**EXECUTION COPY**  **STOCK PURCHASE AGREEMENT**dated as ofApril 30, 2006by and among**LASERSCOPE,****INNOVAQUARTZ INCORPORATED**and**THE STOCKHOLDERS OF INNOVAQUARTZ INCORPORATED**  
 

 
**STOCK PURCHASE AGREEMENT**     THIS STOCK PURCHASE AGREEMENT (this “Agreement”) is made and entered into as of the30th day of April 2006, by and among Laserscope, a California corporation (the“Purchaser”), InnovaQuartz Incorporated, an Arizona corporation (the “Company”),The Griffin Family Revocable Trust (the “Griffin Trust”), Steve Griffin (“Mr.Griffin”) and Brian Barr (“Mr. Barr”). The Griffin Trust and Mr. Barr as sometimesreferred to herein individually as a “Stockholder” and collectively as the“Stockholders.” Mr. Griffin and Mr. Barr as sometimes referred to herein individually as a“Company Principal” and collectively as the “Company Principals.”**RECITALS**     A. The Board of Directors of Purchaser believes it is in the best interests of Purchaser andits stockholders to acquire all of the issued and outstanding capital stock of the Company, all ofwhich capital stock is owned or held of record by the Stockholders, all upon the terms and subjectto the conditions set forth herein (the “Acquisition”), such that upon consummation of theAcquisition Purchaser will own all of the issued and outstanding capital stock of the Company.     B. As an inducement for Purchaser to consummate the Acquisition, the Company, the Stockholdersand the Company Principals have agreed to make certain representations, warranties, covenants andother agreements in connection with the Acquisition, all as set forth herein.     C. As a further inducement for Purchaser to consummate the Acquisition, each of the CompanyPrincipals has agreed to enter into an Employment Agreement (collectively, the “EmploymentAgreements”), which shall be effective only upon the closing of the Acquisition and shall besubstantially in the form of Exhibit A hereto, in the case of Mr. Griffin, andsubstantially in the form of Exhibit B hereto, in the case of Mr. Barr.**AGREEMENT**     In consideration of the mutual promises, agreements, warranties and provisions contained inthis Agreement, the parties hereto, intending to be legally bound, hereby agree as follows:**SECTION 1****PURCHASE AND SALE OF SHARES**     1.1 **Purchase and Sale of Shares**. Subject to the terms and conditions of thisAgreement, Purchaser hereby agrees to purchase at the Closing (as defined below) and theStockholders agree to sell, convey, transfer, assign and deliver to Purchaser at the Closing, freeand clear of all liens, encumbrances or other defects of title, all of the issued and outstandingshares of capital stock of the Company and/or any rights to acquire shares of the capital stock ofthe Company, beneficially owned or held of record and to be beneficially owned or held of recordby the Stockholders, in each case as set forth adjacent the Stockholders’ names in Section 1.1 of the Company Disclosure Schedule, such that on the Closing Date (as definedbelow) Purchaser shall be the sole record and beneficial owner of all outstanding shares and rightsto acquire shares of the Company’s capital stock (the “**Shares**”).
 

 
     1.2 **Consideration**.          (a) The total consideration to be paid by Purchaser for the Shares shall be an aggregate ofSeven Million Five Hundred Twenty Six Thousand One Hundred Twenty Two Dollars ($7,526,122) (the“**Total Initial Payment**”), *plus* the Earnout Amounts, if any, as determined in accordancewith Sections 1.3 and 1.4 below (such amount, the “**Purchase Price**”). At the Closing, Purchasershall pay to the Griffin Trust $5,017,414.67 of the Total Initial Payment and shall pay to Mr.Barr $2,508,707.33 of the Total Initial Payment, in each case either by check or wire transfer ofimmediately available funds pursuant to wire transfer instructions delivered by each Stockholder toPurchaser at least two (2) Business Days prior to the Closing Date.          (b) As additional consideration for the obligations of the Stockholders, the CompanyPrincipals and the Company hereunder, Purchaser shall, as of the Closing: (i) assume the capitalequipment financing obligation of the Company as set forth in Section 1.2 of the CompanyDisclosure Schedule (so as to terminate any further obligation of the Stockholders with respectthereto); and (ii) fully pay all principal and accrued interest owing to the holders of thepromissory notes, having an aggregate principal amount of $310,217, set forth in Section1.2 of the Company Disclosure Schedule (the “Barr Note Payments”).     1.3 **Earnout Payments**.          (a) **Earnout Payment Schedule**. Subject to Purchaser’s rights of set-off set forth inSection 8.3 hereof, the Stockholders shall be entitled to receive the Earnout Amounts (asdefined in Section 1.4 below) as follows:               (i) 50% of the Total First Earnout Amount will be paid to the Stockholders within 30 days ofthe final determination of the Total First Earnout Amount in accordance with Section1.3(f), and the balance of the Total First Earnout Amount will be paid to the Stockholderswithin 30 days of completion of Purchaser’s audited financials for calendar year 2007;               (ii) 50% of the Total Second Earnout Amount will be paid to the Stockholders within 30 days ofthe final determination of the Total Second Earnout Amount in accordance with Section1.3(f), and the balance of the Total Second Earnout Amount will be paid to the Stockholderswithin 30 days of completion of Purchaser’s audited financials for calendar year 2008; and               (iii) 50% of the Total Third Earnout Amount will be paid to the Stockholders within 30 days ofthe final determination of the Total Third Earnout Amount in accordance with Section1.3(f), and the balance of the Total Third Earnout Amount will be paid to the Stockholderswithin 30 days of completion of Purchaser’s audited financials for calendar year 2009.
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          (b) **Earnout Payment Allocations**. Subject to Section 1.3(c), Section1.3(g)(ii) and Purchaser’s rights of set-off set forth in Section 8.3 hereof,two-thirds of each of the Earnout Amounts shall be payable in cash to Mr. Griffin and one-third ofeach of the Earnout Amounts shall be payable in cash to Mr. Barr, in each case by wire transfer ofimmediately available funds pursuant to wire transfer instructions promptly delivered by eachStockholder to Purchaser upon Purchaser’s request.          (c) **Compliance with Agreements**.               (i) Each Stockholder’s right to receive his or its portion of each of the Earnout Amounts iscontingent upon such Stockholder (or, in the case of the Griffin Trust, Mr. Griffin) being inmaterial compliance with the non-competition and non-solicitation sections of his EmploymentAgreement at all times prior to the payment of such Earnout Amount; provided,however, if any material non-compliance is inadvertent or unintentional, is curable(whether through the payment of damages or losses sustained by Purchaser or otherwise), and thenon-complying party has given Purchaser written notice promptly (but no later than 5 business days)after first becoming aware of the facts, events or actions that caused, or could reasonably beexpected to cause, such material non-compliance, the non-complying party shall have 10 businessdays to cure such non-compliance, whereupon such Stockholder’s rights to any Earnout Amounts paidor payable after the date of the non-complying party’s notice to Purchaser shall be reinstated;provided, further, if Purchaser has any basis (other than receipt of the noticereferenced in the first proviso above) to allege any material non-compliance with thenon-competition and non-solicitation sections of the Employment Agreement, then Purchaser, as acondition precedent to invoking its rights pursuant to this Section 1.3(c)(i), shall havegiven such Stockholder (and, in the case of the Griffin Trust, Mr. Griffin) written notice of thealleged breach of such non-competition and non-solicitation sections within 30 days of Purchaserfirst becoming aware of the facts, events or actions that form the basis for such allegation               (ii) Each Stockholder’s right to receive his or its portion of each of the Earnout Amounts isalso contingent upon such Stockholder (and, in the case of the Griffin Trust, Mr. Griffin) being inmaterial compliance with the post-Closing operational covenants of the Company set forth inSection 6.10(a) and (d) of this Agreement; provided, that Purchaser, as acondition precedent to invoking its rights pursuant to this Section 1.3(c)(ii), has givensuch Stockholder (and, in the case of the Griffin Trust, Mr. Griffin) notice of any determinationby Purchaser of such Stockholder’s (or, in the case of the Griffin Trust, Mr. Griffin’s) materialnon-compliance with the terms of Section 6.10(a) or (d) of this Agreement, and, tothe extent such non-compliance is curable (whether through the payment of damages or lossessustained by Purchaser or otherwise), such Stockholder (and, in the case of the Griffin Trust, Mr. Griffin) hasbeen afforded a reasonable opportunity (not to exceed 30 days) to cure such non-compliance,whereupon such Stockholder’s rights to any Earnout Amounts paid or payable after the date ofPurchaser’s notice shall be reinstated).
