Revised Preliminary Notice & Proxy Statement

NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders (“Annual Meeting”) of Modtech Holdings, Inc. (the “Company”) will be held at the Park Hyatt San Francisco, 333 Battery Street, San Francisco, California 94111, on Tuesday, December 13, 2005 at 1:00 P.M., local time, for the following purposes:

The Board of Directors has fixed the close of business on November 4, 2005 as the record date for the determination of the stockholders entitled to notice of and to vote at the Annual Meeting, and only stockholders of record at the close of business on that date will be entitled to vote at the Annual Meeting. A copy of the Annual Report of the Company for the fiscal year ended December 31, 2004 and a Proxy Statement accompany this notice.

All stockholders are cordially invited to attend the Annual meeting in person. YOU ARE URGED TO PROMPTLY COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY IN THE ACCOMPANYING PRE-ADDRESSED, STAMPED ENVELOPE. Your proxy is revocable by written notice to the Company at any time prior to the exercise thereof. Your proxy will not be used if you are present at the Annual Meeting and desire to vote your shares personally.

Modtech Holdings, Inc. (sometimes referred to in this Proxy Statement as the “Company”) is sending out this Proxy Statement in connection with the solicitation by the Board of Directors of proxies to be voted at the Annual Meeting of Shareholders to be held at the Park Hyatt San Francisco, 333 Battery Street, San Francisco, California 94111, on Tuesday, December 13, 2005 at 1:00 P.M. local time, and at any continuation or adjournment thereof (the “Annual Meeting”). We are mailing this Proxy Statement, proxy card and our 2004 Annual Report to stockholders on or about November 11, 2005.

Proxies are being solicited to give all stockholders of record an opportunity to vote on matters to be presented at the Annual Meeting. In the following pages of this Proxy Statement, you will find information on the matters to be voted on at the Annual Meeting or any adjournment of that meeting.

You can vote if you were a stockholder of record of the Company as of the close of business on November 4, 2005. Your shares can be voted at the Annual Meeting only if you are present or represented by a valid proxy.

You can vote your shares either by using the enclosed proxy card or by voting in person at the Annual Meeting by written ballot. If you are planning to attend the Annual Meeting, you should bring proof of identification for entrance to the meeting. If your shares are held in the name of a broker, bank or other nominee, you may be asked to present proof of identification and a statement from the broker, bank or other nominee, reflecting your beneficial ownership of our common stock as of November 4, 2005, as well as a proxy from the nominee to you.

To vote your shares by proxy, complete and return the enclosed proxy card to us before the Annual Meeting. We will vote your shares as you direct on your proxy card. You can specify on your card whether your shares should be voted for all, some or none of the nominees for director listed on the card, whether to approve the completed private placement transaction in which we issued 2,046,000 shares of our common stock and warrants to purchase an additional 1,023,000 shares of our common stock, whether to approve the issuance of common stock to be issued upon the conversion of our $25.9 million convertible note and exercise of the related warrants, whether to approve an amendment to the Certificate of Incorporation increasing the number of authorized shares of common stock from 25 million to 55 million, whether to approve an amendment to our 2002 Nonstatutory Stock Option Plan to increase the number of shares issuable upon exercise of options granted under the plan from 1 million to 2 million, and whether to ratify the appointment of Peterson & Company as our independent auditors. You can abstain from voting on any or all of the proposals.

If you sign and return the proxy card, but do not specify how to vote, then we will vote your shares in favor of our nominees for director, in favor of ratifying the private placement, in favor of approving the issuance of

common stock to be issued upon the conversion of our $25.9 million convertible note and exercise of the related warrants, in favor of approving the amendment to the Certificate of Incorporation, in favor of amending our 2002 Nonstatutory Stock Option Plan and in favor of ratifying the appointment of Peterson & Company as our independent auditors.

If any other matters are properly presented at the Annual Meeting for consideration, then our officers named on your proxy card will have discretion to vote for you on those matters. As of the date of this Proxy Statement, we know of no other matters to be presented at the Annual Meeting.

Written ballots will be available from the Company’s Secretary at the Annual Meeting. If your shares are held in the name of a broker, then you must obtain a proxy, executed in your favor, from the holder of record in order for you to vote your shares at the meeting. Voting by proxy will not limit your right to vote at the Annual Meeting if you decide to attend in person. However, if you do send in your proxy card, and also attend the Annual Meeting, then there is no need to vote again, unless you wish to change your vote.

You can revoke your proxy at any time before it is exercised at the Annual Meeting by doing any of the following: (1) you can deliver a valid proxy with a later date; (2) you can notify the Company’s Secretary in writing at the address on the Notice of Annual Meeting that you have revoked your proxy; or (3) you can vote in person by written ballot at the Annual Meeting.

Your proxy card indicates the number of shares of common stock that you own. Each share of common stock has one vote.

A majority of the outstanding shares of our common stock as of the record date must be present, either in person or by proxy, in order for a quorum to be present to conduct the Annual Meeting. On October 15, 2005, 17,054,719 shares of our common stock were outstanding. Abstentions and broker non-votes are counted as present in determining whether or not there is a quorum. A broker “non-vote” occurs when a broker holding shares for a beneficial owner does not vote on a particular proposal because the broker does not have discretionary voting power with respect to the item and has not received voting instructions from the beneficial owner.

Directors are elected by a plurality of the votes, which means the seven nominees who receive the largest number of properly executed votes will be elected as directors. Each share of our common stock is entitled to one vote for each of the seven director nominees. Cumulative voting is not permitted. If you do not vote for a particular nominee, or if you indicate that you want to withhold authority to vote for a particular nominee on your proxy card, then your vote will not count for or against the nominee. Shares not voted (whether by abstention, broker non-vote, or otherwise) have no impact on the outcome of the election. If any director nominee decides that he does not want to stand for this election, the persons named as proxies in your proxy card will vote for substitute nominees. As of the date of this Proxy Statement, we are not aware of any nominee who does not intend to stand for election.

vote only if given voting instructions from the beneficial owner of the shares. An abstention or “broker non-vote” is not counted as a vote cast on the proposal.

To be approved, this matter must receive the affirmative vote of a majority of the total votes cast on the proposal. Brokers holding shares for beneficial owners do not have the discretion to vote on this matter, but may vote only if given voting instructions from the beneficial owner of the shares. An abstention or “broker non-vote” is not counted as a vote cast on the proposal.

To be approved, this matter must receive the affirmative vote of a majority of the outstanding stock entitled to vote thereon. Brokers holding shares for beneficial owners do not have the discretion to vote on this matter, but may vote only if given voting instructions from the beneficial owner of the shares. An abstention or “broker non-vote” will have the effect of a negative vote on the proposal.

Required Vote – Approval of Amendment of 2002 Nonstatutory Stock Option Plan

To be approved, this matter must receive the affirmative vote of a majority of the total votes cast on the proposal. Brokers holding shares for beneficial owners have the discretion to vote on the ratification of auditors without voting instructions from the beneficial owners of the shares. An abstention or “broker non-vote” is not counted as a vote cast on the proposal.

For any other matters properly considered at the meeting to be approved, they must receive the affirmative vote of a majority of the total votes cast on the proposal, unless the vote of a greater number of shares is required by law or our Certificate of Incorporation or Bylaws.

The cost of soliciting proxies will be borne by the Company. It is expected that proxies will be solicited exclusively by mail; however, if it should appear to be desirable to do so, solicitation may be made by telephone, telegraph or personal interview by our directors, officers and other regular employees, without extra compensation. We may also engage the services of a proxy solicitation firm to assist us. If we do so, we do not expect the cost of such services to exceed $10,000. Brokerage houses, nominees, fiduciaries and other custodians will be requested to forward soliciting material to the beneficial owners of shares and will be reimbursed for their expenses.

To reduce the expense of delivering duplicate voting materials to our stockholders, we are delivering only one set of this Proxy Statement and our Annual Report to certain stockholders who share an address, unless otherwise requested. A separate proxy card is included in the voting materials for each of these stockholders.

If you share an address with another stockholder and have received only one set of voting materials, you may write or call us to request to receive a separate copy of these materials at no cost to you. For future annual meetings, you may request separate voting materials, or request that we send only one set of voting materials to you if you are receiving multiple copies, by calling us at: (951) 943-4014 or by writing us at: Modtech Holdings, Inc. 2830 Barrett Avenue, Perris, California 92571 Attn: Dennis L. Shogren, Chief Financial Officer.

The Company’s current Board of Directors has nominated seven (7) individuals, David M. Buckley, Robert W. Campbell, Daniel J. Donahoe III, Stanley N. Gaines, Charles R. Gwirtsman, Charles C. McGettigan and Myron A. Wick III, for election as directors of the Company at the Annual Meeting, each to serve as such until the next annual meeting of the Company’s stockholders and until their respective successors are elected and qualified. Each of the nominees is a current member of the Company’s Board of Directors. Although it is not presently contemplated that any nominee will decline or be unable to serve as a director, in either such event, the proxies will be voted by the proxy holder for such other persons as may be designated by the present Board of Directors should any nominee become unavailable to serve.

Certain information, as of October 15, 2005, concerning the seven nominees is set forth below:

David M. Buckley, age 40, joined the Company in September 2004 as President and Chief Executive Officer. For most of the six years immediately prior to joining the Company (from 1998 to 1999 and from 2001 through 2004), Mr. Buckley held senior executive and management positions at various divisions and subsidiaries of General Electric Company (“GE”) and GE Capital where he was responsible for generating sales growth and raising productivity and profitability by reducing product cycle-times, increasing inventory turns, and improving operational efficiencies. During 2000 through 2001, he was the President and Chief Executive Officer of TIMM Communications, Inc. (“TIMM”), a technology start-up business in the transportation marketplace, in which GE held a substantial ownership. Prior to Mr. Buckley’s employment with TIMM, the company had been losing money. Mr. Buckley went to TIMM at the request of GE to determine why the company was losing money, and to close down operations if it was decided that the losses were not recoverable. As a result of an investigation conducted by Mr. Buckley, it was discovered that TIMM’s founder had been misappropriating funds. Following completion of this investigation, Mr. Buckley secured the assets of TIMM from further misappropriation by the founder, resigned from TIMM and returned to GE. TIMM was subsequently forced into bankruptcy in early 2001, and Mr. Buckley assisted TIMM’s shareholders in a successful lawsuit against the founder to recover the lost monies. Prior to joining GE, Mr. Buckley was a Senior Manager and Principal Consultant for Price Waterhouse LLP (now known as PricewaterhouseCoopers) from 1995 to 1998 and a General Manager at Palmer Incorporated from 1992 to 1995. He has an MBA from the Wharton School of Business and a Bachelor of Science from the United States Naval Academy.

Robert W. Campbell, age 48, who was elected to the Board of Directors of the Company in 1991, has been the Managing Director of Corporate Finance at B. Riley & Co. Inc. since August 2003. From 1995 to August 2003, Mr. Campbell was Managing Director of Corporate Finance at L.H. Friend, Weinress, Frankson & Presson, LLC. Prior to 1995, among the corporate finance and accounting firms Mr. Campbell was associated with were the Seidler Companies, Inc. and Peat, Marwick, Mitchell & Co.

Daniel J. Donahoe III, age 72, who was elected to the Board of Directors of the Company in 1998, is co-founder and President of Red Rock Resorts, which operates special, unique boutique resorts in the Western

United States. He also serves as Chairman of Daybreak Investments, a privately-held investment company. Mr. Donahoe has been actively involved in the commercial and residential real estate market in the southwest over the past 30 years.

Stanley N. Gaines, age 70, has been a director of the Company since August 2000. Mr. Gaines served as the Chairman and CEO of GNB Incorporated from 1982 to 1988. He was Sr. Vice President International from 1981 through 1983 and Group Vice President, Batteries from 1971 through 1981 for Gould Incorporated. Mr. Gaines serves on the Board of Directors of Students in Free Enterprise.

Charles R. Gwirtsman, age 51, has been a director of the Company since February 1999. He is Managing Director of KRG Capital Partners, LLC, a middle-market private equity firm. Prior to joining KRG Capital in 1996, Mr. Gwirtsman served as Senior Vice President of FCM Fiduciary Capital Management Company, the manager of two mezzanine debt funds, from January 1994 to June 1996. Prior to this, Mr. Gwirtsman was employed as a Corporate Vice President at PaineWebber, Incorporated from 1988 to 1993 as a member of the Private Finance Group. Mr. Gwirtsman serves on the Board of Directors of Cuisine Solutions and a number of privately held companies.

Charles C. McGettigan, age 60, serves as Chairman of the Board and has been a director of the Company since June 1994. Mr. McGettigan is a co-founder and managing director of McGettigan, Wick & Co., Inc., an investment banking firm formed in 1988, and a co-founder and general partner of Proactive Investment Managers, L.P., the general partner of Proactive Partners, L.P., a merchant banking fund formed in 1991. Prior to founding McGettigan, Wick & Co., Inc., he was a Principal, Corporate Finance, of Hambrecht & Quist and a Senior Vice President of Dillon, Read & Co. Mr. McGettigan currently is a director of Cuisine Solutions, Inc. and Chairman of Onsite Energy.

Myron A. Wick III, age 62, became a director of the Company in June 1994. Mr. Wick is currently a managing director and co-founder of McGettigan, Wick & Co., Inc., an investment banking firm formed in 1988, and a general partner of Proactive Investment Managers, L.P., the general partner of Proactive Partners, L.P., a merchant banking fund formed in 1991. Mr. Wick is a director of CTC Media and Citizens Communications.

Mr. Buckley is the only director employed by the Company. There is no family relationship between any director and any other director or executive officer of the Company. There are no arrangements or understandings between any director and any other person(s) pursuant to which he was or is to be selected a director. The Board of Directors has determined that Robert W. Campbell, Daniel J. Donahoe III, Stanley N. Gaines, Charles C. McGettigan and Charles R. Gwirtsman are “independent” as defined in the NASDAQ listing standards.

Our Board of Directors unanimously recommends that you vote “FOR” the nominees listed above.

During the last fiscal year, the Board of Directors of the Company held four meetings. Each director attended at least 75% of the meetings of the Board of Directors and the meetings of the committees of which he was a member. The Company does not have a formal policy regarding directors’ attendance at annual stockholder meetings, but directors are generally expected to attend such meetings and all directors were present at last year’s meeting.

The Board has established an Audit Committee, which is comprised of Mr. Campbell, Mr. Gwirtsman and Mr. Gaines, a Compensation Committee, which is comprised of Mr. McGettigan, Mr. Gwirtsman and Mr. Wick, and a Nominating Committee, which is comprised of Mr. Gwirtsman and Mr. McGettigan. The Board of Directors has determined that each of the committee members meets the independence requirements of the

Nasdaq Stock Market and that Robert W. Campbell is an “audit committee financial expert” as defined under applicable Securities and Exchange Commission rules.

The Audit Committee meets to consult with the Company’s independent auditors concerning their engagement and audit plan, and thereafter concerning the auditor’s report and management letter and with the assistance of the independent auditors, also monitors the adequacy of the Company’s internal accounting controls, including management’s assessment of the effectiveness of internal control over financial reporting. Its activities are described in more detail under “Report of the Audit Committee” below and in the Audit Committee Charter set forth in Appendix A to this Proxy Statement. The Audit Committee held eight meetings during the last fiscal year.

The Nominating Committee met once during the last fiscal. The Nominating Committee operates pursuant to a written charter. The charter is not presently available on the Company’s website, but a copy of the charter is set forth in Appendix B to this Proxy Statement.

The Nominating Committee recommends to the Board of Directors candidates for election to the Board by first identifying and evaluating potential director nominees using criteria approved by the Board of Directors. In the case of incumbent directors whose terms of office are set to expire, the Nominating Committee reviews such directors’ service to the Company during their term. This review may include number of meetings attended, level of participation, quality of performance and any transactions of such directors with the Company during their term of office. In the case of new director candidates, the Nominating Committee will use its network of contacts to compile a list of potential candidates. It may consider candidates recommended by management. It may also engage, if it deems it appropriate, a professional search firm. The Nominating Committee has not yet utilized the services of such a firm. The Nominating Committee will determine if a nominee must be independent under the Nasdaq Stock Market rules and, if so, whether the nominee meets the test of independence as set forth in such rules.

