale Transaction or (y) two (2) business days after the Company notifies the Placement Agent in writing that the Company will not be consummating a Sale Transaction (the “Minimum Deadline”); provided, however, that in no event shall the Minimum Deadline be earlier than May 24, 2002. Any amounts the Company pays to the Placement Agent under this section shall be credited towards any future fees payable to the Placement Agent or its affiliates for assisting the Company with a future transaction

(d) Notification. The Company shall notify the Placement Agent immediately, and in writing, (i) when any event shall have occurred during the period commencing on the date hereof and ending on the later of the last Closing or the Termination Date as a result of which the Offering Documents would include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and (ii) of the receipt of any notification with respect to the modification, rescission, withdrawal or suspension of the qualification or registration of the Units, or of any exemption from such registration or qualification, in any jurisdiction, as applicable. The Company will use its best efforts to prevent the issuance of any such modification, rescission, withdrawal or suspension and, if any such modification, rescission, withdrawal or suspension is issued and the Placement Agent so requests, to obtain the lifting thereof as promptly as possible.

(e) Blue Sky. The Company will use its best efforts to assist the Placement Agent to qualify or register the Securities for offering and sale under, or establish an exemption from such qualification or registration under, the securities or “blue sky” laws of such jurisdictions as the Company may reasonably request; provided however, that the Company will not be obligated to qualify as a dealer in securities in any jurisdiction in which it is not so qualified. The Company will not consummate any sale of Securities in any jurisdiction in which it is not so qualified or in any manner in which such sale may not be lawfully made.

(f) Form D Filing. The Company shall file five copies of a Notice of Sales of Securities on Form D with the SEC no later than 15 days after the first issuance of the Units. The Company shall file promptly such amendments to such Notices on Form D as shall become necessary and shall also comply with any filing requirement imposed by the laws of any state or jurisdiction in which offers and sales are made. The Company shall furnish the Placement Agent with copies of all such filings.

(g) Press Releases, Etc. The Company shall not, during the period commencing on the date hereof and ending on the later of the last Closing or Termination Date, issue any press release or other communication, or hold any press conference with respect to the Company, its financial condition, results of operations, business, properties, assets, or liabilities, without the prior consent of the Placement Agent, which consent shall not be unreasonably withheld, provided, however, the Company may issue any such releases which in the reasonable opinion of counsel to the Company are required for compliance with applicable legal and regulatory requirements. Furthermore, the Company shall not at any time include information with respect to the Placement or use the Placement Agent’s name in any press release, advertisement or on any website maintained by the Company without the prior written consent of the Placement Agent, which consent, with respect to information regarding the Placement only, shall not be unreasonably withheld.

(h) Shareholder Meeting; Redemption of Warrants. In the event that the Placement consists of Note Units, the Company shall use its best efforts to obtain, within 60 days following the Initial Closing, shareholder approval of (i) the terms and conditions of the Placement, including the Per Share Purchase Price, (ii) the conversion of the Bridge Notes into an investment in the Placement and (ii) the issuance of securities, including the Warrants and the Agent’s Warrants, to the Placement Agent or any of its affiliated persons or entities.

(i) Resale Registration. The Company shall file a registration statement with the SEC covering the resale of the Shares and the Reserved Shares pursuant to the terms of the Registration Rights Agreement.

(j) Appointment of Directors. In the event the Bridge Notes are not repaid in full prior to the Termination Date, the Board shall appoint two designees of the Placement Agent reasonably acceptable to the Board to fill the vacancies left by the resignations, prior to the date of this Agreement, of Michael Falk and Lee Provow.

(a) The Company agrees to indemnify and hold harmless the Placement Agent and each Selected Dealer, if any, and their respective shareholders, directors, officers, agents and controlling persons (an “Indemnified Party”) against any and all loss, liability, claim, damage and expense whatsoever (and all actions in respect thereof), and to reimburse the Placement Agent for reasonable legal fees and related expenses as incurred (including, but not limited to the costs of investigating, preparing or defending any such action or claim whether or not in connection with litigation in which the Placement Agent is a party and the costs of giving testimony or furnishing documents in response to a subpoena or otherwise), arising out of (i) any untrue statement or alleged untrue statement of a material fact contained in the Transaction Documents or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading (provided, however, that the Company shall not be liable in any such case to the extent that any such loss, liability, claim, damage or expense arises out of or is based upon any untrue statement of a material fact or alleged untrue statement or a material fact provided by the Placement Agent in writing to the Company specifically for use in the Transaction Documents), (ii) any violation by the Company of the federal securities laws or the securities laws of any

states, or otherwise arising out of the Placement Agent’s engagement hereunder, except in respect of any matters as to which the Placement Agent shall have been adjudicated to have acted with gross negligence, or (iii) any breach by the Company of any of its representations, warranties or covenants contained in this Agency Agreement.

(b) Promptly after receipt by an Indemnified Party under this Section of notice of the commencement of any action, the Indemnified Party will, if a claim in respect thereof is to be made against the Company under this Section, notify in writing the Company of the commencement thereof; but the omission so to notify the Company will not relieve it from any liability which it may have to the Indemnified Party otherwise than under this Section except to the extent the defense of the claim is prejudiced. In case any such action is brought against an Indemnified Party, and it notifies the Company of the commencement thereof, the Company will be entitled to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, subject to the provisions herein stated, with counsel reasonably satisfactory to the Indemnified Party, and after notice from the Company to the Indemnified Party of its election so to assume the defense thereof, the Company will not be liable to the Indemnified Party under this Section for any legal or other expenses subsequently incurred by the Indemnified Party in connection with the defense thereof other than reasonable costs of investigation (provided the Company has been advised in writing that such investigation is being undertaken). The Indemnified Party shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such counsel shall not be at the expense of the Company if the Company has assumed the defense of the action with counsel reasonably satisfactory to the Indemnified Party; provided that the fees and expenses of such counsel shall be at the expense of the Company if (i) the employment of such counsel has been specifically authorized in writing by the Company or (ii) the named parties to any such action (including any impleaded parties) include both the Indemnified Party or Parties and the Company and, in the reasonable judgment of counsel for the Indemnified Party as expressed in writing to the Indemnified Party and the Company, it is advisable for the Indemnified Party or Parties to be represented by separate counsel due to an actual conflict of interest (in which case the Company shall not have the right to assume the defense of such action on behalf of an Indemnified Party or Parties), it being understood, however, that the Company shall not, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of more than one separate firm of attorneys for all the Indemnified Parties. No settlement of any action against an Indemnified Party shall be made without the Company’s consent (which shall not be unreasonably withheld) unless such an Indemnified Party is fully and completely released in connection therewith.

(a) Survival. Any termination of the Placement in accordance with the terms of this Agreement without consummation thereof shall be without obligation on the part of any party except that the indemnification provided in Section 5 hereof and the contribution provided in Section 6 hereof shall survive any termination and shall survive the later of the final Closing of the Placement or the Termination Date for a period of two years.

(b) Representations, Warranties and Covenants to Survive Delivery. The respective representations, warranties, indemnities, agreements, covenants and other statements as of the date hereof shall survive execution of this Agreement and delivery of the Units and the termination of this Agreement for a period of two years after such respective event.

(c) No Other Beneficiaries. This Agreement is intended for the sole and exclusive benefit of the parties hereto and their respective successors and controlling persons, and no other person, firm or corporation shall have any third-party beneficiary or other rights hereunder.

(d) Governing Law; Resolution of Disputes. This Agreement shall be governed by and construed in accordance with the law of the State of New York without regard to conflict of law provisions. The Placement Agent and the Company will attempt to settle any

claim or controversy arising out of this Agreement through consultation and negotiation in good faith and a spirit of mutual cooperation. Should such attempts fail, then the dispute will be mediated by a mutually acceptable mediator to be chosen by the Placement Agent and the Company within 15 days after written notice from either party demanding mediation. Neither party may unreasonably withhold consent to the selection of a mediator, and the parties will share the costs of the mediation equally. Any dispute which the parties cannot resolve through negotiation or mediation within six months of the date of the initial demand for it by one of the parties may then be submitted to the courts for resolution, in which event each of the parties hereto hereby irrevocably submits to the non-exclusive jurisdiction of the state and federal courts sitting in the Southern District of New York, 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. The use of mediation will not be construed under the doctrine of latches, waiver or estoppel to affect adversely the rights of either party. Nothing in this paragraph will prevent either party from resorting to judicial proceedings if (a) good faith efforts to resolve the dispute under these procedures have been unsuccessful or (b) interim relief from a court is necessary to prevent serious and irreparable injury.

(e) Counterparts. This Agreement may be signed in counterparts with the same effect as if both parties had signed one and the same instrument.

(f) Notices. Any communications specifically required hereunder to be in writing, if sent to the Placement Agent, will be sent by overnight courier providing a receipt of delivery or by certified or registered mail to it at Commonwealth Associates, 830 Third Avenue, New York, New York 10022, Att: Carl Kleidman, with a copy to Loeb & Loeb LLP, 345 Park Avenue, New York, New York 10154, Att: Fran Stoller and if sent to the Company, will be sent by overnight courier providing a receipt of delivery or by certified or registered mail to it at 25 Orinda Way, Orinda, California 94563, Att: John Moss, with a copy to Wilson, Sonsini, Goodrich & Rosati, Professional Corporation, 650 Page Mill Road, Palo Alto, California 94304, Attention: Adam R. Dolinko.

(g) Entire Agreement. This Agreement constitutes the entire agreement of the parties with respect to the matters herein referred and supersedes all prior agreements and understandings, written and oral, between the parties with respect to the subject matter hereof. Neither this Agreement nor any term hereof may be changed, waived or terminated orally, except by an instrument in writing signed by the party against which enforcement of the change, waiver or termination is sought.

(1) other or additional stock or other securities or property (other than cash) by way of dividend,

(2) any cash or other property paid or payable out of any source other than retained earnings (determined in accordance with generally accepted accounting principles), or

(3) other or additional stock or other securities or property (including cash) by way of stock-split, spin-off, reclassification, combination of shares or similar corporate rearrangement,

(1) If at any time or from time to time during the twelve-month period immediately following the Initial Warrant Exercise Date , the Company issues or sells, or is deemed by the express provisions of this Section 8(c) to have issued or sold, Additional Shares of Common Stock (as hereinafter defined), other than as a dividend or other distribution on any class of stock as provided in Section 8(d) and other than upon a subdivision or combination of shares of Common Stock as provided in Section 8(e), for an Effective Price (as hereinafter defined) less than the Exercise Price or, if an adjustment in the Exercise Price has theretofore been made, then less than the existing Exercise Price, then and in each such case

(2) For the purpose of making any adjustment required under this Section 8(c), the consideration received by the Company for any issue or sale of securities shall (i) to the extent it consists of cash be computed at the amount of cash received by the Company, (ii) to the extent it consists of property other than cash, be computed at the fair value of that property as determined in good faith by the Board, (iii) if Additional Shares of Common Stock, Convertible Securities (as hereinafter defined) or rights or options to purchase either Additional Shares of Common Stock or Convertible Securities are issued or sold together with other stock or securities or other assets of the Company for a consideration which covers both, be computed as the portion of the consideration so received that may be reasonably determined in good faith by the Board to be allocable to such Additional Shares of Common Stock, Convertible Securities or rights or options, and (iv) be computed after reduction for all expenses payable by the Company in connection with such issue or sale.

(3) For the purpose of the adjustment required under this Section 8(c), if the Company issues or sells any rights or options for the purchase of, or stock or other securities convertible into or exchangeable for, Additional Shares of Common Stock (such convertible or exchangeable stock or securities being hereinafter referred to as “Convertible Securities”) and if the Effective Price of such Additional Shares of Common Stock is less than the Exercise Price then in effect, then in each case the Company shall be deemed to have issued at the time of the issuance of such rights or options or Convertible Securities the maximum number of Additional Shares of Common Stock issuable upon exercise,

conversion or exchange thereof and to have received as consideration for the issuance of such shares an amount equal to the total amount of the consideration, if any, received by the Company for the issuance of such rights or options or Convertible Securities, plus, in the case of such rights or options, the minimum amounts of consideration, if any, payable to the Company upon the exercise of such rights or options, plus, in the case of Convertible Securities, the minimum amounts of consideration, if any, payable to the Company (other than by cancellation of liabilities or obligations evidenced by such Convertible Securities) upon the conversion or exchange thereof. No further adjustment of the Exercise Price, adjusted upon the issuance of such rights, options or Convertible Securities, shall be made as a result of the actual issuance of Additional Shares of Common Stock on the exercise of any such rights or options or the conversion or exchange of any such Convertible Securities. If any such rights or options or the conversion or exchange privilege represented by any such Convertible Securities shall expire without having been exercised, the Exercise Price adjusted upon the issuance of such rights, options or Convertible Securities shall be readjusted to the Exercise Price which would have been in effect had an adjustment been made on the basis that the only Additional Shares of Common Stock so issued were the Additional Shares of Common Stock, if any, actually issued or sold on the exercise of such rights or options or rights of conversion or exchange of such Convertible Securities, and such Additional Shares of Common Stock, if any, were issued or sold for the consideration actually received by the Company upon such exercise, plus the consideration, if any, actually received by the Company for the granting of all such rights or options, whether or not exercised, plus the consideration received for issuing or selling the Convertible Securities actually converted or exchanged, plus the consideration, if any, actually received by the Company (other than by cancellation of liabilities or obligations evidenced by such Convertible Securities) on the conversion or exchange of such Convertible Securities.

(4) For the purpose of the adjustment required under this Section 8(c), if the Company issues or sells, or is deemed by the express provisions of this subsection to have issued or sold, any rights or options for the purchase of Convertible Securities and if the Effective Price of the Additional Shares of Common Stock underlying such Convertible Securities is less than the Exercise Price then in effect, then in each such case the Company shall be deemed to have issued at the time of the issuance of such rights or options the maximum number of Additional Shares of Common Stock issuable upon conversion or exchange of the total amount of Convertible Securities covered by such rights or options and to have received as consideration for the issuance of such Additional Shares of Common Stock an amount equal to the amount of consideration, if any, received by the Company for the issuance of such rights or options, plus the minimum amounts of consideration, if any, payable to the Company upon the exercise of such rights or options and plus the minimum amount of consideration, if any, payable to the Company (other than by cancellation of liabilities or obligations evidenced by such Convertible Securities) upon the conversion or exchange of such Convertible Securities. No further adjustment of the Exercise Price, adjusted upon the issuance of such rights or options, shall be made as a result of the actual

issuance of the Convertible Securities upon the exercise of such rights or options or upon the actual issuance of Additional Shares of Common Stock upon the conversion or exchange of such Convertible Securities. The provisions of paragraph (3) above for the readjustment of the Exercise Price upon the expiration of rights or options or the rights of conversion or exchange of Convertible Securities shall apply mutatis mutandis to the rights, options and Convertible Securities referred to in this paragraph (4).

(5) “Additional Shares of Common Stock” shall mean all shares of Common Stock issued by the Company on or after the Initial Warrant Exercise Date, whether or not subsequently reacquired or retired by the Company other than (i) shares of Common Stock issued upon conversion of the Series A Preferred and the Series B Preferred in accordance with the Company’s certificate of incorporation, (ii) shares of Common Stock issuable upon exercise of the Warrants, the Series B Warrants, the warrants issued by the Company in April, 2001 (the “April 2001 Warrants”) and the warrants issued by the Company on August 31, 2001 (the “August 2001 Warrants”) (iii) shares of Common Stock issuable upon exercise of warrants to purchase Common Stock issued and outstanding as of the Initial Warrant Exercise Date (provided that the exercise price and other terms of such warrants are not modified after the Initial Warrant Exercise Date to adjust the exercise price), (iv) shares of Common Stock issued to individuals who are or were employees or directors of or consultants and advisors to the Company or any subsidiary pursuant to stock purchases or stock option plans or other arrangements approved by the compensation committee of the Board or pursuant to guidelines approved by the compensation committee of the Board and not vetoed by the Director designated by the holders of the Series B Preferred, (v) shares of Common Stock issued in connection with bona fide acquisitions, mergers, joint ventures and other similar transactions approved by the Board (provided the primary purpose of such transaction is not to raise capital) and (vi) shares of Common Stock issued pursuant to any event for which adjustment is made to the conversion price under the anti-dilution provisions provided for in Section 3(d) of the Company’s certificate of designations for the Series B Preferred (the “Series B Designation”), or to the Exercise Price under the anti-dilution provisions under this Section 8, Section 4 of the April 2001 Warrants, Section 4 of the August 2001 Warrants or Section 4 of the Series B Warrants. The “Effective Price” of Additional Shares of Common Stock shall mean the quotient determined by dividing the total number of Additional Shares of Common Stock issued or sold, or deemed to have been issued or sold by the Company under this Section 8(c), into the aggregate consideration received, or deemed to have been received, by the Company for such issue under this Section 8(c), for such Additional Shares of Common Stock. “Other Securities” with respect to an issue or sale of Additional Shares of Common Stock shall mean (1) Convertible Securities (other than the Series B Preferred and the Series A Preferred (provided that the terms of the Series A Preferred are not modified after the Initial Warrant Exercise Date to adjust the conversion price thereof), and (2) the Series B Warrants, the April 2001 Warrants, the August 2001 Warrants and the Warrants); “the number of shares of Common Stock underlying Other Securities” on a particular date shall mean the number of shares of Common

Stock issuable upon the exercise, conversion or exchange, as the case may be, of such Other Securities at the close of business on such date.

(6) Any reduction in the conversion price of any Convertible Security, whether outstanding on the Initial Warrant Exercise Date or thereafter, or the subscription price of any option, warrant or right to purchase Common Stock or any Convertible Security (whether such option, warrant or right is outstanding on the Initial Warrant Exercise Date or thereafter), to an Effective Price less than the then Exercise Price shall be deemed to be an issuance of such Convertible Security and the issuance of all such options, warrants or subscription rights, and the provisions of Section 8(c).(3), (4) and (5) shall apply thereto mutatis mutandis.

(7) Dilution in Case of Other Stock or Securities. In case any shares of stock or other securities, other than Common Stock of the Company, shall at the time be receivable upon the exercise of the Warrants, and in case any additional shares of such stock or any additional such securities (or any stock or other securities convertible into or exchangeable for any such stock or securities) shall be issued or sold for a consideration per share such as to dilute the purchase rights evidenced by the Warrants, then and in each such case the Exercise Price shall forthwith be adjusted, substantially in the manner provided for above in this Section 8(c), so as to protect the Holders of the Warrants against the effect of such dilution.