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          (d) **Change of Control Transaction**. In the event a Change of Control Transaction iscompleted at any time during the period beginning on the date hereof and ending on the earlier of(i) the satisfaction or termination of Purchaser’s payment obligations to the Stockholders withrespect to the Earnout Amounts or (ii) the third anniversary of the Closing Date (the “**RestrictedPeriod**”), either (A) Purchaser shall require the successor entity to expressly agree in writing toassume all such payment obligations as specified in Sections 1.3 and 1.4 hereof andPurchaser’s operational covenants specified in Section 6.10 hereof; or (B) in lieu thereof,Purchaser or the successor entity shall, at or prior to the closing of the Change of ControlTransaction and as a condition thereof, pay to the Stockholders, in full satisfaction of suchpayment obligations, the following percentages of the maximum buyout amount of $15,000,000 (the“**Maximum Buyout Amount**”): (I) 50% of the Maximum Buyout Amount *less* the aggregate amount ofall Earnout Amounts paid, or which would have been payable but for a Stockholder’s (or, in the caseof the Griffin Trust, Mr. Griffin’s) noncompliance with Section 1.3(c) or Purchaser’sexercise of its rights of set-off set forth in Section 8.3, prior to the date of the Changeof Control Transaction, in the event the Change of Control Transaction occurs on or prior to thefirst anniversary of the Closing Date; (II) 73% of the Maximum Buyout Amount *less* theaggregate amount of all Earnout Amounts paid, or which would have been payable but for aStockholder’s (or, in the case of the Griffin Trust, Mr. Griffin’s)noncompliance with Section1.3(c) or Purchaser’s exercise of its rights of set-off set forth in Section 8.3, priorto the date of the Change of Control Transaction, in the event the Change of Control Transactionoccurs after the first anniversary of the Closing Date but on or prior to the second anniversary ofthe Closing Date; and (III) 100% of the Maximum Buyout Amount *less* the aggregate amount ofall Earnout Amounts paid, or which would have been payable but for a Stockholder’s (or, in the caseof the Griffin Trust, Mr. Griffin’s) noncompliance with Section 1.3(c) or Purchaser’sexercise of its rights of set-off set forth in Section 8.3, prior to the date of the Changeof Control Transaction, in the event the Change of Control Transaction occurs after the secondanniversary of the Closing Date but on or prior to the third anniversary of the Closing Date.          (e) **Product Sales Limitations**. Prior to the expiration of the Restricted Period andexcept as contemplated and permitted by Section 6.10(d), Purchaser shall not (i) impose anysales prohibitions or take other actions to exclude any of the Company Developed Products includedin the Baseline Budget from its sales efforts (unless it shall permit the Company to sell any suchCompany Developed Products exclusively), including, without limitation, but only in the eventPurchaser elects to sell any Company Developed Products, the implementation of any commission orcompensation structure that provides for compensation to Purchaser’s salespersons, representatives,distributors or other persons responsible for the sale by Purchaser of Company Developed Productsafter the Closing that is less favorable to such persons than the commission or compensation structure applicable to their sales of Purchaser’slike products of comparable quality in the same markets, (ii) impose any material restrictionduring any calendar year in the Restricted Period on the Company’s expenditure or application ofits financial, capital and other resources during such calendar year or the Company’s employeestaffing levels during such calendar year, in each case, subject to the amounts and otherlimitations applicable to such calendar year as set forth in the Baseline Budget, or (iii)otherwise restrict the Company’s sales of the Company Developed Products included in the BaselineBudget in a manner that results in a reduction in sales of such Company Developed Products (a“**Product Sales Limitation**”); provided, however, a Product Sales Limitation shallexclude, and not result from Purchaser’s imposition of, (A) any sales prohibitions or the taking ofother actions required to address a quality assurance or
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regulatorycompliance problem, (B) any requirement that the purchase price of the Company’s products be comparable to the purchase priceof like products of comparable quality in the same market, (C) any requirement that the grossmargin on sales of the Company’s products be at least equal to the combined gross margin on salesby Purchaser of comparable products (currently 75%) less an allowance for reasonable selling and/ordistribution expenses not to exceed 10% of the applicable per unit sales price, or (D) any otherrestriction or requirement as is reasonably necessary to prevent a violation of any law, regulationor other legal obligation applicable to Purchaser, the Company or any of their respectiveaffiliates or subsidiaries. In the event Purchaser or its successor (as applicable) elects to takeany action during the Restricted Period that constitutes a Product Sales Limitation, Purchaser orits successor (as applicable) shall be obligated to pay to the Stockholders, at or prior to theimposition of the Product Sales Limitation, as a condition thereof, and in full satisfaction of allpayment obligations of Purchaser or its successor (as applicable) under this Agreement, thefollowing percentages of the Maximum Buyout Amount: (I) 50% of the Maximum Buyout Amount*less* the aggregate amount of all Earnout Amounts paid, or which would have been payable butfor a Stockholder’s (or, in the case of the Griffin Trust, Mr. Griffin’s) noncompliance withSection 1.3(c) or Purchaser’s exercise of its rights of set-off set forth in Section8.3, prior to the date of the Product Sales Limitation, in the event the Product SalesLimitation occurs on or prior to the first anniversary of the Closing Date; (II) 73% of the MaximumBuyout Amount *less* the aggregate amount of all Earnout Amounts paid, or which would havebeen payable but for a Stockholder’s (or, in the case of the Griffin Trust, Mr. Griffin’s)noncompliance with Section 1.3(c) or Purchaser’s exercise of its rights of set-off setforth in Section 8.3, prior to the date of the Product Sales Limitation, in the event theProduct Sales Limitation occurs after the first anniversary of the Closing Date but on or prior tothe second anniversary of the Closing Date; and (III) 100% of the Maximum Buyout Amount*less* the aggregate amount of all Earnout Amounts paid, or which would have been payable butfor a Stockholder’s (or, in the case of the Griffin Trust, Mr. Griffin’s) noncompliance withSection 1.3(c) or Purchaser’s exercise of its rights of set-off set forth in Section8.3, prior to the date of the Product Sales Limitation, in the event the Product SalesLimitation occurs after the second anniversary of the Closing Date but on or prior to the thirdanniversary of the Closing Date. Notwithstanding anything in this Section 1.3(e) to thecontrary, if the Stockholders have any basis to allege that a Product Sales Limitation hasoccurred, then the Stockholders, as a condition precedent to invoking their rights pursuant to this Section 1.3(e), shall have given Purchaser written notice of the basis for suchallegation within 30 days of first becoming aware of the facts, events or actions that form thebasis for such allegation, and, to the extent such allegation is valid, Purchaser shall have 30days to cure the Product Sales Limitation.          (f) **Calculation of Gross Revenue and Pre-Tax Profits**. The amount of gross revenue andpre-tax profits of the Company for any calendar year during the Restricted Period shall becalculated in accordance with generally accepted accounting principles of the United States(“GAAP”), applied in a manner consistent with that which the Purchaser’s financials havebeen prepared and subject to the following:               (i) Purchaser and each of the Stockholders and the Company Principals agrees and acknowledgesthat the gross revenue and pre-tax profits targets set forth in the initial Baseline Budget wereestablished based on the fact that revenue generated under the Boston Scientifics Supply Agreement(as defined in Section 1.4(a) below) cannot be recognized under GAAP until expiration of the 180-day final inspection and