In order to be recommended to the Board of Directors as a nominee by the Nominating Committee, each potential nominee must, at a minimum, be able to read and understand financial statements, be over 21 years of age, have a background and experience in business, which may include finance, retail or wholesale operations, marketing or other fields which will complement the talents of the other directors, be willing and able to take the time to actively participate in Board and committee meetings and related activities, and have a reputation for honesty and integrity. Other than the foregoing, there are no stated minimum criteria for director nominees, but the Nominating Committee may consider such other factors as it may deem appropriate, including, without limitation, judgment, skill, diversity, experience with businesses of comparable size to the Company, the interplay of a nominee’s experience with the experience of other directors and the extent to which a nominee would be a desirable addition to the Board of Directors and any committees of the Board.

The Nominating Committee will consider director candidates recommended by stockholders provided the procedures set forth below are followed by the stockholders in submitting recommendations. The candidates recommended by stockholders will be evaluated by the Nominating Committee in the same manner as other potential nominees using the criteria described above.

In order for a stockholder’s director candidate to be considered by the Nominating Committee for an upcoming annual meeting of stockholders, the stockholder must notify the Nominating Committee of its director candidate not less than 120 calendar days, nor more than 150 calendar days, before the anniversary of the date of the Company’s notice of annual meeting to its stockholders in connection with the previous year’s annual meeting. Recommendations must be in writing and directed to the Secretary of the Company at 2830 Barrett

Avenue, Perris, California 92571. Recommendations must include (a) the name, age, business address and residence address of the candidate, (b) the principal occupation or employment of such person for the past five years, and description of employer businesses and positions held by the candidate at such employers (c) the class and number of shares of the Company which are beneficially owned by such person on the date of such stockholder’s notice and (d) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of directors. Recommendations must be accompanied by a written consent of the proposed director candidate to stand for election if nominated by the Company’s Board of Directors and to serve on the Board if elected by the stockholders. The stockholder recommending the candidate must also give the following information about themselves, (a) the name and address, as such information appears on the Company’s books, of such stockholder and any other stockholders known by such stockholder to be supporting such nominee(s), (b) the class and number of shares of the Company which are beneficially owned by such stockholder and each other stockholder known by such stockholder to be supporting such nominee(s) on the date of such stockholders notice, (c) a representation that the stockholder is a holder of record of stock of the Company entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; and (iii) a description of all arrangements or understandings between the stockholder and each nominee and other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder.

After all potential nominees have been evaluated by the Nominating Committee, the nominees to be recommended to the Board of Directors will be selected by the Nominating Committee by majority vote.

With respect to compensation, the Compensation Committee determines the compensation of executive officers and the amounts of executive officers participation in stock option, bonus and other similar plans. The Compensation Committee met once during fiscal 2004.

Neither Mr. McGettigan, Mr. Wick nor Mr. Gwirtsman has ever been an officer or employee of the Company, except that Mr. McGettigan did serve as an interim Chief Executive Officer following the resignation of the Company’s former Chief Executive Officer, Evan Gruber, on August 11, 2004, until the hiring of the Company’s current Chief Executive Officer, David M. Buckley, on September 7, 2004. None of the executive officers of the Company served as members of the compensation committee (or other board committee performing equivalent functions, or, in the absence of such a committee, the entire board of directors) of another entity during 2004.

Each non-employee director, other than the Chairman of the Board, is paid an annual retainer of $10,000 plus $1,000 for each board and board committee meeting attended and $1,000 for each committee they chair. Additionally, the Chairman of the Board is paid $10,000 per month plus $1,000 for each board meeting. Once every four years commencing with the year in which he is first elected to the Board of Directors, each non-employee director is granted an option to purchase 20,000 shares of Common Stock. Thereafter, the option vests at the rate of 25% a year for each year of service on the Board of Directors. The Company reimburses the expenses of its non-employee directors in attending Board meetings. If a director is also an employee of the Company, no compensation is paid for any services provided as a director.

Stockholders who wish to communicate with the Board of Directors, or individual directors, may send correspondence to them in care of the Secretary of the Company at the Company’s principal executive offices

located at 2830 Barrett Avenue, Perris, California 92751. Currently, the Secretary does not screen this correspondence to determine which communications will be relayed to Board members, but a majority of the independent directors may change this policy if they believe a change is necessary due to the nature and/or volume of the correspondence.

The Company has adopted a Code of Business Conduct and Ethics that applies to all of its officers, directors and employees. This code is publicly available on the Company website at www.modtech.com.

The executive officers of the Company are David M. Buckley, President and Chief Executive Officer, Dennis L. Shogren, Senior Vice President of Finance, Chief Financial Officer and Secretary and Ronald C. Savona, Senior Vice President of Operations and Chief Operating Officer. The business experience of Mr. Buckley is set forth above under the heading “Election of Directors.”

Mr. Shogren, age 51, joined Modtech in June 2003 as its Chief Financial Officer. Prior to joining the Company, Mr. Shogren held senior level positions at Haskel International from 2001 to 2003 and for Ameron International from 1997 to 2001, where he was responsible for corporate finance and reporting, manufacturing, engineering and support functions, with additional emphasis on lean manufacturing improvements. He holds an MBA degree from the University of Rochester’s William E. Simon Graduate School of Business Administration and a Bachelor of Science degree in accounting from the State University of New York at Brockport.

Mr. Savona, age 53, joined the Company in January 2003 as Director of Marketing and was promoted to Chief Operating Officer in October 2004. Mr. Savona has more than 30 years of experience in top management positions in the modular building and construction industry. From 2000 through 2002, Mr. Savona was Chief Executive Officer of Eco Building Systems, Inc., a manufacturer of modular buildings utilizing a patented glass fiber reinforced concrete wall system. While the CEO of Eco Building Systems, Inc., Mr. Savona was primarily responsible for the manufacturing operations and growth of the company. During 2002, an involuntary petition for reorganization was filed against Eco Building Systems, Inc. under Chapter 11 of the Bankruptcy Code. Mr. Savona left Eco Building Systems, Inc. in December of 2002. He is a graduate of the UCLA executive management program.

Subject to the terms of applicable employment agreements, officers serve at the pleasure of the Board of Directors. There are no arrangements or understandings by or between any executive officer and any other person(s) pursuant to which he or she was or is to be selected as an officer of the Company.

The following table summarizes the annual and long term compensation paid by the Company during fiscal years ended December 31, 2004, 2003 and 2002 to (i) its current and former Chief Executive Officer and (ii) the four other most highly compensated executive officers, with annual compensation exceeding $100,000, serving as of December 31, 2004.

In September 2004, the Company entered into an employment agreement with Mr. Buckley that expires December 31, 2006. The agreement provides for an annual base salary of not less than $345,000 and for annual bonuses ranging from 68% to 158% of annual base salary, based on meeting certain performance targets. Mr. Buckley has the discretion to receive up to one-half (but no less than 25%) of the aggregate bonus earned in a given year in cash, with the remainder to be paid in stock options. The agreement also provided for a signing bonus of $150,000, net of taxes. If during the first 12 months of the term of the agreement Mr. Buckley’s

employment is terminated by the Company without cause or because of his death or disability, Mr. Buckley will be entitled to a lump sum severance payment equal to 12 months base salary. If such termination occurs thereafter or if the Company does not renew the employment agreement upon expiration of its term, including any extended term, Mr. Buckley will be entitled to a lump sum severance payment equal to 18 months base salary. If Mr. Buckley’s employment is terminated within 12 months following a “Change of Control,” 50% of his granted but unvested stock options shall immediately vest. If the termination occurs more than 12 months after a Change of Control, 100% of his granted but unvested options shall immediately vest. The agreement defines a Change of Control as having taken place (i) if any person or entity or group of affiliated persons or entities acquires after the date of the agreement ownership of more than 50% of the Company’s outstanding common stock, or, (ii) in connection with certain types of transactions, including a merger or sale of substantially all of the Company’s assets, the persons who were directors of the Company immediately before the acquisition cease to constitute three-fourths of the membership of the board of directors of the Company or its successor prior to the earlier of the first anniversary of the transaction or the next meeting of stockholders to elect directors, except to the extent any new directors during such period were elected or nominated by at least three-fourths of such persons or by new directors so elected or nominated. The agreement also contains non-solicitation provisions that extend for 24 months after termination of employment for any reason and confidentiality provisions which have no time limit.

Under the Company’s 401(k) Plan, our officers and other employees may elect to defer up to 12% of their compensation, subject to limitations under the Internal Revenue Code. We make contributions on a 50% matching basis. Amounts deferred are deposited by us in a trust account for distribution to employees upon retirement, attainment of age 59¹/2, permanent disability, death, termination of employment or the occurrence of conditions constituting extraordinary hardship. For the year ended December 31, 2004, the Company contributed $6,000 as matching contributions to the account of Mr. Gruber.

The following table sets forth certain information regarding options granted by the Company during the year ended December 31, 2004 to the executive officers of the Company identified in the Summary Compensation Table set forth above:

The following table sets forth information regarding options exercised during the year ended December 31, 2004 by the executive officers of the Company identified in the Summary Compensation Table set forth above, as well as the aggregate value of unexercised options held by such executive officers at December 31, 2004. The Company has no outstanding stock appreciation rights, either freestanding or in tandem with options.

Aggregated Option Exercises Last Fiscal Year and Fiscal Year End Option Values

It is the policy of the Company’s Compensation Committee to establish compensation levels for the executive officers, which reflect the Company’s overall performance and their performance, responsibilities and contributions to the long-term growth and profitability of the Company. The committee determines compensation of the executive officers, including the chief executive officer, based on its evaluation of the Company’s overall performance, including various quantitative factors, primarily the Company’s financial performance, sales and earnings against the Company’s operating plan, as well as various qualitative factors such as new product development, the Company’s product and service quality, the extent to which the executive officers have contributed to forming a strong management team and other factors which the committee believes are indicative of the Company’s ongoing ability to achieve its long-term growth and profit objectives. The Compensation Committee has and may continue to rely on reports from compensation consultants in this matter.

The principal component of the compensation of the executive officers is their base salaries. The committee also retains the discretion to award bonuses based on corporate or individual performance. The committee evaluates the practices of various industry groups, market data, including data obtained from time to time from outside compensation consultants, and other economic information to determine the appropriate ranges of base salary levels which will enable the Company to retain and incentivize the executive officers. Throughout the year, the committee members review the corporate and individual performance factors described above. The committee, based upon its review of performance for the previous year and its review of the Company’s operating plan, establishes salary levels and awards any bonuses to the executive officers, including the chief executive officer.

The Compensation Committee also considers grants of stock options for the Company’s key employees, including executive officers. The purpose of the stock option program is to provide incentives to the Company’s management to work to maximize stockholder value. The option program also utilizes vesting periods to encourage key employees to continue in the employ of the Company. Individual amounts of annual stock option grants are derived based upon review of competitive compensation practices with respect to the same or similar executive positions, overall corporate performance and individual performance.

Salary for the chief executive officer is set through surveys adjusted for recent company performance with an additional bonus component based on Company performance in the current year. In 2004, Mr. Gruber’s bonus

was based on the Company’s sales and profitability performance through August 7, 2004 and Mr. Buckley’s was a signing bonus deemed necessary to attract Mr. Buckley to join the Company.

The Compensation Committee Report will not be deemed to be incorporated by reference into any filing by the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the Company specifically incorporates the report by reference.

The Audit Committee (“Committee”) assists the Board of Directors in fulfilling its oversight responsibilities by reviewing the financial information proposed to be provided to stockholders and others, the Company’s internal controls, and the audit process. Management has the primary responsibility for the financial statements and the reporting process. The Company’s independent auditors are responsible for expressing an opinion on the conformity of the Company’s audited financial statements to U.S. generally accepted accounting principles and the effectiveness of the Company’s internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). The Committee reviews the Company’s financial reporting process on behalf of the Board of Directors, but the activities of the Committee are in no way designed to supersede or alter the traditional responsibilities of the Board of Directors or independent auditors. The Committee’s role does not provide any special assurances with regard to the Company’s financial statements, nor does it involve a professional evaluation for the quality of the audits performed by the independent auditors.

The Committee has reviewed and discussed with management the audited financial statements and the audit conducted to assess the effectiveness of the Company’s internal control over financial reporting. The Committee has discussed with the independent auditors the matters required to be discussed by Statement on Auditing Standards No. 61 (Communication with Audit Committees). The Committee received from the independent auditors the written disclosures required by Independence Standards Board No. 1 (Independence Discussions with Audit Committees) and discussed with them their independence from the Company and its management.

Based on the reviews and discussions referred to above, the Committee recommended to the Board of Directors that the audited financial statements and the report on the effectiveness of the Company’s internal control over financial reporting be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 for filing with the Securities and Exchange Commission. The Audit Committee has also recommended the selection of Peterson & Company as the Company’s independent auditors.

The Audit Committee Report will not be deemed to be incorporated by reference into any filing by the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the Company specifically incorporates the report by reference.

Fees billed to the Company by KPMG LLP for services rendered during fiscal year 2004 and 2003 were as follows:

Our Audit Committee has adopted written pre-approval policies and procedures pursuant to which all audit, audit-related and tax services, and all permissible non-audit services, are pre-approved by category of service. The term of such pre-approval is generally 12 months, unless the Audit Committee determines otherwise. Pre-approval fee levels for all services to be provided by the independent auditor are established periodically by the Audit Committee. The levels encompass both estimated hours for specific services and hourly fee rates. Any proposed services exceeding these fee levels require specific pre-approval by the Audit Committee. The fees are budgeted, and actual fees versus the budget are monitored throughout the year. If the invoice for any pre-approved services materially exceeds the estimated amount, the Audit Committee must approve the excess amount prior to payment of the invoice. During the year, circumstances may arise when it may become necessary to engage the independent auditor for additional services not contemplated in the original pre-approval. In those instances, we will obtain the specific pre-approval of the Audit Committee before engaging the independent auditor. The policies require the Audit Committee to be informed of each service, and the policies do not include any delegation of the Audit Committee’s responsibilities to management. The Audit Committee may delegate pre-approval authority to one or more of its members. The member to whom such authority is delegated will report any pre-approval decisions to the Audit Committee no later than at it’s next scheduled meeting.

The graph set forth below compares the stock price of the Company since January 1, 2000 against (1) the S&P 500, and (2) the composite of the companies listed by Hemscott in its non-residential building construction (“Peer Group”). The graph is based upon information provided to the Company by Hemscott.

The Stock Price Performance Graph will not be deemed to be incorporated by reference into any filing by the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the Company specifically incorporates the graph by reference.

The following table sets forth information regarding the ownership of our Common Stock as of October 15, 2005, by (i) each of the current directors, (ii) each person or group known by us to be the beneficial owner of more than 5% of our outstanding Common Stock, and (iii) all current directors and executive officers as a group. Except as otherwise noted and subject to community property laws where applicable, each beneficial owner has sole voting and investment power with respect to all shares shown as beneficially owned by them. Except as otherwise indicated, the address of each holder identified below is in care of the Company, 2830 Barrett Avenue, Perris, California 92571.

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s officers and directors, and persons who own more than ten percent of a registered class of the Company’s equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission, and to furnish the Company with copies of all such forms which they file. To the Company’s knowledge, based solely on the Company’s review of such reports, the Company believes that all Section 16(a) filing requirements applicable to all such persons were complied with during the fiscal year covered by this report, except for the inadvertent late filings of Form 3 by David M. Buckley, Dennis L. Shogren and Ronald C. Savona.

APPROVAL OF THE PRIVATE PLACEMENT OF 2,046,000 SHARES OF COMMON STOCK AND WARRANTS TO PURCHASE AN ADDITIONAL 1,023,000 SHARES OF COMMON STOCK

We are seeking stockholder approval of the private placement we completed in August 2005 in which we issued and sold a total of 2,046,000 shares of our common stock and warrants to purchase an additional 1,023,000 shares of common stock (the “2005 Transaction”). The securities were sold pursuant to the terms of a Securities Purchase Agreement, dated August 5, 2005, with certain investors, including institutional funds that were existing stockholders, and certain of our officers and directors (the “2005 Purchase Agreement”).