(8) Record Date Deemed Date of Issuance. In case the Company shall take a record of the holders of shares of its stock of any class for the purpose of entitling them (a) to receive a dividend or a distribution payable in Common Stock or in Convertible Securities, or (b) to subscribe for, purchase or otherwise acquire Common Stock or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the Additional Shares of Common Stock issued or sold or deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution, or the date of the granting of such rights of subscription, purchase or other acquisition, as the case may be.

(9) No adjustment in the Exercise Price shall be required unless such adjustment would require an increase or decrease of at least one cent ($0.01) in such price; provided, however, that any adjustments which by reason of this Section 8 are not required to be made shall be carried forward and taken into account in any subsequent adjustment required to be made hereunder. All calculations under this Section 8 shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be.

(1) the Exercise Price then in effect shall be decreased as of the time of such issuance or, in the event such record date is fixed, as of the close of business on such record date, by multiplying the Exercise Price then in effect by a fraction (A) the numerator of which is the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and (B) the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date as the case may be, plus the number of shares of Common Stock issuable in payment of such dividend or distribution; provided, however, that if such record date is fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Exercise Price shall be recomputed accordingly as of the close of business on such record date, and thereafter the Exercise Price shall be adjusted pursuant to this Section 8(d) as of the time of actual payment of such dividends or distributions; and

(2) the number of shares of Common Stock theretofore receivable upon the exercise of this Warrant shall be increased, as of the time of such issuance or, in the event such record date is fixed, as of the close of business on such record date, in inverse proportion to the decrease in the Exercise Price thereof.

(i) Due Qualification or Exemption. (A) The Placement will become qualified or be exempt from qualification under the securities laws of the several states pursuant to paragraph 4(d) below not later than the Closing Date, and (B) at the Closing Date no stop order suspending the sale of the Units shall have been issued, and no proceeding for that purpose shall have been initiated or threatened;

(ii) No Material Misstatements. Neither the Blue Sky qualification materials nor the Offering Documents, nor any supplement thereto, will contain any untrue statement of a fact which in the opinion of the Placement Agent is material, or omits to state a fact which is material and is required to be stated therein, or is necessary to make the statements therein, in light of the circumstances under which they were made, not misleading;

(iii) Compliance with Agreements. The Company will have complied with all agreements and satisfied all conditions on its part to be performed or satisfied hereunder at or prior to each Closing;

(iv) Corporate Action. The Company will have taken all necessary corporate action, including, without limitation, obtaining the approval of the Company’s board of directors (the “Board”), for the execution and delivery of this Agreement and the other Offering Documents required to be entered into at or prior to such Closing, the performance by the Company of its obligations hereunder and thereunder and the Placement;

(v) Opinion of Counsel. The Placement Agent shall receive the opinion of Wilson, Sonsini, Goodrich & Rosati, Professional Corporation, counsel to the Company, dated the Closing(s), substantially to the effect that:

(vi) Officers’ Certificate. The Placement Agent shall receive a certificate of the Company, signed by the Chief Executive Officer and Chief Financial Officer thereof, that the representations and warranties contained in Section 2 hereof are true and accurate in all material respects at such closing with the same effect as though expressly made at such closing.

(vii) Due Diligence. The Placement Agent shall have completed and been satisfied with the results of its due diligence investigation of the Company, including, without limitation, the Company’s financial statements, expense budgets, business prospects, capital structure and contractual arrangements.

(viii) Transaction Documents. The Placement Agent shall have received duly executed copies of the Warrant Agreement, the Registration Rights Agreement and the Security Agreement.

(ix) Fund Escrow Agreement. The Placement Agent shall have received a copy of a duly executed escrow agreement in the form previously delivered to the Company regarding the deposit of funds pending the closing(s) of the Placement with a bank or trust company acceptable to the Placement Agent (the “Fund Escrow Agreement”).

(x) Shareholder Meeting; Proxies. In the event that the Placement consists of Note Units, the Placement Agent shall have received evidence satisfactory to it from the Company that the Company has initiated the obtaining of the Approval. In addition, to the extent permitted by federal and state securities laws, the Company shall have received proxies from each of the executive officers and directors of the Company agreeing to vote in favor of the Approval.

(i) Bridge Note Amendment and Conversions. In the event that there is no Sale Transaction prior to the Termination Date, the obligations of the Company hereunder with respect to the Placement will be subject to the receipt, on or prior to the Initial Closing, of signatures by the holders of more than $3,500,000 principal amount of the Bridge Notes to the Note Financing Amendment and Conversion Agreement (in the form agreed to by the Company and Commonwealth) agreeing: (x) to cancel at least $3,500,000 principal amount of the Bridge Notes in consideration for Units in the Placement and (y) on behalf of all holders of the Bridge Notes, to consent to the issuance of the Notes, to add the Notes to the Security Agreement, to extend the maturity date of the Bridge Notes which are not cancelled to August 31, 2002 (subject to receipt of the Approval), and to extend the filing date to May 31, 2002 for the registration statement related to the warrants issued in connection with the Bridge Notes.

(ii) Proxies. In the event that the Company is required to seek the Approval, to the extent permitted by federal and state securities laws, the Company shall have received proxies from each of Commonwealth, ComVest Venture Partners, L.P., Robert Priddy and Shea Ventures/J.F. Shea & Co. agreeing to vote in favor of the Approval.

(i) Placement. Simultaneously with payment for and delivery of the Units at the closing of the Placement and subject to the following sentence, the Company shall: (A) pay to the Placement Agent a placement agent fee equal to 6% of the gross proceeds of Units sold in the Placement; and (B) issue to the Placement Agent or its designees five-year warrants in the form to be agreed to by the Company and the Placement Agent to purchase that number of Shares as equals 8% of the Shares and Warrant Shares underlying the Units sold in the Placement at exercise prices per Share equal to the Per Share Purchase Price and Market Price, respectively (the “Agent’s Warrants”); provided, however, that if affiliates of the Placement Agent have been appointed to the Board prior to the Closing pursuant to the provisions of Section 4(j) hereof, the Agent’s Warrants will be placed into escrow and issued to the Placement Agent upon receipt of the Approval; provided, however, that the Company may issue the Agent’s Warrants earlier if the directors affiliated with the Placement Agent thereafter resign from the Board and the Company and Commonwealth determine, after conferring with Nasdaq, that such issuance will not violate the applicable listing requirements of the Nasdaq. The Company shall also, upon presentation of appropriate receipts and invoices, reimburse the Placement Agent for up to $50,000 of its accountable expenses, including legal fees. With respect to Units purchased upon the conversion of Bridge Notes held by ComVest, the fees due to the Placement Agent pursuant to clauses (A) and (B) above shall be 4% and 6%, respectively; with respect to Units purchased by Kinecta Corporation, the fees due to the Placement Agent pursuant to clauses (A) and (B) above shall be 3% and 4%, respectively; and with respect to Units purchased by any of the investors listed on Exhibit A to the Term Sheet dated April 12, 2002, no fees shall be due to the Placement Agent pursuant to clauses (A) and (B) above unless the Placement Agent and the Company have entered into a fee-sharing arrangement with Ladenburg Thalmann. The Company shall also pay all expenses in connection with the qualification of the Units under the securities or Blue Sky laws of the states which the Placement Agent shall designate, including reasonable legal fees, filing fees and disbursements of Placement Agent’s counsel in connection with such Blue Sky matters.

(ii) Interest. In the event that for any reason the Company shall fail to pay to the Placement Agent all or any portion of the fees payable hereunder when due, interest shall accrue and be payable on the unpaid cash balance due hereunder from the date when first due through and including the date when actually collected by the Placement Agent, at a rate equal to four percent above the prime rate of Citibank, N.A., in New York, New York, computed on a daily basis and adjusted as announced from time to time.

SECTION 1. DEFINITIONS. As used herein, the following terms shall have the following meanings, unless the context shall otherwise require:

SECTION 2. WARRANTS AND ISSUANCE OF WARRANT CERTIFICATES.

SECTION 3. FORM AND EXECUTION OF WARRANT CERTIFICATES.

SECTION 4. EXERCISE.

SECTION 5. RESERVATION OF SHARES; LISTING; PAYMENT OF TAXES; ETC.

SECTION 6. EXCHANGE AND REGISTRATION OF TRANSFER. Subject to the restrictions on transfer contained in the Warrant Certificates and the Subscription Agreements between the Company and the purchasers of Units:

SECTION 7. LOSS OR MUTILATION. Upon receipt by the Company and the Warrant Agent of evidence satisfactory to them of the ownership of and loss, theft, destruction or mutilation of any Warrant Certificate and (in case of loss, theft or destruction) of indemnity satisfactory to them, and (in the case of mutilation) upon surrender and cancellation thereof, the Company shall execute and the Warrant Agent shall (in the absence of notice to the Company and/or Warrant Agent that the Warrant Certificate has been acquired by a bona fide purchaser) countersign and deliver to the Registered Holder in lieu thereof a new Warrant Certificate of like tenor representing an equal aggregate number of Warrants. Applicants for a substitute Warrant

Certificate shall comply with such other reasonable regulations and pay such other reasonable charges as the Warrant Agent may prescribe.

SECTION 8. ANTI-DILUTION PROVISIONS. The Exercise Price in effect at any time and the number and kind of securities purchasable upon the exercise of the Warrants shall be subject to adjustment from time to time upon the happening of certain events as follows:

A) the Holder of a Warrant shall be entitled to receive, in lieu of the number of shares theretofore receivable upon the exercise of such Warrant, a number of shares of Common Stock determined by (i) dividing the original Exercise Price by the Exercise Price as adjusted as a result of such issue or sale (as provided below), and (ii) multiplying the resulting quotient by the number of shares of Common Stock called for on the face of such Warrant, as adjusted in accordance with Section 8 hereof; and

B) the then existing Exercise Price shall be reduced, as of the opening of business on the date of such issue or sale, as follows: the Exercise Price shall be reduced to a price determined by multiplying that Exercise Price by a fraction (i) the numerator of which shall be (a) the number of shares of Common Stock outstanding at the close of business on the day next preceding the date of such issue or sale, plus (b) the number of shares of Common Stock which the aggregate consideration received (or by the express provisions hereof deemed to have been received) by the Company for the total number of Additional Shares of Common Stock so issued would purchase at such Exercise Price, plus (c) the number of shares of Common Stock into which all outstanding shares of Series A Preferred Stock, par value $0.0001 per share, of the Company (the “Series A Preferred”) are convertible at the close of business on the date next preceding the date of such issue or sale, plus (d) the number of shares of Common Stock into which all outstanding shares of Series B Preferred Stock, par value $0.0001 per share, of the Company (the “Series B Preferred”) are convertible at the close of business on the date next preceding the date of such issue or sale, plus (e) the number of shares of Common Stock for which all warrants issued concurrently with the Series

B Preferred (the “Series B Warrants”) and all other warrants outstanding as of the Initial Warrant Exercise Date that are exercisable for shares of Common Stock are exercisable at the Exercise Price in effect at the close of business on the date next preceding the date of such issue or sale, plus (f) the number of shares of Common Stock underlying all Other Securities (as hereinafter defined) at the close of business on the date next preceding the date of such issue or sale, and (ii) the denominator of which shall be (a) the number of shares of Common Stock outstanding at the close of business on the date of such issue or sale after giving effect to such issue of Additional Shares of Common Stock, plus (b) the number of shares of Common Stock into which all outstanding shares of Series B Preferred of the Company are convertible at the close of business on the date next preceding the date of such issue or sale, plus (c) the number of shares of Common Stock into which all outstanding shares of all Series A Preferred of the Company are convertible at the close of business on the date next preceding the date of such issue or sale, plus (d) the number of shares of Common Stock for which all Series B Warrants and all other warrants outstanding on the Initial Warrant Exercise Date that are exercisable for shares of Common Stock are exercisable at the Exercise Price in effect at the close of business on the date next preceding the date of such issue or sale, plus (e) the number of shares of Common Stock underlying the Other Securities at the close of business on the date next preceding the date of such issue or sale.

SECTION 9. REGISTRATION UNDER THE SECURITIES ACT OF 1933. The Company agrees to register the Warrant Shares for resale under the Securities Act on the terms and subject to the conditions set forth in the Registration Rights Agreement between the Company and each of the investors in the Placement.

SECTION 10. FRACTIONAL WARRANTS AND FRACTIONAL SHARES. If the number of shares of Common Stock purchasable upon the exercise of each Warrant is adjusted pursuant to Section 8 hereof, the Company shall nevertheless not be required to issue fractions of shares, upon exercise of the Warrants or otherwise, or to distribute certificates that evidence fractional shares. With respect to any fraction of a share called for upon any exercise of a Warrant, the Company shall pay to the Holder an amount in cash equal to such fraction multiplied by the current market value of such fractional share, determined as follows:

SECTION 11. WARRANT HOLDERS NOT DEEMED STOCKHOLDERS. No holder of Warrants shall, as such, be entitled to vote or to receive dividends or be deemed the holder of Common Stock that may at any time be issuable upon exercise of such Warrants for any purpose whatsoever, nor shall anything contained herein be construed to confer upon the holder of Warrants, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issue or reclassification of stock, change of par value or change of stock to no par value, consolidation, merger or conveyance or otherwise), or to receive notice of meetings, or to receive dividends or subscription rights, until such Holder shall have exercised such Warrants and been issued shares of Common Stock in accordance with the provisions hereof.

SECTION 12. RIGHTS OF ACTION. All rights of action with respect to this Agreement are vested in the respective Registered Holders of the Warrants, and any Registered Holder of a Warrant, without consent of the Warrant Agent or of the holder of any other Warrant, may, on his own behalf and for his own benefit, enforce against the Company his right to exercise his Warrants for the purchase of shares of Common Stock in the manner provided in the Warrant Certificate and this Agreement.

SECTION 13. AGREEMENT OF WARRANT HOLDERS. Every holder of a Warrant, by his acceptance thereof, consents and agrees with the Company, the Warrant Agent and every other holder of a Warrant that:

SECTION 14. CANCELLATION OF WARRANT CERTIFICATES. If the Company shall purchase or acquire any Warrant or Warrants, the Warrant Certificate or Warrant Certificates evidencing the same shall thereupon be canceled by it and retired. The Warrant Agent shall also cancel Common Stock following exercise of any or all of the Warrants represented thereby or delivered to it for transfer, split-up, combination or exchange.

SECTION 15. CONCERNING THE WARRANT AGENT.

SECTION 16. MODIFICATION OF AGREEMENT. The parties hereto may by supplemental agreement make any changes or corrections in this Agreement (i) that it shall deem appropriate to cure any ambiguity or to correct any defective or inconsistent provision or manifest mistake or error herein contained; (ii) to reflect an increase in the number of Warrants which are to be governed by this Agreement resulting from an increase in the size of the Placement; (iii) to reflect an increase in the number of Warrants which are to be governed by this Agreement resulting from the conversion of warrants issued to the Placement Agent or its designees in connection with the Placement; or (iv) that it may deem necessary or desirable and which shall not adversely affect the interests of the holders of Warrant Certificates; provided, however, that this Agreement shall not otherwise be modified, supplemented or altered in any respect except with the consent in writing of the Company, the Placement Agent and the holders of at least a majority of the outstanding Warrants except that nothing shall prevent the Company and a Registered Holder from consenting to modifications to this Agreement which affect or are applicable to such Registered Holder only.

SECTION 17. NOTICES. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been made when delivered or mailed first class registered or certified mail, postage prepaid as follows: if to the Registered Holder of a Warrant Certificate, at the address of such holder as shown on the registry books maintained by the Warrant Agent; if to the Company, at 25 Orinda Way, Orinda, California 94563, Attention: John Moss; if to the Warrant Agent, at its Corporate Office and if to the Placement Agent, at 830 Third Avenue, New York, New York 10022, Attention: Carl Kleidman.

SECTION 18. GOVERNING LAW. All questions concerning the construction, validity, enforcement and interpretation of this Agreement 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. Each party hereby irrevocably submits to the exclusive jurisdiction of the federal courts sitting in the Southern District of New York, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address for such notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. Each party hereby 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 Agreement or any transaction contemplated hereby.

SECTION 19. BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of the Company and the Warrant Agent (and their respective successors and assigns) and the holders from time to time of Warrant Certificates. Nothing in this Agreement is intended or shall be construed to confer upon any other person any right, remedy or claim, in equity or at law, or to impose upon any other person any duty, liability or obligation.

SECTION 20. TERMINATION. This Agreement shall terminate on the earlier to occur of (i) the close of business on the second day following the Warrant Expiration Date; or (ii) the date upon which all Warrants have been exercised.

SECTION 21. COUNTERPARTS. This Agreement may be executed in several counterparts, which taken together shall constitute a single document.

(a) DEFINITIONS. As used herein, the following terms shall have the following meanings, unless the context shall otherwise require:

(b) EXERCISE OF WARRANTS

(c) RESERVATION OF SHARES; LISTING; PAYMENT OF TAXES; ETC.

(d) EXCHANGE, TRANSFER OR ASSIGNMENT. This Warrant is exchangeable, without expense, at the option of the Holder, upon presentation and surrender hereof to the Company for other warrants of different denominations entitling the holder thereof to purchase in the aggregate the same number of Common Shares purchasable hereunder. Upon surrender of this Warrant to the Company at its principal office with the Assignment Form annexed hereto duly executed and funds sufficient to pay any transfer tax, the Company shall, without charge, execute and deliver a new Warrant in the name of the assignee named in such

instrument of assignment and this Warrant shall promptly be canceled. This Warrant may be divided or combined with other warrants which carry the same rights upon presentation hereof at the principal office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued and signed by the Holder hereof. The term “Warrant” as used herein includes any Warrants into which this Warrant may be divided or exchanged.

(e) LOSS OR MUTILATION. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) of reasonably satisfactory indemnification, and upon surrender and cancellation of this Warrant, if mutilated, the Company will execute and deliver a new Warrant of like tenor and date. Any such new Warrant executed and delivered shall constitute an additional contractual obligation on the part of the Company, whether or not this Warrant so lost, stolen, destroyed, or mutilated shall be at any time enforceable by anyone.

(f) ANTI-DILUTION PROVISIONS. The Exercise Price in effect at any time and the number and kind of securities purchasable upon the exercise of the Warrants shall be subject to adjustment from time to time in accordance with the terms set forth below.