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acceptance or rejection period specified therein; however,Purchaser and each of the Stockholders and the Company Principals further agrees and acknowledgesthat if the Boston Scientifics Supply Agreement is amended post-Closing in a manner that enablesthe recognition of any revenue generated thereunder in an earlier calendar year than iscontemplated in the initial Baseline Budget, then the gross revenue and pre-tax profits targets setforth in the initial Baseline Budget will be revised to appropriately reflect such earlier revenuerecognition;               (ii) subject to the Company Principals’ compliance with Section 6.10(b) hereof, anyand all sales of Company Developed Products completed during any calendar year ending within theRestricted Period, whether by the Company or the Purchaser, shall be deemed made 100% by theCompany and included in the Company’s gross revenue for such calendar year at the sale price paidby the customer;               (iii) subject to the Company Principals’ compliance with Section 6.10(c) hereof, thepercentage of any and all sales of Jointly Developed Products completed during any calendar yearending within the Restricted Period allocable to the Company as mutually agreed by the partiespursuant to Section 6.10(c), whether by the Company or the Purchaser, shall be deemed madeby the Company and the same percentage of the gross revenue generated from such sales, based on thesale price paid by the customer, shall be included in the Company’s gross revenue for such calendaryear;               (iv) except for the types and amounts of charges or expenses attributable to the Companypursuant to the Baseline Budget, no one-time charges or expenses attributable to any Subsidiary ofPurchaser other than the Company shall be allocated to the Company in calculating the Company’spre-tax profit;               (v) for calendar year 2006, any fees and expenses incurred or reasonably expected to beincurred by the Company, the Stockholders or the Company Principals in connection with thenegotiation of the terms and conditions of this Agreement and the completion of the Acquisition,including all legal, accounting, financial advisory, consulting and other fees and expenses ofthird parties, shall, subject to such parties’ compliance with Section 6.1 hereof, beexcluded for the purpose of calculating Company pre-tax profit; and               (vi) Purchaser’s payment of any Earnout Amount shall not be deemed an expense of the Companyfor the purpose of calculating any Earnout Amount.          (g) **Baseline Cap Production and Reinvestment Requirement**. Notwithstanding any otherterm of this Section 1.3 or Section 1.4 below, Purchaser acknowledges and agreesthat: (i) the Company’s attainment of the Baseline Cap Production Requirement shall be excused asa condition to the accrual of any Earnout Amount to the extent that Purchaser does not submitorders for (or otherwise directs the Company not to produce) a number of caps equal to or greaterthan the Baseline Cap Production Requirement; and (ii) to the extent the amount, if any, comprisingthe Reinvestment Requirement for each calendar year ending within the Restricted Period is notreinvested by the Company in approved research and development or product marketing activitiesduring such calendar year after expending commercially reasonable efforts to effect suchreinvestments, then the Earnout Amount, if any, for such calendar year shall be reduceddollar-for-dollar by the amount of such reinvestment shortfall, but in no event shall exceed 10% ofsuch Earnout Amount, and such reduction shall be the sole effect from the Company’s failure tofully reinvest the amount comprising the Reinvestment Requirement for that calendar year.
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           (h) **Determination of Earnout Amounts**. Within 30 days after Purchaser’s completion ofits audited financials for the applicable calendar year (namely, calendar year 2006 in the case ofthe Total First Earnout Amount, calendar year 2007 in the case of the Total Second Earnout Amount,and calendar year 2008 in the case of the Total Third Earnout Amount), Purchaser shall submit tothe Stockholders a calculation, with reasonable detail, of the applicable Earnout Amount and theStockholders shall have 15 days thereafter to dispute such calculation by submitting a writtendispute notice to Purchaser. Purchaser shall make the books and records of account of the Companyfully available to the Stockholders and the Stockholders’ representatives until such time as allEarnout Amounts due and payable hereunder have been finally determined solely for use in verifyingand calculating the applicable Earnout Amount. Subject to the full availability of the books andrecords of account of the Company, the Stockholders’ failure to provide Purchaser written notice ofdispute within such 15 days shall be deemed acceptance by the Stockholders of Purchaser’scalculation. If the Stockholders do not timely dispute Purchaser’s calculation or the Stockholdersearlier accept Purchaser’s calculation in writing, then Purchaser shall promptly remit theapplicable Earnout Amount to the Stockholders. If the Stockholders timely dispute Purchaser’scalculation, then Purchaser and the Stockholders shall have 20 days to negotiate in good faith toresolve the dispute. If such parties do not reach a mutually acceptable resolution from suchnegotiations, then the dispute shall be submitted to a nationally recognized public accounting firm agreeable to each such party andwith whom neither such party (or any of its Affiliates) has had a relationship within the past 24months. Such accounting firm and the Stockholders shall be given reasonable access to all relevantrecords of the Company to calculate the applicable Earnout Amount, which calculation shall besubmitted by the accounting firm to Purchaser and the Stockholders within 45 days. Each ofPurchaser and the Stockholders shall have 20 days thereafter to submit to each other and theaccounting firm written comments on such calculation and an additional 20 days to similarly submitto each other and the accounting firm written rebuttal comments to each other’s initial comments.Within 15 days after the rebuttal comment period, the accounting firm shall submit its finalcalculation to each of Purchaser and the Stockholders, which shall be final and binding on theparties hereto, and after which Purchaser shall promptly remit the applicable Earnout Amount (ifany) as so calculated to the Stockholders. Purchaser and the Stockholders shall share equally thefees and expenses of such accounting firm, provided if the applicable Earnout Amount as finallydetermined by the accounting firm is more than twenty-five percent (25%) greater than Purchaser’soriginal calculation of such Earnout Amount, all of such fees and expenses shall be paid byPurchaser. Interest shall accrue on any unpaid portion of the applicable Earnout Amount commencingon the date the Stockholders give notice of dispute of Purchaser’s calculation of such EarnoutAmount; provided, however, that Purchaser may remit to the Stockholders such amountas Purchaser deems not in dispute and interest shall thereupon accrue only on the difference, ifany, ultimately determined in accordance with this Section 1.3(f). The rate of interestshall be the rate of interest then published by Bank of America, San Francisco, California, as its“prime” lending rate for commercial borrowers.