As discussed below, as a condition to the 2005 Transaction, we agreed to seek stockholder approval of the transaction. If this approval is obtained, it will eliminate the $6.20 floor on adjustments to the exercise price of the warrants issued in the 2005 Transaction in the event of future issuances of shares of common stock (or securities convertible into or exercisable for common stock) at a price per share that is less than the then current exercise price of the warrants.

The following discussion includes summaries of the 2005 Purchase Agreement, the First Amended and Restated Registration Rights Agreement among us and the investors in the 2005 Transaction and the form of

Warrant to Purchase Common Stock issued to the investors, copies of which are attached to this proxy statement as Appendices C, D, and E, respectively. These summaries are qualified in their entirety by reference to those documents.

The following discussion also summarizes the provisions of additional agreements we have entered into with one of the investors and with our senior lender, Fortress Credit Corp.

Under the 2005 Purchase Agreement, we issued to the investors and the investors purchased from us, a total of 2,046,000 shares of our common stock and warrants to purchase an additional 1,023,000 shares of common stock for an aggregate purchase price of $11,629,110. Those investors who were not our officers or directors paid $5.67 per share, including a warrant for one-half share. Our officers and directors who participated in the 2005 Transaction paid $6.285 per share, including a warrant for one-half share. The exercise price of the warrants is $8.00 per share and is subject to adjustment pursuant to weighted average anti-dilution provisions. The warrants are exercisable for a period of 5 years from the date of issuance, but do not become exercisable until six months after the closing of the 2005 Transaction.

The investors who participated in the 2005 Transaction held in the aggregate approximately 26.6% of the voting power of our outstanding shares prior to the transaction and approximately 37.3% after the closing of the transaction, but prior to the exercise of the warrants. If the warrants are fully exercised, the investors will hold approximately 40.9% of the voting power outstanding, assuming no further issuance of shares other than those acquired upon exercise of the warrants.

As a result of our financial performance in 2004, we were required to replace our credit facility with Wells Fargo National Bank, as administrative agent, and the other lenders identified in the facility. As part of the replacement of this credit facility, on December 30, 2004, pursuant to a Securities Purchase Agreement dated the same date (the “2004 Purchase Agreement”), we issued to a new lender a $25 million Senior Subordinated Secured Convertible (the “Convertible Note) and a related warrant (the “2004 Warrant”), each with a term of five years.

On February 25, 2005, we completed the replacement of the Wells Fargo credit facility by entering into a $38 million credit facility with Fortress Credit Corp., as administrative and collateral agent, and the lenders identified in the new credit facility. At the time, we believed that the Convertible Note and the new credit facility, together with funds from operations, provided us with sufficient liquidity to meet our operating requirements for the foreseeable future.

Subsequently, we incurred additional losses and needed additional capital. Beginning in May 2005, our chief executive officer, David M. Buckley, and our chairman of the board, Charles C. McGettigan, began exploring financing alternatives. As part of this process, they contacted various parties including both the holder of the Convertible Note and the Peninsula Fund LLP which, at the time, was one of our stockholders. The note holder proposed terms that were not acceptable, but the proposal by the Peninsula Fund LLP was acceptable. Mr. McGettigan worked with the Peninsula Fund LLP to develop mutually agreeable terms and conditions of an equity financing transaction which included other institutional funds. Certain of the funds required as a condition of their participation that a number of our officers and directors invest in the equity transaction with the other funds.

It was agreed that the purchase price for each share of common stock, plus a warrant for one-half of a share of common stock, would be the average of the closing bid prices of our common stock for the five-day trading period from May 26, 2005, through June 2, 2005. This resulted in a purchase price of $5.67 per share. Because

the 2005 Transaction was going to close in advance of stockholder approval, Nasdaq Market Place Rules required that our officers and directors purchase their shares and warrants at a price per share that was the greater of (i) the book value of our shares or (ii) the closing bid price on the day preceding the execution of the 2005 Purchase Agreement, plus, in each case, 1/8^th multiplied by the percentage warrant coverage that would occur if the warrant exercise price was reduced to the lowest amount permitted under the warrants without prior stockholder approval. This resulted in an increase in price of $0.085 per share.

Pursuant to Nasdaq Market Place Rules, book value was the amount reflected in our 10-Q report for the period ended March 31, 2005, or $6.10 per share. From July 13, 2005, until August 3, 2005, the book value of our shares exceeded the closing bid price by an average of $0.10 per share. On August 4^th and August 5^th, the closing bid price rose to $6.20 and our officers and directors purchased their shares and warrants at a price of $6.285 per share of common stock (including a warrant for one-half share).

Section 144 of the Delaware General Corporation Law governs “related party transactions” or transactions in which a board member or officer of a corporation has a direct or indirect financial interest. Delaware law provides that such transactions are not void or voidable even if the interested director is present at, participates in and votes on the transaction: (i) if the material facts as to the director’s or officer’s relationship or interest and as to the contract or transaction are disclosed or are known to the board of directors, and the board of directors in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors may be less than a quorum; or (ii) the material facts as to the director’s or officer’s relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is approved in good faith by the vote of the stockholders.

At a board of directors meeting held on June 7, 2005 the general terms of the 2005 Transaction were discussed and found to be in the best interests of the company and our stockholders. Our officers were authorized to complete the negotiation of the transaction and prepare the definitive agreements. Separately, our independent directors unanimously approved the terms of the transaction and the participation of our officers and directors in the transaction.

On June 24, 2005, our board of directors met again to review the progress of the negotiations and documentation and again reviewed the terms of the transaction. On July 18, 2005, our board approved the terms of the substantially completed documentation and authorized our officers to finalize the transaction.

In considering the 2005 Transaction, our board of directors and our independent directors took into account a number of factors, including:

The proceeds from the 2005 Transaction of approximately $11.6 million are being used for working capital purposes. Approximately $8.6 million has been used to pay down our credit facility with our senior lender, Fortress Capital. We plan to use the remaining $3 million, together with any proceeds we might receive upon exercise of the warrants, as working capital for ongoing operations.

The 2004 Purchase Agreement, pursuant to which the Convertible Note and 2004 Warrant were issued to one of our lenders, prohibits any issuance of common stock or warrants at a price per share that is less than the conversion price of the Convertible Note without stockholder approval of the matters described in the following Proposal No. 3 set forth in this Proxy Statement. The purchase price of the common stock and the exercise price of the warrants sold in the 2005 Transaction were both below the conversion price of the Convertible Note. The holder of the Convertible Note agreed to allow the 2005 Transaction to close without the stockholder approval required under the 2004 Purchase Agreement, but we are now obligated under the terms of the 2005 Purchase Agreement to seek stockholder approval of the 2005 Transaction.

Rule 4350(i) of the Nasdaq Marketplace Rules requires stockholder approval for the issuance of securities other than in a public offering at a price per share less than the greater of the book or market value of a company’s stock, where the amount of securities being issued represents 20% or more of an issuer’s outstanding listed securities or 20% or more of the voting power outstanding before the issuance.

We are subject to the Nasdaq Marketplace Rules because our common stock is listed on the Nasdaq National Market. The issuance of the warrants and shares of common stock in the 2005 Transaction did not require stockholder approval under Nasdaq Marketplace Rule 4350(i) because the exercise price of the warrants was not less than the greater of the book or market value of our common stock. We are seeking stockholder approval of the 2005 Transaction in accordance with the Nasdaq Marketplace Rules. If such approval is obtained, the exercise price of the warrants issued in the 2005 Transaction may be reduced in the future below $6.20 per share pursuant to the anti-dilution provisions of the warrants as described below.

As a condition of the 2005 Transaction, the holder of the Convertible Note required that Charles A. Gwirtsman, Charles C. McGettigan, Jon D. Gruber, J. Patterson McBaine, Gruber & McBaine Capital Management and Peninsula Capital Management execute Voting Agreements agreeing to vote their shares in favor of the “Stockholder Approval” as defined in the 2004 Purchase Agreement which approval relates to the 2005 Transaction. Mr. Gwirtsman and Mr. McGettigan are directors of our company, and all of the parties, except for Mr. Gwirtsman, were investors in the 2005 Transaction. These parties hold, in the aggregate, approximately 5,708,000 shares, or 33.8% of the currently outstanding shares of our common stock.

Two million shares of common stock were sold to the investors in the 2005 Transaction at a price of $5.67 per share, which included a warrant for one-half of a share. Our officers and directors who participated in the 2005 Transaction purchased an aggregate of 46,000 shares at $6.285 per share, which included a warrant for one-half of a share. The warrant issued to each investor is exercisable for up to 50% of the number of shares of common stock purchased by them in the 2005 Transaction. The exercise price of the warrants is $8.00 per share. The warrants have a term of five years from the closing of the 2005 Transaction, but do not become exercisable until 6 months after the closing. The warrants have a weighted average anti-dilution provision that will cause an adjustment to the exercise price and number of shares of common stock issuable upon exercise of the warrants, but the exercise price cannot be reduced below $6.20 per share without prior stockholder approval.

If we issue or sell, or pursuant to the warrants are deemed to have issued or sold, any shares of our common stock (excluding certain issuances or sales described below) for a price per share less than the exercise price of

the warrants in effect immediately prior to such issue or sale (a “Dilutive Issuance”), then immediately after such Dilutive Issuance, the exercise price then in effect shall be reduced to an amount equal to the product of (A) the exercise price in effect immediately prior to such Dilutive Issuance and (B) the quotient determined by dividing (1) the sum of (I) the product derived by multiplying the exercise price in effect immediately prior to such Dilutive Issuance and the number of shares of our common stock deemed outstanding immediately prior to such Dilutive Issuance plus (II) the consideration, if any, received by us upon such Dilutive Issuance, by (2) the product derived by multiplying (I) the exercise price in effect immediately prior to such Dilutive Issuance by (II) the number of shares of our common stock deemed outstanding immediately after such Dilutive Issuance. For example, if we issue an additional 2 million shares at $5 per share and the number of shares outstanding immediately prior to such issuance remains at 17,054,719, which is the number outstanding as of October 15, 2005, then pursuant to the anti-dilution provisions, the exercise price of the warrants will be reduced from $8 per share to $7.69 per share.

In addition, upon an adjustment of the exercise price as described above, the number of shares of common stock to be received upon exercise of the warrants shall be adjusted to the number of shares of common stock determined by multiplying the exercise price in effect immediately prior to such adjustment by the number of number of shares of common stock acquirable upon exercise of the warrants immediately prior to such adjustment and dividing the product thereof by the exercise price resulting from such adjustment. In the example given above the number of shares that may be acquired upon exercise of the warrants will increase from 1,023,000 to 1,064,239.

The anti-dilution provisions above do not apply to certain “excluded securities,” including securities issued in connection with employee benefit plans, upon conversion or the exercise of certain convertible securities, pursuant to certain underwritten public offerings, or pursuant to certain acquisitions by us.

In connection with the 2005 Transaction we entered into a First Amended and Restated Registration Rights Agreement which amended and restated the Registration Rights Agreement we had entered into in connection with the 2004 Transaction. Pursuant to the First Amended and Restated Registration Rights Agreement, we agreed to prepare and file with the Securities and Exchange Commission a registration statement covering resales by the investors of the shares of common stock purchased in the 2005 Transaction and issuable upon exercise of the warrants issued in the transaction, as well as resales by the investor in the 2004 Transaction of (i) shares of common stock to be acquired upon exercise of the 2004 Warrant (ii) shares of common stock to be acquired by the investor upon exercise of a new warrant granted to it in connection with, but not part of, the 2005 Transaction and (iii) shares of common stock to be acquired by the investor upon the conversion of the Convertible Note which was amended and restated to increase its principal balance from $25 million to $25.9 million.

We will bear all reasonable expenses of the registration, other than underwriting discounts and commissions. We will also reimburse two of the institutional investors for the fees and disbursements of their respective legal counsel up to a maximum of $10,000 each.

We have agreed to indemnify the investors against any losses, including fees and expenses, which may arise out of an untrue statement or an omission of a material fact required to be stated in the registration statement, other than losses arising out of written information furnished by the investors for use in connection with the registration statement. Each investor has agreed to indemnify us against any losses that may arise out of written information furnished by the investor for use in connection with the registration statement. The amounts that any investor may be obligated to indemnify us or any underwriter for are limited to the net proceeds the investor receives from the sale of registrable securities under the registration statement.

As a condition of their investment in the private placement, certain of the institutional funds required that there be some level of participation in the private placement by the Company’s officers and directors. As a result, the following officers and directors purchased the shares and warrants indicated opposite their names at a price of $6.285 per share, which price included a warrant for one-half share.

Each of these officers and directors executed a lock up letter pursuant to which they agreed not to engage in any transactions concerning our common stock, (including purchases or sales) during the period that begins August 5, 2005 and ends 180 days after the registration statement we have agreed to file in connection with the 2005 Transaction has remained continuously effective. These letters do not apply to the sale of shares of common stock pursuant to the registration statement or to the sale of up to 5% of the common stock owned by these officers and directors on August 5, 2005.

Other than as described above, our officers and directors will receive no payments or benefits as a result of the 2005 Transaction.

Under Delaware law, stockholders are not entitled to appraisal or other similar rights in connection with the 2005 Transaction.

In connection with the 2005 Transaction, we entered into a First Amendment and Waiver of Financing Agreement with Fortress Credit Corp., as administrative and collateral agent, and the lenders identified in the amendment which (i) waived compliance by us with the financial covenants under the Financing Agreement with such parties, dated February 25, 2005, and (ii) amended the financial covenants of that Financing Agreement. The closing of the 2005 Transaction was a condition to our receiving this amendment and waiver.

We also entered into a Consent, Waiver, Amendment and Exchange Agreement (the “Waiver”), dated August 5, 2005, with the lender to whom we had issued the Convertible Note. Following the closing of the 2005 Transaction, the conversion price of the Convertible Note was adjusted to $8.57 per share pursuant to the anti-dilution provisions of the Convertible Note. The Waiver waived certain events of default by us under our prior agreements with the holder of the Note. In connection with the Convertible Note and the Waiver we issued a warrant to the holder of the Convertible Note for 8,276 shares of our common stock (the “2005 Warrant”). The 2005 Warrant was in addition to both the warrant the holder purchased in the 2005 Transaction and the 2004 Warrant. The 2005 Warrant was exercisable at $8.70 per share, which exercise price was adjusted upon closing of the 2005 Transaction to $8.56 per share pursuant to the anti-dilution provisions of the 2005 Warrant. The anti-dilution provisions of the Convertible Note and 2005 Warrant do not allow for further adjustment to the conversion price and exercise price, respectively, without the stockholder approval described in the following Proposal No. 3.

If the 2005 Transaction is approved by the stockholders, the exercise price of the warrants issued in the transaction may, upon future Dilutive Issuances, be reduced below $6.20 per share in accordance with the anti-dilution provisions of the warrants as described above. As described above, as the warrant exercise price is lowered, the number of shares of common stock that can be purchased upon exercise of the warrant increases. This results in greater dilution of the percentage ownership of the current stockholders.

Our Board of Directors unanimously recommends that you vote “FOR” approval of the 2005 Transaction.

We are seeking approval of the issuance of the common stock to be issued upon conversion of our $25.9 million Senior Subordinated Secured Convertible Note and exercise of the related warrants in order to remove the $8.57 floor on the conversion price of the note and the $8.56 floor on the exercise price of the related warrants and to eliminate the limitation on the number of shares of common stock which can be acquired upon conversion of the note and exercise of the warrants.

On December 30, 2004, we closed a private placement (the “2004 Transaction”) in which we issued a $25 million Senior Subordinated Secured Convertible Note which was convertible into shares of our common stock at $8.70 per share (the “Convertible Note”) and a related warrant to purchase our common stock at an exercise price of $8.70 per share (the “2004 Warrant”). In connection with the 2005 Transaction described in Proposal No. 2, the Convertible Note was amended and restated to increase its principal balance from $25 million to $25.9 million. The conversion price remained at $8.70 per share and an additional warrant to purchase common stock at an exercise price of $8.70 per share was issued (the “2005 Warrant).