(g) FRACTIONAL WARRANTS AND FRACTIONAL SHARES. If the number of Common Shares purchasable upon the exercise of each Warrant is adjusted pursuant to Section (f) hereof, the Company shall nevertheless not be required to issue fractions of shares, upon exercise of the Warrants or otherwise, or to distribute certificates that evidence fractional shares. With respect to any fraction of a share called for upon any exercise hereof, such fraction shall be rounded down to the nearest whole share.

(h) WARRANT HOLDERS NOT DEEMED STOCKHOLDERS. No holder of Warrants shall, as such, be entitled to vote or to receive dividends or be deemed the holder of Common Shares that may at any time be issuable upon exercise of such Warrants for any purpose whatsoever, nor shall anything contained herein be construed to confer upon the holder of Warrants, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issue or reclassification of stock, change of par value or change of stock to no par value, consolidation, merger, arrangement or conveyance or otherwise), or to receive notice of meetings, or to receive dividends or subscription rights, until such Holder shall have exercised such Warrants and been issued Common Shares in accordance with the provisions hereof.

(i) AGREEMENT OF WARRANT HOLDERS. Every holder of a Warrant, by his acceptance thereof, consents and agrees with the Company and every other holder of a Warrant that:

(j) MODIFICATION OF AGREEMENT. The provisions of this Warrant may from time to time be amended, modified or waived, if such amendment, modification or waiver is applicable to all of the Warrants and is in writing and consented to by the Company and the holders of at least a majority of the outstanding Warrants and such amendment, modification or waiver shall be binding upon the holder of this Warrant (and any assignee thereof) regardless of whether the holder consented to such amendment, modification or waiver; provided that nothing shall prevent the Company and a Registered Holder from consenting to modifications to this Agreement which affect or are applicable to such Registered Holder only.

(k) NOTICES. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been made when delivered or mailed first class registered or certified mail, postage prepaid as follows: if to the Registered Holder of a Warrant Certificate, at the address of such holder as shown on the registry books maintained by the Company; if to the Company, if to the Company, at 25 Orinda Way, Orinda, California 94563, Attention: John Moss; and if to the Holder, c/o Commonwealth Associates, L.P. at 830 Third Avenue, New York, New York 10022, Attention: Carl Kleidman.

(l) GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of New York.

(m) BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of the Company (and its respective successors and assigns) and the holders from time to time of the Warrants. Nothing in this Agreement is intended or shall be construed to confer upon any other person any right, remedy or claim, in equity or at law, or to impose upon any other person any duty, liability or obligation.

(n) TERMINATION. This Agreement shall terminate on the earlier to occur of (i) the close of business on the second day following the Warrant Expiration Date; or (ii) the date upon which all Warrants represented hereby have been exercised.

(o) COUNTERPARTS. This Agreement may be executed in several counterparts, which taken together shall constitute a single document.

(p) REGISTRATION RIGHTS. The holders of the Warrants and the Warrant Shares or their transferees shall have the registration rights set forth in the Registration Rights Agreement dated May 24, 2002 among the Company, Commonwealth Associates, L.P. and each of the investors in the Private Placement, which agreement is incorporated herein by reference in its entirety.

(a) DEFINITIONS. As used herein, the following terms shall have the following meanings, unless the context shall otherwise require:

(b) EXERCISE OF WARRANTS

(c) RESERVATION OF SHARES; LISTING; PAYMENT OF TAXES; ETC.

(d) EXCHANGE, TRANSFER OR ASSIGNMENT. This Warrant is exchangeable, without expense, at the option of the Holder, upon presentation and surrender hereof to the Company for other warrants of different denominations entitling the holder thereof to purchase in the aggregate the same number of Common Shares purchasable hereunder. Upon surrender of this Warrant to the Company at its principal office with the Assignment Form annexed hereto duly executed and funds sufficient to pay any transfer tax, the Company shall, without charge, execute and deliver a new Warrant in the name of the assignee named in such

instrument of assignment and this Warrant shall promptly b¶e canceled. This Warrant may be divided or combined with other warrants which carry the same rights upon presentation hereof at the principal office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued and signed by the Holder hereof. The term “Warrant” as used herein includes any Warrants into which this Warrant may be divided or exchanged.

(e) LOSS OR MUTILATION. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) of reasonably satisfactory indemnification, and upon surrender and cancellation of this Warrant, if mutilated, the Company will execute and deliver a new Warrant of like tenor and date. Any such new Warrant executed and delivered shall constitute an additional contractual obligation on the part of the Company, whether or not this Warrant so lost, stolen, destroyed, or mutilated shall be at any time enforceable by anyone.

(f) ANTI-DILUTION PROVISIONS. The Exercise Price in effect at any time and the number and kind of securities purchasable upon the exercise of the Warrants shall be subject to adjustment from time to time in accordance with the terms set forth in Section 8 of the Warrant Agreement dated May 24, 2002 between the Company and Commonwealth Associates, L.P. entered into in connection with the Private Placement, which Section 8 is incorporated herein by reference in its entirety.

(g) FRACTIONAL WARRANTS AND FRACTIONAL SHARES. If the number of Common Shares purchasable upon the exercise of each Warrant is adjusted pursuant to Section (f) hereof, the Company shall nevertheless not be required to issue fractions of shares, upon exercise of the Warrants or otherwise, or to distribute certificates that evidence fractional shares. With respect to any fraction of a share called for upon any exercise hereof, such fraction shall be rounded down to the nearest whole share.

(h) WARRANT HOLDERS NOT DEEMED STOCKHOLDERS. No holder of Warrants shall, as such, be entitled to vote or to receive dividends or be deemed the holder of Common Shares that may at any time be issuable upon exercise of such Warrants for any purpose whatsoever, nor shall anything contained herein be construed to confer upon the holder of Warrants, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issue or reclassification of stock, change of par value or change of stock to no par value, consolidation, merger, arrangement or conveyance or otherwise), or to receive notice of meetings, or to receive dividends or subscription rights, until such Holder shall have exercised such Warrants and been issued Common Shares in accordance with the provisions hereof.

(i) AGREEMENT OF WARRANT HOLDERS. Every holder of a Warrant, by his acceptance thereof, consents and agrees with the Company and every other holder of a Warrant that:

(j) MODIFICATION OF AGREEMENT. The provisions of this Warrant may from time to time be amended, modified or waived, if such amendment, modification or waiver is applicable to all of the Warrants and is in writing and consented to by the Company and the holders of at least a majority of the outstanding Warrants and such amendment, modification or waiver shall be binding upon the holder of this Warrant (and any assignee thereof) regardless of whether the holder consented to such amendment, modification or waiver; provided that nothing shall prevent the Company and a Registered Holder from consenting to modifications to this Agreement which affect or are applicable to such Registered Holder only.

(k) NOTICES. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been made when delivered or mailed first class registered or certified mail, postage prepaid as follows: if to the Registered Holder of a Warrant Certificate, at the address of such holder as shown on the registry books maintained by the Company; if to the Company, if to the Company, at 25 Orinda Way, Orinda, California 94563, Attention: John Moss; and if to the Holder, c/o Commonwealth Associates, L.P. at 830 Third Avenue, New York, New York 10022, Attention: Carl Kleidman.

(l) GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of New York.

(m) BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of the Company (and its respective successors and assigns) and the holders from time to time of the Warrants. Nothing in this Agreement is intended or shall be construed to confer upon any other person any right, remedy or claim, in equity or at law, or to impose upon any other person any duty, liability or obligation.

(n) TERMINATION. This Agreement shall terminate on the earlier to occur of (i) the close of business on the second day following the Warrant Expiration Date; or (ii) the date upon which all Warrants represented hereby have been exercised.

(o) COUNTERPARTS. This Agreement may be executed in several counterparts, which taken together shall constitute a single document.

(p) REGISTRATION RIGHTS. The holders of the Warrants and the Warrant Shares or their transferees shall have the registration rights set forth in the Registration Rights Agreement dated May 24, 2002 among the Company, Commonwealth Associates, L.P. and each of the investors in the Private Placement, which agreement is incorporated herein by reference in its entirety.

(a) Notwithstanding the foregoing, the Company shall prepare and file with the SEC on or before the date that is twenty (20) days from the Initial Closing (as defined in the Subscription Agreement) (the “Filing Deadline”), a Registration Statement or Registration Statements, as necessary, on Form S-3 covering the resale of all of the Holders’ Registrable Securities. In the event that Form S-3 is unavailable for such a registration, the Company shall use such other form as is available for such a registration, subject to the provisions of Section 2.5. The Company shall use its reasonable best efforts to cause such Registration Statement to be declared effective by the SEC as promptly as practicable, but in no event later than sixty (60) days after the Initial Closing if the Registration Statement is not reviewed by the staff of the SEC, or if the Registration Statement is so reviewed, one hundred twenty (120) days after the Initial Closing (the “Effectiveness Deadline”).

(b) In the event that (i) the Registration Statement to be filed by the Company pursuant to Section 2.2(a) above is not filed with the Commission on or prior to the Filing Deadline, (ii) such Registration Statement is not declared effective by the Commission on or prior to the Effectiveness Deadline, (iii) such Registration Statement is not maintained as effective by the Company for the period set forth in Section 3.1 below or (iv) the amendment to the Registration Statement or the additional Registration Statement referred to in Section 2.6 below is not filed within fifteen (15) business days as set forth therein (each a “Registration Default”) then the Company will pay the Holders (pro rated on a daily basis), as liquidated damages for a Registration Default and not as a penalty two percent (2%) of the purchase price of the Units purchased from the Company and held by the Holders at the time of and during the pendency of such Registration Default for each month that one or more Registration Defaults are then in existence, subject to a cap, in the case of failure to maintain effectiveness only, of twenty percent (20%) of the purchase price of the Units. Such payment of the liquidated damages shall be made to the Holders in cash, within five (5) calendar days of demand, provided, however, that the payment of such liquidated damages shall not relieve the Company from its obligations to register the Shares pursuant to this Section. Notwithstanding the foregoing, in the event that the Holder holds Agent’s Warrants, the two percent (2%) penalties and the twenty percent (20%) cap described above shall not be payable in cash but shall be effected as a reduction in the exercise price of the Agent’s Warrants.

(c) If the Company does not remit the payment to the Holders as set forth above, the Company will pay the Holders reasonable costs of collection, including attorneys’ fees, in addition to the liquidated damages. The registration of the Shares pursuant to this provision shall not affect or limit the Holders’ other rights or remedies as set forth in this Agreement.

(A) The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware. The Company is duly qualified as a foreign corporation to do business and is in good standing in the State of California.

(B) The Company has the requisite corporate power and authority to execute, deliver and perform its obligations under this Agreement and each of the other Transaction Documents, including issuance of the Notes, the Shares and the Warrants in accordance with the terms thereof. The execution and delivery of the Transaction Documents by the Company, the performance of the obligations of the Company thereunder and the consummation by it of the transactions contemplated therein have been duly authorized by the Board and, to the extent required, by the shareholders of the Company (other than the Company’s obligation to comply with NASD Marketplace Rules). The Transaction Documents have been duly executed and delivered by the Company.

(C) The issuance and sale of the Notes, the Shares and the Warrants have been duly authorized. The Shares and the Warrant Shares are duly authorized and reserved for issuance in accordance with the Transaction Documents, and when issued and paid for in accordance with the Transaction Documents, the Shares and the Warrant Shares will be validly issued, fully paid and non-assessable and free of all taxes, liens, charges and preemptive rights with respect to the issue thereof.

(D) Based in part upon, and subject to the accuracy as to factual matters of, the Subscribers’ representations in Article I of the Subscription Agreement, the Notes, the Shares and the Warrants may be issued to the Subscribers pursuant to the Transaction Documents without registration under the Securities Act of 1933, as amended.

(E) Other than the Company’s obligation to comply with NASD Marketplace Rules, no authorization, approval, consent, filing or other order of any Federal or state governmental body, regulatory agency, self-regulatory organization or stock exchange or market, or to such counsel’s knowledge, any court, is required to be obtained by the Company to enter into and perform its obligations under the Transaction Documents or for the issuance and sale of the Notes and the Warrants as contemplated by the Transaction Documents, except such as have been made or will be made by the Company.

(F) To such counsel’s knowledge, there is no action, suit, proceeding, inquiry or investigation before or by any arbitrator, court, public board or body or any governmental agency or self-regulatory organization pending or threatened against the Company or any of the properties of the Company that might materially and adversely affect the Company or its business, operations, properties or financial condition, or that might materially adversely affect the transactions or other acts contemplated by the Transaction Documents.

(G) The execution, delivery and performance by the Company of the Transaction Documents, the consummation by the Company of the transactions contemplated thereby and the compliance by the Company with the terms thereof does not violate, conflict with or constitute a default under the Company’s Certificate of Incorporation, as amended to date, the Company’s Bylaws as currently in effect or any other material contract, agreement or arrangement by which the Company is bound, or any applicable law, rule, regulation, judgment, order or decree actually known to the Company’s counsel of any governmental agency or court having jurisdiction over the Company or any of its properties or business, in each case, other than as set forth in the Schedules to this Agreement and other than the Company’s obligation to comply with NASD Marketplace Rules.

(1) “Common Stock” shall mean stock of the Company of any class, whether now or hereafter authorized, which has the right to participate in the distributions of earnings and assets of the Company without limit as to amount or percentage, which at the date hereof consists of 250,000,000 authorized shares of Common Stock.

(2) “Exercise Date” shall mean, as to any Warrant, the date on which the Warrant Agent shall have received both (a) the certificate representing such Warrant (the “Warrant Certificate”), with the exercise form thereon duly executed by the Registered Holder thereof or his attorney duly authorized in writing, and (b) if payment is to be made in cash, cash or an official bank or certified check made payable to the Company, of an amount in lawful money of the United States of America equal to the Exercise Price.

(3) “Exercise Price” shall mean the purchase price to be paid upon exercise of each Warrant in accordance with the terms hereof, which price shall be $1.00, subject to adjustment from time to time pursuant to the provisions of Section (f) hereof and subject further to the Company’s right to reduce the Exercise Price upon notice to all Registered Holders.

(4) “Initial Warrant Exercise Date” shall mean shall mean May 24, 2002.

(5) “Registered Holder” shall mean the person in whose name any Warrants shall be registered on the books maintained by the Company pursuant to Section (d).

(6) “Warrant Expiration Date” shall mean 5:00 P.M. (New York time) on May 24, 2007; provided that if such date shall in the State of New York be a holiday or a day on which banks are authorized to close, then 5:00 P.M. (New York time) on the next following day which in the State of New York is not a holiday or a day on which banks are authorized to close. Upon notice to all Registered Holders the Company shall have the right to extend the Warrant Expiration Date.

(7) “Warrant Shares” shall mean the shares of Common Stock deliverable upon exercise of the Warrants, as adjusted from time to time.

(1) Each Warrant may be exercised by the Registered Holder thereof at any time on or after the Initial Warrant Exercise Date, but not after the Warrant Expiration Date, upon the terms and subject to the conditions set forth herein. A Warrant shall be deemed to have been exercised immediately prior to the close of business on the Exercise Date and the person entitled to receive the securities deliverable upon such exercise shall be treated for all purposes as the holder upon exercise thereof as of the close of business on the Exercise Date. As soon as practicable on or after the Exercise Date the Company shall deposit the proceeds received from the exercise of a Warrant, and promptly after clearance of checks received in payment of the Exercise Price pursuant to such Warrants, issue and deliver to the person or persons entitled to receive the same a certificate or certificates for the securities deliverable upon such exercise (plus a certificate for any remaining unexercised Warrants of the Registered Holder).

(2) The Registered Holder may, at its option, exchange this Warrant on a cashless basis, in whole or in part (a “Warrant Exchange”), into the number of Warrant Shares determined in accordance with this Section (b)(2), by surrendering the Warrant Certificate at the principal office of the Company or at the office of its stock transfer agent, accompanied by an irrevocable notice stating such Registered Holder’s intent to effect such exchange, the number of Warrant Shares to be exchanged and the date of the notice of such intent to exchange (the “Notice of Exchange”). The Registered Holder may send a Notice of Exchange to the Company prior to the Initial Warrant Exercise Date. The Warrant Exchange shall take place on the date the Notice of Exchange is received by the Company (the “Exchange Date”). Certificates for the shares issuable upon such Warrant Exchange and, if applicable, a new warrant of like tenor evidencing the balance of the shares remaining subject to such Warrant, shall be issued as of the Exchange Date and delivered to the Registered Holder as soon as is reasonably practicable following the Exchange Date. In connection with any Warrant Exchange, a Warrant shall represent the right to subscribe for and acquire the number of Warrant Shares (rounded to the next highest integer) equal to (i) the number of Warrant Shares specified by the Registered Holder in its Notice of Exchange (the “Total Number”) less (ii) the number of Warrant Shares equal to the quotient obtained by dividing (x) the product of the Total Number and the existing Exercise Price by (y) the current market value of a share of Common Stock as set forth below:

(1) The Company covenants that it will at all times reserve and keep available out of its authorized Common Shares, solely for the purpose of issue upon exercise of Warrants, such number of Common Shares as shall then be issuable upon the exercise of all outstanding Warrants. The Company covenants that all Common Shares which shall be issuable upon exercise of the Warrants and payment of the Exercise Price shall, at the time of delivery, be duly and validly issued, fully paid, nonassessable and free from all taxes, liens and charges with respect to the issue thereof (other than those which the Company shall promptly pay or discharge).

(2) The Company will use reasonable efforts to obtain appropriate approvals or registrations under state “blue sky” securities laws with respect to the exercise of the Warrants; provided, however, that the Company shall not be obligated to file any general consent to service of process or qualify as a foreign corporation in any jurisdiction. With respect to any such securities laws, however, Warrants may not be exercised by, nor Common Shares issued to, any Registered Holder in any state or province in which such exercise would be unlawful.

(3) The Company shall pay all documentary, stamp or similar taxes and other governmental charges that may be imposed with respect to the issuance of Warrants, or the issuance, or delivery of any shares upon exercise of the Warrants; provided, however, that if the Common Shares are to be delivered in a name other than the name of the Registered Holder of the Warrant Certificate representing any Warrant being exercised, then no such delivery shall be made unless the person requesting the same has paid to the Company the amount of transfer taxes or charges incident thereto, if any.