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     1.4 **Earnout Amounts**.          (a) **Certain Definitions**.               (i) “**Baseline Budget**” means the budget for calendar years 2006, 2007 and 2008 as set forth inExhibit C attached hereto, which sets forth the gross revenue and pre-tax profit targetsfor each of these calendar years, as amended and updated from time to time in accordance withSection 6.10(e). The Baseline Budget will provide for continued manufacture of at least125,000 caps per year by the Company for Purchaser on a cost basis with the same level of qualityand timing of delivery as is currently being provided to Purchaser by the Company (the “**BaselineCap Production Requirement**”); provided, however, if Purchaser funds the capitalexpenditures necessary to double the Company’s cap production capacity (which are not expected toexceed $100,000 plus incremental labor costs), the Baseline Cap Production Requirements shall beincreased to 250,000 caps per year. In addition, the Baseline Budget for each of calendar years2006, 2007 and 2008 shall, at the direction of Purchaser in its sole discretion, require andreflect the Company’s reinvestment of up to 7% or $250,000 of its revenue, whichever is greater(the “**Reinvestment Requirement**”), towards research and development activities, which amounts shallbe fully reflected as expenses for purposes of determining the pre-tax profit targets for each ofthese calendar years. The Reinvestment Requirement will also include, at the direction of Purchaser in its sole discretion, up tocertain levels of investment in product marketing to be identified in the Baseline Budget.               (ii) “**Boston Scientific Supply Agreement**” means the Supply Agreement dated as of February 11,2005 by and between Boston Scientific Corporation and the Company.               (iii) “**Change of Control Transaction**” means (1) a sale of all or substantially all ofPurchaser’s assets, or (2) any merger, consolidation or other business combination transaction ofPurchaser with or into another corporation, entity or person, other than a transaction in which theholders of at least a majority of the shares of voting capital stock of Purchaser outstandingimmediately prior to such transaction continue to hold (either by such shares remaining outstandingor by their being converted into shares of voting capital stock of the surviving entity) a majorityof the total voting power represented by the shares of voting capital stock of Purchaser (or thesurviving entity) outstanding immediately after such transaction, or (3) the direct or indirectacquisition (including by way of a tender or exchange offer) by any person, or persons acting as agroup, of beneficial ownership or a right to acquire beneficial ownership of shares representing amajority of the voting power of the then outstanding shares of capital stock of Purchaser.               (iv) “**Company Developed Products**” means the Company’s existing products and products indevelopment as of the Closing Date as identified in the Baseline Budget and any new productsindependently developed by the Company after the Closing Date without any development contributionfrom Purchaser or any of its subsidiaries or affiliates other than the Company, including withoutlimitation concept generation, design, prototyping, manufacturing, testing and validation services.
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               (v) **“Earnout Amounts”**shall mean the Total First Earnout Amount, the Total Second EarnoutAmount, and the Total Third Earnout Amount.               (vi) “**First Earnout Shortfall Payment**” means the amount obtained by *multiplying*(x) the unpaidMaximum First Earnout Amount divided by 20, by (y) the lesser of (1) the number equal to thedifference between 80% and the percentage of the revenue target set forth in the Baseline Budgetactually achieved for 2006 or (2) the number equal to the difference between 80% and the percentageof the pre-tax profit target set forth in the Baseline Budget actually achieved for 2006.               (vii) “**Jointly Developed Products**” means new products or product improvement projects thatare jointly developed by the Company and Purchaser or any of Purchaser’s other subsidiaries oraffiliates as a result of any development contribution from Purchaser or such other subsidiaries oraffiliates, including without limitation concept generation, design, prototyping, manufacturing,testing and validation services. For the purposes of determining the status of any new product asa Company Developed Product or a JointlyDeveloped Product, Purchaser and the Stockholders shall mutually identify in writing, prior tothe commencement of development of such new product, any development contribution by Purchaser thatshall cause such new product to be a Jointly Developed Product, and, in the absence of anyidentified development contribution by Purchaser, such new product shall be deemed a CompanyDeveloped Product.               (viii) “**Second Earnout Shortfall Payment**” means the amount obtained by *multiplying*(x) theMaximum Second Earnout Amount (reduced by the amount of the First Earnout Shortfall Carryover)divided by 20, by (y) the lesser of (1) the number equal to the difference between 80% and thepercentage of the revenue target set forth in the Baseline Budget actually achieved for 2007 or (2)the number equal to the difference between 80% and the percentage of the pre-tax profit target setforth in the Baseline Budget actually achieved for 2007.               (ix) “**Sub-Baseline Budget**” means for each calendar year reflected in the Baseline Budget, agross revenue target equal to 80% of the gross revenue target set forth in the Baseline Budget forthat calendar year and 80% of the pre-tax profit target set forth in the Baseline Budget for thatcalendar year.               (x) **“Third Earnout Shortfall Payment**” means the amount obtained by *multiplying*(x) the MaximumThird Earnout Amount (reduced by the amount of the Second Earnout Shortfall Carryover) divided by20, by (y) the lesser of (1) the number equal to the difference between 80% and the percentage ofthe revenue target set forth in the Baseline Budget actually achieved for 2008 or (2) the numberequal to the difference between 80% and the percentage of the pre-tax profit target set forth inthe Baseline Budget actually achieved for 2008.