The conversion price of the Convertible Note and the exercise price of the 2004 Warrant and 2005 Warrant (collectively the “Warrants”) are both subject to weighted average anti-dilution provisions that are operative upon certain future issuances of securities, but cannot be adjusted below a floor of $8.57 per share for the Convertible Note and $8.56 per share for the Warrants (each an “Applicable Floor Price”) without stockholder approval. Also, under the terms of the 2004 Transaction, the shares of common stock to be issued upon conversion of the Convertible Note and exercise of the Warrants cannot in the aggregate be 20% or more of our common stock outstanding prior to the 2004 Transaction (the “Share Ceiling”). Following the closing of the 2005 Transaction, the conversion price of the Convertible Note was reduced to $8.57 and the exercise price of the Warrants was reduced to $8.56.

In connection with the 2004 Transaction, we agreed to seek, in accordance with the Nasdaq Marketplace Rules, stockholder approval of the issuance of the shares of common stock to be issued upon conversion of the Convertible Note and Warrants. If this approval is obtained, the Applicable Floor Prices and the Share Ceiling will be removed pursuant to the terms of the Convertible Note and the Warrants. As a result, if we issue or sell, or are deemed to issue or sell, shares of common stock in the future at a price that is less than the conversion price of the Convertible Note or exercise price of the Warrants, the conversion price and exercise price may be adjusted pursuant to the anti-dilution provisions of the Convertible Note and the Warrants to a price per share that is less than the Applicable Floor Price. In addition, the conversion of the Convertible Note and the exercise of the Warrants may result in the issuance to the holder thereof of shares of common stock equal to 20% or more of our outstanding common stock or voting power prior to the closing of the 2004 Transaction.

If this Proposal No. 3 is not approved, except for certain excluded securities such as those issued in connection with employee benefit plans, we may not issue or sell shares of common stock (or securities convertible into or exercisable for common stock) at a per share price below $8.57. This may limit our ability to obtain future financing.

As discussed below, stockholder approval is required by the Nasdaq Marketplace Rules prior to the issuance in a private placement of common stock (or securities convertible into, or exercisable for common stock) equal to 20% or more of the common stock or voting power outstanding prior to the issuance for less than the greater of the book or market value of the stock.

The following discussion includes summaries of the Convertible Note and the Warrants, copies of which are attached to this Proxy Statement as Appendices F and G. The summaries are qualified in their entirety by reference to the documents.

General. On December 30, 2004, we entered into a Securities Purchase Agreement (the “2004 Purchase Agreement”) with an investor for the private placement of the Convertible Note in the principal amount of $25 million and the issuance of the related 2004 Warrant. In connection with the 2004 Transaction, we also entered into a Registration Rights Agreement with the investor. At the closing, we entered into a Pledge Agreement and Security Agreement with the investor. Pursuant to the Purchase Agreement, we made certain covenants with the investor, including: (i) we would seek stockholder approval pursuant to the Nasdaq Marketplace Rules described below to eliminate the Applicable Floor Price and Share Ceiling provisions contained in the Convertible Note and the 2004 Warrant, and (ii) in the absence of such stockholder approval, that we would not issue or sell securities at a per share price less than $8.57.

In connection with the 2005 Transaction described in Proposal No. 2, we amended and restated the Convertible Note, increasing its principal balance to $25.9 million, and we also issued the related 2005 Warrant. The agreement to seek stockholder approval pursuant to the Nasdaq Marketplace Rules applies to the amended and restated Convertible Note, the 2004 Warrant and the 2005 Warrant.

Convertible Note. The Convertible Note accrues interest at a rate of 7% per annum with accrued interest payable quarterly in arrears in cash. The Convertible Note matures on December 31, 2009 and is convertible into shares of our common stock at a conversion price of $8.70, subject to weighted average anti-dilution provisions described below. Following the closing of the 2005 Transaction, the conversion price of the Convertible Note was reduced to $8.57. At that conversion price and subject to the Share Ceiling, the Convertible Note is convertible into 3,022,170 shares of our common stock.

Subject to certain conditions, at any time after December 31, 2007, we may convert the Convertible Note into our common stock if the weighted average price of the common stock equals or exceeds 175% of the then current conversion price of the Convertible Note for a specified period.

On June 30, 2006, 2007 and 2008, the holder of the Convertible Note may require us to redeem in cash up to 32%, 36%, and 32%, respectively, of the original principal balance, plus accrued interest. If our senior credit facility prohibits the first or second redemptions to be made entirely in cash, we may, at our option, deliver shares of common stock in lieu of certain portions to be paid in cash provided the shares have been registered for resale and we have met certain other conditions.

Upon a change of control (as defined in the Convertible Note), the holder of the note may require us to redeem all or a portion of the Convertible Note at a price in cash equal to the greater of (i) the product of (x) the change of control premium, (y) the conversion amount being redeemed and (z) the quotient determined by dividing (a) the closing sale price of the our common stock immediately following the public announcement of

such proposed change of control by (b) the conversion price and (ii) the product of (x) the change of control premium and (y) the conversion amount being redeemed (as such terms are defined in the Convertible Note).

An event of default will occur under the Convertible Note for a number of reasons, including our failure to pay when due any principal, interest or late charges on the Convertible Note, certain defaults on our indebtedness other than the Convertible Note, certain events of bankruptcy and our breach or failure to perform in respect of representations and obligations under the Convertible Note. Upon the occurrence of an event of default, our obligations under the Convertible Note may become due and payable in accordance with the terms thereof at a price equal to the greater of (i) the product of (x) the conversion amount to be redeemed and (y) the redemption premium and (ii) the product of (x) the conversion rate with respect to such conversion amount in effect at such time as the holder delivers an event of default redemption notice and (b) the closing sale price of our common stock on the date immediately preceding such event of default (as such terms are defined in the Convertible Note).

Warrants. In connection with the issuance of the Convertible Note and the Convertible Note, we issued the Warrants to the holder of the Convertible Note that are currently exercisable for an aggregate of 242,057 shares of our common stock. The Warrants are exercisable until December 31, 2009 at an exercise price of $8.56 per share, subject to anti-dilution provisions similar to the provisions set forth in the Convertible Note and described below. The original exercise price of $8.70 per share was adjusted to $8.56 in connection with the closing of the 2005 Transaction described in Proposal No. 2.

Registration Rights. In connection with the 2004 Transaction, we entered into a Registration Rights Agreement with the holder of the Convertible Note. This agreement was amended and restated by the First Amended and Restated Registration Rights Agreement described in Proposal No. 2. The resale of the shares of common stock to be issued upon conversion of the Convertible Note and exercise of the Warrants is covered by the Amended and Restated Registration Rights Agreement.

Pledge and Security Agreement. Our obligations under the Convertible Note are secured by substantially all of our assets.

Anti-dilution Provisions of the Convertible Note and the Warrants. If we issue or sell, or pursuant to the Convertible Note and the Warrants are deemed to have issued or sold, any shares of our common stock (excluding certain issuances or sales described below) for a price per share less than the conversion price (in the case of the Convertible Note) or the exercise price (in the case of the Warrants) in effect immediately prior to such issue or sale (a “Dilutive Issuance”), then immediately after such Dilutive Issuance, the conversion price or the exercise price (or both) then in effect shall be reduced to an amount equal to the product of (A) the conversion price or the exercise price, respectively, in effect immediately prior to such Dilutive Issuance and (B) the quotient determined by dividing (1) the sum of (I) the product derived by multiplying the conversion price or the exercise price, respectively, in effect immediately prior to such Dilutive Issuance and the number of shares of our common stock deemed outstanding immediately prior to such Dilutive Issuance plus (II) the consideration, if any, received by us upon such Dilutive Issuance, by (2) the product derived by multiplying (I) the conversion price or the exercise price, respectively, in effect immediately prior to such Dilutive Issuance by (II) the number of shares of our common stock deemed outstanding immediately after such Dilutive Issuance.

In addition, in the case of the Warrants, upon an adjustment of the exercise price as described above, the number of shares of common stock to be received upon exercise of the Warrants shall be adjusted to the number of shares of common stock determined by multiplying the exercise price in effect immediately prior to such adjustment by the number of number of shares of common stock acquirable upon exercise of the Warrant immediately prior to such adjustment and dividing the product thereof by the exercise price resulting from such adjustment.

The anti-dilution provisions above do not apply to certain “excluded securities,” including securities issued in connection with employee benefit plans, upon conversion of the Convertible Note or the exercise of the Warrants, pursuant to certain underwritten public offerings, or pursuant to certain acquisitions by us.

Currently, the anti-dilution adjustments described above are subject to the Applicable Floor Price such that if a Dilutive Issuance were to occur, the conversion price and exercise price could not be reduced to a price lower than the Applicable Floor Price. If the stockholders approve this Proposal No. 3, the Applicable Floor Price will be eliminated for both the Convertible Note and the Warrants such that the conversion price and exercise price can be reduced to a price lower than $8.57. In addition, if stockholders approve this Proposal No. 3, the Share Ceiling will be lifted and we could issue upon conversion of the Convertible Note and exercise of the Warrants shares of common stock that equal or exceed 20% of our outstanding shares prior to the closing of the 2004 Transaction.

As a result of our financial performance in 2004, we were required to replace our credit facility with Wells Fargo National Bank, as administrative agent, and the other lenders identified in the facility. We retained Rodman & Renshaw LLC to assist us in locating a replacement lender. A proposal was made by the new lender in October 2004. Our board of directors reviewed and discussed the proposal in late October 2004 and authorized our officers to complete the negotiation of the transaction and the preparation of the definitive documents. Our board reviewed the progress of negotiations in November 2004. The transaction was finalized and approved by the board in late December 2004 and on December 30, 2004, pursuant to the Purchase Agreement, we issued to the new lender the Convertible Note and 2004 Warrant. The conversion price of the Convertible Note was $8.70 which equaled 115% of the arithmetic average of the weighted average price of our common stock on the five trading days commencing with the first trading day after December 31, 2004. The exercise price of the 2004 Warrant was also $8.70.

In considering the issuance of the Convertible Note and 2004 Warrant, our board of directors considered a number of factors, including:

The proceeds from the 2004 Transaction of approximately $25 million are being used for working capital purposes. Six million dollars was used to pay down our credit facility with Wells Fargo and through October 15, 2005, approximately $9 million has been used as working capital for ongoing operations. Pursuant to the terms of the 2004 Transaction, the remaining $10 million of proceeds is restricted and will not become available for use by us until we have met certain profitability requirements. We plan to use the remaining $10 million proceeds when and if released, together with any proceeds we might receive upon exercise of the Warrants, as working capital for ongoing operations.

None of our officers or directors participated in the 2004 Transaction or received any benefit from the 2004 Transaction.

Under Delaware law, stockholders are not entitled to appraisal rights or other similar rights in connection with the 2004 Transaction.

We are seeking stockholder approval of the issuance of the common stock to be issued in upon conversion of the Convertible Note and exercise of the Warrants in order to (i) eliminate the Applicable Floor Price and Share Ceiling provisions contained in the Convertible Note and the Warrants in accordance with the terms of the Convertible Note and the Warrants (ii) comply with the Nasdaq Marketplace Rules and (iii) fulfill a covenant made as a condition to consummating the 2004 Transaction.

Nasdaq Marketplace Rules. Rule 4350(i) of the Nasdaq Marketplace Rules requires stockholder approval for the issuance of securities other than in a public offering at a price per share less than the greater of the book or market value of a company’s stock, where the amount of securities being issued represents 20% or more of an issuer’s outstanding listed securities or 20% or more of the voting power outstanding before the issuance.

We are subject to the Nasdaq Marketplace Rules because our common stock is listed on the Nasdaq National Market. The issuance of the Convertible Note and the 2004 Warrant in the 2004 Transaction and the issuance of the 2005 Warrant in the 2005 Transaction amendment and restatement of the Convertible Note did not require stockholder approval under Nasdaq Marketplace Rule 4350(i) because of the Applicable Floor Price and Share Ceiling provisions. We are seeking stockholder approval pursuant to Rule 4350(i) so that pursuant to the terms of the Convertible Note and the Warrants, if stockholder approval is obtained, the Applicable Floor Price and Share Ceiling provisions contained in the Convertible Note and the Warrants will be eliminated.

If the Applicable Floor Price and Share Ceiling are eliminated, then following future issuances of shares of common stock (or securities convertible into or exercisable for such shares) at a price below the then current conversion price of the Convertible Note or exercise price of the Warrants, it is possible for such conversion or exercise price to be adjusted to a price that is below the market price of the common stock as of the closing of the 2004 Transaction. In addition, it will also be possible for the number of shares of common stock to be issued upon conversion of the Convertible Note or exercise of the Warrants to equal or exceed 20% of the outstanding shares or voting power as of the closing of the 2004 Transaction.

Covenant of the Transaction. In addition, as a condition to consummating the 2004 Transaction, we agreed to seek stockholder approval of the issuance of the securities in accordance with Nasdaq Marketplace Rules. We have agreed that if stockholder approval is not obtained at the Annual Meeting, we will continue to seek, at our expense, stockholder approval during each calendar quarter thereafter until stockholder approval is obtained.

The total number of shares of common stock currently issuable upon conversion of the Convertible Note and exercise of the Warrants in full is limited to less than 20% of the shares of common stock outstanding immediately prior to the 2004 Transaction, or approximately 2,898,550 shares. If this Proposal No. 3 is approved, the number of shares that may be currently issued upon conversion of the Convertible Note and the Warrants will increase to 3,264,227, which represents approximately 23% of the shares of common stock outstanding immediately preceding the 2004 Transaction. However, under the terms of the Convertible Note and Warrants their holder may not be issued shares of common stock upon conversion or exercise in an amount sufficient to cause the holder to beneficially own more than 4.99% of our common stock immediately after the issuance after giving effect to the issuance. The holder may, at its election, increase this percentage ownership limitation to 9.99%.

In addition to the elimination of the Share Ceiling, approval of this Proposal No. 3 will remove the Applicable Floor Price in both the Convertible Note and the Warrants and the conversion price of the Convertible Note and the exercise price of the Warrants will be immediately reduced to $7.82. The reduction in the exercise price of the Warrants to $7.82 will increase the number of shares that can be purchased on exercise of the Warrants from 242,057 to 264,963, further diluting the percentage ownership of current stockholders. Future issuances of shares of common stock (or securities convertible into or exercisable for such shares) at a price below the then current exercise price of the Warrants will result in additional reductions in the exercise price and increases in the number of shares to be acquired upon exercise of the Warrants. This will result in additional dilution to current stockholders.

Our Board of Directors unanimously recommends that you vote “FOR” approval of the issuance of the shares of common stock to be issued upon conversion of the Convertible Note, and the Warrants.

APPROVAL OF AN AMENDMENT TO OUR ARTICLES OF INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK FROM 25 MILLION SHARES TO 55 MILLION SHARES.

We currently are authorized to issue up to 25 million shares of common stock. As of October 15, 2005, we had 17,054,719 shares outstanding. As of that date an additional 1,358,501 shares of our common stock were issuable upon exercise of outstanding stock options and an additional 68,823 shares were reserved under our stock option plans for future grants of options. We also had reserved for issuance upon exercise of outstanding warrants, including those described in Proposal No. 2 and Proposal No. 3 above and conversion of the outstanding convertible note also described in such proposals, an additional 5,714,799 shares.

Our Board of Directors believes that it is advisable and in our best interests to have available additional authorized but unissued shares of common stock in an amount adequate to provide for our future needs. As a result, our Board of Directors approved an amendment to our Certificate of Incorporation to increase the authorized number of shares of common stock from 25 million to 55 million.

The increased authorized shares of common stock will enable us to have sufficient shares available to issue in conjunction with (i) the proposed amendment to our 2002 Nonstatutory Stock Option Plan as described below (ii) future employee incentive plans pursuant to which stocks or options could be granted to provide additional incentive to attract and retain the best qualified personnel; (iii) the raising of additional equity capital or convertible debt to fund business operations; and (iv) future acquisitions of property, securities or businesses of other persons. We currently have no agreements or understandings with respect to any such acquisitions.

If the amendment to the Certificate of Incorporation is approved by the stockholders, the additional shares will be available for issuance from time to time by us at the discretion of our Board of Directors, normally without further stockholder action (except as may be required for a particular transaction by applicable law, requirements of regulatory agencies or by NASDAQ rules), for any proper corporate purpose, including those described in the preceding paragraph.

The amendment to the Certificate of Incorporation increasing the number of authorized shares of common stock, if approved by the stockholders, will be effective upon filing a Certificate of Amendment with the Delaware Secretary of State.