(1) Adjustment for Dividends in Other Stock and Property; Reclassifications. In case at any time or from time to time the holders of the Common Stock (or any shares of stock or other securities at the time receivable upon the exercise of this Warrant) shall have received, or, on or after the record date fixed for the determination of eligible shareholders, shall have become entitled to receive, without payment therefor,

(2) Adjustment for Reorganization, Consolidation and Merger. In case of any reorganization of the Company (or any other corporation the stock or other securities of which are at the time receivable on the exercise of this Warrant) after the Initial Warrant Exercise Date, or in case, after such date, the Company (or any such other corporation) shall consolidate with or merge into another corporation or entity or convey all or substantially all its assets to another corporation or entity, then and in each such case Holder, upon the exercise hereof as provided in Section (b) at any time after the consummation of such reorganization, consolidation, merger or conveyance, shall be entitled to receive, in lieu of the stock or other securities and property receivable upon the exercise of this Warrant prior to such consummation, the stock or other securities or property to which such Holder would have been entitled upon such consummation if Holder had exercised this Warrant immediately prior thereto, all subject to further adjustment as provided in Sections (f)(1), (f)(2) and (f)(3); in each such case, the terms of this Warrant shall be applicable to the shares of stock or other securities or property receivable upon the exercise of this Warrant after such consummation.

(3) Adjustment for Certain Dividends and Distributions. If the Company at any time or from time to time makes, or fixes a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in additional shares of Common Stock, then and in each such event the number of shares of Common Stock receivable upon the full exercise of this Warrant (the “Aggregate Number”) then in effect shall be increased as of the time of such issuance or, in the event such record date is fixed, as of the close of business on such record date, by multiplying the Aggregate Number then in effect by a fraction (A) the denominator of which is the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and (B) the numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date as the case may be, plus the number of shares of Common Stock issuable in payment of such dividend or distribution; provided, however, that if such record date is fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Aggregate Number shall be recomputed accordingly as of the close of business on such record date, and thereafter the Aggregate Number shall be adjusted pursuant to this Section (f)(3) as of the time of actual payment of such dividends or distributions.

(4) Stock Split and Reverse Stock Split. If the Company at any time or from time to time effects a stock split or subdivision of the outstanding Common Stock, the Aggregate Number then in effect immediately before that stock split or subdivision shall be proportionately increased. If the Company at any time or from time to time effects a reverse stock split or combines the outstanding shares of Common Stock into a smaller number of shares, the Aggregate Number then in effect immediately before that reverse stock split or combination shall be proportionately decreased. Each adjustment under this Section (f)(4) shall become effective at the close of business on the date the stock split, subdivision, reverse stock split or combination becomes effective.

(5) No Impairment. The Company will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger,

dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company but will at all times in good faith assist in the carrying out of all the provisions of this Section (f) and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holders of the Warrants against impairment.

(6) Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of the Conversion Price pursuant to this Section (f), the Company at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of a Warrant a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Company shall, upon the written request at any time of any holder of a Warrant, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustments and readjustments, (ii) Aggregate Number at the time in effect, and (iii) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the exercise of the Warrant.

(7) Notices of Record Date. In case

(8) Stock Purchase Rights. If at any time or from time to time, the Company grants or issues to all the record holders of the Common Stock any options, warrants or subscription rights (collectively, the “Stock Purchase Rights”) entitling a holder to purchase Common Stock or any security convertible into or exchangeable for Common Stock or to

purchase any other stock or securities of the Company, the Holder shall be entitled to acquire, upon the terms applicable to such Stock Purchase Rights, the aggregate Stock Purchase Rights which Holder could have acquired if Holder had been the record holder of the maximum number of shares of Common Stock issuable upon exercise of this Warrant on both (x) the record date for such grant or issuance of such Stock Purchase Rights, and (y) the date of the grant or issuance of such Stock Purchase Rights.

(1) The Warrants are transferable only on the registry books of the Company by the Registered Holder thereof in person or by his attorney duly authorized in writing and only if the Warrant Certificates representing such Warrants are surrendered at the office of the Company, duly endorsed or accompanied by a proper instrument of transfer satisfactory to the Company in its sole discretion, together with payment of any applicable transfer taxes; and

(2) The Company may deem and treat the person in whose name the Warrant Certificate is registered as the holder and as the absolute, true and lawful owner of the Warrants represented thereby for all purposes, and the Company shall not be affected by any notice or knowledge to the contrary, except as otherwise expressly provided for herein.

(1) “Common Stock” shall mean stock of the Company of any class, whether now or hereafter authorized, which has the right to participate in the distributions of earnings and assets of the Company without limit as to amount or percentage, which at the date hereof consists of 250,000,000 authorized shares of Common Stock.

(2) “Exercise Date” shall mean, as to any Warrant, the date on which the Warrant Agent shall have received both (a) the certificate representing such Warrant (the “Warrant Certificate”), with the exercise form thereon duly executed by the Registered Holder thereof or his attorney duly authorized in writing, and (b) if payment is to be made in cash, cash or an official bank or certified check made payable to the Company, of an amount in lawful money of the United States of America equal to the Exercise Price.

(3) “Exercise Price” shall mean the purchase price to be paid upon exercise of each Warrant in accordance with the terms hereof, which price shall be $1.19, subject to adjustment from time to time pursuant to the provisions of Section (f) hereof and subject further to the Company’s right to reduce the Exercise Price upon notice to all Registered Holders.

(4) “Initial Warrant Exercise Date” shall mean shall mean May 24, 2002.

(5) “Registered Holder” shall mean the person in whose name any Warrants shall be registered on the books maintained by the Company pursuant to Section (d).

(6) “Warrant Expiration Date” shall mean 5:00 P.M. (New York time) on May 24, 2007; provided that if such date shall in the State of New York be a holiday or a day on which banks are authorized to close, then 5:00 P.M. (New York time) on the next following day which in the State of New York is not a holiday or a day on which banks are authorized to close. Upon notice to all Registered Holders the Company shall have the right to extend the Warrant Expiration Date.

(7) “Warrant Shares” shall mean the shares of Common Stock deliverable upon exercise of the Warrants, as adjusted from time to time.

(1) Each Warrant may be exercised by the Registered Holder thereof at any time on or after the Initial Warrant Exercise Date, but not after the Warrant Expiration Date, upon the terms and subject to the conditions set forth herein. A Warrant shall be deemed to have been exercised immediately prior to the close of business on the Exercise Date and the person entitled to receive the securities deliverable upon such exercise shall be treated for all purposes as the holder upon exercise thereof as of the close of business on the Exercise Date. As soon as practicable on or after the Exercise Date the Company shall deposit the proceeds received from the exercise of a Warrant, and promptly after clearance of checks received in payment of the Exercise Price pursuant to such Warrants, issue and deliver to the person or persons entitled to receive the same a certificate or certificates for the securities deliverable upon such exercise (plus a certificate for any remaining unexercised Warrants of the Registered Holder).

(2) The Registered Holder may, at its option, exchange this Warrant on a cashless basis, in whole or in part (a “Warrant Exchange”), into the number of Warrant Shares determined in accordance with this Section (b)(2), by surrendering the Warrant Certificate at the principal office of the Company or at the office of its stock transfer agent, accompanied by an irrevocable notice stating such Registered Holder’s intent to effect such exchange, the number of Warrant Shares to be exchanged and the date of the notice of such intent to exchange (the “Notice of Exchange”). The Registered Holder may send a Notice of Exchange to the Company prior to the Initial Warrant Exercise Date. The Warrant Exchange shall take place on the date the Notice of Exchange is received by the Company (the “Exchange Date”). Certificates for the shares issuable upon such Warrant Exchange and, if applicable, a new warrant of like tenor evidencing the balance of the shares remaining subject to such Warrant, shall be issued as of the Exchange Date and delivered to the Registered Holder as soon as is reasonably practicable following the Exchange Date. In connection with any Warrant Exchange, a Warrant shall represent the right to subscribe for and acquire the number of Warrant Shares (rounded to the next highest integer) equal to (i) the number of Warrant Shares specified by the Registered Holder in its Notice of Exchange (the “Total Number”) less (ii) the number of Warrant Shares equal to the quotient obtained by dividing (x) the product of the Total Number and the existing Exercise Price by (y) the current market value of a share of Common Stock as set forth below:

(1) The Company covenants that it will at all times reserve and keep available out of its authorized Common Shares, solely for the purpose of issue upon exercise of Warrants, such number of Common Shares as shall then be issuable upon the exercise of all outstanding Warrants. The Company covenants that all Common Shares which shall be issuable upon exercise of the Warrants and payment of the Exercise Price shall, at the time of delivery, be duly and validly issued, fully paid, nonassessable and free from all taxes, liens and charges with respect to the issue thereof (other than those which the Company shall promptly pay or discharge).

(2) The Company will use reasonable efforts to obtain appropriate approvals or registrations under state “blue sky” securities laws with respect to the exercise of the Warrants; provided, however, that the Company shall not be obligated to file any general consent to service of process or qualify as a foreign corporation in any jurisdiction. With respect to any such securities laws, however, Warrants may not be exercised by, nor Common Shares issued to, any Registered Holder in any state or province in which such exercise would be unlawful.

(3) The Company shall pay all documentary, stamp or similar taxes and other governmental charges that may be imposed with respect to the issuance of Warrants, or the issuance, or delivery of any shares upon exercise of the Warrants; provided, however, that if the Common Shares are to be delivered in a name other than the name of the Registered Holder of the Warrant Certificate representing any Warrant being exercised, then no such delivery shall be made unless the person requesting the same has paid to the Company the amount of transfer taxes or charges incident thereto, if any.

(1) The Warrants are transferable only on the registry books of the Company by the Registered Holder thereof in person or by his attorney duly authorized in writing and only if the Warrant Certificates representing such Warrants are surrendered at the office of the

Company, duly endorsed or accompanied by a proper instrument of transfer satisfactory to the Company in its sole discretion, together with payment of any applicable transfer taxes; and

(2) The Company may deem and treat the person in whose name the Warrant Certificate is registered as the holder and as the absolute, true and lawful owner of the Warrants represented thereby for all purposes, and the Company shall not be affected by any notice or knowledge to the contrary, except as otherwise expressly provided for herein.

(A) If the Common Stock is listed on a national securities exchange or admitted to unlisted trading privileges on such exchange or listed for trading on the Nasdaq Stock Market (“Nasdaq”), the current market value shall be the highest closing price of the Common Stock on such exchange or market for the five trading days preceding the date of the Notice of Exchange;

(B) If the Common Stock is not so listed or admitted to unlisted trading privileges, the current market value shall be the average of the last reported bid and asked prices reported by the National Quotation Bureau, Inc. for the five business days preceding the date of the Notice of Exchange; or

(C) If the Common Stock is not so listed or admitted to unlisted trading privileges and bid and asked prices are not so reported, the current market value shall be an amount determined in such reasonable manner as may be prescribed by the Board of Directors of the Company.

(A) other or additional stock or other securities or property (other than cash) by way of dividend,

(B) any cash or other property paid or payable out of any source other than retained earnings (determined in accordance with generally accepted accounting principles), or

(C) other or additional stock or other securities or property (including cash) by way of stock-split, spin-off, reclassification, combination of shares or similar corporate rearrangement, (other than (x) additional shares of Common Stock or any other stock or securities into which such Common Stock shall have been changed, (y) any other stock or securities convertible into or exchangeable for such Common Stock or such other stock or securities or (z) any Stock Purchase Rights, issued as a stock dividend or stock-split), then and in each such case Holder, upon the exercise hereof as provided in Section (b), shall be entitled to receive the amount of stock and other securities and property (including cash in the cases referred to in clauses (B) and (C) above) which such Holder would hold on the date of such exercise if on the Initial Warrant Exercise Date Holder had been the holder of record of the number of shares of Common Stock called for on the face of this Warrant, as adjusted in accordance with the first paragraph of this Warrant, and had thereafter, during the period from the Initial Warrant Exercise Date to and including the date of such exercise, retained such shares and/or all other or additional stock and other securities and property (including cash in the cases referred to in clauses (B) and (C) above) receivable by it as aforesaid during

such period, giving effect to all adjustments called for during such period by Sections (f)(1), (f)(2) and (f)(3).

(A) the Company shall take a record of the holders of its Common Stock (or other stock or securities at the time receivable upon the exercise of the Warrants) for the purpose of entitling them to receive any dividend or other distribution, or any right to subscribe for or purchase any shares of stock of any class or any other securities, or to receive any other right, or

(B) of any capital reorganization of the Company, any reclassification of the capital stock of the Company, any consolidation or merger of the Company with or into another corporation, or any conveyance of all or substantially all of the assets of the Company to another corporation, or

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

(A) If the Common Stock is listed on a national securities exchange or admitted to unlisted trading privileges on such exchange or listed for trading on the Nasdaq Stock Market (“Nasdaq”), the current market value shall be the highest closing price of the Common Stock on such exchange or market for the five trading days preceding the date of the Notice of Exchange;

(B) If the Common Stock is not so listed or admitted to unlisted trading privileges, the current market value shall be the average of the last reported bid and asked prices reported by the National Quotation Bureau, Inc. for the five business days preceding the date of the Notice of Exchange; or

(C) If the Common Stock is not so listed or admitted to unlisted trading privileges and bid and asked prices are not so reported, the current market value shall be an amount determined in such reasonable manner as may be prescribed by the Board of Directors of the Company.

0000912057-02-024127.txt : 20020613 0000912057-02-024127.hdr.sgml : 20020613 20020613171021 ACCESSION NUMBER: 0000912057-02-024127 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 20020613 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTRAWARE INC CENTRAL INDEX KEY: 0001025134 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 680389976 STATE OF INCORPORATION: DE FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: S-3 SEC ACT: 1933 Act SEC FILE NUMBER: 333-90442 FILM NUMBER: 02678559 BUSINESS ADDRESS: STREET 1: 25 ORINDA WAY CITY: ORINDA STATE: CA ZIP: 94563 BUSINESS PHONE: 9254468729 MAIL ADDRESS: STREET 1: 25 ORINDA WAY CITY: ORINDA STATE: CA ZIP: 94563 S-3 1 a2081927zs-3.htm S-3
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As filed with the Securities and Exchange Commission on June 13, 2002

Registration No. 333-

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM S-3
REGISTRATION STATEMENT
Under
The Securities Act of 1933

INTRAWARE, INC.
(Exact name of Registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)

4899
(Primary Standard Industrial
Classification Code Number)

68-0389976
(I.R.S. Employer
Identification Number)

25 Orinda Way
Orinda, CA 94563
(925) 253-4500
(Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices)

John J. Moss, Esq.
25 Orinda Way
Orinda, California 94563
(925) 253-4500
(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:

Adam R. Dolinko, Esq.
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304
(650) 493-9300

Approximate date of commencement of proposed sale to the public: From time to time after this registration statement becomes effective.

If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. o

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. ý

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. o

CALCULATION OF REGISTRATION FEE

Title of Each Class of Securities to be Registered	Amount to be Registered(1)	Proposed Maximum Offering Price Per Share(2)	Proposed Maximum Aggregate Offering Price(2)	Amount of Registration Fee


Common Stock $0.0001 par value	5,100,240 shares	$1.19	$6,069,286	$559

(1): Includes 1,160,240 shares of common stock issued or issuable upon the exercise of warrants.
(2): Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c) under the Securities Act of 1933 based on a per share price of $1.19, the average of the high and low reported sales prices of the Registrant's common stock on the Nasdaq SmallCap Market on June 10, 2002.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission acting pursuant to said Section 8(a) may determine.

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED JUNE 13, 2002

INTRAWARE, INC.
5,100,240 Shares
Common Stock

This prospectus relates to 5,100,240 shares of our common stock which may be sold from time to time by the selling securityholders identified in this prospectus. The 5,100,240 shares offered by this prospectus include 3,940,000 shares of our common stock issued in a private placement in May 2002 and 1,160,240 shares that have been issued or are issuable upon the exercise of warrants that we issued in the same private placement. While we may receive up to approximately $1.3 million upon the exercise of the warrants, we will not receive any proceeds from the sale of the shares offered by this prospectus.

This prospectus covers only dispositions of the shares of common stock being registered and not the issuance of the shares upon exercise of the warrants or transfer of the warrants. The warrants will not be listed on any securities exchange or quoted in any over-the-counter market.

Our common stock is quoted on the Nasdaq SmallCap Market under the symbol "ITRA". On June 12, 2002, the last reported sale price for our common stock on the Nasdaq SmallCap Market was $1.19 per share.

Investment in the securities involves risks. See "Risk Factors" beginning on page 2 of this prospectus.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

The date of this prospectus is , 2002.

You should rely only on the information incorporated by reference or provided in this prospectus or any prospectus supplement. We have not authorized anyone else to provide you with different information. The selling securityholders will not make an offer of the shares of our common stock in any state where the offer is not permitted. You should not assume that the information in this prospectus or any prospectus supplement is accurate as of any date other than the date on the front of those documents.

TABLE OF CONTENTS

		Page
The Company		1
Information Regarding Forward-Looking Statements		1
Risk Factors		2
Use of Proceeds		8
Selling Securityholders		8
Plan of Distribution		11
Legal Matters		13
Experts		13
Where You Can Find More Information		13

The Company

We are a leading provider of electronic software delivery and management (ESDM) services to enterprise software companies. Using our ESDM solutions, software companies can reduce their costs, improve their customer satisfaction, strengthen their compliance with U.S. export laws, and better understand how their customers are using their software.

We were incorporated in Delaware on August 14, 1996. Our corporate offices are located at 25 Orinda Way, Orinda, California, 94563. Our telephone number at that location is (925) 253-4500.

On May 24, 2002, we issued 3,940,000 shares of our common stock and warrants to purchase an additional 788,000 shares of our common stock with an exercise price of $1.19 per share to investors in a private placement. We also issued warrants to purchase 310,200 shares our common stock with an exercise price of $1.00 per share and warrants to purchase 62,040 shares of our common stock with an exercise price of $1.19 per share to the placement agent for this transaction and its designee. This registration statement covers the resale of the shares (including the shares issued or issuable upon exercise of warrants) issued in our May 2002 private placement.