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          (b) **Total First Earnout Amount**.               (i) **Actual First Earnout Amount**. The Stockholders shall be entitled to receive,subject to Section 1.3(c) and Purchaser’s rights of set-off set forth in Section8.3 hereof, up to $1,500,000 of additional consideration (the “**Maximum First Earnout Amount**”)as follows: (A) if the Company’s 100W Holmium side-firing fiber is completely validated byPurchaser for use with the 100W Holmium lasers currently available for the treatment of BPH usinglaser vaporization in accordance with cost and technical validation criteria set forth onExhibit D hereto, and ready to ship by the start of the 2006 Annual Meeting of the AmericanUrological Association (May 20, 2006), the Stockholders shall be entitled to receive $1,000,000 ofthe Maximum First Earnout Amount (the “**H100 Payment**”); (B) if the Company’s revenues and pre-taxprofits in calendar year 2006 equal or exceed the 2006 target amounts set forth in the BaselineBudget and, subject to Section 1.3(g) hereof, the Baseline Cap Production Requirement issatisfied for such year, the Stockholders shall be entitled to receive 100% of the then remainingportion of the Maximum First Earnout Amount; and (C) if the Company’s revenues and/or pre-taxprofits in calendar year 2006 are less than the 2006 target amounts in the Baseline Budget but bothrevenues and pre-tax profits exceed the 2006 target amounts in the Sub-Baseline Budget and, subjectto Section 1.3(g) hereof, the Baseline Cap Production Requirement is satisfied for such year, the Stockholders shall be entitled toreceive a portion of the Maximum First Earnout Amount equal to the First Earnout Shortfall Payment(the total amount that becomes due and payable to the Stockholders pursuant to clauses (A), (B)and/or (C) above being, the “**Actual First Earnout Amount**”). For purposes hereof, the “**FirstEarnout Shortfall Carryover**” means the Maximum First Earnout Amount *less* the Actual FirstEarnout Amount.               (ii) **Actual First Profit-Sharing Amount**. In addition to the Actual First EarnoutAmount, if the Company’s revenues and pre-tax profits in calendar year 2006 exceed the 2006 revenueand pre-tax profit target amounts set forth in the Baseline Budget and, subject to Section 1.3(g)hereof, the Baseline Cap Production Requirement is satisfied for such year, the Stockholders shallbe entitled to receive, subject to Section 1.3(c) and Purchaser’s rights of set-off setforth in Section 8.3 hereof, an amount equal to the sum of (I) 40% of the pre-tax profitsin excess of the pre-tax profit target in the Baseline Budget attributable to sales of CompanyDeveloped Products in calendar year 2006 *plus* (II) 20% of the pre-tax profits in excess ofthe pre-tax profit target in the Baseline Budget attributable to sales or cost reductions ofJointly Developed Products in calendar year 2006 (such sum, the “**Actual First Profit-SharingAmount**” and together with the Actual First Earnout Amount, the “**Total First Earnout Amount**”).          (c) **Total Second Earnout Amount**.               (i) **Actual Second Earnout Amount**. The Stockholders shall be entitled to receive,subject to Section 1.3(c) and Purchaser’s rights of set-off set forth in Section8.3 hereof, additional consideration up to the sum of $1,000,000 *plus* the First EarnoutShortfall Carryover (such sum, the “**Maximum Second Earnout Amount**”) as follows: (A) if theCompany’s revenues and pre-tax profits in calendar year 2007 exceed the 2007 target amounts setforth in the Baseline Budget and, subject to Section 1.3(g) hereof, the Baseline CapProduction Requirement is satisfied for such year, the Stockholders shall be entitled to receive100% of the Maximum Second Earnout Amount; or (B) if the Company’s revenues and/or pre-tax profitsin calendar year 2007 are less than the 2007 target amounts in the Baseline Budget but bothrevenues and pre-
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taxprofits meet or exceed the 2007 target amounts in the Sub-Baseline Budget and, subject to Section 1.3(g) hereof, the Baseline Cap Production Requirement is satisfied forsuch year, the Stockholders shall be entitled to receive an amount equal to the First EarnoutShortfall Carryover *plus* a portion of the Maximum Second Earnout Amount equal to the SecondEarnout Shortfall Payment (the total amount that becomes due and payable to the Stockholderspursuant to clause (A) or (B) above being, the “**Actual Second Earnout Amount**”). For purposeshereof, the “**Second Earnout Shortfall Carryover**” means: (i) $0, in the event the Actual SecondEarnout Amount is determined pursuant to clause (A) above, (ii) $1,000,000 *minus* the SecondEarnout Shortfall Payment, in the event the Actual Second Earnout Amount is determined pursuant toclause (B) above; or (iii) $1,000,000, in the event the Actual Second Earnout Amount is $0.               (ii) **Actual Second Profit-Sharing Amount**. In addition to the Actual Second EarnoutAmount, if the Company’s revenues and pre-tax profits in calendar year 2007 exceed the 2007 targetrevenue and pre-tax profit amounts set forth in the Baseline Budget and, subject to Section1.3(g) hereof, the Baseline Cap Production Requirement is satisfied for such year, theStockholders shall be entitled to receive, subject to Section 1.3(c) and Purchaser’s rightsof set-off set forth in Section 8.3 hereof, an amount equal to the sum of (I) 40% of thepre-tax profits in excess of pre-tax profit target in the Baseline Budget attributable to sales ofCompany Developed Products in calendar year 2007, plus (II) 20% of the pre-tax profits in excess ofthe pre-tax profit target in the Baseline Budget attributable to sales or cost reductions ofJointly Developed Products in calendar year 2007 (such sum, the “**Actual Second Profit-SharingAmount**” and together with the Actual Second Earnout Amount, the “**Total Second Earnout Amount**”).          (d) **Total Third Earnout Amount**.               (i) **Actual Third Earnout Amount**. The Stockholders shall be entitled to receiveadditional consideration up to the sum of $1,000,000 *plus* the Second Earnout ShortfallCarryover (such sum, the “**Maximum Third Earnout Amount**”) as follows: (A) if the Company’s revenuesand pre-tax profits in calendar year 2008 exceed the 2008 target amounts set forth in the BaselineBudget and, subject to Section 1.3(g) hereof, the Baseline Cap Production Requirement issatisfied for such year, the Stockholders shall be entitled to receive, subject to Section1.3(c) and Purchaser’s rights of set-off set forth in Section 8.3 hereof, 100% of theMaximum Third Earnout Amount; or (B) if the Company’s revenues and/or pre-tax profits in calendaryear 2008 are less than the 2008 target amounts in the Baseline Budget but both revenues andpre-tax profits meet or exceed the 2008 target amounts in the Sub-Baseline Budget and, subject toSection 1.3(g), the Baseline Cap Production Requirement is satisfied for such year, theStockholders shall be entitled to receive an amount equal to the Second Earnout Shortfall Carryover*plus* a portion of the Maximum Third Earnout Amount equal to the Third Earnout ShortfallPayment (the total amount that becomes due and payable to the Stockholders pursuant to clause (A)or (B) above being, the “**Actual Third Earnout Amount**”).               (ii) **Actual Third Profit-Sharing Amount**. In addition to the Actual Third EarnoutAmount, if the Company’s revenues and pre-tax profits in calendar year 2008 exceed the 2008 targetrevenue and pre-tax profit amounts set forth in the Baseline Budgetand, subject to Section