Our Board of Directors unanimously recommends that you vote “FOR” the amendment to our Certificate of Incorporation to increase our authorized common stock from 25 million shares to 55 million shares.

APPROVAL OF AN AMENDMENT TO THE COMPANY’S 2002 NONSTATUTORY STOCK OPTION PLAN TO INCREASE THE NUMBER OF AUTHORIZED SHARES UNDER THE PLAN

The Board of Directors has approved an amendment to the Company’s 2002 Nonstatutory Stock Option Plan (the “2002 Plan”) to increase the shares authorized to be issued under awards granted thereunder from

1 million to 2 million. The amendment is necessary to cover future grants of options under the 2002 Plan. Prior to the amendment, 19,677 shares remained available for option grants under the 2002 Plan.

The 2002 Plan was approved at the annual meeting of shareholders held on August 6, 2002. The purpose of the 2002 Plan is to provide an additional incentive to employees and directors to enter into and remain in the service or employ of the Company by providing such individuals with an opportunity to receive grants of options. In addition, the Board of Directors believes that the receipt of such options encourages the recipients to contribute materially to the growth of the Company and further align the interests of such recipients with the interests of stockholders.

Stockholder approval of the amendment to the 2002 Plan is required under NASDAQ rules and for the Company to maintain the deductibility of performance-based compensation granted under the 2002 Plan to the extent such compensation might be subject to Section 162(m) of the Internal Revenue Code of 1986.

The 2002 Plan permits the Company to grant nonstatutory stock options to employees, officers, directors, consultants, independent contractors and advisors of the Company and any of its subsidiaries or parent companies. No other form of stock option, stock grant, or stock bonus, including, without limitation, incentive stock options, may be granted under the 2002 Plan.

The 2002 Plan is administered by a committee of the Board of Directors comprised of two or more “non-employee directors” within the meaning of Rule 16b-3 of the Securities Exchange Act of 1934 appointed to administer the 2002 Plan, or if no such committee is appointed, by the Board of Directors acting as the committee (collectively the “Committee”). The Committee has the authority to determine: (i) the individuals to whom options shall be granted; (ii) the size and terms of the options to be made to each individual and (iii) the time when the options will be granted and the duration of any applicable exercise period, including the criteria for exercisability and the acceleration of exercisability. The Committee also has the authority to interpret any provision of the 2002 Plan or any award granted thereunder.

The exercise price of the stock options is determined by the Committee and set forth in an option agreement entered into with the optionee, provided, however, that the exercise price cannot be less than the fair market value of the Company’s common stock on the date of grant. The fair market value is deemed to be the closing price on the Nasdaq National Market on the date of grant. On August 15, 2005, the closing price for a share of the Company’s common stock, as reported on the Nasdaq National Market, was $6.80.

The Committee specifies the time or times at which the options will be exercisable. Subject to the provisions of the stock option agreements, the options may be exercised in whole or in part. The exercise price of options granted under the 2002 Plan shall be paid in cash, or when approved by the Committee and allowed by applicable law, the exercise price may be paid by (i) cancellation of indebtedness of the Company to the option holder, (ii) surrender of shares of Company common stock owned by the option holder, (iii) tender of a full recourse promissory note, (iv) waiver of compensation due to or accrued by the option holder for services rendered, (v) a “same-day sale” commitment from the option holder and a National Association of Securities Dealers, Inc. (“NASD”) broker, (vi) a “margin” commitment from the option holder and an NASD broker, or (vii) any combination of the foregoing.

Except as otherwise determined by the Committee and set forth in the option grant, options may be exercised up to 12 months following the termination of employment due to the death or disability of the optionee and up to three months following termination of employment for any other reason, except for cause. An optionee’s unexercised options will be canceled upon termination for cause. Notwithstanding the foregoing three-month and 12-month periods, no option may be exercised after the period of exercisability set forth in the option agreement.

Optionees may not assign or transfer their options except by testamentary will or by the laws of descent and distribution.

If any option granted pursuant to the 2002 Plan expires or terminates for any reason without being fully exercised, the remaining shares underlying the option can become available again for issuance in connection with future stock option grants.

In the event of a merger, consolidation, dissolution or liquidation of the Company, the sale of substantially all of the assets of the Company or any other similar corporate transaction, the successor corporation may assume, replace or substitute equivalent awards in exchange for those granted under the 2002 Plan or provide substantially similar consideration, shares or other property as was provided to stockholders of the Company in such transaction (after taking into account the provisions of the awards). In the event that the successor corporation in such transaction does not assume or substitute the options awarded, such options will expire upon the closing of such transaction at such time and upon such conditions as the Committee determines. The Committee may elect to fully or partially accelerate the vesting of options prior to the closing of the transaction.

The Board of Directors may amend or terminate the 2002 Plan at any time without the approval of the stockholders of the Company, unless such approval is required by law, the Nasdaq Market Marketplace Rules, or otherwise.

The foregoing summary of the 2002 Plan is qualified in its entirety by reference to the 2002 Plan, a copy of which is attached to this Proxy Statement as Appendix G.

The following is a brief summary as of the date of this Proxy Statement of the federal income tax consequences to the Company and option holders under the 2002 Plan. The federal tax laws may change and the federal, state and local tax consequences for any option holder will depend upon his or her individual circumstances.

An option holder will not recognize any taxable income at the time a non-statutory stock option is granted. However, upon exercise of a non-statutory stock option, the option holder must include in income as compensation an amount equal to the difference between the fair market value of the purchased shares on the date of exercise and the option holder’s exercise price for these shares. The included amount must be treated as ordinary income by the option holder and may be subject to withholding by the Company (either by payment in cash or withholding out of the option holder’s salary). Upon resale of the shares by the option holder, any subsequent appreciation or depreciation in the value of the shares will be treated as capital gain or loss.

Any acceleration of the vesting or payment of awards under the 2002 Plan in the event of a change in control in the Company may cause part or all of the consideration involved to be treated as an “excess parachute payment” under the Internal Revenue Code of 1986, which may subject the option holder to a 20% excise tax and which may not be deductible by the Company.

The Company may deduct, from any payment or distribution of shares under the plan, the amount of any tax required by law to be withheld with respect to such payment, or may require the option holder to pay such amount to the Company prior to, and as a condition of, making such payment or distribution. Subject to rules and limitations established by the Committee, an option holder may elect to satisfy the withholding required, in whole or in part, either by having the Company withhold shares of Company common stock from any payment under the plan or by the option holder delivering shares of Company common stock to the Company. Any election must be made in writing on or before the date when the amount of taxes to be withheld is determined. The portion of the withholding that is so satisfied will be determined using the fair market value of the Company common stock on the date when the amount of taxes to be withheld is determined.

The Company anticipates that any compensation deemed paid by it in connection with exercises of options granted under the 2002 Plan with exercise prices equal to the fair market value of the option shares on the grant date will qualify as performance-based compensation for purposes of Internal Revenue Code Section 162(m) and will not have to be taken into account for purposes of the $1 million limitation per covered individual on the deductibility of the compensation paid to certain executive officers of the Company. Accordingly, all compensation deemed paid with respect to the options is expected to remain deductible by the Company without limitation under Internal Revenue Code Section 162(m).

Previously, under Financial Accounting Standards Board (“FASB”) Statement No. 123, option grants at 100% of fair market value did not result in any charge to the Company’s earnings. However, the Company was required to disclose in footnotes and pro forma statements to the Company’s financial statements, the impact the options would have upon the Company’s reported earnings if the value of those options at the time of grant was treated as a compensation expense. On December 16, 2004, the FASB issued Statement No. 123R which requires all share-based payments to employees, including grants of employee stock options to be recognized in the financial statements based on their fair values. Pro forma disclosure will no longer be an alternative to financial statement recognition. Statement No. 123R will be effective for the Company beginning January 1, 2006. The Company believes that adoption of Statement No. 123R may have a material effect on the financial results, however, the full effect has not been determined.

The number of outstanding options will also be a factor in determining the Company’s earnings per share on a diluted basis.

The following table sets forth the number of shares to be issued upon exercise of outstanding options, the weighted-average exercise price of such options, and the number of shares remaining available for issuance as of our most recent completed fiscal year.

Because option grants under the 2002 Plan are subject to the discretion of the Committee, awards under the 2002 Plan for the current year are indeterminable. Future option exercise prices under the 2002 Plan are also indeterminable because they will be based on the fair market value of the common stock on the date of grant. The table below indicates the options granted under the 2002 Plan during the fiscal year ended December 31, 2004 to the named executives and all executives as a group, all non-executive directors as a group and all non-executive officer employees as a group. The exercise prices of the options were fixed at the fair market value of the underlying shares of common stock on the date of grant and ranged from $7.25 per share to $9.70 per share.

Our Board of Directors unanimously recommends that you vote “FOR” the amendment to our 2002 Nonstatutory Stock Option Plan to increase the authorized number of shares of common stock under the plan from 1 million to 2 million.

The Audit Committee has appointed Peterson & Company as the independent auditors for the Company for the 2005 fiscal year. Peterson & Company replaces KMPG LLP who were the independent auditors of the Company for the 2004 fiscal year.

Although stockholder ratification is not required, the appointment of Peterson & Company is being submitted for ratification at the Annual Meeting with a view towards soliciting the shareholders’ opinions, which the Audit Committee will take into consideration in future deliberations. If the appointment is not ratified, the Audit Committee will consider the engagement of other independent accountants. Even if the appointment is ratified, the Audit Committee may terminate Peterson & Company’s engagement as the Company’s independent auditors without the approval of the Company’s stockholders whenever the Audit Committee deems termination appropriate.

No representatives of KMPG LLP or Peterson & Company are expected to be present at the Annual Meeting.

Our Board of Directors unanimously recommends that the Company’s stockholders vote “FOR” ratification of Peterson & Company as independent auditors for the 2005 fiscal year.

On April 11, 2005, KPMG LLP (“KPMG”) advised us that it would not stand for reelection as our independent registered public accounting firm following completion of its audit of the Company’s consolidated financial statements for the year ended December 31, 2004, and management’s assessment of internal control over financial reporting as of December 31, 2004 and the effectiveness of internal control over financial reporting as of December 31, 2004. On June 23, 2005, after filing our Annual Report on Form 10-K for the fiscal year ended December 31, 2004, KPMG’s resignation became effective.

The audit reports of KPMG on our consolidated financial statements as of and for the years ended December 31, 2004 and 2003 did not contain an adverse opinion or disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles. The audit reports of KPMG on our management’s assessment of the effectiveness of our internal control over financial reporting and the effectiveness of internal control over financial reporting as of December 31, 2004 did not contain an adverse opinion or disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles, except that KPMG’s report indicates that we did not maintain effective internal control over financial reporting as of December 31, 2004 because of the effect of material weaknesses on the achievement of the objectives of the control criteria and the report contains explanatory paragraphs as described in Item 9A(d), Report of Independent Registered Public Accounting Firm, included in our Annual Report on Form 10-K. In KPMG’s report, the following material weaknesses were identified and included in our management’s assessment as of December 31, 2004:

In connection with the audits of the fiscal years ended December 31, 2003 and December 31, 2004, and the subsequent interim period through April 11, 2005, there were: (1) no disagreements with KPMG on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements if not resolved to their satisfaction would have caused them to make reference in connection with their opinion to the subject matter of the disagreement, or (2) “reportable events” (as such term is defined in Item 304(a)(1)(v) of Regulation S-K promulgated by the Securities and Exchange Commission), except KPMG did report and advise the Company of the material weaknesses described above. KPMG furnished the Company with a letter addressed to the Securities and Exchange Commission stating that it agrees with the preceding statements. The letter was filed with the Company’s current report on Form 8-K/A on June 28, 2005.

On May 4, 2005, we engaged Peterson & Company (“Peterson”) as our independent registered public accountants for the interim periods after December 31, 2004 and the year ending December 31, 2005. The decision to retain Peterson was approved by our Audit Committee. During our two most recent fiscal years and all subsequent interim periods, we did not consult with Peterson (i) regarding the application of accounting

principles to a specific transaction, either completed or proposed, (ii) on any matter that was the subject of a disagreement or a reportable event as defined in Items 304(a)(1)(iv) and (v) of Regulation S-K, or (iii) the type of audit opinion that might be rendered on our financial statements, nor during such period did Peterson provide to us, either a written report or oral advice, that was an important factor considered by us in reaching a decision as to an accounting, auditing or financial reporting issue.

In accordance with the Company’s Bylaws, in order to be considered for inclusion in the Company’s proxy statement and form of proxy relating to the Company’s next annual meeting of stockholders, proposals by the Company’s stockholders intended to be presented at such annual meeting must be received by the Company no later than July 14, 2006 and no earlier than June 14, 2006. Proposals must comply with the requirements as to form and substance set forth in the Company’s Bylaws and established by the Securities and Exchange Commission for proposals in order to be included in the proxy statement.

A stockholder proposal for the Company’s next annual stockholders’ meeting that is not requested to be included in the Company’s proxy materials will be considered untimely if received by the Company after September 27, 2006. Accordingly, the proxy with respect to the Company’s next annual stockholders’ meeting will confer discretionary authority to vote on any stockholder proposals received by the Company after September 27, 2006.

The Board of Directors knows of no other matters to be presented for action at the meeting. However, if any matters not included in this Proxy Statement properly come before the meeting, it is the intention of the person named in the enclosed proxy to vote under the authority therein given in accordance with his best judgment.

Our 2004 Annual Report on Form 10-K, which includes audited financial statements for the fiscal year ended December 31, 2004 and other financial information about us, accompanies this Proxy Statement and is incorporated into this Proxy Statement by reference. Our Quarterly Report on Form 10-Q for the period ended September 30, 2005, is also incorporated into this Proxy Statement by reference. A copy of the Quarterly Report and any amendments thereto is available without charge to any person to whom this Proxy Statement has been delivered upon written or oral request by such person to Dennis L. Shogren, Chief Financial Officer, Modtech Holdings, Inc., 2830 Barrett Avenue, Perris, California 92571 (telephone number 951-943-4014). The copy will be sent to such person by first class mail within one business day after our receipt of the request. Copies of the Annual Report and Quarterly Report are also available through the Securities and Exchange Commission’s website at www.sec.gov. and through our website at www.modtech.com.

The Audit Committee is appointed by the Board of Directors of Modtech Holdings, Inc., a Delaware corporation (the Company) for the primary purposes of:

The Audit Committee shall be appointed by the Board of Directors and shall be comprised of three or more Directors (as determined from time to time by the Board), each of whom shall meet the independence requirements of the Nasdaq Stock Market, Inc. Each member of the Audit Committee shall have the ability to understand fundamental financial statements. In addition, at least one member of the Audit Committee shall have past employment experience in finance or accounting, professional certification in accounting, or any other comparable experience or background which results in the individual’s financial sophistication, including being or having been a chief executive officer, chief financial officer or other senior officer with financial oversight responsibilities.

2) Review (by full Committee or Chair) with management and the independent accountants the Company’s quarterly financial statements in advance of SEC filings.

3) Oversee the external audit coverage. The Company’s independent accountants are ultimately accountable to the Board of Directors and the Audit Committee, which have the ultimate authority and responsibility to

select, evaluate and, where appropriate, replace the independent accountants. In connection with its oversight of the external audit coverage, the Audit Committee will:

4) Pre-approve all auditing services, internal control-related services and permitted non-audit services to be performed for the Company by its independent auditors, subject to certain permitted de minimus exceptions for non-audit services. Such authority may be delegated to sub-committees of one or more members, provided that the decisions of such sub-committees are presented to the Audit Committee at its next scheduled meeting.

5) Have the authority to retain independent legal, accounting or other advisors to the extent it deems necessary. The Audit Committee shall be provided the necessary resources for such purposes.

6) Establish procedures for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters, and the confidential anonymous submission by employees of concerns regarding questionable accounting or auditing matters.

7) Meet periodically with management to review and assess the Company’s major financial risk exposures and the manner in which such risks are being monitored and controlled.

8) Meet at least annually in separate executive session with each of the chief financial officer and the independent accountants.

9) Review periodically with the Company’s counsel (i) legal and regulatory matters which may have a material affect on the financial statements, and (ii) corporate compliance policies or codes of conduct.

10) Report regularly to the Board of Directors with respect to Audit Committee activities.