Information Regarding Forward-Looking Statements

In addition to the other information contained in this prospectus, investors should carefully consider the risk factors disclosed in this prospectus in evaluating an investment in our common stock. This prospectus and the documents incorporated herein by reference include "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. All statements other than statements of historical fact are "forward-looking statements" for purposes of these provisions, including any projections of earnings, revenues or other financial items, any statements of the plans and objectives of management for future operations, any statements concerning proposed new products or services, any statements regarding future economic conditions or performance, and any statement of assumptions underlying any of the foregoing. In some cases, forward-looking statements can be identified by the use of terminology such as "may", "will", "expects", "plans", "anticipates", "estimates", "potential", or "continue" or the negative thereof or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained herein and in such incorporated documents are reasonable, there can be no assurance that such expectations or any of the forward-looking statements will prove to be correct, and actual results could differ materially from those projected or assumed in the forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to inherent risks and uncertainties, including but not limited to the risk factors set forth below and for the reasons described elsewhere in this prospectus. All forward-looking statements and reasons why results may differ included in this prospectus are made as of the date hereof, and Intraware assumes no obligation to update any such forward-looking statement or reason why actual results might differ.

Risk Factors

You should carefully consider the risks described below before making a decision to invest in our common stock. The risks and uncertainties described below are not the only ones facing Intraware. Additional risks and uncertainties not presently known to us or that we do not currently believe are important to an investor may also harm our business operations. If any of the events, contingencies, circumstances or conditions described in the following risks actually occur, our business, financial condition or our results of operations could be seriously harmed. If that occurs, the trading price of our common stock could decline, and you may lose part or all of your investment.

We have negative cash flow and may not have sufficient cash to continue operations or, even if we can continue operations, to effectively manage our working capital requirements and fund our operations for the period required to achieve profitability.

Our annual report on Form 10-K for our fiscal year ended February 28, 2002 contains a disclosure expressing substantial doubt regarding our ability to continue as a going concern as a result of our recurring losses and negative cash flows from operations. We have limited cash and credit available, and may be unable to raise additional financing or establish additional lines of credit. As of February 28, 2002, we had approximately $3 million in cash and cash equivalents. In May 2002, we raised $9.5 million in gross proceeds through the sale of our Asset Management software business, before cash costs including lease termination, employee severance, and legal and accounting costs. That month we also raised approximately $3.9 million in gross proceeds through a private placement of common stock and warrants, including $2.6 million in cash and $1.3 million in cancelled debt, before approximately $400,000 in placement agency, legal and accounting costs. We used $5.7 million of the cash proceeds from those transactions to retire our remaining debt. We may not be able to achieve the revenue and gross margin objectives necessary to achieve positive cash flow or profitability without obtaining additional financing. Such financing may not be available on reasonable terms, and if available such additional financing will dilute current shareholders. If such financing is required and we cannot obtain it, we will have to discontinue operations.

Our SubscribeNet service is our only product offering and demand for this service remains uncertain in the current economic climate.

In May 2002, we sold our asset management software business. Accordingly, our SubscribeNet electronic software delivery and management services is now our only product offering. For most of the 2001 calendar year, we experienced weakening demand for our SubscribeNet service. While there have been signs of strengthening demand for this service in the 2002 calendar year, the business climate for the technology sector remains uncertain. We market the SubscribeNet service primarily to enterprise software companies, and several enterprise software companies have reported reductions in demand and lowered forecasts for their products and services over the past year. We may experience similar reductions in demand for our SubscribeNet service, which would have an immediate and adverse effect on us.

If Nasdaq determines that we have failed to meet its SmallCap Market listing requirements, our common stock may be delisted.

Effective May 30, 2002, our common stock moved from being listed on the Nasdaq National Market to the Nasdaq SmallCap Market. Nasdaq has requirements that a company must meet in order to remain listed on the Nasdaq SmallCap Market. One requirement is that the bid price of a company's stock not fall below $1.00. The bid price of our common stock was below $1.00 almost continuously between September 19 and December 5, 2001 and dropped below $1.00 in April and May 2002. If as a result of the application of any of Nasdaq's listing requirements, our common stock were delisted from

the Nasdaq SmallCap Market, our stock would become harder to buy and sell. Further, our stock could then potentially be subject to what are known as the "penny stock" rules, which place additional requirements on broker-dealers who sell or make a market in such securities. Consequently, if we were removed from the Nasdaq SmallCap Market, the ability or willingness of broker-dealers to sell or make a market in our common stock might decline. As a result, your ability to resell your shares of our common stock could be adversely affected.

We have a history of losses, we expect future losses and we may not ever become profitable.

We have not achieved profitability, may incur net losses through our fiscal year ending February 28, 2003 and may not ever become profitable in the future. We incurred net losses attributable to common stockholders of $37.4 million for the fiscal year ended February 28, 2002, $68.4 million for the year ended February 28, 2001, and $28.0 million for the year ended February 29, 2000. As of February 28, 2002, we had an accumulated deficit of approximately $142 million. We will need to generate significant additional online services and technology revenues and/or reduce operating costs to achieve and maintain positive cash flow and profitability. We have a limited operating history that makes it difficult to forecast our future operating results. Our revenues have declined in recent quarters, and we cannot be certain that we will achieve sufficient revenues or gross profits in future quarters for positive cash flow or profitability. If we do achieve positive cash flow or profitability in any period, we cannot be certain of continued or increased positive cash flow or profitability on a quarterly or annual basis.

Any termination of our relationship with Sun Microsystems or Corporate Software would have a substantial adverse effect on our business.

We provide online software update and license management services to Sun Microsystems, Inc.'s iPlanet customers through our SubscribeNet and Fulfillment services under an agreement that expires on June 30, 2003 and that is terminable by Sun Microsystems at any time on 90 days' notice. We cannot assure you that this agreement will be extended after June 30, 2003, or that Sun Microsystems will not terminate this agreement. Most of our SubscribeNet revenues to date have been generated through this iPlanet contract, and our failure to extend this contract at the end of its current term could have a material adverse effect on our SubscribeNet revenues and on our business as a whole. If Sun Microsystems chose to offer its own electronic software delivery, tracking, maintenance or other services, which it is permitted to do under the current agreement, it would have a substantial adverse effect on our business, results of operations and financial condition.

Under our Sales Alliance Agreement with Corporate Software dated June 28, 2001, we are transitioning to Corporate Software our reseller relationship with iPlanet. This agreement expires in June 2003, but may terminate earlier under certain circumstances, including any termination of the reseller contract between Corporate Software and iPlanet. A significant portion of our SubscribeNet revenues since July 2001 have been generated through this Corporate Software contract, and a significant portion of our revenues in future periods could be generated through this contract. Any termination of this contract before June 2003 could have a material adverse effect on our business and financial performance.

Software manufacturers may not wish to use our SubscribeNet service as a way of outsourcing electronic delivery of their software.

Our strategy for achieving profitability assumes significant revenue growth from our SubscribeNet service. However, we cannot assure you that software manufacturers that are not currently our SubscribeNet customers will find it strategically or economically justifiable to use the SubscribeNet service to deliver software to their end-users. Some software manufacturers are reluctant for security

reasons to deliver their software via the Internet or to authorize a third party to do so on their behalf. Some software manufacturers believe that they can internally develop an adequate electronic software delivery system at a cost lower than the fees we charge for SubscribeNet. These and other concerns on the part of software manufacturers could make it difficult for us to quickly achieve significant growth in SubscribeNet revenue, which could in turn hinder our ability to achieve profitability and positive cash flow.

We are dependent on market acceptance of electronic software delivery, and if it does not achieve widespread acceptance, our business will be adversely affected.

Our future success will depend in large part on broadened acceptance by information technology professionals of electronic software delivery as a method of receiving business software. If electronic software delivery does not achieve widespread market acceptance, our business will be adversely affected. Electronic software delivery is a relatively new method of distributing software products and the growth and market acceptance of electronic software delivery is highly uncertain and subject to a number of risk factors. These factors include:

•: the potential for state and local authorities to levy taxes on Internet transactions;
•: the unavailability of sufficient network bandwidth to enable purchasers to rapidly download software;
•: the limited number of software packages that are available for electronic software delivery as compared to those available through traditional delivery methods;
•: customer unfamiliarity with and resistance to the process of downloading software; and
•: customer concerns about transaction security.

Even if electronic software delivery achieves widespread acceptance, we cannot be sure that we will overcome the substantial technical challenges associated with electronically delivering software reliably and consistently on a long-term basis. Furthermore, the proliferation of software viruses poses a risk to market acceptance of electronic software delivery. Any well-publicized transmission of a computer virus by us or another company using electronic software delivery could deter information technology professionals from utilizing electronic software delivery technology and our business could be adversely affected.

Increased security risks of online commerce may deter future use of our services.

Concerns over the security of transactions conducted on the Internet and the privacy of users may also inhibit the growth of our SubscribeNet service. Any failure by us to prevent security breaches could significantly harm our business and results of operations. We cannot be certain that advances in computer capabilities, new discoveries in the field of cryptography, or other developments will not result in a compromise or breach of the algorithms we use to protect our customers' transaction data or our software vendors' products. Anyone who is able to circumvent our security measures could misappropriate proprietary information or cause interruptions in our operations. We may be required to incur significant costs to protect against security breaches or to alleviate problems caused by breaches. Any well-publicized compromise of security could deter people from using the web to conduct transactions that involve transmitting confidential information or downloading sensitive materials.

The loss of one or more of our key customers could adversely affect our revenues.

We believe that a substantial amount of revenue from our SubscribeNet service in any given future period may come from a relatively small number of customers (in addition to Sun Microsystems, as

detailed above). If one or more major customers were to stop using our services or products, our operating results could be materially adversely affected. Our contractual relationships with most of these customers are subject to renewal annually. As a result, we cannot assure you that any of our customers will renew their contracts with us in any given year.

Our quarterly financial results are subject to significant fluctuations because of many factors and any of these could adversely affect our stock price.

Our operating results have fallen below the expectations of public market analysts and investors in the past. It is likely that in future quarters our operating results will again be below the expectations of public market analysts and investors and as a result, the price of our common stock will fall. Our operating results have varied widely in the past, and we expect that they will continue to vary significantly from quarter to quarter due to a number of risk factors, including:

•: potential weakening of demand for our SubscribeNet services and iPlanet products that we sell jointly with Corporate Software;
•: the unwillingness of certain potential customers to purchase our services due to concerns about our financial strength;
•: the timing of sales of our services;
•: potential renewed cost cutting in our sales, marketing, product development and support areas;
•: potential loss of strategic relationships with major customers and resellers;
•: potential delays in introducing our products and services according to planned release schedules;
•: changes in our pricing policies;
•: caution among software companies in changes in accepting or outsourcing electronic delivery of their software;
•: potential technical difficulties, system failures or Internet downtime;
•: potential changes in the regulatory environment;
•: our ability to upgrade and develop our information technology systems and infrastructure;
•: costs related to acquisitions of technology or businesses; and
•: general economic conditions, as well as those specific to the Internet and related industries.

In addition, our June 2001 agreement with Corporate Software, under which we are transitioning to Corporate Software our business of reselling iPlanet software, has resulted in and will continue to result in a decrease in revenue to us. Our May 2002 sale of our asset management software business to Computer Associates International, Inc. will also result in a substantial decrease in our revenue and gross profit. These decreases in our revenues and gross profit could affect the market price of our common stock.

Our operating expenses, which include sales and marketing, product development and general and administrative expenses, are based on our expectations of future gross profits and are relatively fixed in the short term. If gross profits fall below our expectations and we are not able to quickly reduce our spending in response, our operating results would be adversely affected.

Our industry is highly competitive and we cannot assure you that we will be able to effectively compete.

The market for selling online services and software is highly competitive. We expect competition to intensify as current competitors expand and improve their service offerings, new competitors enter the market, and the business market for information technology services continues to exhibit softness. We have experienced, and expect to continue to experience, competition on our SubscribeNet sales. We cannot assure you that we will be able to compete successfully against current or future competitors, or that competitive pressures faced by us will not adversely affect our business and results of operations.

Our current competitors include a number of companies offering electronic software delivery and management solutions. We expect additional competition from other established and emerging companies. Increased competition is likely to result in price reductions, reduced gross margins and loss of market share, any of which could have a significant adverse effect on our business and results of operations. Many of our current and potential competitors have longer operating histories, significantly greater financial, technical, marketing and other resources, better name recognition, and a larger installed base of customers than we do. Many of our competitors may also have well-established relationships with our existing and prospective customers. Our current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products to address customer needs and compete with our products. We also expect that the competition will increase as a result of software industry consolidations. As a result, we may not be able to effectively compete for customers.

Our executive officers and certain key personnel are critical to our business and these officers and key personnel may not remain with us in the future.

Our future success depends upon the continued service of our executive officers and other key technology, sales, marketing and support personnel. None of our officers or key employees is bound by an employment agreement for any specific term. If we lost the services of one or more of our key employees, or if one or more of our executive officers or employees decided to join a competitor or otherwise compete directly or indirectly with us, this could have a significant adverse effect on our business. In particular, the services of Peter H. Jackson, our Chief Executive Officer, would be difficult to replace.

We face risks of claims from third parties for intellectual property infringement that could adversely affect our business.

We electronically deliver third-party software to end-users. This activity creates the potential for claims to be made against us, either directly or through contractual indemnification provisions with software companies. Any claims could result in costly litigation and be time-consuming to defend, divert management's attention and resources, cause delays in releasing new or upgrading existing services or require us to enter into royalty or licensing agreements. These claims could be made for defamation, negligence, patent, copyright or trademark infringement, personal injury, invasion of privacy or other legal theories based on the nature, content or copying of these materials.

Litigation regarding intellectual property rights is common in the Internet and software industries. We expect that Internet technologies and software products and services may be increasingly subject to third-party infringement claims as the number of competitors in our industry segment grows and the functionality of products in different industry segments overlaps. There can be no assurance that our services do not infringe on the intellectual property rights of third parties.

In addition, we may be involved in litigation involving the software of third party vendors that we have electronically distributed in the past. Royalty or licensing agreements, if required, may not be available on acceptable terms, if at all. A successful claim of infringement against us could adversely

affect our business. Although we carry general liability insurance, our insurance may not cover all potential claims or may not be adequate to protect us from all liability that may be imposed.

We take steps to verify that end-users who download third-party software through our SubscribeNet service are entitled to deploy and use that software. However, there can be no assurance that this verification procedure will help us defend against claims by, or protect us against liability to, the owners of copyrights in that third-party software.

Our success and ability to compete are substantially dependent upon our internally developed technology, which we protect through a combination of patent, copyright, trade secret and trademark law. We are aware that certain other companies are using or may have plans to use the name "Intraware" as a company name or as a trademark or service mark. While we have received no notice of any claims of trademark infringement from any of those companies, we cannot assure you that certain of these companies may not claim superior rights to "Intraware" or to other marks we use. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our services or technology and we cannot be certain that the steps we have taken will prevent misappropriation of our technology.

Our market may undergo rapid technological change and our future success will depend on our ability to meet the changing needs of our industry.

Our market is characterized by rapidly changing technology, evolving industry standards and frequent new product announcements. To be successful, we must adapt to our rapidly changing market by continually improving the performance, features and reliability of our services. We could incur substantial costs to modify our services or infrastructure in order to adapt to these changes. Our business could be adversely affected if we incur significant costs without adequate results, or find ourselves unable to adapt rapidly to these changes.

Additional government regulations may increase our costs of doing business.

In delivering third-party software through our SubscribeNet service, we must comply with U.S. export controls on software generally and encryption technology in particular. Changes in these laws could require us to implement costly changes to our automated export compliance processes. More generally, the law governing Internet transactions remains largely unsettled, even in areas where there has been some legislative action. The adoption or modification of laws or regulations relating to the Internet could adversely affect our business by increasing our costs and administrative burdens. It may take years to determine whether and how existing laws such as those governing intellectual property, privacy, libel and taxation apply to the Internet. Laws and regulations directly applicable to communications or commerce over the Internet are becoming more prevalent. It appears that additional laws and regulations regarding protection of privacy on the Internet will be adopted at the state and federal levels in the United States. The European Union has enacted its own data protection and privacy directive, which required all 15 European Union Member States to implement laws relating to the processing and transmission of personal data. We must comply with these new regulations in both Europe and the United States, as well as any other regulations adopted by other countries where we may do business. The growth and development of the market for online commerce may prompt calls for more stringent consumer protection laws, both in the United States and abroad. Compliance with any newly adopted laws may prove difficult for us and may negatively affect our business.

Use of Proceeds

We will not receive any proceeds from the sale by the selling securityholders of common stock, although we have received $2.6 million in cash and $1.3 million in cancelled debt for issuance of the common stock, and may receive up to approximately $1.3 million, upon exercise of the warrants.

Selling Securityholders

The shares of common stock being offered by the selling securityholders include 1,160,240 shares that have been issued or are issuable upon exercise of warrants. We are registering the shares so that the selling securityholders may offer the shares for resale from time to time. In addition to being selling securityholders, Commonwealth Associates, L.P. has served as placement agent in three private placements by the Company of its equity and debt securities since April 2001, and Ladenburg Thalmann & Co. Inc. received warrants for assisting Commonwealth Associates as placement agent in our May 2002 private placement.

The table below lists the selling securityholders and other information regarding the beneficial ownership of the common stock by each of the selling securityholders. The second column lists, for each selling securityholder, the number of shares of common stock held, including the number of shares of common stock, based on its ownership of our preferred stock and warrants, that would have been issuable to the selling securityholders on May 29, 2002, assuming conversion of all preferred stock and the exercise of all warrants held by such selling securityholder on that date, without regard to any limitations on conversions or exercise. The third column lists the shares of common stock (including shares issued or issuable upon exercise of warrants) being offered by this prospectus by each selling securityholder, and the fourth column assumes the sale of all of the shares offered by each selling securityholder. The selling securityholders may sell all, some or none of their shares in this offering. See "Plan of Distribution." Some of the selling securityholders may also sell shares of the Company's common stock pursuant to other registration statements we have filed.