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1.3(g)hereof, the Baseline Cap Production Requirement is satisfied for such year, the Stockholders shall be entitled to receive, subject to Section 1.3(c) and Purchaser’s rightsof set-off set forth in Section 8.3 hereof, an amount equal to the sum of (I) 40% of thepre-tax profits in excess of the pre-tax profit target in the Baseline Budget attributable to salesof Company Developed Products in calendar year 2008 plus (II) 20% of the pre-tax profits in excessof pre-tax profit target in the Baseline Budget attributable to sales or cost reductions of JointlyDeveloped Products in calendar year 2008 (such sum, the “**Actual Third Profit-SharingAmount**” and together with the Actual Third Earnout Amount, the “**Total Third Earnout Amount**”).          (e) **Allocation of Costs**. The Company will be integrated into Purchaser’s internalfinancial reporting system and accounted for as an independent profit center for purposes ofallocation of expenses. Expenses will be allocated in accordance with the following principles aswell as the procedures set forth in the notes to the Baseline Budget: (i) general andadministrative expenses such as finance, legal, human resources, and information technology shallbe allocated on a percentage of total revenues basis; (ii) research and development costs shall beallocated directly on a cost incurred basis; (iii) marketing costs shall either be combined andallocated on a percentage of total revenues basis or on a percentage of unit sales basis orallocated directly on a cost incurred basis as set forth in the Baseline Budget; (iv) direct salesexpenses such as commissions, spiffs, and the like shall be allocated directly to the Company.**SECTION 2****CLOSING**     2.1 **Closing Date**. The closing of the Acquisition (the “**Closing**”) shall beheld at the offices of Orrick, Herrington & Sutcliffe LLP, 1000 Marsh Road, Menlo Park, CA 94025 at5:00 p.m. California time on the date hereof (the “Closing Date”), unless another date,time or place is agreed to in writing by Purchaser and the Stockholders.     2.2 **Actions at the Closing**. At the Closing, the Company, the Stockholders andPurchaser shall take such actions and execute and deliver such agreements and other instruments anddocuments as necessary or appropriate to effect the transactions contemplated by this Agreement inaccordance with its terms, including without limitation the following:          (a) At the Closing, the Stockholders and/or the Company shall deliver or cause to be deliveredto Purchaser the following:               (i) a certificate or certificates representing all of the Shares, together with stock powersduly endorsed in blank for transfer of the Shares to Purchaser, with any required transfer stampsaffixed thereto;               (ii) the Employment Agreements executed by the Stockholders;               (iii) duly and validly executed copies of all agreements, instruments, certificates and otherdocuments, in form and substance reasonably satisfactory to Purchaser, that are necessary orappropriate to evidence the release of any and all liens (other than Permitted Liens as specifiedin Section 3.13(a)) and other encumbrances on the Shares or the assets of the Companyarising out of, resulting from or in connection with any loans, guarantees or other similar arrangements between or among the Company, the Stockholders, the Company Principals orany third party creditors of the Company;
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               (iv) a copy of the properly executed certificate regarding the Foreign Investment and RealProperty Tax Act of 1980 for the purpose of satisfying Purchaser’s obligations under TreasuryRegulation Section 1.1445-2(c)(3);               (v) duly and validly executed copies of all consents, waivers, approvals or authorizations, inform and substance reasonably satisfactory to Purchaser, from third parties whose consent orapproval are required to consummate the transactions contemplated by this Agreement; and               (vi) all other documents, certificates, instruments or writings required to be delivered bythe Stockholders pursuant to this Agreement, including without limitation those documents set forthin Section 7.3 hereof.          (b) At the Closing, Purchaser shall deliver or cause to be delivered to the Stockholders thefollowing:               (i) the Initial Payment Amount;               (ii) the Barr Note Payments; and               (iii) all other documents, certificates or writings required to be delivered by Purchaserpursuant to this Agreement, including without limitation those documents set forth in Section7.2 hereof.          (c) All deliveries, payments and other transactions and documents relating to the Closing (i)shall be independent and none shall be effective unless and until all are effective (except to theextent that the party entitled to the benefit thereof has waived satisfaction or performancethereof as a condition precedent to Closing), and (ii) shall be deemed to be consummatedsimultaneously.     2.3 **No Further Ownership Rights in Shares****.**All cash paid in respect of the surrenderfor exchange of the Shares in accordance with the terms of this Agreement shall be deemed to befull satisfaction of the Stockholders’ rights pertaining to such Shares.**SECTION 3****REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE STOCKHOLDERS**     In this Agreement, any reference to any event, change, condition or effect being“material” with respect to any entity or group of entities means any material event,change, condition or effect related to the condition (financial or otherwise), properties, assets(including intangible
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assets), liabilities, business, operations or results of operations of suchentity or group of entities that is the subject matter of the applicable representation or warranty. In this Agreement, any reference to a “Material Adverse Effect” with respect to anyentity or group of entities means any event, change or effect that, when taken individually ortogether with all other adverse changes and effects, is or is reasonably likely to be materiallyadverse to the condition (financial or otherwise), properties, assets, liabilities, business orresults of operations of such entity and its subsidiaries, taken as a whole, or to prevent ormaterially delay consummation of the transactions contemplated under this Agreement or otherwise toprevent such entity and its subsidiaries from performing their obligations under this Agreementother than any such event, change or effect, directly or indirectly, (a) resulting from or arisingin connection with (i) general political, economic, financial, capital market or industry-wideconditions which do not have a disproportionate impact on the business of the Company taken as awhole, (ii) this Agreement, the transactions contemplated hereby or the authorized announcement orother disclosure of this Agreement or the transactions contemplated hereby, (iii) any failure bythe Company to meet any projections or forecasts provided to Purchaser unless fraudulently derived(but not the underlying material adverse change, event, circumstance or development giving risethereto), or (b) attributable to the fact that the prospective owner of the Company is thePurchaser or any affiliate of the Purchaser.     In this Agreement, any reference to a party’s “knowledge” means such party’s actualknowledge, in the case of the Stockholders (which shall, in the case of the Griffin Trust, bedeemed to include the actual knowledge of Mr. Griffin), and such party’s actual knowledge afterreasonable inquiry of the officers, directors and other employees of such party reasonably believedto have knowledge of such matters, in the case of Purchaser and the Company.     Each of the Company, the Stockholders and the Company Principals hereby, jointly andseverally, represents and warrants to Purchaser that the statements contained in this Section 3 aretrue and correct, except as expressly set forth in the disclosure schedule delivered by theCompany, the Stockholders and the Company Principals to Purchaser on or before the date of thisAgreement (the “Company Disclosure Schedule”). The Company Disclosure Schedule shall bearranged in paragraphs corresponding to the numbered and lettered paragraphs contained in thisSection 3 to which the disclosure relates, provided, that any information disclosed under anyparagraph of the Company Disclosure Schedule shall be deemed disclosed and incorporated into anyother paragraph of this Section 3 where it is reasonably apparent that such disclosure, withoutreference to extrinsic documentation, is relevant to such other paragraph. Except for therepresentations and warranties set forth in this Section 3 and Section 4 below, the Company andStockholders make no other representation or warranty (either express or implied) herein or withrespect to the transactions contemplated hereby.     3.1 **Organization, Standing and Power; Subsidiaries**. The Company is a corporation dulyorganized, validly existing and in good standing under the laws of its jurisdiction oforganization. The Company has the requisite corporate power and authority andall necessary government approvals to own, lease and operate its properties and to carry onits business as now being conducted and as proposed to be conducted, except where the failure tohave such power, authority and governmental approvals would not, individually or in the aggregate,have a Material Adverse Effect on the Company. The Company is duly qualified or licensed as aforeign corporation to do business, and is in good standing, in