11) Prepare the report of the Audit Committee required by the rules of the Securities and Exchange Commission to be included in the proxy statement for each annual meeting.

12) Review and reassess annually the adequacy of this Audit Committee Charter and recommend any proposed changes to the Board of Directors.

While the Audit Committee has the responsibilities and powers set forth in this Charter, it is not the duty of the Audit Committee to plan or conduct audits or to determine that the Company’s financial statements are complete and accurate and are in accordance with accounting principles generally accepted in the United States of America or to assess the effectiveness of the Company’s internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). This is the responsibility of management and the independent accountants. Nor is it the duty of the Audit Committee to conduct investigations, to resolve disagreements, if any, between management and the independent accountants or to assure compliance with laws and regulations and the Company’s corporate policies.

The purpose of the Nominating Committee is to identify, evaluate and recommend to the Board of Directors director nominees for election at the annual shareholders meeting.

In conducting its activities, the Committee will regularly consult with the Chief Executive Officer and other members of the Board of Directors to assure that the Committee’s actions and decisions are consistent with maintaining a sound relationship between the Board of Directors and management, and among the directors.

The Committee shall meet as often as its members deem necessary to perform the Committee’s responsibilities. The Committee may invite to its meetings any officer, director, member of senior management of the Company or such other persons as it deems appropriate to carry out its responsibilities. All meetings of the Committee may be held telephonically and the Committee may act by written consent in lieu of a meeting.

The Chair shall cause minutes of each meeting of the Committee to be maintained and shall report the activities of the Committee to the Board of Directors on a current basis. Minutes of each Committee meeting shall be distributed to the Board of Directors.

This charter is subject to modification and interpretation by the Board of Directors.

SECURITIES PURCHASE AGREEMENT (this “Agreement”), dated as of August 5, 2005, by and among Modtech Holdings, Inc., a Delaware corporation, with headquarters located at 2830 Barrett Avenue, Perris, California 92751 (the “Company”), and the investors listed on the Schedule of Buyers attached hereto (each, a “Buyer” and collectively, the “Buyers”).

A. The Company and the Buyers are executing and delivering this Agreement in reliance upon the exemption from securities registration afforded by Rule 506 of Regulation D (“Regulation D”) as promulgated by the United States Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended (as so amended, the “1933 Act”);

B. The Company has authorized the issuance and sale of up to 2,046,000 shares of its common stock, par value $0.01 per share (the “Common Stock”) and warrants to acquire up to 1,023,000 shares of Common Stock in substantially the form attached hereto as Exhibit A (the “Warrants”), pursuant to the terms of this Agreement;

C. The Buyers wish to purchase, upon the terms and conditions stated in this Agreement, an aggregate of up to 2,046,000 shares of Common Stock (the “Offered Shares”) in the respective amounts set forth opposite each Buyer’s name on the Schedule of Buyers, together with Warrants exercisable into shares of Common Stock (the “Warrant Shares”); and

D. Contemporaneously with the execution and delivery of this Agreement, the parties hereto are executing and delivering an Amended and Restated Registration Rights Agreement (the “Registration Rights Agreement”), pursuant to which the Company has agreed to provide certain registration rights under the 1933 Act and the rules and regulations promulgated thereunder, and applicable state securities laws.

a. Purchase of Offered Shares. Subject to the satisfaction (or waiver) of the conditions set forth in Sections 6 and 7 below, the Company shall issue and sell to each Buyer and each Buyer, severally and not jointly, agrees to purchase from the Company the respective number of Offered Shares set forth opposite such Buyer’s name on the Schedule of Buyers, together with the Warrants, at the respective purchase price (the “Purchase Price”) set forth opposite such Buyer’s name on the Schedule of Buyers (the “Closing”). The Offered Shares, together with the Warrants and the Warrant Shares are referred to herein as the “Securities”).

i. Closing Date. The date and time of the Closing (the “Closing Date”) shall be 10:00 a.m. California Time, on August 5, 2005, subject to notification of satisfaction (or waiver) of the conditions to the Closing set forth in Sections 6 and 7 below (or such later date as is mutually agreed to by the Company and the Buyers). The Closing shall occur on the Closing Date at the offices of Shartsis Friese LLP, One Maritime Plaza, 18^th Floor, San Francisco, California 94111.

c. Form of Payment. On the Closing Date or within one business day thereafter, (i) each Buyer shall pay an amount equal to the Purchase Price to the Company for the Offered Shares and Warrants to be issued and sold to such Buyer at the Closing, by wire transfer of immediately available funds in accordance with the Company’s written wire instructions, and (ii) the Company shall deliver to each Buyer, stock certificates (in the denominations as such Buyer shall request (the “Common Stock Certificates”) representing such number of the Offered Shares which such Buyer is then purchasing (as indicated opposite such Buyer’s name on the Schedule of Buyers), along with the Warrant, duly executed on behalf of the Company and registered in the name of such Buyer or its designee.

a. Investment Purpose. Such Buyer (i) is acquiring the Securities for its own account for investment only and not with a view towards, or for resale in connection with, the public sale or distribution thereof, except pursuant to sales registered or exempt from registration under the 1933 Act; provided, however, that by making the representations herein, such Buyer does not agree to hold any of the Securities for any minimum or other specific term and reserves the right to dispose of them at any time in accordance with or pursuant to a registration statement or an exemption under the 1933 Act and otherwise in accordance with applicable law. Such Buyer is acquiring the Securities hereunder in the ordinary course of its business. Such Buyer does not presently have any agreement or understanding, directly or indirectly, with any Person to distribute any of the Securities. If such Buyer is acting in a representative capacity on behalf of one or more funds, partnerships or managed accounts, such Buyer has the authority to make, and has made, the foregoing representations and warranties on behalf of each such fund, partnership or account, each of which shall be deemed a Buyer hereunder

b. Accredited Investor Status. Such Buyer is an “accredited investor” as that term is defined in Rule 501(a)(3) of Regulation D, and such Buyer is also knowledgeable, sophisticated and experienced in making, and is qualified to make decisions with respect to, investments in securities presenting an investment decision like that involved in the purchase of the Securities, including investments in securities issued by the Company and investments in comparable companies. Such Buyer acknowledges that it is able to bear the financial risk associated with an investment in the Securities.

c. Reliance on Exemptions. Such Buyer understands that the Securities are being offered and sold to it in reliance on specific exemptions from the registration requirements of United States federal and state securities laws and that the Company is relying in part upon the truth and accuracy of, and such Buyer’s compliance with, the representations, warranties, agreements, acknowledgments and understandings of such Buyer set forth herein in order to determine the availability of such exemptions and the eligibility of such Buyer to acquire such securities.

d. Information. Such Buyer and its advisors, if any, have been furnished with all materials relating to the business, finances and operations of the Company and materials relating to the offer and sale of the Securities which have been requested by such Buyer, and such Buyer and its advisors, if any, have been afforded the opportunity to ask questions of the Company. Neither such inquiries nor any other due diligence investigations conducted by such Buyer or its advisors, if any, or its representatives shall modify, amend or affect such Buyer’s right to rely on the Company’s representations and warranties contained in Section 3 below. Such Buyer understands that its investment in the Securities involves a high degree of risk. Such Buyer has sought such accounting, legal and tax advice as it has considered necessary to make an informed investment decision with respect to its acquisition of the Securities.

e. No Governmental Review. Such Buyer understands that no United States federal or state agency or any other government or governmental agency has passed on or made any recommendation or endorsement of the Securities or the fairness or suitability of the investment in the Securities nor have such authorities passed upon or endorsed the merits of the offering of the Securities.

f. Transfer or Resale. Such Buyer understands that except as provided in the Registration Rights Agreement: (i) the Securities have not been and are not being registered under the 1933 Act or any state securities laws, and may not be offered for sale, sold, assigned or transferred unless subsequently registered thereunder or there is an exemption from registration; (ii) any sale of the Securities made in reliance on Rule 144 promulgated under the 1933 Act, as amended, or any successor rule thereto (“Rule 144”) may be made only in accordance with the terms of Rule 144 and further, if Rule 144 is not applicable, any resale of the Securities under circumstances in which the seller (or the person through whom the sale is made) may be deemed to be an underwriter (as that term is defined in the 1933 Act) may require compliance with some other exemption under the 1933 Act or the rules and regulations of the SEC thereunder; and (iii) neither the

Company nor any other person is under any obligation to register such securities under the 1933 Act or any state securities laws or to comply with the terms and conditions of any exemption thereunder.

g. Legends. Such Buyer understands that the certificates or other instruments representing the Securities, except as set forth below, shall bear a restrictive legend in substantially the following form (and a stop-transfer order may be placed against transfer of such stock certificates):

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 HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT.

THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE PROVISIONS OF A SECURITIES PURCHASE AGREEMENT BETWEEN THE COMPANY AND THE HOLDER, WHICH MAY RESTRICT THE TRANSFER OF SUCH SECURITIES IN CERTAIN CIRCUMSTANCES. A COPY OF SUCH AGREEMENT MAY BE OBTAINED, WITHOUT CHARGE, AT THE COMPANY’S PRINCIPAL OFFICE.

The legends set forth above shall be removed and the Company shall issue a certificate without such legends to the holder of the Securities upon which it is stamped, if, unless otherwise required by state securities laws, (i) such Securities are registered for resale under the 1933 Act, (ii) in connection with a sale transaction, such holder provides the Company with an opinion of counsel, in a generally acceptable form, to the effect that a public sale, assignment or transfer of the Securities may be made without registration under the 1933 Act, or (iii) such holder provides the Company with reasonable assurances that the Securities can be sold pursuant to Rule 144 without any restriction as to the number of securities acquired as of a particular date that can then be immediately sold. Such Buyer acknowledges, covenants and agrees to sell the Securities represented by a certificate(s) from which the legends have been removed, only pursuant to (i) a registration statement effective under the 1933 Act or (ii) advice of counsel that such sale is exempt from registration required by Section 5 of the 1933 Act, including, without limitation, a transaction pursuant to Rule 144.

h. Validity; Enforcement. Such Buyer, if it is an entity, is duly organized, validly existing and in good standing in the state of its organization and was not formed for the purpose of investing in the Securities. Such Buyer has full right, power and authority to enter into this Agreement and to consummate the transaction contemplated hereby. This Agreement has been duly and validly authorized, executed and delivered on behalf of such Buyer and is a valid and binding agreement of such Buyer enforceable against such Buyer in accordance with its terms, subject as to enforceability to general principles of equity and to applicable bankruptcy, insolvency, reorganization, moratorium, liquidation and other similar laws relating to, or affecting generally, the enforcement of applicable creditors’ rights and remedies.

i. Residency. Such Buyer is a resident of that state and country specified in its address on the Schedule of Buyers.

j. Brokers or Finders. The Company will not incur, directly or indirectly, as a result of any action taken by the Buyers, any liability for brokerage or finders’ fees or agents’ commissions or any similar charges in connection with this Agreement or any transactions contemplated hereby.

k. Trading Disclosures. Except as set forth on Schedule 2(l), from June 2, 2005 through and including the date hereof, Buyer has not bought, sold, sold short, transferred, written options or otherwise disposed of or acquired any of the Company’s securities.

a. Organization and Qualification. Except as disclosed in Schedule 3(a), the Company and its “Subsidiaries” (which for purposes of this Agreement means a “Subsidiary” as defined in Rule 405 under the 1933 Act) are corporations duly organized and validly existing in good standing under the laws of the jurisdiction in which they are incorporated, and have the requisite corporate power and authorization to own their properties and to carry on their business as now being conducted, except where the failure of any Subsidiary to be duly organized, validly existing and in good standing would not have a Material Adverse Effect. Each of the Company and its Subsidiaries 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 material adverse effect on the business, properties, assets, operations, results of operations, financial condition or prospects of the Company and its Subsidiaries, if any, taken as a whole, or on the transactions contemplated hereby or by the agreements and instruments to be entered into in connection herewith, or on the authority or ability of the Company to perform its obligations under the Transaction Documents (as defined below). The Company has no Subsidiaries except as set forth on Schedule 3(a).

b. Authorization; Enforcement; Validity. (i) The Company has the requisite corporate power and authority to enter into and perform this Agreement, the Registration Rights Agreement, the Irrevocable Transfer Agent Instructions (as defined in Section 5), the Warrants and each of the other agreements entered into by the parties hereto in connection with the transaction contemplated by this Agreement (collectively, the “Transaction Documents”), and to issue the Securities in accordance with the terms hereof and thereof, (ii) the execution and delivery of the Transaction Documents by the Company and the consummation by it of the transactions contemplated hereby and thereby, including without limitation the issuance of the Offered Shares and the Warrants and the reservation for issuance and the issuance of the Warrant Shares, 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, except for the consent of Amphora Limited to the transaction contemplated herein and the approval of such transaction by the Nasdaq Listings Qualification Department (which approval has already been obtained) (iii) the Transaction Documents have been duly executed and delivered by the Company, (iv) the Transaction Documents constitute the 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.

c. Capitalization. As of August 3, 2005, the authorized capital stock of the Company consists of (i) 25,000,000 shares of Common Stock, of which as of the date hereof, 14,834,535 shares are issued and outstanding, 1,598,508 shares are reserved for issuance pursuant to the Company’s stock option and purchase plans and 2,873,564 shares are issuable and reserved for issuance pursuant to securities (other than the Warrants) exercisable or exchangeable for, or convertible into, shares of Common Stock, and (ii) 5,000,000 shares of Preferred Stock, of which as of the date hereof, no shares are issued. All of such outstanding shares have been, or upon issuance will be, validly issued and are fully paid and nonassessable. Except as disclosed in Schedule 3(c), (i) no shares of the Company’s capital stock are subject to preemptive rights or any other similar rights or any liens or encumbrances suffered or permitted by the Company, (ii) none of the Company or any of its Subsidiaries has any outstanding debt securities, (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, any shares of capital stock of the Company or any of its Subsidiaries, or contracts, commitments, understandings or arrangements by which the Company or any of its Subsidiaries is or may become bound to issue additional shares of capital stock of the Company or any of its Subsidiaries or options, warrants, scrip, rights to subscribe to, calls or commitments of any

character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of the Company or any of its Subsidiaries, (iv) there are no agreements or arrangements under which the Company or any of its Subsidiaries is obligated to register the sale of any of their securities under the 1933 Act (except the Registration Rights Agreement), (v) there are no outstanding securities or instruments of the Company or any of its Subsidiaries which contain any redemption or similar provisions, and there are no contracts, commitments, understandings or arrangements by which the Company or any of its Subsidiaries is or may become bound to redeem a security of the Company or any of its Subsidiaries, (vi) there are no securities or instruments containing antidilution or similar provisions that will be triggered by the issuance of the Securities as described in this Agreement, and (vii) the Company does not have any stock appreciation rights or stock “phantom stock” plans or agreements or any similar plan or agreement. The Company has furnished to the Buyer true and complete copies of the Company’s Certificate of Incorporation, as amended and as in effect on the date hereof (the “Certificate of Incorporation”), and the Company’s By-laws as amended and as in effect on the date hereof (the “By-laws”), and the terms of all securities convertible into or exercisable for Common Stock and the material rights of the holders thereof in respect thereto. Schedule 3(c) lists all issuances of the Company’s securities (both debt and equity) since January 1, 2004, detailing the name of the acquirer, the number and type of securities acquired, and the consideration paid. Schedule 3(c) also lists each sale of Common Stock by the Company’s officers, directors and greater than 5% owners of the Company’s Common Stock from January 1, 2004, through and including the date of this Agreement.

d. Issuance of Securities. The Offered Shares are duly authorized and, upon issuance in accordance with the terms hereof, shall be (i) validly issued, fully paid and nonassessable, (ii) free from all taxes, liens and charges with respect to the issue thereof and (iii) entitled to the rights and preferences set forth in the Certificate of Incorporation. A sufficient number of shares of Common Stock (subject to adjustment pursuant to the Company’s covenant set forth in Section 4(f) below) have been duly authorized and reserved for issuance upon exercise of the Warrants such that upon such exercise the Company will have sufficient shares to issue to the holders of the Warrants in order to satisfy its obligations thereunder. Upon exercise of the Warrants, the Warrant Shares will be validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issue thereof, with the holders being entitled to all rights accorded to a holder of Common Stock. Subject to the accuracy of the Buyers’ representations and warranties, the issuance by the Company of the Securities is exempt from registration under the 1933 Act.