Name of Selling Security Holder	Common Shares Beneficially Owned Prior to Offering (1)		Common Stock That May Be Sold in The Offering		% of Common Stock Beneficially Owned After Sale (2)
Apodaca Investment Partners, LP	120,000	(3)	120,000	(3)	*
Capital Ventures International	1,200,000	(4)	1,200,000	(4)	*
Commonwealth Associates, L.P.	616,321	(5)	354,240	(5)	*
ComVest Venture Partners, L.P.	4,038,824	(6)	300,000	(7)	8.1	%
Cranshire Capital	300,000	(8)	300,000	(8)	*
George M. Drysdale	743,867	(9)	240,000	(10)	*
Noam Gottesman and Geraldine Gottesman,	257,803	(11)	60,000	(11)	*
Harvard Development Inc.	62,000	(12)	12,000	(12)	*
Harvard Investments Inc.	124,000	(13)	24,000	(13)	*
Carol R. Hill Spousal Trust	124,000	(14)	24,000	(14)	*
Ladenburg Thalmann & Co. Inc.	18,000	(15)	18,000	(15)	*
Allan MacDonald and Eileen MacDonald, JTROS	209,100	(16)	60,000	(16)	*
The Stacy B. and Thomas T. McCormick Family Trust	300,000	(17)	150,000	(17)	*
Micro Capital Fund, Ltd	210,000	(18)	210,000	(18)	*
Micro Capital Fund, L.P.	390,000	(19)	390,000	(19)	*
Lloyd A. Moriber	128,750	(20)	30,000	(20)	*
Passport I, LP	300,000	(21)	300,000	(21)	*
Robert Priddy	2,768,689	(22)	360,000	(23)	5.2	%
Primarius Partners LP	48,000	(24)	48,000	(24)	*
Shea Ventures LLC	1,447,408	(25)	300,000	(26)	2.5	%
Triton West Group	600,000	(27)	600,000	(27)	*

*: Less than one percent
(1): Assumes exercise of all warrants and conversion of all of the holder's Series A Preferred Stock and Series B-1 Preferred Stock into shares of our common stock.
(2): Calculated based on Rule 13d-3(d)(1)(i) of the Exchange Act using 45,574,980 shares of common stock outstanding as of May 29, 2002. In calculating each holder's amount, we treated as outstanding the number of shares of common stock issuable upon conversion of all of that particular holder's preferred stock and exercise of that holder's warrants. However, we did not assume the conversion of any other holder's preferred stock or exercise of any other holder's warrants. Also, assumes sale of all of the shares of common stock (including shares issued or issuable upon exercise of the warrants) offered under this prospectus.
(3): Includes 20,000 shares of common stock issuable upon exercise of warrants.
(4): Includes 200,000 shares of common stock issuable upon exercise of warrants.
(5): Includes 354,240 shares of common stock issuable upon exercise of warrants.
(6): Includes 531,599 shares of common stock issuable upon exercise of warrants.
(7): Includes 50,000 shares of common stock issuable upon exercise of warrants.
(8): Includes 50,000 shares of common stock issuable upon exercise of warrants.
(9): Includes 40,000 shares of common stock issuable upon exercise of warrants and 151,933 shares of common stock held by Drysdale Partners, of which 131,121 shares are issuable upon conversion of Series A Preferred Stock and 13,812 shares are issuable upon exercise of warrants. Mr. Drysdale may be deemed to beneficially own shares held by Drysdale Partners.

(10): Includes 40,000 shares of common stock issuable upon exercise of warrants.
(11): Includes 10,000 shares of common stock issuable upon exercise of warrants.
(12): Includes 2,000 shares of common stock issuable upon exercise of warrants.
(13): Includes 4,000 shares of common stock issuable upon exercise of warrants.
(14): Includes 4,000 shares of common stock issuable upon exercise of warrants.
(15): Includes 18,000 shares of common stock issuable upon exercise of warrants.
(16): Includes 10,000 shares of common stock issuable upon exercise of warrants.
(17): Includes 25,000 shares of common stock issuable upon exercise of warrants.
(18): Includes 35,000 shares of common stock issuable upon exercise of warrants.
(19): Includes 65,000 shares of common stock issuable upon exercise of warrants.
(20): Includes 5,000 shares of common stock issuable upon exercise of warrants.
(21): Includes 50,000 shares of common stock issuable upon exercise of warrants.
(22): Includes 374,432 shares of common stock issuable upon conversion of Series B-1 Preferred Stock and 300,800 shares of common stock issuable upon exercise of warrants.
(23): Includes 60,000 shares of common stock issuable upon exercise of warrants.
(24): Includes 8,000 shares of common stock issuable upon exercise of warrants.
(25): Includes 315,425 shares of common stock issuable to J.F. Shea & Co., Inc. upon conversion of Series B-1 Preferred Stock and 144,480 shares of common stock issuable to J.F. Shea & Co., Inc upon exercise of warrants. Shea Ventures LLC may be deemed to beneficially own these shares.
(26): Includes 50,000 shares of common stock issuable upon exercise of warrants.
(27): Includes 100,000 shares of common stock issuable upon exercise of warrants.

Plan of Distribution

We are registering the shares of common stock (including shares issued or issuable upon exercise of the warrants) to permit the resale of the shares of common stock from time to time after the date of this prospectus. We will not receive any of the proceeds from the sale by the selling securityholders of the shares of common stock, although we may receive up to approximately $1.3 million upon exercise of the warrants. We will bear all fees and expenses incident to our obligation to register the shares of common stock.

The selling securityholders may sell all or a portion of the common stock beneficially owned by them and offered hereby from time to time directly or through one or more underwriters, broker-dealers or agents. If the common stock is sold through underwriters or broker-dealers, the selling securityholder will be responsible for underwriting discounts or commissions or agent's commissions. The common stock may be sold in one or more transactions at fixed prices, at prevailing market prices at the time of the sale, at varying prices determined at the time of sale, or at negotiated prices. These sales may be effected in transactions, which may involve crosses or block transactions,

(1): on any national securities exchange or quotation service on which the securities may be listed or quoted at the time of sale,
(2): in the over-the-counter market,
(3): in transactions otherwise than on these exchanges or systems or in the over-the-counter market,
(4): through the writing of options, whether such options are listed on an options exchange or otherwise,
(5): through the settlement of short sales, or
(6): by any other legally available means.

If the selling securityholders effect such transactions by selling shares of common stock to or through underwriters, broker-dealers or agents, such underwriters, brokers-dealers or agents may receive commissions in the form of discounts, concessions or commissions from the selling securityholders or commissions from purchasers of the shares of common stock for whom they may act as agent or to whom they may sell as principal (which discounts, concessions or commissions as to particular underwriters, brokers-dealers or agents may be in excess of those customary in the types of transactions involved). To the extent that shares are sold through Commonwealth Associates, L.P. as selling broker, Commonwealth will receive no more than the customary brokerage commission. In connection with sales of the common stock or otherwise, the selling securityholders may enter into hedging transactions with broker-dealers, which may in turn engage in short sales of the common stock in the course of hedging in positions they assume. The selling securityholders may also sell shares of common stock short and deliver shares of common stock covered by this prospectus to close out short positions, provided that the short sale is made after the registration statement is declared effective and a copy of this prospectus is delivered in connection with the short sale. The selling securityholder may also loan or pledge shares of common stock to broker-dealers that in turn may sell such shares.

The selling securityholders may pledge or grant a security interest in some or all of the shares of common stock owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of common stock from time to time pursuant to the prospectus. The selling securityholders also may transfer and donate the shares of common stock in other circumstances in which case the transferees, donees, pledgees or other successors in interest will be the selling beneficial owners for purposes of the prospectus.

The selling securityholders and any broker-dealer participating in the distribution of the shares of common stock may be deemed to be "underwriters" within the meaning of the Securities Act, and any commissions paid, or any discounts or concessions allowed to any such broker-dealer may be deemed to be underwriting commissions or discounts under the Securities Act. At the time a particular offering of the shares of common stock is made, a prospectus supplement, if required, will be distributed which will set forth the aggregate amount of shares of common stock being offered and the terms of the offering, including the name or names of any broker-dealers or agents, any discounts, commissions and other terms constituting compensation from the selling securityholder and any discounts, commissions or concessions allowed or reallowed or paid to broker-dealers.

Under the securities laws of some states, the shares of common stock may be sold in such states only through registered or licensed brokers or dealers. In addition, in some states the shares of common stock may not be sold unless such shares have been registered or qualified for sale in such state or an exemption from registration or qualification is available and is complied with.

There can be no assurance that any selling securityholder will sell any or all of the shares of common stock registered pursuant to the shelf registration statement, of which this prospectus forms a part.

The selling securityholders and any other person participating in such distribution will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including, without limitation, Regulation M of the Exchange Act, which may limit the timing of purchases and sales of any of the shares of common stock by the selling securityholders and any other participating person. Regulation M may also restrict the ability of any person engaged in the distribution of the shares of common stock to engage in market-making activities with respect to the shares of common stock. All of the foregoing may affect the marketability of the shares of common stock and the ability of any person or entity to engage in market-making activities with respect to the shares of common stock.

We will pay all expenses of the registration of the shares of common stock pursuant to the registration rights agreement estimated to be $40,000 in total, including, without limitation, Securities and Exchange Commission filing fees, expenses of compliance with state securities or "blue sky" laws and transfer agent fees relating to sales pursuant to this prospectus; provided, however, that the selling securityholders will pay all underwriting discounts and selling commissions, if any. In connection with sales made pursuant to this prospectus, we will indemnify the selling securityholders against liabilities, including some liabilities under the Securities Act, in accordance with the registration rights agreement or the selling securityholders will be entitled to contribution. We will be indemnified by the selling securityholders against civil liabilities, including liabilities under the Securities Act that may arise from any written information furnished to us by the selling securityholders for use in this prospectus, in accordance with the related registration rights agreement or we will be entitled to contribution.

Once sold under the shelf registration statement, of which this prospectus forms a part, the shares of common stock will be freely tradable in the hands of persons other than our affiliates.

Legal Matters

The validity of the issuance of the shares of common stock being offered by this prospectus will be passed upon for us by Wilson Sonsini Goodrich & Rosati, Professional Corporation.

Experts

The consolidated financial statements incorporated in this prospectus by reference to the Annual Report on Form 10-K for the year ended February 28, 2002 have been so incorporated in reliance on the report (which contains an explanatory paragraph relating to Intraware, Inc.'s ability to continue as a going concern as described in note 1 to the consolidated financial statements) of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting.

Where You Can Find More Information

We are subject to the information requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In accordance with the Exchange Act, Intraware files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information filed by Intraware may be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. Copies of such material also may be obtained at prescribed rates from the Public Reference Branch of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549-1004. Please call the Commission at 1-800-SEC-0330 for further information on the public reference rooms. Intraware's common stock is listed on The Nasdaq SmallCap Market System and such reports, proxy statements and other information concerning Intraware may be inspected at the offices of The Nasdaq Stock Market, Inc. 1735 K Street, N.W., Washington, D.C. 20016-1506. The Commission maintains a web site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission.

The SEC allows us to "incorporate by reference" the information we file with them, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is considered to be part of this prospectus, and information we later file with the SEC will automatically update and supersede this information. We incorporate by reference the documents listed below and any future filings we will make with the SEC under Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act until this offering is complete:

•: Our Annual Report on Form 10-K for the fiscal year ended February 28, 2002 (File No. 000-25249);
•: Our Current Report on Form 8-K as filed with the Commission on May 31, 2002; and
•: The description of our common stock which is contained in our Registration Statement on Form 8-A filed with the Commission on January 8, 1999 pursuant to Section 12 of the Exchange Act, and any description of any of our securities which is contained in any registration statement filed after the date hereof under Section 12 of the Exchange Act, including any amendment or report filed for the purpose of updating any such description.

You may also request a copy of these filings, at no cost by writing or telephoning us at the following address:

Intraware, Inc.
General Counsel
25 Orinda Way
Orinda, California 94563
(925) 253-4500

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the costs and expenses payable by Intraware in connection with the sale of common stock being registered. All amounts are estimates except the SEC registration fee.

		Amount to be Paid
SEC registration fees		$	559
Legal fees and expenses			25,000
Accounting fees and expenses			5,000
Miscellaneous fees and expenses			9,441

	Total	$	40,000

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law authorizes a court to award, or a corporation's board of directors to grant, indemnity to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933. Our amended and restated certificate of incorporation, as amended, and our amended and restated bylaws provide for indemnification of our directors, officers, employees and other agents to the maximum extent permitted by Delaware law. In addition, we have entered into indemnification agreements with our officers and directors.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE

Exhibit Number
4.1		Warrant Agreement dated May 24, 2002 between Intraware, Inc. and Commonwealth Associates, L.P. and Form of Investor Warrant Certificate.
4.2		Form of Placement Agent Warrant with $1.00 exercise price.
4.3		Form of Placement Agent Warrant with $1.19 exercise price.
4.4		Registration Rights Agreement, dated May 24, 2002 by and among Intraware, Inc., Commonwealth Associates, L.P. and the investors named therein.
5.1		Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation, regarding legality of the securities being registered.
10.1		Form of Subscription Agreement, dated May 24, 2002 by and among Intraware, Inc. and the investors.
10.2		Placement Agency Agreement, dated May 10, 2002 by and between Intraware, Inc. and Commonwealth Associates, L.P.
23.1		Consent of PricewaterhouseCoopers LLP.
23.2		Consent of Attorneys (see Exhibit 5.1).

II-1

ITEM 17. UNDERTAKINGS

(a) We undertake:

(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:

(i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;

(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement.

(iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement;

(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

(b) The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the Company's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in this registration statement shall be deemed to be a new registration statement relating to the securities offered thereby, and the offering of such securities at the time shall be deemed to be the initial bona fide offering thereof.

(c) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act, and is, therefore, unenforceable. If a claim for indemnification against such liabilities (other than payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

II-2

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Orinda, State of California on June 13, 2002.

		INTRAWARE, INC.
		By:		/s/ PETER H. JACKSON Peter H. Jackson Chief Executive Officer

II-3

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Peter H. Jackson and John J. Moss, and each of them, his attorneys-in-fact, each with the power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to sign any registration statement for the same offering covered by this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, and all post-effective amendments thereto, and to file the same, with all exhibits thereto in all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every Act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that such attorneys-in-fact and agents or any of them, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.

Signature	Title	Date

/s/ PETER H. JACKSON Peter H. Jackson	Chief Executive Officer and Director (Principal Executive Officer)	June 13, 2002
/s/ WENDY A. NIETO Wendy A. Nieto	Chief Financial Officer (Principal Accounting Officer)	June 13, 2002
Laurence M. Baer	Director	June 13, 2002
/s/ RONALD E.F. CODD Ronald E.F. Codd	Director	June 13, 2002
/s/ MARK B. HOFFMAN Mark B. Hoffman	Director	June 13, 2002
/s/ FROST R.R. PRIOLEAU Frost R. R. Prioleau	President and Director	June 13, 2002

II-4

EXHIBIT INDEX

Exhibit Number
4.1		Warrant Agreement dated May 24, 2002 between Intraware, Inc. and Commonwealth Associates, L.P. and Form of Investor Warrant Certificate.
4.2		Form of Placement Agent Warrant with $1.00 exercise price.
4.3		Form of Placement Agent Warrant with $1.19 exercise price.
4.4		Registration Rights Agreement, dated May 24, 2002 by and among Intraware, Inc., Commonwealth Associates, L.P. and the investors named therein.
5.1		Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation, regarding legality of the securities being registered.
10.1		Form of Subscription Agreement, dated May 24, 2002 by and among Intraware, Inc. and the investors.
10.2		Placement Agency Agreement, dated May 10, 2002 by and between Intraware, Inc. and Commonwealth Associates, L.P.
23.1		Consent of PricewaterhouseCoopers LLP.
23.2		Consent of Attorneys (see Exhibit 5.1).

QuickLinks

INTRAWARE, INC. 5,100,240 Shares Common Stock
TABLE OF CONTENTS
The Company
Information Regarding Forward-Looking Statements
Risk Factors
Use of Proceeds
Selling Securityholders
Plan of Distribution
Legal Matters
Experts
Where You Can Find More Information
PART II INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE

ITEM 17. UNDERTAKINGS

SIGNATURES
EXHIBIT INDEX
EX-4.1 3 a2081927zex-4_1.htm EXHIBIT 4.1

Exhibit 4.1

WARRANT AGREEMENT

AGREEMENT, dated as of this 24th day of May, 2002, by and among INTRAWARE, INC., a Delaware corporation (the “Company”), and COMMONWEALTH ASSOCIATES, L. P., a New York limited partnership (the “Placement Agent”).

W I T N E S S E T H

WHEREAS, in connection with a private placement (the “Placement”) of up to 60 units (“Units”), each Unit consisting of (i) 100,000 shares of Common Stock (the “Shares”), and (ii) four-year warrants to purchase 20,000 shares of Common Stock (the “Warrants”), each Warrant exercisable to purchase one share of the Company’s Common Stock

NOW THEREFORE, in consideration of the premises and the mutual agreements hereinafter set forth and for the purpose of defining the terms and provisions of the Warrants and the certificates representing the Warrants and the respective rights and obligations thereunder of the Company, the holders of certificates representing the Warrants and the Warrant Agent, the parties hereto agree as follows:

The Warrant Agent may at any time consult with counsel satisfactory to it (who may be counsel for the Company) and shall incur no liability or responsibility for any action taken, suffered or omitted by it in good faith in accordance with the opinion or advice of such counsel.

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

	INTRAWARE, INC.

	By:	/s/ Peter H. Jackson
		Name: Peter H. Jackson
		Title: Chief Executive Officer

	COMMONWEALTH ASSOCIATES, L.P.

	By:	Commonwealth Associates Management
		Company, Inc., its general partner

	By:	/s/ Joseph Wynne
		Name: Joseph Wynne
		Title: Secretary

THIS WARRANT AND ANY SHARES OF COMMON STOCK ISSUABLE UPON ITS EXERCISE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE TRANSFERRED UNTIL (1) A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 (THE “SECURITIES ACT”) SHALL HAVE BECOME EFFECTIVE WITH RESPECT THERETO, OR (2) RECEIPT BY THE ISSUER OF AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE ISSUER TO THE EFFECT THAT REGISTRATION UNDER THE SECURITIES ACT IS NOT REQUIRED IN CONNECTION WITH SUCH PROPOSED TRANSFER NOR IS SUCH TRANSFER IN VIOLATION OF ANY APPLICABLE STATE SECURITIES LAWS.

No.PO2W

May 24, 2002

________ Warrants

VOID AFTER MAY24, 2006

WARRANT CERTIFICATE FOR PURCHASE OF COMMON STOCK

CORPORATION

This certifies that FOR VALUE RECEIVED ________________________ or registered assigns (the “Registered Holder”) is the owner of the number of Warrants (“Warrants”) specified above. Each Warrant initially entitles the Registered Holder to purchase, subject to the terms and conditions set forth in this Certificate and the Warrant Agreement (as hereinafter defined), one fully paid and nonassessable share of common stock (“Common Stock”) of Intraware, Inc., a Delaware corporation (the “Company”), at any time commencing on the Initial Warrant Exercise Date (as defined in the Warrant Agreement) and prior to the Expiration Date (as hereinafter defined), upon the presentation and surrender of this Warrant Certificate with the Subscription Form on the reverse hereof duly executed, at the corporate office of the Company, as warrant agent, or its successor (the “Warrant Agent”), accompanied by payment of an amount equal to $___ per share for each Warrant (the “Exercise Price”) in lawful money of the United States of America in cash or by official bank or certified check made payable to the Company. The the Exercise Price is subject to adjustment in accordance with the terms and conditions of Section 8 of the Warrant Agreement.