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eachjurisdiction where the character of the properties owned, leased or operated by it or the nature of its business makessuch qualification or licensing necessary, except for such failures to be so qualified or licensedand in good standing that would not, individually or in the aggregate, have a Material AdverseEffect on the Company. Schedule 3.1 of the Company Disclosure Schedule contains a true andcomplete listing of the locations of all sales office, manufacturing facilities, and any otheroffice or facilities of the Company, a true and complete list of all jurisdictions in which theCompany maintains any employees, and a true and complete list of all jurisdictions in which theCompany is duly qualified and licensed to transact business as a foreign corporation. The Companydoes not directly or indirectly own any equity or similar interest in, or any interest convertibleinto or exchangeable or exercisable for, any equity or similar interest in, any corporation,partnership, limited liability company, joint venture or other business association or entity. TheCompany does not have any subsidiaries.     3.2 **Articles of Incorporation and Bylaws**. The Company has delivered a true andcorrect copy of the Articles of Incorporation and Bylaws or other charter documents, as applicable,of the Company, each as amended to date, to Purchaser, and no amendments have been made thereto orhave been authorized since the date thereof. The Company is not in violation of any of theprovisions of its Articles of Incorporation or Bylaws or equivalent organizational documents.     3.3 **Capital Structure**.          (a) The authorized capital stock of the Company consists of 70,000 shares of Common Stock, parvalue $1.00 per share, of which 15,000 shares are issued and outstanding as of the date hereof (the“Company Common Stock”). Other than the Company Common Stock, the Company has no othercapital stock authorized, issued or outstanding and no outstanding commitments to issue any sharesof capital stock. The Stockholders are the sole owners of all outstanding shares of Company CommonStock. All outstanding shares of Company Common Stock are duly authorized, validly issued, fullypaid and non-assessable and are free of any liens or encumbrances other than any liens orencumbrances created by or imposed upon the holder thereof, and are not subject to preemptiverights or rights of first refusal created by statute, the Articles of Incorporation or Bylaws ofthe Company or any agreement to which the Company is a party or by which it is bound. Alloutstanding shares of Company Common Stock were issued in compliance with all applicable federaland state securities laws. There are no options, warrants, calls, rights, commitments, agreementsor arrangements of any character to which the Company or any Subsidiary is a party or by which theCompany or any Subsidiary is bound relating to the issued or unissued capital stock of the Companyor any Subsidiary or obligating the Company or any Subsidiary to issue, deliver, sell, repurchaseor redeem, or cause to be issued, delivered, sold, repurchased or redeemed, any shares of capital stock of the Company or any Subsidiary orobligating the Company or any Subsidiary to grant, extend, accelerate the vesting of, change theprice of, or otherwise amend or enter into any such option, warrant, call, right, commitment oragreement.          (b) Immediately following the Closing, Purchaser will own one hundred percent (100%) of theissued and outstanding capital stock of the Company, free and clear of all liens, encumbrances orother defects of title.
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     3.4 **Authorization**. The Company has all requisite corporate power and authorityto enter into this Agreement and to consummate the transactions contemplated hereby. The executionand delivery of this Agreement and the consummation of the transactions contemplated hereby havebeen duly authorized by all necessary corporate action on the part of the Company, an no furtheraction is required on the part of the Company to authorize this Agreement and the transactionscontemplated hereby. This Agreement has been duly executed and delivered by the Company, and,assuming the due authorization, execution and delivery by the other parties hereto, constitutes avalid and legally binding obligation of the Company, enforceable against the Company in accordancewith its terms except (i) as limited by applicable bankruptcy, insolvency, reorganization,moratorium, fraudulent conveyance, and other laws of general application affecting enforcement ofcreditors’ rights generally, or (ii) as limited by laws relating to the availability of specificperformance, injunctive relief, or other equitable remedies.     3.5 **No Conflict**. Except as disclosed in Schedule 3.5 of the Company DisclosureSchedule, the execution and delivery of this Agreement by the Company does not, and theconsummation of the transactions contemplated hereby will not, conflict with, or result in anyviolation of, or default under (with or without notice or lapse of time, or both), or give rise toa right of termination, cancellation or acceleration of any obligation or loss of any benefit under(any such event, a “Conflict”) (i) any provision of the Articles of Incorporation or Bylawsof the Company or any of its Subsidiaries, as amended, or (ii) any mortgage, indenture, lease,contract or other agreement or instrument, permit, concession, franchise or license to which theCompany or any of its properties or assets is subject, or (iii) any judgment, order, decree,statute, law, ordinance, rule or regulation applicable to the Company or its properties or assets.     3.6 **Consents**. Except as disclosed in Schedule 3.6 of the Company Disclosure Schedule,no consent, waiver, approval, order or authorization of, or registration, qualification,designation, declaration or filing with, any court, administrative agency or commission or otherfederal, state, county, local or other foreign governmental authority, instrumentality, agency orcommission (“Governmental Entity”) or any third party, including a party to any agreementwith the Company, the Stockholders or the Company Principals (so as not to trigger any Conflict),is required by or with respect to the Company, the Stockholders or the Company Principals inconnection with the execution and delivery of this Agreement or the consummation of thetransactions contemplated hereby.     3.7 **Company Financial Statements**. The Company Principals have delivered to Purchasertrue and complete copies of the Company’s unaudited balance sheet as of the Company’s lastaccounting day in fiscal years 2003, 2004 and 2005 and unaudited income statement for the financialyears then ended, as well as the Company’s unaudited balance sheet as of March 31, 2006 and therelated unaudited statement of income for the period then ended (collectively, the “CompanyFinancials”). Except as disclosed in Section 3.7 of the Company Disclosure Scheduleand except for the absence of statements of stockholders’ equity and cash flows, footnotes andyear-end adjustments, the Company Financials have been prepared in accordance with GAAP,consistently applied, and present fairly in all material respects the financial condition andresults of operations of the Company as at their respective dates and for the period then ended.The Company Financials conform to the books and records of the Company, and have been prepared inthe ordinary course of business, consistent with past practice. The Company’s unaudited balance sheet as of March 31, 2006 shall be referred toherein as the “Company Current Balance Sheet.”