e. No Conflicts. The execution, delivery and performance of the Transaction Documents by the Company, the performance by the Company of its obligations under the Certificate of Incorporation and the consummation by the Company of the transactions contemplated hereby and thereby (including, without limitation, the reservation for issuance and the issuance and registration of the Warrant Shares) will not (i) result in a violation of the Certificate of Incorporation or the By-laws (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any material agreement, indenture or instrument to which the Company or any of its Subsidiaries is a party, or (iii) result in a violation of any law, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations and the rules and regulations of the Principal Market (as defined in Section 4(h) below)) applicable to the Company or any of its Subsidiaries or by which any material property or asset of the Company or any of its Subsidiaries is bound or affected. Neither the Company nor its Subsidiaries is in violation of any term of or in default under its Certificate of Incorporation or By-laws or their organizational charter or by-laws, respectively, and other than the Transaction Documents, there are no other agreements or organizational documents that govern the rights of the Securities. Neither the Company nor any of its Subsidiaries is in violation of any term of or in default under any material contract, agreement, mortgage, indebtedness, indenture, instrument, judgment, decree or order or any statute, rule or regulation applicable to the Company or its Subsidiaries, except, in each case, where such violation could not reasonably be expected to, individually or in the aggregate, have a Material Adverse Effect on the Company. The business of the Company and its Subsidiaries is not being conducted in violation of any law, ordinance or regulation of any governmental entity, except for violations the sanctions for which either individually or in the

aggregate could not reasonably be expected to have a Material Adverse Effect. Except as specifically contemplated by this Agreement and as required under the 1933 Act and except for the consent of Amphora Limited to the transaction contemplated herein and the approval of such transaction by the Nasdaq Listings Qualification Department, 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 or to perform its obligations under the Certificate of Designations, in each case in accordance with the terms hereof or thereof. All consents, authorizations, orders, filings and registrations which the Company is required to obtain pursuant to the preceding sentence have been obtained or effected on or prior to the date hereof.

f. SEC Documents; Financial Statements. Except as provided in Schedule 3(f), since December 31, 2004, 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 delivered to or otherwise made available to the Buyers or their respective representatives true and complete 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). No other information provided by or on behalf of the Company to the Buyers which is not included in the SEC Documents, including, without limitation, information referred to in Section 2(d) of this Agreement, contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements therein, in the light of the circumstance under which they are or were made, not misleading. Neither the Company nor any of its Subsidiaries or any of their officers, directors, employees or agents have provided the Buyers with any material, nonpublic information.

g. Absence of Certain Changes. Except as disclosed in Schedule 3(g), since March 31, 2005, there has been no Material Adverse Effect in the business, properties, operations, financial condition, results of operations or prospects of the Company or its Subsidiaries. The Company has not taken any steps, and does not currently expect to take any steps, to seek protection pursuant to any bankruptcy law nor does the Company or any of its Subsidiaries have any knowledge or reason to believe that its creditors intend to initiate involuntary bankruptcy proceedings. Except as disclosed in Schedule 3(g), since March 31, 2005, the Company has not declared or paid any dividends, sold any assets in excess of $50,000 outside of the ordinary course of business or had capital expenditures in excess of $50,000. Except as disclosed in Schedule 3(g), since March 31, 2005, there has not been any other event which could have a Material Adverse Effect or which could adversely affect the validity or enforceability of, or the authority or the ability of the Company to perform its obligations under the Transaction Documents.

h. Absence of Litigation. Except as set forth in Schedule 3(h), there is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory

organization or body pending or, to the knowledge of the Company or any of its Subsidiaries, threatened against or affecting the Company or any of its Subsidiaries or any of the Company’s or the Company’s Subsidiaries’ officers or directors in their capacities as such, which could have a Material Adverse Effect.

i. Acknowledgment Regarding Buyers’ Purchase of Securities. The Company acknowledges and agrees that each of the Buyers is acting solely in the capacity of arm’s-length purchaser with respect to the Transaction Documents and the transactions contemplated hereby and thereby. The Company further acknowledges that each Buyer is not acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to the Transaction Documents and the transactions contemplated hereby and thereby, and any advice given by any of the Buyers or any of their respective representatives or agents in connection with the Transaction Documents and the transactions contemplated hereby and thereby is merely incidental to such Buyer’s purchase of the Securities. The Company further represents to each Buyer that the Company’s decision to enter into the Transaction Documents has been based solely on the independent evaluation by the Company and its representatives.

j. No Undisclosed Events, Liabilities, Developments or Circumstances. No event, liability, development or circumstance has occurred or exists, or is expected to occur, with respect to the Company or its Subsidiaries or their respective business, properties, prospects, operations or financial condition, that would be required to be disclosed by the Company under applicable securities laws on a registration statement filed with the SEC relating to an issuance and sale by the Company of its Common Stock and which has not been publicly announced. Except as disclosed in Schedule 3(j), the Company has completed and fully satisfied all of its obligations with regard to the Heritage project located in Brentwood, California.

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

l. No Integrated Offering. Neither the Company, nor any of its affiliates, nor, to the Company’s knowledge, any person acting on its or their behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under circumstances that would require registration of any of the Securities under the 1933 Act or cause this offering of the Securities to be integrated with prior offerings by the Company for purposes of the 1933 Act or except as set forth on Schedule 3(l), 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, nor will the Company or any of its Subsidiaries take any action or steps that would require registration of any of the Securities under the 1933 Act (except pursuant to the Registration Rights Agreement) or cause the offering of the Securities to be integrated with other offerings.

m. Employee Relations. Neither the Company nor any of its Subsidiaries is involved in any union labor dispute nor, to the knowledge of the Company or any of its Subsidiaries, is any such dispute threatened. None of the Company’s or its Subsidiaries’ employees is a member of a union, neither the Company nor any of its Subsidiaries is a party to a collective bargaining agreement, and the Company and its Subsidiaries believe that their relations with their employees are good. No executive officer (as defined in Rule 501(f) of the 1933 Act) has notified the Company that such officer intends to leave the Company or otherwise terminate such officer’s employment with the Company. No executive officer, to the best knowledge of the Company and its Subsidiaries, is, or is now expected to be, in violation of any material term of any employment contract, confidentiality, nondisclosure or proprietary information agreement, non-competition agreement, or any other contract or agreement or any restrictive covenant, and the continued employment of each such executive officer does not subject the Company or any of its Subsidiaries to any liability with respect to any of the foregoing matters.

n. Intellectual Property Rights. The Company and its Subsidiaries own or possess adequate rights or licenses to use all trademarks, trade names, service marks, service mark registrations, service names, patents, patent rights, copyrights, inventions, licenses, approvals, governmental authorizations, trade secrets

and rights necessary to conduct their respective businesses as now conducted or as proposed to be conducted, except where the failure to own or possess such rights could not reasonably be expected to, individually or in the aggregate, have a Material Adverse Effect. None of the Company’s trademarks, trade names, service marks, service mark registrations, service names, patents, patent rights, copyrights, inventions, licenses, approvals, government authorizations, trade secrets or other intellectual property rights have expired or terminated, or are expected to expire or terminate within two years from the date of this Agreement, unless such expiration or termination could not reasonably be expected to, individually or in the aggregate, have a Material Adverse Effect. The Company and its Subsidiaries do not have any knowledge of any infringement by the Company or its Subsidiaries of trademark, trade name rights, patents, patent rights, copyrights, inventions, licenses, service names, service marks, service mark registrations, trade secret or other similar rights of others, or of any such development of similar or identical trade secrets or technical information by others and, there is no claim, action or proceeding being made or brought against, or to the Company’s knowledge, being threatened against, the Company or its Subsidiaries regarding trademark, trade name, patents, patent rights, invention, copyright, license, service names, service marks, service mark registrations, trade secret or other infringement; and the Company and its Subsidiaries are unaware of any facts or circumstances which might give rise to any of the foregoing. The Company and its Subsidiaries have taken reasonable security measures to protect the secrecy, confidentiality and value of all of their intellectual properties, and the Company is not aware of any third party making any unauthorized or infringing use of the intellectual properties of the Company or any of its Subsidiaries.

o. Environmental Laws. The Company and its Subsidiaries (i) are in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants (“Environmental Laws”), (ii) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses and (iii) are in compliance with all terms and conditions of any such permit, license or approval except where, in each of the three foregoing cases, the failure to so comply could not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect.

p. Title. The Company and its Subsidiaries have clear title to all real property, if any, owned by it and good and valid title to all personal property owned by it which, in each case, is material to the business of the Company and its Subsidiaries, in each case free and clear of all liens, encumbrances and defects, except such as do not materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company and any of its Subsidiaries. Any real property and facilities held under lease by the Company and any of its Subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its Subsidiaries.

q. Insurance. The Company and each of its Subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as management of the Company believes to be prudent and customary in the businesses in which the Company and its Subsidiaries are engaged, and all of such insurance is in full force and effect. Neither the Company nor any such Subsidiary has been refused any insurance coverage sought or applied for and neither the Company nor any such Subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that could not reasonably be expected to, individually or in the aggregate, have a Material Adverse Effect.

r. Regulatory Permits. The Company and its Subsidiaries possess all certificates, authorizations and permits issued by the appropriate federal, state or foreign regulatory authorities necessary to conduct their respective businesses, except where the failure to possess any such certificate, authorization or permit could not reasonably be expected to, individually or in the aggregate, have a Material Adverse Effect, and neither the Company nor any such Subsidiary has received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit.

s. Internal Accounting Controls. Subject to the material weaknesses disclosed in the Company’s report on Form 10-K for the fiscal year ended December 31, 2004, the Company and each of its Subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management’s general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset and liability accountability, (iii) access to assets or incurrence of liabilities is permitted only in accordance with management’s general or specific or authorization and (iv) the recorded accountability for assets and liabilities is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

t. Tax Status. The Company and each of its Subsidiaries has made or filed all federal and state income and all other tax returns, reports and declarations required by any jurisdiction to which it is subject unless and only to the extent that the Company and each of its Subsidiaries has set aside on its books provisions reasonably adequate for the payment of all unpaid and unreported taxes) and has paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations, except those being contested in good faith and has set aside on its books provision reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the Company know of no basis for any such claim.

u. Transactions With Affiliates. Except as set forth in Schedule 3(u) or the SEC Documents filed at least ten (10) days prior to the date hereof and other than the grant of stock options disclosed on Schedule 3(c), none of the officers, directors, or employees of the Company is presently a party to any transaction with the Company or any of its Subsidiaries (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any corporation, partnership, trust or other entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner.

v. Rights Agreement. 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.

w. No Other Agreements. The Company has not, directly or indirectly, made any agreements with any Buyers relating to the terms or conditions of the transactions contemplated by the Transaction Documents except as set forth in the Transaction Documents.

x. Material Contracts. All material contracts of the Company that are required by applicable rules and regulations of the SEC to be filed as exhibits to the SEC Documents (“Material Contracts”) have been so filed. The Company has not received notice of a default and is not in default under, or with respect to, any Material Contract. To the knowledge of the Company, no other party to any Material Contract is in default thereunder, nor does any condition exist that, with notice or lapse of time or both, would constitute a default by such party thereunder. Schedule 3(x) lists each agreement with Fortress Credit Corporation, Fortress Investment Company and Amphora Limited as is in effect on the date hereof (collectively, the “Loan Documents”), and after giving effect to waivers and releases obtained by the Company, the Company is not in breach of any provision of the Loan Documents.

y. Brokers or Finders. The Buyers will not incur, directly or indirectly, as a result of any action taken by the Company, any liability for brokerage or finders’ fees or agents’ commissions or any similar charges in connection with this Agreement or any transactions contemplated hereby.

z. Officers, Directors and 5% Shareholders. Each of the Company’s key executive officers and directors and persons owning 5% or more of the Common Stock is listed on Schedule 3(z).

aa. Consents. The Company is not required to obtain any consent, authorization or approval of any Person in order for it to execute, deliver or perform any of its obligations under or contemplated by the Transactions Documents, in each case in accordance with the terms hereof or thereof other than the August 1, 2005 Nasdaq approval letter attached hereto as Exhibit E. The Company is not in violation of the listing requirements of the Principal Market and has no knowledge of any facts that would reasonably lead to delisting or suspension of the Common Stock in the foreseeable future.

a. Closing Conditions Compliance. Each party shall use its best efforts to satisfy timely each of the conditions to be satisfied by it as provided in Sections 6 and 7 of this Agreement.

b. Form D and Blue Sky. The Company agrees to file a Form D with respect to the Securities as required under Regulation D and to provide a copy thereof to each Buyer promptly after such filing. The Company shall, on or before the Closing Date, take such action as the Company shall reasonably determine is necessary in order to obtain an exemption for or to qualify the Securities for sale to the Buyers at the Closing pursuant to this Agreement under applicable securities or “Blue Sky” laws of the states of the United States. The Company shall make all filings and reports relating the offer and sale of the Securities required under applicable securities or “Blue Sky” laws of the states of the United States following the Closing Date.

c. Reporting Status. Until the earlier of (i) the date as of which the Investors (as that term is defined in the Registration Rights Agreement, but excluding therefrom any officers or directors) may sell all of the Offered Shares and the Warrant Shares without restriction pursuant to Rule 144(k) promulgated under the 1933 Act (or successor thereto), or (ii) the date on which (A) the Investors shall have sold all the Offered Shares and the Warrant Shares and (B) none of the Offered Shares or Warrants is outstanding (the “Registration Period”), the Company shall file all reports required to be filed with the SEC pursuant to the 1934 Act, and the Company shall not terminate its status as an issuer required to file reports under the 1934 Act even if the 1934 Act or the rules and regulations thereunder would otherwise permit such termination.

d. Use of Proceeds. The Company will use the proceeds from the sale of the Offered Shares for substantially the same purposes and in substantially the same amounts as indicated in Schedule 4(d).

e. Financial Information. The Company agrees to send the following to each Investor (as that term is defined in the Registration Rights Agreement, but excluding therefrom any officers or directors of the Company and any Investors who no longer own Securities) during the Registration Period: (i) within two (2) business days after the filing thereof with the SEC, a copy of its Annual Reports on Form 10-K, its Quarterly Reports on Form 10-Q, any Current Reports on Form 8-K, including any amendments to such documents, and any registration statements (other than on Form S-8) or amendments filed pursuant to the 1933 Act, provided that if any such report is filed with the SEC through EDGAR then the Company shall not be obligated to deliver a copy of such report to any Investor; (ii) on the same day as the release thereof, facsimile copies of all press releases issued by the Company or any of its Subsidiaries; and (iii) copies of any notices and other information made available or given to the stockholders of the Company generally, contemporaneously with the making available or giving thereof to the stockholders.

f. Reservation of Shares. The Company shall take all action necessary to at all times have authorized, and reserved for the purpose of issuance, no less than 100% of the number of shares of Common Stock needed to provide for the issuance of the shares of Common Stock upon exercise of all outstanding Warrants.

g. Lock Up. The Company shall obtain for Buyers’ benefit the written agreement from each of its executive officers and directors not to sell, short sell, loan, margin, dispose, pledge or transfer, directly or indirectly, more than five percent (5%) of the Company’s capital stock they own or control, such restrictions to apply from the date hereof through the period ending on the day following the 180^th consecutive day that the Registration Statement is available for the resale of the Offered Shares and Warrant Shares. Such agreement shall be in substantially the form provided in Exhibit B hereto, but shall not prohibit those

executive officers and directors who are Buyers of Securities from selling such Securities in accordance with the Registration Statement. The Company shall provide a standing stop order with its transfer agent to prohibit the activity proscribed by such agreement. The Company agrees not to amend any such agreement without prior written consent of the Required Holders.

h. Listing. The Company shall promptly secure the listing of all of the Registrable Securities (as defined in the Registration Rights Agreement) upon each national securities exchange and automated quotation system, if any, upon which shares of Common Stock are then listed (subject to official notice of issuance) and shall maintain, so long as any other shares of Common Stock shall be so listed, such listing of all Registrable Securities from time to time issuable under the terms of the Transaction Documents. Subject to meeting applicable listing requirements, the Company shall use reasonable best efforts to maintain authorization of the Common Stock for quotation on the Nasdaq National Market, and neither the Company nor any of its Subsidiaries shall take any action which would be reasonably expected to result in the delisting or suspension of the Common Stock on the Principal Market. The Company shall pay all fees and expenses in connection with satisfying its obligations under this Section 4(h).