This Warrant Certificate and each Warrant represented hereby are issued pursuant to and are subject in all respects to the terms and conditions set forth in the Warrant Agreement (the “Warrant Agreement”), dated May24, 2002 by and among the Company, and Commonwealth Associates, L.P., as representative of the placement agents.

In the event of certain contingencies provided for in the Warrant Agreement, the Exercise Price or the number of shares of Common Stock subject to purchase upon the exercise of each Warrant represented hereby are subject to modification or adjustment.

Each Warrant represented hereby is exercisable at the option of the Registered Holder, but no fractional shares of Common Stock will be issued. In the case of the exercise of less than all the Warrants represented hereby, the Company shall cancel this Warrant Certificate upon the surrender hereof and shall execute and deliver a new Warrant Certificate or Warrant Certificates of like tenor, which the Warrant Agent shall countersign, for the balance of such Warrants.

The term “Expiration Date” shall mean 5:00 P.M. (New York time) on May 24, 2006. If such date shall in the State of New York be a holiday or a day on which the banks are authorized to close, then the Expiration Date shall mean 5:00 P.M. (New York time) the next following day which in the State of New York is not a holiday or a day on which banks are authorized to close. The Company may, at its election, extend the Expiration Date.

This Warrant Certificate is exchangeable, upon the surrender hereof by the Registered Holder at the corporate office of the Warrant Agent, for a new Warrant Certificate or Warrant Certificates of like tenor representing an equal aggregate number of Warrants, each of such new Warrant Certificates to represent such number of Warrants as shall be designated by such Registered Holder at the time of such surrender. Upon due presentment with any tax or other governmental charge imposed in connection therewith, for registration of transfer of this Warrant Certificate at such office, a new Warrant Certificate or Warrant Certificates representing an equal aggregate number of Warrants will be issued to the transferee in exchange therefor, subject to the limitations provided in the Warrant Agreement.

Prior to the exercise of any Warrant represented hereby, the Registered Holder shall not be entitled to any of the rights of a stockholder of the Company, including, without limitation, the right to vote or to receive dividends or other distributions, and shall not be entitled to receive any notice of any proceedings of the Company, except as provided in the Warrant Agreement.

Prior to due presentment for registration of transfer hereof, the Company may deem and treat the Registered Holder as the absolute owner hereof and of each Warrant represented hereby (notwithstanding any notations of ownership or writing hereon made by anyone other than a duly authorized officer of the Company) for all purposes and shall not be affected by any notice to the contrary.

This Warrant Certificate shall be governed by and construed in accordance with the laws of the State of New York.

IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed, manually or in facsimile by two of its officers thereunto duly authorized and a facsimile of its corporate seal to be imprinted hereon.


	INTRAWARE, INC.

Dated: May 24, 2002
	By:
		Name: Peter H. Jackson
		Title: Chief Executive Officer

	By:
		Name: John Moss
		Title: Secretary

SUBSCRIPTION FORM

To Be Executed by the Registered Holder

in Order to Exercise Warrants

The undersigned Registered Holder hereby irrevocably elects to exercise Warrants represented by this Warrant Certificate, and to purchase the securities issuable upon the exercise of such Warrants, and requests that certificates for such securities shall be issued in the name of

PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER

______________________________

[please print or type name and address]

and be delivered to

______________________________

[please print or type name and address]

and if such number of Warrants shall not be all the Warrants evidenced by this Warrant Certificate, that a new Warrant Certificate for the balance of such Warrants be registered in the name of, and delivered to, the Registered Holder at the address stated below.

Dated:						Number of Warrants Exercised
X

						Check if Cashless Exercise Election
						(Section 4(b) of Warrant Agreement)


						Address



Taxpayer Identification Number


Signature Guaranteed

ASSIGNMENT

To Be Executed by the Registered Holder

in Order to Assign Warrants

FOR VALUE RECEIVED, ____________________ hereby sells, assigns and transfers unto

PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER

______________________________

[please print or type name and address]

_________________________ of the Warrants represented by this Warrant Certificate, and hereby irrevocably constitutes and appoints ____________________________________ _______________________________ Attorney to transfer this Warrant Certificate on the books of the Company, with full power of substitution in the premises.


Dated:
X

Signature Guaranteed

THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (A BANK, STOCKBROKER, SAVINGS AND LOAN ASSOCIATION OR CREDIT UNION WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM) PURSUANT TO RULE 17Ad-15 OF THE SECURITIES EXCHANGE ACT OF 1934.

EX-4.2 4 a2081927zex-4_2.htm EXHIBIT 4.2

Exhibit 4.2

THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE BEEN ACQUIRED FOR INVESTMENT PURPOSES ONLY AND MAY NOT BE TRANSFERRED UNTIL (i) A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”) SHALL HAVE BECOME EFFECTIVE WITH RESPECT THERETO OR (ii) RECEIPT BY THE COMPANY OF AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY TO THE EFFECT THAT REGISTRATION UNDER THE SECURITIES ACT IS NOT REQUIRED IN CONNECTION WITH SUCH PROPOSED TRANSFER NOR IS SUCH TRANSFER IN VIOLATION OF ANY APPLICABLE STATE SECURITIES LAWS. THIS LEGEND SHALL BE ENDORSED UPON ANY WARRANT ISSUED IN EXCHANGE FOR THIS WARRANT OR ANY SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT.

WARRANT TO PURCHASE COMMON STOCK

INTRAWARE, INC.

No. AW02-1

This is to Certify That, FOR VALUE RECEIVED, ___________________, or assigns (the “Holder”), is entitled to purchase, subject to the provisions of this warrant ______________ fully paid, validly issued and nonassessable shares of common stock of the Company (the “Common Stock”) at a per share price equal to the Exercise Price, subject to adjustment as set forth herein. The number of shares of Common Stock to be received upon the exercise of this Warrant and the price to be paid for each share may be adjusted from time to time as hereinafter set forth. This Warrant, together with warrants of like tenor, constituting in the aggregate warrants (the “Warrants”) to purchase up to 310,200 shares of Common Stock, is being issued pursuant to a placement agency agreement between the Company and Commonwealth Associates, L. P. in connection with a private placement of the Company’s securities (the “Private Placement”).

then, and in each such case, the Company will mail or cause to be mailed to each holder of a Warrant at the time outstanding a notice specifying, as the case may be, (a) the date on which a 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, or (b) the date on which such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding-up is expected to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or such stock or securities at the time receivable upon the exercise of the Warrants) shall be entitled to exchange their shares of Common Stock (or such other stock or securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding-up, such notice shall be mailed at least 30 days prior to the date therein specified.

IN WITNESS WHEREOF, the parties hereto have caused this Warrant Agreement to be duly executed as of the 24th day of May, 2002.

	INTRAWARE, INC.

	By:
		Name:
		Title:

EXERCISE FORM

Dated ____________________

(1) The undersigned hereby irrevocably elects to exercise the within Warrant to the extent of purchasing shares of Common Stock of Intraware, Inc. (or such number of shares or other securities or property to which the undersigned is entitled in lieu thereof or in addition thereto under the provisions of the Warrant).

(2) The undersigned elects to exercise the within Warrant on a cashless basis pursuant to the provisions of Section (b)(2) of the Warrant by checking below:

______ check if cashless exercise; or

(3) The undersigned encloses herewith a bank draft, certified check or money order payable to the Company in payment of the exercise price determined under, and on the terms specified in, the Warrant.

(4) The undersigned hereby irrevocably directs that the said shares be issued and delivered as follows:


Signature of Subscriber


Print Name

ASSIGNMENT FORM

FOR VALUE RECEIVED, hereby sells, assigns and transfers unto

Name

(Please typewrite or print in block letters)

Address

the right to purchase shares of Common Stock represented by this Warrant to the extent of shares as to which such right is exercisable and does hereby irrevocably constitute and appoint ______________ Attorney, to transfer the same on the books of the Company with full power of substitution in the premises.

Date

Signature

EX-4.3 5 a2081927zex-4_3.htm EXHIBIT 4.3

Exhibit 4.3

WARRANT TO PURCHASE COMMON STOCK

INTRAWARE, INC.

No. AW02-1A

This is to Certify That, FOR VALUE RECEIVED, ___________________, or assigns (the “Holder”), is entitled to purchase, subject to the provisions of this warrant ___________________ fully paid, validly issued and nonassessable shares of common stock of the Company (the “Common Stock”) at a per share price equal to the Exercise Price, subject to adjustment as set forth herein. The number of shares of Common Stock to be received upon the exercise of this Warrant and the price to be paid for each share may be adjusted from time to time as hereinafter set forth. This Warrant, together with warrants of like tenor, constituting in the aggregate warrants (the “Warrants”) to purchase up to 62,040 shares of Common Stock, is being issued pursuant to a placement agency agreement between the Company and Commonwealth Associates, L. P. in connection with a private placement of the Company’s securities (the “Private Placement”).

IN WITNESS WHEREOF, the parties hereto have caused this Warrant Agreement to be duly executed as of the 24th day of May, 2002.

	INTRAWARE, INC.

	By:
		Name:
		Title:

EXERCISE FORM

Dated ____________________

(2) The undersigned elects to exercise the within Warrant on a cashless basis pursuant to the provisions of Section (b)(2) of the Warrant by checking below:

______ check if cashless exercise; or

(4) The undersigned hereby irrevocably directs that the said shares be issued and delivered as follows:


Signature of Subscriber


Print Name

ASSIGNMENT FORM

FOR VALUE RECEIVED, hereby sells, assigns and transfers unto

Name
(Please typewrite or print in block letters)


Address

Date


Signature

EX-4.4 6 a2081927zex-4_4.htm EXHIBIT 4.4

Exhibit 4.4

REGISTRATION RIGHTS AGREEMENT

REGISTRATION RIGHTS AGREEMENT (the “Agreement”), dated as of May 24, 2002, by and between Intraware, Inc., a Delaware corporation (the “Company”), Commonwealth Associates, L.P., a New York limited partnership (“Commonwealth”), and each of the investors identified on Schedule 1 hereto (as such schedule may be updated from time to time) and signatory hereto (each, an “Investor”, and collectively, the “Investors”) or their permitted assigns (each, a “Holder”, and collectively, the “Holders”).

WHEREAS, this Agreement is being entered into in connection with the financing extended by the Investors to the Company (the “Financing”) in which, pursuant to the terms of subscription agreements entered into between the Company and each Investor (collectively, the “Subscription Agreement”), each Investor will receive units (the “Units”) consisting of (a) shares (the “Shares”) of common stock, par value $0.0001 per share (the “Common Stock”), and (b) four-year warrants (the “Warrants”) to purchase shares of Common Stock (the “Warrant Shares”) and in which, pursuant to the terms of the Placement Agency Agreement, dated May 10, 2002, between Commonwealth and the Company, Commonwealth will receive Warrants to purchase shares of Common Stock (the “Agent’s Shares”); and

WHEREAS, the terms of the Financing contemplate that the Conversion Shares, the Warrant Shares and the Agent’s Shares are entitled to registration rights.

NOW, THEREFORE, in consideration of the foregoing and the mutual promises, representations, warranties and covenants and agreements contained herein, the Company and each of the Investors hereto, intending to be legally bound hereby agree as follows:

I. DEFINITIONS.

The following additional definitions shall apply for purposes of this Agreement:

II. REGISTRATION.

III. OBLIGATIONS OF THE COMPANY.

Whenever required under this Agreement to effect the registration of any Registrable Securities, the Company will, as expeditiously as possible, fulfill the following obligations:

IV. OBLIGATIONS OF THE HOLDERS.

V. INDEMNIFICATION.

In the event of any registration under this Agreement:

VI. MISCELLANEOUS.

VII. GENERAL.

If to the Company:

Intraware, Inc.

25 Orinda Way

Orinda, CA 94563

Telephone: (925) 253-4500

Facsimile: (925) 253-4541

Attention: General Counsel

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

Wilson Sonsini Goodrich & Rosati, Professional Corporation

650 Page Mill Road

Palo Alto, CA 94304-1050

Telephone: (650) 493-9300

Facsimile: (650) 493-6811

Attention: Adam R. Dolinko, Esq.

If to a Holder, to its most recent address and facsimile number provided to the Company five (5) days prior to the effectiveness of any change thereof, together with a copy to Commonwealth Associates, L.P., 830 Third Avenue, New York, NY 10022.

Written confirmation of receipt (a) given by the recipient of such notice, consent, waiver or other communication, (b) mechanically or electronically generated by the sender’s facsimile machine containing the time, date, recipient facsimile number and an image of the first page of such transmission, or (c) provided by an overnight courier service shall be rebuttable evidence of personal

service, receipt by facsimile or receipt from an overnight courier service in accordance with clause (a), (b) or (c) above, respectively.

[remainder of page intentionally left blank]

	INTRAWARE, INC.

	By:	/s/ Peter H. Jackson
		Name: Peter H. Jackson
		Title: Chief Executive Officer

The foregoing Agreement is hereby accepted as of the date

first above written:

By:
Investor Name:
	Title:

COMMONWEALTH ASSOCIATES, L.P.

By:	Commonwealth Associates Management Company, Inc.

By:	/s/ Joseph Wynne
	Name: Joseph Wynne
	Title: Secretary

SCHEDULE I

No.	Name	Address	Number of Shares	Number of Warrants

1.	Apodaca Investment Partners, LP	505 Montgomery, Suite 1100 San Francisco, CA 94111	100,000	20,000
2.	Passport I, LP	One Sansome St., 39^th Floor San Francisco, CA 94104	250,000	50,000
3.	Cranshire Capital, L.P.	666 Dundee Road, Suite 1901 Northbrook, IL 60062	250,000	50,000
4.	Micro Capital Fund, Ltd.	410 Jessie St., #1002 San Francisco, CA 94103	175,000	35,000
5.	Micro Capital Fund, L.P.	410 Jessie St., #1002 San Francisco, CA 94103	325,000	65,000
6.	Primarius Partners LP	One Montgomery, Suite 3300 San Francisco, CA 94104	40,000	8,000
7.	Triton West Group	601 Montgomery St., Suite 1060 San Francisco, CA 94111	500,000	100,000
8.	Stacy B. and Thomas T. McCormick Family Trust	17 Camino Encinas Orinda, CA 94563	125,000	25,000
9.	Lloyd A. Moriber	Palm Bay Towers 720 NE 69^thStreet Miami, FL 33138	25,000	5,000
10.	ComVest Venture Partners, LP	830 Third Avenue New York, NY 10022	250,000	50,000
11.	George M. Drysdale	35B Pacific Plaza Ayala Ave. Makati, Phillippines	200,000	40,000
12.	Robert Priddy	3435 Kingsboro Road Apt. 1601 Atlanta, GA 30326	300,000	60,000
13.	Shea Ventures, LLC	655 Brea Canyon Road Walnut, CA 91789	250,000	50,000

No.	Name	Address	Number of Shares	Number of Warrants

14.	Capital Ventures International	c/o Heights Capital Management Attention: Mike Mollen 401 City Avenue, Suite 220 Bala Cynwyd, PA 19004	1,000,000	200,000
15.	Harvard Investments, Inc.	7600 E. Doubletree Ranch Rd. #220 Scottsdale, AZ 85258	20,000	4,000
16.	Harvard Developments Inc.	2000-1874 Scarth Street Regina, Saskatchewan, Canada S4P 4B3	10,000	2,000
17.	Carol R. Hill Spousal Trust	Suite 29, First Floor Beckwith Mall Lower Broad Street BridgeTown, Barbados	20,000	4,000
18.	Allan MacDonald and Eileen MacDonald JTWROS	48 Inverleith Place EH3 5QB Edinburgh Scotland, United Kingdom	50,000	10,000
19.	Noam Gottesman and Geraldine Gottesman	31 Phillimore Gardens London, W8 70G United Kingdom	50,000	10,000
20.	Commonwealth Associates, L.P.	830 Third Avenue New York, NY 10022		354,240
21.	Ladenburg Thalmann & Co. Inc.	590 Madison Ave. New York, NY 10022		18,000
	TOTAL:		3,940,00	1,160,240

EXHIBIT A

Form of Letter to Transfer Agent

[Transfer Agent]

Attn:

Re: Intraware, Inc.

Ladies and Gentlemen:

Reference is made to (a) the Subscription Agreements between Intraware, Inc., a Delaware corporation (the “Company”), and the investor parties thereto (the “Holders”) pursuant to which the Company is issuing to the Holders shares of its common stock and common stock purchase warrants (the Subscription Agreements”) and (b) the Registration Rights Agreement dated May __, 2002 (the “Registration Agreement”) by and among Company, Commonwealth Associates, L.P. and the Holders pursuant to which the Company agreed to register such shares of common stock and the common stock issuable upon exercise of the common stock purchase warrants (the “Common Stock”).

This letter shall serve as our irrevocable authorization and direction to you (provided that you are the transfer agent for the Company with respect to its Common Stock at such time) to issue Common Stock from time to time upon notice from the Company. So long as you have previously received (i) an opinion of the Company’s outside counsel substantially in the form of Exhibit A attached hereto (the “Opinion”) (which the Company shall direct be delivered to you by such outside counsel upon the effectiveness of the registration statement covering resales of Common Stock) stating that a registration statement covering resales of Common Stock has been declared effective by the Securities and Exchange Commission under the Securities Act of 1933, as amended, (ii) a certification from the clearing broker for the Holders as to compliance with the prospectus delivery requirements and as to the fact that the sale of the Common Stock was made in compliance with the “Plan of Distribution” section set forth in such registration statement (the “Broker Certification”), (iii) a copy of such registration statement and (iv) confirmation from the Company that sales are permitted under the registration statement at that time, then certificates representing Common Stock sold pursuant to such registration statement shall not bear any legend restricting transfer of Common Stock thereby and should not be subject to any stop-transfer restriction. Provided, however, that if you have not previously received a copy of the Opinion, the Broker Certification and such registration statement, then the certificates representing Common Stock shall bear the following legend:

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ISSUED IN RELIANCE UPON AN EXEMPTION FROM, OR IN A

TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”). THE SECURITIES MAY NOT BE OFFERED, SOLD, TRANSFERRED OR ASSIGNED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS.

Please be advised that the Holders have relied upon this instruction letter as an inducement to enter into the Subscription Agreements and the Registration Rights Agreement, accordingly, each of the Holders is a third party beneficiary to these instructions.

Please execute this letter in the space indicated to acknowledge your agreement to act in accordance with these instructions.

	Very truly yours,

	INTRAWARE, INC.

EXHIBIT B

Form of Notice of Effectiveness of Registration Statement

[Transfer Agent]

Attn:

Re: Intraware, Inc.

Ladies and Gentlemen:

We are counsel to Intraware, Inc., a Delaware corporation (the “Company”), and have represented the Company in connection with those certain Subscription Agreements (the “Subscription Agreements”) entered into by and among the Company and the Investors named therein (collectively, the “Holders”) pursuant to which the Company issued to the Holders 8% senior secured promissory notes and warrants (the “Warrants”) to purchase shares of the Company’s common stock, par value $0.0001 per share (the “Common Stock”) . Pursuant to the above mentioned agreements, the Company also has entered into a Registration Rights Agreement with the Holders (the “Registration Rights Agreement”) pursuant to which the Company agreed, among other things, to register the Registrable Securities (as defined in the Registration Rights Agreement), including the shares of Common Stock issuable upon exercise of the Warrants, under the 1933 Act of 1933, as amended (the “1933 Act”). In connection with the Company’s obligations under the Registration Rights Agreement, on ____________ ____, the Company filed a Registration Statement on Form S-3 (File No. 333-_____________) (the “Registration Statement”) with the Securities and Exchange Commission (the “SEC”) relating to the Registrable Securities which names each of the Holders as a selling stockholder thereunder.

In connection with the foregoing, we advise you that a member of the SEC’s staff has advised us by telephone that the SEC has entered an order declaring the Registration Statement effective under the 1933 Act at [Enter Time of Effectiveness] on [Enter Date of Effectiveness] and we have no knowledge, after telephonic inquiry of a member of the SEC’s staff, that any stop order suspending its effectiveness has been issued or that any proceedings for that purpose are pending before, or threatened by, the SEC and the Registrable Securities are available for resale under the 1933 Act pursuant to the Registration Statement.

	Very truly yours,
	[Issuer’s Counsel]
	By:

cc: [List Names of Holders]

EX-5.1 7 a2081927zex-5_1.htm EXHIBIT 5.1
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Exhibit 5.1

[LETTERHEAD OF WILSON SONSINI GOODRICH & ROSATI,
PROFESSIONAL CORPORATION]

June 13, 2002

Intraware, Inc.
25 Orinda Way
Orinda, California 94563

Re: Intraware, Inc. (the "Company") Registration Statement on Form S-3

Ladies and Gentlemen:

We are acting as counsel for Intraware, Inc. (the "Company") in connection with the registration under the Securities Act of 1933, as amended, of 5,100,240 shares of common stock, $0.0001 par value per share (the "Shares"), of the Company to be offered and sold by certain securityholders of the Company (the "Selling Securityholders"), of which 1,160,240 shares are issuable (the "Warrant Shares") upon exercise of warrants (the "Warrants"). In this regard, we have participated in the preparation of a Registration Statement on Form S-3 relating to such shares of common stock. Such Registration Statement, as amended, is herein referred to as the "Registration Statement."

We are of the opinion that the Shares and the Warrant Shares to be offered and sold by the Selling Securityholders have been duly authorized and, if issued, are legally issued, fully paid and nonassessable, or, when issued by the Company in accordance with the terms of the Warrants, will be legally issued, fully paid and nonassessable.

We consent to the use of this opinion as an exhibit to the Registration Statement, and further consent to the use of our name wherever appearing in the Registration Statement, including the Prospectus constituting a part thereof, and any amendment thereto.

	Very truly yours,
	WILSON SONSINI GOODRICH & ROSATI Professional Corporation
	/s/ WILSON SONSINI GOODRICH & ROSATI

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Exhibit 5.1

EX-10.1 8 a2081927zex-10_1.htm EXHIBIT 10.1

Exhibit 10.1

INTRAWARE, INC.

SUBSCRIPTION AGREEMENTmade as of this 24th day of May, 2002 between Intraware, Inc., a corporation organized under the laws of the State of Delaware with offices at 25 Orinda Way, Orinda, California 94563 (the “Company”), and the undersigned (the “Subscriber”).

WHEREAS, the Company desires to issue in a private placement to “accredited investors” (the “Placement”) a minimum of 30 (the “Minimum Offering”) and a maximum of 60 (the “Maximum Offering”) units (“Units”) on the terms and conditions set forth herein and in the exhibits hereto, and the Subscriber desires to acquire the number of Units set forth on the signature page hereof; and

WHEREAS each Unit shall consist of: (i) that number of shares of the Company’s common stock (the “Common Stock”) which is equal to $100,000 divided by the Per Share Purchase Price (the “Shares”); and (ii) four-year warrants to purchase the number of shares of Common Stock (the “Warrant Shares”) equal to 20% of the Shares comprising a Unit at an exercise price per share equal to the Market Price (the “Warrants”). The “Per Share Purchase Price” shall be the lower of (i) $1.00 or (ii) 85% of the Market Price. The “Market Price” shall be the average of the closing prices of the Common Stock for the five consecutive trading days immediately preceding the initial closing of the Placement (the “Initial Closing”); and

WHEREAS, the Warrants shall be governed by the warrant agreement in the form attached hereto as Exhibit B (the “Warrant Agreement”); and

WHEREAS, the Shares and Warrant Shares are entitled to registration rights on the terms set forth in this Subscription Agreement and in the Registration Rights Agreement (the “Registration Rights Agreement”), attached hereto as Exhibit C and incorporated herein by reference and made a part hereof; and

WHEREAS, Commonwealth Associates, L.P. is acting as placement agent (the “Placement Agent”) for the Placement pursuant to a placement agency agreement dated as of May 10, 2002 between the Company and the Placement Agent (the “Agency Agreement”); and

WHEREAS, the Subscriber is delivering simultaneously herewith a completed confidential investor questionnaire (the “Questionnaire”).

NOW, THEREFORE, for and in consideration of the premises and the mutual covenants hereinafter set forth, the parties hereto do hereby agree as follows:

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT 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 APPLICABLE STATE SECURITIES LAWS, OR (B) AN OPINION OF COUNSEL, IN A REASONABLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS, OR (II) UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT.

The legend set forth above shall be removed and the Company shall issue a certificate or other instrument without such legend to the holder of the Securities upon which it is stamped, if (a) such Securities are being sold pursuant to a registration statement under the 1933 Act, (b) such holder delivers to the Company an opinion of counsel, in a reasonably acceptable form, to the Company that a disposition of the Securities is being made pursuant to an exemption from such registration, or (c) such holder provides the Company with reasonable assurance that a disposition of the Securities may be made pursuant to the Rule without any restriction as to the number of securities acquired as of a particular date that can then be immediately sold.

The Company represents and warrants to the Subscriber, except as set forth in the disclosure schedules attached hereto:

If to the Company:

Intraware, Inc.
25 Orinda Way
Orinda, CA 94563
Telephone: (925) 253-4500
Facsimile: (925) 253-4541
Attention: General Counsel

With a copy to:

Wilson Sonsini Goodrich & Rosati, Professional Corporation
650 Page Mill Road
Palo Alto, CA 94304
Telephone: (650) 493-9300
Facsimile: (650) 493-6811
Attention: Adam R. Dolinko, Esq.

If to the Subscriber, to its address and facsimile number set forth at the end of this Subscription Agreement, or to such other address and/or facsimile number and/or to the attention of such other person as specified by written notice given to the Company five (5) days prior to the effectiveness of such change. Written confirmation of receipt (a) given by the recipient of such notice, consent, waiver or other communication, (b) mechanically or electronically generated by the sender’s facsimile machine containing the time, date, recipient facsimile number and an image of the first page of such transmission, or (c) provided by an overnight courier service shall be rebuttable evidence of personal service, receipt by facsimile or receipt from an overnight courier service in accordance with clause (a), (b) or (c) above, respectively.

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


Signature of Subscriber			Signature of Co-Subscriber


Name of Subscriber [please print]			Name of Co-Subscriber [please print]


Address of Subscriber			Address of Co-Subscriber


Social Security or Taxpayer Identification Number of Subscriber			Social Security or Taxpayer Identification Number of Co-Subscriber


Subscriber’s Account Number at Commonwealth Associates


Dollar Amount of Units Subscribed For			Principal Amount of Notes Converted as Payment for Units Subscribed for

*If Subscriber is a Registered Representative with an NASD member firm, have the following acknowledgment signed by the appropriate party:
The undersigned NASD member firm acknowledges receipt of the notice required by Rule 3040 of the NASD Conduct Rules.			Subscription Accepted: INTRAWARE, INC.

			By:
Name of NASD Member			Name: Title:

By
			Dollar Amount of Subscription Accepted
Authorized Officer Accepted

EX-10.2 9 a2081927zex-10_2.htm EXHIBIT 10.2

Exhibit 10.2

INTRAWARE, INC.

PLACEMENT AGENCY AGREEMENT

Commonwealth Associates, L.P.
830 Third Avenue
New York, New York 10022

As of May 10, 2002

Gentlemen:

This Placement Agency Agreement (this “Agreement”) confirms the retention by Intraware, Inc., a Delaware corporation (the “Company”), of Commonwealth Associates, L.P., a New York limited partnership (“Commonwealth” or the “Placement Agent”), to act as the sales agent, on a best efforts basis, in connection with a private placement for the Company, on the terms set forth below.

The Company proposes to offer for sale solely to “accredited investors,” in a private placement (the “Placement”), up to 140 units (including fractions thereof) at $100,000 per unit. In the event that the Placement will result in the issuance of securities representing no more than 19.9% of the Company’s issued and outstanding common stock under applicable guidelines and policies of the Nasdaq Stock Market (the “Issuance Limitation”), each unit (a “Share Unit”) shall consist of: (i) that number of shares of the Company’s common stock (the “Common Stock”) which is equal to $100,000 divided by the Per Share Purchase Price (the “Shares”); and (ii) four-year warrants to purchase the number of shares of Common Stock (the “Warrant Shares”) equal to 20% of the Shares comprising a Share Unit at an exercise price per share equal to the Market Price (the “Warrants”). In the event that the Placement of Share Units will exceed the Issuance Limitation, each unit (a “Note Unit”) shall instead consist of: (i) a $100,000 principal amount 8% senior secured promissory note due August 31, 2002 substantially in the form attached hereto as Appendix A (each, a “Note” and collectively, the “Notes”) convertible upon receipt of the shareholder approval referenced in Section 4(h) hereof (the “Approval”) into the number of Shares which is equal to $100,000 divided by the Per Share Purchase Price; and (ii) Warrants to purchase the number of Warrant Shares equal to 50% of the Shares comprising a Note Unit at an exercise price per share equal to the Market Price. The “Per Share Purchase Price” shall be the lower of (i) $1.00 or (ii) 85% of the Market Price. The “Market Price” shall be the average of the closing prices of the Common Stock for the five consecutive trading days immediately preceding the initial closing of the Placement (the “Initial Closing”). The Share Units and Note Units are collectively referred to herein as the “Units.”

Warrants to be issued to members of the Company’s Board of Directors (the “Board”) or their affiliates, shall be held in escrow until the receipt of the Approval; provided, however, that, the Company may issue the Warrants earlier if the affected directors resign from the Board and the Company and Commonwealth determine, after conferring with Nasdaq, that such issuance will not violate the applicable listing requirements of the Nasdaq. Upon receipt of the Approval, (i) 60% of the Warrants issued as part of the Note Units, if applicable, will be subject to redemption by the Company for nominal consideration and (ii) the Company will release from

escrow, if not previously released, Warrants to purchase the number of Warrant Shares equal to 20% of the Shares comprising a Unit to any members of the Board or their affiliates who purchased a Unit in the Placement. The Warrants shall be governed by a warrant agreement substantially in the form attached hereto as Appendix B (the “Warrant Agreement”).

A minimum of 30 Units ($3,000,000) (the “Minimum Offering”), and a maximum of 140 Units ($14,000,000) (the “Maximum Offering”) will be sold in the Placement; provided, however that the Maximum Offering shall be subject to reduction by the Company, on a dollar for dollar basis, to the extent of proceeds, if any, from sales of the Company’s assets other than the ordinary course of business (a “Sale Transaction”) consummated prior to the Termination Date (as defined in Section 1(a) hereof), or otherwise if the issuance of Warrants and/or Agent’s Warrants (as defined in Section 3(e) hereof) in connection with the sale of Note Units would exceed the Issuance Limitation. In the event there is no Sale Transaction prior to the Termination Date, the Minimum Offering shall be increased to 85 Units ($8,500,000), of which 50 Units must be purchased by check or wire transfer and 35 Units must be purchased upon the cancellation of outstanding 8% senior secured promissory notes issued by the Company in August and September 2001 (the “Bridge Notes”). Up to 70 Units of the Placement may be purchased by investors upon cancellation of Bridge Notes.

The Units will be offered pursuant to those terms and conditions mutually acceptable to Commonwealth, the investors and the Company. The Units are being offered in accordance with Section 4(2) of the Securities Act of 1933, as amended (the “1933 Act”) and Regulation D promulgated thereunder. The Minimum Offering will be made on a “best efforts — all or none” basis and the balance of the Placement will be offered on a best efforts basis.

The form of proposed subscription agreement between the Company and each subscriber for the Placement is referred to herein as the “Subscription Agreement.” The SEC Documents (as defined in Section 2(e) hereof), the Subscription Agreement and all exhibits that are part of the Subscription Agreement are collectively referred to herein as the “Offering Documents.” The Company will prepare and deliver to the Placement Agent a reasonable number of copies of the Offering Documents in form and substance reasonably satisfactory to the Placement Agent and its counsel. The Offering Documents, together with (i) this Agreement, (ii) the Notes, (iii) the Warrant Agreement, (iv) the Registration Rights Agreement among each Subscriber, the Company and the Placement Agent in the form to be agreed to by the Subscribers (the “Registration Rights Agreement”), (v) the Security Agreement and Agency Appointment Agreement in the form to be agreed to by the Subscribers and the holders of the Bridge Notes (the “Security Agreement”), (vi) the Fund Escrow Agreement (as defined in Section 3(b)(ix) hereof), (vii) the Agent’s Warrants (as defined in Section 3(d) hereof), (viii) the Conversion Agreements (as defined in Section 3(c)(i) hereof) and (ix) exhibits, schedules and appendices that are part of the Offering Documents, the Warrant Agreement, the Registration Rights Agreement, the Security Agreement and this Agreement are collectively referred to herein as the “Transaction Documents.”

Each prospective investor subscribing to purchase Units in the Placement (each a “Subscriber”) will be required to deliver, among other things, the Subscription Agreement and a confidential purchaser questionnaire in the form to be provided to prospective investors.

Capitalized terms used herein, unless otherwise defined or unless the context otherwise indicates, shall have the same meanings provided in the Offering Documents.

To provide for just and equitable contribution, if (i) an Indemnified Party makes a claim for indemnification pursuant to Section 5 but it is found in a final judicial determination, not subject to further appeal, that such indemnification may not be enforced in such case, even though this Agreement expressly provides for indemnification in such case, or (ii) any indemnified or indemnifying party seeks contribution under the 1933 Act, the 1934 Act, or otherwise, then the Company (including for this purpose any contribution made by or on behalf

of any officer, director, employee or agent for the Company, or any controlling person of the Company), on the one hand, and the Placement Agent and any Selected Dealers (including for this purpose any contribution by or on behalf of an indemnified party), on the other hand, shall contribute to the losses, liabilities, claims, damages, and expenses whatsoever to which any of them may be subject, in such proportions as are appropriate to reflect the relative benefits received by the Company, on the one hand, and the Placement Agent and the Selected Dealers, on the other hand; provided, however, that if applicable law does not permit such allocation, then other relevant equitable considerations such as the relative fault of the Company and the Placement Agent and the Selected Dealers in connection with the facts which resulted in such losses, liabilities, claims, damages, and expenses shall also be considered. In no case shall the Placement Agent or a Selected Dealer be responsible for a portion of the contribution obligation in excess of the compensation received by it pursuant to Section 3 hereof or the Selected Dealer Agreement, as the case may be. No person guilty of a fraudulent misrepresentation shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. For purposes of this Section 6, each person, if any, who controls the Placement Agent or a Selected Dealer within the meaning of Section 15 of the 1933 Act or Section 20(a) of the 1934 Act and each officer, director, stockholder, employee and agent of the Placement Agent or a Selected Dealer, shall have the same rights to contribution as the Placement Agent or the Selected Dealer, and each person, if any who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20(a) of the 1934 Act and each officer, director, employee and agent of the Company, shall have the same rights to contribution as the Company, subject in each case to the provisions of this Section 6. Anything in this Section 6 to the contrary notwithstanding, no party shall be liable for contribution with respect to the settlement of any claim or action effected without its written consent. This Section 6 is intended to supersede any right to contribution under the 1933 Act, the 1934 Act, or otherwise.

Name(s) in Full

Address(es)

Number of Shares

S.S. or IRS #

If you find the foregoing is in accordance with our understanding, kindly sign and return to us a counterpart hereof, whereupon this instrument along with all counterparts will become a binding agreement between us.

	Very truly yours,

	INTRAWARE, INC.

	By:	/s/ Peter H. Jackson
		Name: Peter H. Jackson
		Title: Chief Executive Officer

Agreed: COMMONWEALTH ASSOCIATES, L.P.

By:	Commonwealth Associates Management Company, Inc.

By:	/s/ Joseph Wynne
	Name: Joseph Wynne
	Title: Secretary

Schedules

EX-23.1 10 a2081927zex-23_1.htm EXHIBIT 23.1
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Exhibit 23.1

Consent of Independent Accountants

We hereby consent to the incorporation by reference in this Registration Statement on Form S-3 of Intraware, Inc. of our report dated April 5, 2002, except as to events described in Note 15 which is dated May 28, 2002, relating to the financial statements and our report dated April 5, 2002 relating to the financial statement schedule, which appear in Intraware, Inc.'s Annual Report on Form 10-K for the year ended February 28, 2002. We also consent to the reference to us under the heading "Experts" in such Registration Statement.

/s/ PricewaterhouseCoopers LLP

San Francisco, California
June 11, 2002

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Exhibit 23.1

Consent of Independent Accountants