i. Expenses. The Company shall reimburse Peninsula Catalyst Fund, L.P. its expenses (including reasonable attorneys’ fees and expenses) in due diligence and negotiating and preparing the Transaction Documents and consummating the transactions contemplated thereby.

j. Filing of Form 8-K. On or before the first (1^st) business day following the Closing Date, the Company shall file a Form 8-K with the SEC describing the terms of the transactions contemplated by the Transaction Documents in the form required by the 1934 Act., and otherwise disclose all material non-public information previously disclosed to Buyers which information continues to be, as of the date hereof, material and non-public.

k. Form S-3 Eligibility. The Company shall use its best efforts to obtain eligibility to file a registration statement on Form S-3 so that it is available for the registration of the resale of Registrable Securities.

l. Limitation on Filing Registration Statements. From the date hereof through the period ending on the day following the 30^th consecutive trading day that the Registration Statement is available for the resale of the Securities, the Company shall not register any securities other than the Securities, any securities that the Company currently is required to register and securities on Form S-8 issued in connection with any stock option plan, stock purchase plan, stock bonus plan or other plan for the benefit of employees, officers or directors of the Company.

m. Stockholder Approval. The Company shall use its best efforts to obtain as soon as possible, but in no event later than the 90^th day following the date hereof, “Stockholder Approval” as that term is defined in Section 4(v) the Securities Purchase Agreement between Amphora Limited and the Company dated as of December 30, 2004.

a. Delivery of Legended Common Stock. Upon execution of this Agreement, the Company shall issue irrevocable instructions to its transfer agent, and any subsequent transfer agent, to issue certificates, registered in the name of each Buyer or its respective nominee(s), for the Offered Shares and the Warrant Shares in such amounts as specified from time to time by each Buyer to the Company (the “Irrevocable Transfer Agent Instructions”), which instructions shall be in the form as provided in Exhibit D hereto. Prior to registration of the Offered Shares and the Warrant Shares under the 1933 Act, all Securities shall bear the restrictive legend specified in Section 2(g) of this Agreement. The Company warrants that no instruction other than the Irrevocable Transfer Agent Instructions referred to in this Section 5, and stop transfer instructions to give effect to Section 2(f) hereof (in the case of the Offered Shares and the Warrant Shares, prior to registration of the Offered Shares and the Warrant Shares under the 1933 Act) will be given by the Company to its transfer agent and that the Securities shall otherwise be freely transferable on the books and records of the Company as and to the extent provided in this Agreement and the Registration Rights Agreement.

b. Delivery of Unlegended Common Stock. After the Offered Shares and Warrant Shares have been registered for resale, in lieu of delivering physical certificates representing Offered Shares or Warrant Shares, provided the Company’s transfer agent is participating in the Depositary Trust Company (“DTC”) Fast Automated Securities Transfer program, on the written request of a Buyer who shall have previously instructed its broker to confirm such request to the Company’s transfer agent, the Company shall cause its transfer agent to transmit electronically the Offered Shares or the Warrant Shares to the Buyer by crediting the account of the Buyer’s prime broker with DTC through its Deposit Withdrawal Agent Commission system no later than the date upon which the Company is required to deliver shares to the Buyer under the terms of this Agreement. Nothing in this Section 5 shall affect in any way each Buyer’s obligations and agreements to comply with all applicable prospectus delivery requirements, if any, upon resale of the Securities. If a Buyer provides the Company with an opinion of counsel, in a generally acceptable form, to the effect that a public sale, assignment or transfer of the Securities may be made without registration under the 1933 Act or the Buyer provides the Company with reasonable assurances (including, without limitation, by delivering a certificate of an executive officer of such Buyer) that the Securities can be sold pursuant to Rule 144 without any restriction as to the number of securities acquired as of a particular date that can then be immediately sold, the Company shall permit the transfer, and promptly instruct its transfer agent to issue one or more certificates in such name and in such denominations as specified by such Buyer and without any restrictive legend.

c. Timing of Delivery. Whenever the Company is required to deliver Securities under the Transaction Documents, whether with or without a restrictive legend, such delivery shall be made within three (3) business days of the day that request is made for delivery of such Securities.

d. Specific Performance. The Company acknowledges that a breach by it or its transfer agent of their respective obligations hereunder will cause irreparable harm to the Buyers by vitiating the intent and purpose of the transaction contemplated hereby. Accordingly, the Company acknowledges that the remedy at law for a breach of its obligations under this Section 5 will be inadequate and agrees, in the event of a breach or threatened breach of the provisions of this Section 5, that the Buyers shall be entitled, in addition to all other available remedies, to an order and/or injunction restraining any breach and requiring immediate issuance and transfer, without the necessity of showing economic loss and without any bond or other security being required.

The obligation of the Company hereunder to issue and sell the Securities to each Buyer at the Closing is subject to the satisfaction, at or before the Closing Date, of each of the following conditions, provided that these conditions are for the Company’s sole benefit and may be waived by the Company at any time in its sole discretion by providing each Buyer with prior written notice thereof:

a. Such Buyer shall have executed each of the Transaction Documents to which it is a party and delivered the same to the Company.

b. Such Buyer shall have delivered to the Company the Purchase Price for the Offered Shares and the related Warrants being purchased by such Buyer at the Closing by wire transfer of immediately available funds pursuant to the wire instructions provided by the Company.

c. The representations and warranties of such Buyer shall be true and correct as of the Closing Date (except for representations and warranties that speak as of a specific date), and such Buyer shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by such Buyer at or prior to the Closing Date.

d. The offer and sale of the Offered Shares and the related Warrants to such Buyer pursuant to this Agreement shall be exempt from the registration requirements under the 1933 Act and shall be exempt from the registration and/or qualification requirements of all applicable state securities laws.

The obligation of each Buyer hereunder to purchase the Securities at the Closing is subject to the satisfaction, at or before the Closing Date, of each of the following conditions, provided that these conditions are for each Buyer’s sole benefit and may be waived by such Buyer at any time in its sole discretion by providing the Company with prior written notice thereof:

a. The Company shall have executed each of the Transaction Documents and delivered the same to such Buyer.

c. The representations and warranties of the Company shall be true and correct as of the Closing Date (except for representations and warranties that speak as of a specific date) and the Company shall have performed, satisfied and complied with the covenants, agreements and conditions required by the Transaction Documents to be performed, satisfied or complied with by the Company at or prior to the Closing Date. Such Buyer shall have received a certificate, executed by the Chief Executive Officer of the Company, dated as of the Closing Date, to the foregoing effect and as to such other matters as may be reasonably requested by such Buyer.

d. Such Buyer shall have received the opinion of the Company’s counsel dated as of the Closing Date, in form, scope and substance reasonably satisfactory to such Buyer and in substantially the form of Exhibit C attached hereto.

e. The Company shall have executed and delivered to such Buyer the Warrants and the Common Stock Certificates (in such denominations as such Buyer shall request) for the Offered Shares being purchased by such Buyer at the Closing.

f. The Company’s Board of Directors shall have adopted resolutions authorizing the issuance of the Offered Shares, the Warrants and the Warrant Shares and the other transactions provided by this Agreement and the Transaction Documents in a form reasonably acceptable to such Buyer.

g. As of the Closing Date, the Company shall have reserved out of its authorized and unissued Common Stock a sufficient number of shares of Common Stock for the purpose of effecting the exercise of the Warrants.

h. The Irrevocable Transfer Agent Instructions, in the form of Exhibit D attached hereto, shall have been delivered to and acknowledged in writing by the Company’s transfer agent.

i. The Company shall have delivered to such Buyer a certificate evidencing the incorporation and good standing of the Company and each Subsidiary in such corporation’s state of incorporation issued by the Secretary of State of such state of incorporation as of a date within 10 days of the Closing Date.

j. The Company shall have delivered to such Buyer a certified copy of the Certificate of Incorporation as certified by the Secretary of State of the State of Delaware within 10 days of the Closing Date.

k. The Company shall have delivered to such Buyer a secretary’s certificate, dated as the Closing Date, as to (i) the resolutions described in Section 7(f) and (g), (ii) the Certificate of Incorporation and (iii) the Bylaws, each as in effect at the Closing.

l. The Company shall have made all filings under all applicable federal and state securities laws necessary to consummate the issuance of the Securities pursuant to this Agreement in compliance with such laws.

n. The offer and sale of the Offered Shares and the related Warrants pursuant to this Agreement shall be exempt from the registration requirements under the 1933 Act and shall be exempt from the registration and/or qualification requirements of all applicable state securities laws.

o. The Company shall have delivered to such Buyer such other documents relating to the transactions contemplated by this Agreement as such Buyer or its counsel reasonably request.

In consideration of each Buyer’s execution and delivery of the Transaction Documents and acquiring the Securities thereunder and in addition to all of the Company’s other obligations under the Transaction Documents, the Company shall defend, protect, indemnify and hold harmless each Buyer and each other holder of the Securities and all of their stockholders, partners, members, officers, directors, employees and direct or indirect investors and any of the foregoing Persons’ agents or other representatives (including, without limitation, those retained in connection with the transactions contemplated by this Agreement) (collectively, the “Indemnitees”) from and against any and all actions, causes of action, suits, claims, losses, costs, penalties, fees, liabilities and damages, and expenses in connection therewith (irrespective of whether any such Indemnitee is a party to the action for which indemnification hereunder is sought), and including reasonable attorneys’ fees and disbursements (the “Indemnified Liabilities”), incurred by any Indemnitee as a result of, or arising out of, or relating to (a) any misrepresentation or breach of any representation or warranty made by the Company in any Transaction Documents, (b) any breach of any covenant, agreement or obligation of the Company contained in any Transaction Documents or (c) any cause of action, suit or claim brought or made against such Indemnitee by a third party (including for these purposes a derivative action brought on behalf of the Company) and arising out of or resulting from (i) the execution, delivery, performance or enforcement of any Transaction Documents, (ii) any transaction financed or to be financed in whole or in part, directly or indirectly, with the proceeds of the issuance of the Securities or (iii) the status of such Buyer or holder of the Securities as an investor in the Company pursuant to the transactions contemplated by the Transaction Documents. To the extent that the foregoing undertaking by the Company may be unenforceable for any reason, the Company shall make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities that is permissible under applicable law. Except as otherwise set forth herein, the mechanics and procedures with respect to the rights and obligations under this Section 8 shall be the same as those set forth in Section 6 of the Registration Rights Agreement.

a. Governing Law; Jurisdiction; Jury Trial. The corporate laws of the State of Delaware shall govern all issues concerning the relative rights of the Company and its stockholders. All other 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 non-exclusive jurisdiction of the state and federal courts sitting in the City of San Francisco, California, 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 HEREWITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.

b. 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 parties; 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.

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

d. 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.

e. Entire Agreement; Amendments. This Agreement supersedes all other prior oral or written agreements between the Buyers, the Company, their affiliates and persons acting on their behalf with respect to the matters discussed herein, and this Agreement and the instruments referenced herein 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 any Buyer makes any representation, warranty, covenant or undertaking with respect to such matters. No provision of this Agreement may be amended other than by an instrument in writing signed by the Company and the holders of a majority of the Offered Shares then outstanding, and no provision hereof may be waived other than by an instrument in writing signed by the party against whom enforcement is sought. No such amendment shall be effective to the extent that it applies to less than all of the holders of the Offered Shares then outstanding.

f. Notices. 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: (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided confirmation of transmission is mechanically or electronically generated and kept on file by the sending party); or (iii) one business day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be:

If to a Buyer, to it at the address and facsimile number set forth on the Schedule of Buyers attached hereto, with copies to such Buyer’s representatives, if any, specified on the Schedule of Buyers, or at

such other address and/or facsimile number and/or to the attention of such other person as the recipient party has specified by written notice given to each other party in accordance with the above provisions 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 (i), (ii) or (iii) above, respectively; provided however that the foregoing clause (B) shall only be valid if such communication contained in the facsimile is delivered by an overnight courier service within 24 hours of the transmission of facsimile.

g. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns, including any purchasers of the Offered Shares. The Company shall not assign this Agreement or any rights or obligations hereunder without the prior written consent of the holders of a majority of the Offered Shares then outstanding, including by merger or consolidation. A Buyer may assign some or all of its rights hereunder without the consent of the Company, provided, however, that any such assignment shall not release such Buyer from its obligations hereunder unless such obligations are assumed by such assignee. Notwithstanding anything to the contrary contained in the Transaction Documents, the Buyers shall be entitled to pledge the Securities in connection with a bona fide margin account.

h. No Third Party Beneficiaries. This 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.

i. Survival. The representations, warranties and covenants of the Company and the Buyers shall survive the Closing. Each Buyer shall be responsible only for its own representations, warranties, agreements and covenants hereunder.

j. Publicity. The Company shall be entitled, without the prior approval of any Buyer, to make any press release or other public disclosure with respect to the transactions contemplated hereby as it deems reasonably necessary or appropriate in accordance with its disclosure obligations under applicable law, rules and regulations; provided, however, that the Company will not identify by name any Buyer, other than those that are officers and directors of the Company, in any press release or the body of any other public disclosure without such Buyer’s prior approval which will not be unreasonably withheld or delayed; provided, further, that to the extent the Company breaches the foregoing provision and such breach is the sole cause of an Event of Default (as defined in the Amended and Restated Senior Subordinated Secured Convertible Note between Amphora Limited and the Company of even date herewith (the “Amended Note”), notwithstanding the provisions of Section 2 of the Amended Note, the Interest Rate (as defined in the Amended Note) shall not be increased to the Default Rate (as defined in the Amended Note).

k. 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.

l. No Strict Construction. The language used in this Agreement will 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.

m. Remedies. Each Buyer and each holder of the Securities shall have all rights and remedies set forth in the Transaction Documents and all rights and remedies which such holders have been granted at any time under any other agreement or contract and all of the rights which such holders have under any law. The parties hereto hereby declare that it is impossible to measure in money the damages which will accrue to Buyers or any holder of the Securities by reason of the Company’s failure to perform any of the obligations under this Agreement and agree that the terms of this Agreement shall be specifically enforceable by Buyers and each holder of the Securities. If a Buyer or any holder of Securities institutes any action or proceeding

to specifically enforce the provisions hereof, any person or entity against whom such action or proceeding is brought hereby waives the claim or defense therein that such Buyer or the holder of the Securities has an adequate remedy at law, and such person or entity shall not offer in any such action or proceeding the claim or defense that such remedy at law exists.

n. Independence. The Company and each Buyer acknowledge that each Buyer is acting and has acted independently from one another and not as a group in connection with the transaction evidenced by the Transaction Documents, including without limitation, performing due diligence, negotiating the Transaction Documents, and deciding whether to acquire the Securities, hold the Securities, vote the Securities or dispose of the Securities. The Company and each Buyer further acknowledge that each Buyer intends to act independently from one another and not as a group in connection with (i) any amendment or waiver of rights under this Agreement or the Registration Rights Agreement, (ii) any future purchase or sale of the Company’s equity securities, (iii) the acquisition, holding, voting or disposing of the Securities or any other capital stock of the Company, or (iv) any other matter arising under or related to the Transaction Documents.

o. Representation. Each party hereto acknowledges that (i) Peninsula Catalyst Fund, L.P. retained Shartsis Friese LLP to represent it in connection with the Transaction Documents, that its interests may not necessarily coincide with the interests of the other Buyers, and that each other Buyer has consulted with, or has had the opportunity to consult with, its own legal counsel and has not relied on Shartsis Friese LLP for legal counsel in connection with this transaction, and (ii) Amphora Limited retained Schulte Roth & Zabel LLP to represent it in connection with the Transaction Documents, that its interests may not necessarily coincide with the interests of the other Buyers, and that each other Buyer has consulted with, or has had the opportunity to consult with, its own legal counsel and has not relied on Schulte Roth & Zabel LLP for legal counsel in connection with this transaction.

p. Exculpation. Each Buyer acknowledges that it is not relying upon any person, firm or corporation, other than the Company and its officers and directors, in making its investment or decision to invest in the Company.