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     3.8 **Accounts Receivable**. All accounts receivable shown on the Company Current BalanceSheet (net of reserves indicated on the Company Current Balance Sheet) or thereafter acquired untilthe date hereof (net of reserves accrued in the normal course of business and consistent with pastpractice), other than accounts receivable owing to the Company by the Purchaser, are valid andenforceable obligations of the applicable account debtor and arose and are collectible prior to thefirst anniversary of the date of this Agreement. The values at which accounts receivable arecarried reflect the accounts receivable valuation policy of the Company, which is consistent withits past practice and in accordance with GAAP applied on a consistent basis. Subject to anyreserves indicated on the Company Balance Sheet and any right of return provided in the ordinarycourse of business consistent with past practices, none of the receivables of the Company issubject to any claim of offset, recoupment, set off, or counterclaim (other than as implied underapplicable law), and, to the knowledge of the Company and the Stockholders, there are no facts orcircumstances (whether asserted or unasserted) that would give rise to any such claim (other thanas implied under applicable law). No receivables are contingent upon the performance by theCompany or the Stockholders of any obligation or contract. No person or entity has any lien,charge, pledge, security interest, or other encumbrance on any such receivables, and no agreementfor deduction or discount has been made with respect to any of such receivables, except as fullyreflected in the Company Balance Sheet.     3.9 **No Undisclosed Liabilities**. The Company has no material liability, indebtedness,obligation, expense, claim, deficiency, guaranty or endorsement of any type, whether accrued,absolute, contingent, matured, unmatured or of any other nature, which individually or in theaggregate is required to be reflected as a liability on the Company Balance Sheet in accordancewith GAAP, that is not reflected or reserved against in the Company Current Balance Sheet, exceptfor those which may have been incurred after the date of the Company Current Balance Sheet. Allliabilities, indebtedness, obligations, expenses, claims, deficiencies, guaranties or endorsementsof any type of the Company incurred after the date of the Company Current Balance Sheet wereincurred in the ordinary course of business consistent with past practices and are not materialboth individually and in the aggregate to the Company or its business.     3.10 **No Changes**. Since March 31, 2006, there has not been, occurred or arisen any:          (a) transaction by the Company except in the ordinary course of business and consistent withpast practices;          (b) amendment or change to the Articles of Incorporation or the Bylaws of the Company;          (c) capital expenditure or capital commitment by the Company, other than purchase orders forraw materials entered into in the ordinary course of business consistent with past practices andnot exceeding $20,000 individually or $100,000 in the aggregate;
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          (d) destruction of, damage to or loss of any material assets, material business or materialcustomer of the Company (whether or not covered by insurance);          (e) work stoppage, labor strike or other labor trouble, or any action, suit, claim, labordispute or grievance relating to any labor, safety or discrimination matter involving the Company,including, without limitation, charges of wrongful discharge or other unlawful labor practices oractions;          (f) change in accounting methods or practices (including any change in depreciation oramortization policies or rates) by the Company other than as required by GAAP;          (g) revaluation by the Company of any of its assets;          (h) declaration, setting aside or payment of a dividend or other distribution with respect toCompany Common Stock or any direct or indirect redemption, purchase or other acquisition by theCompany of its capital stock;          (i) increase in the salary or other compensation payable or to become payable by the Companyto any of its officers, directors, employees or advisors, or the declaration, payment or commitmentor obligation of any other kind for the payment, by the Company, of a bonus or other additionalsalary or compensation to any such person;          (j) agreement, contract, covenant, instrument, lease, or commitment to which the Company is aparty or by which it or any of its assets is bound and which is material to the Company’s businessor any termination, extension, amendment or modification of the terms of any such agreement,contract, covenant, instrument, lease, or commitment to which the Company is a party or by which itor any of its assets is bound, other than licenses of the Company Intellectual Property which aregoverned by subsection (q) below and other than agreements entered into in connection with theAcquisition;          (k) sale, lease, license or other disposition of any of the material assets or properties ofthe Company or any creation of any security interest in such assets or properties, in each caseother than in the ordinary course of the Company’s business;          (l) loan by the Company to any person or entity, incurring by the Company of any indebtedness,guaranteeing by the Company of any indebtedness, issuance or sale of any debt securities of theCompany or guaranteeing of any debt securities of others;          (m) waiver or release of any right or claim of the Company material to the Company business,including any write-off or other compromise of any account receivable of the Company;          (n) commencement or notice or, to the Company’s or the Stockholders’ knowledge, threattherefor, of any lawsuit or, to the Company’s or the Stockholders’ knowledge, proceeding, audit orinvestigation against the Company or its affairs;
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          (o) notice of any claim or potential claim of ownership by any person other than the Companyof any of the Company Intellectual Property (as defined in Section 3.14 hereof) owned by ordeveloped or created by the Company or of infringement by the Company of any other person’sIntellectual Property (as defined in Section 3.14 hereof);          (p) issuance or sale, or contract to issue or sell, by the Company of any shares of theCompany Common Stock or securities exchangeable, convertible or exercisable therefor, or anysecurities, warrants, options or rights to purchase any of the foregoing;          (q) sale by the Company of any Company Intellectual Property or the entering into of anylicense agreement, security agreement, assignment or other conveyance or option, with respect toCompany Intellectual Property with any person or entity (other than standard customer licenseagreements entered into in the ordinary course of business consistent with past practice), or (ii)the purchase or other acquisition of any Intellectual Property or the entering into of any licenseagreement, security agreement, assignment or other conveyance or option with respect to theIntellectual Property of any person or entity (other than standard supplier license agreements forreadily commercially available off-the-shelf software), or (iii) the change in pricing or royaltiesset or charged by the Company to its customers or licensees or in pricing or royalties set orcharged by persons who have licensed Intellectual Property to the Company;          (r) any event or condition of any character that has had or is reasonably likely to have aCompany Material Adverse Effect; or          (s) negotiation or agreement by the Company or any officer or employees thereof to do any ofthe things described in the preceding clauses (a) through (r) (other than negotiations withPurchaser and its representatives regarding the transactions contemplated by this Agreement).     3.11 **Tax Matters**.          (a) Definition of Taxes. For the purposes of this Agreement, “Tax” or,collectively, “Taxes”, means (i) any and all federal, state, local and foreign taxes,assessments and other similar governmental charges, duties, impositions and liabilities, includingtaxes based upon or measured by gross receipts, income, profits, sales, use and occupation, andvalue added, ad valorem, transfer, franchise, withholding, payroll, recapture, employment, exciseand property taxes, together with all interest, penalties and additions imposed with respect to suchamounts; (ii) any liability for the payment of any amounts of the type described in clause (i) as aresult of being a member of an affiliated, consolidated, combined or unitary group for any period;and (iii) any liability for the payment of any amounts of the type described in clause (i) or (ii)as a result of any express or implied obligation to indemnify any other person or as a result ofany obligations under any agreements or arrangements with any other person with respect to suchamounts and including any liability for taxes of a predecessor entity.          (b) Tax Returns and Audits.               (i) The Company as of the Closing Date will have prepared and timely filed all federal, state,local and foreign returns, estimates, information statements and reports (“Returns”)required to be filed prior to the Closing Date relating to any and all material Taxes of theCompany or its operations, and such Returns are and will be true and correct in all materialrespects and have been and will be completed in all material respects in accordance with applicablelaw.
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               (ii) The Company as of the Closing Date will have paid all Taxes it is required to pay andwithheld with respect to its employees all federal and state income taxes, Federal InsuranceContribution Act (“FICA”), Federal Unemployment Tax Act (“FUTA”) and other Taxesrequired to be withheld.               (iii) There any Tax deficiency outstanding, assessed or proposed against the Company, nor hasthe Company executed any waiver of any statute of limitations on or extending the period for theassessment or collection of any Tax, which waiver or extension remains in effect.               (iv) No audit or other examination of any Return of the Company (or any member of theconsolidated, combined or unitary group of which is a member) is presently in progress, nor has theCompany (or any other member of such group) been notified of any request for such an audit or otherexamination.               (v) The Company has no liabilities for unpaid federal, state, local and foreign Taxes incurredprior to the date of the Company Current Balance Sheet (including without limitation anyliabilities for Taxes as a result of being a member of a consolidated, combined or unitary group)which have not been accrued or reserved on the Company Current Balance Sheet, whether asserted orunasserted, contingent or otherwise, and the Company has not incurred any such liability for Taxessince the date of the Company Current Balance Sheet other than in the ordinary course of business.               (vi) The Company has made available to Purchaser or its legal counsel, copies of all foreign,federal, state and local income and all state and local sales and use Returns for or including theCompany filed for all periods since its inception.               (vii) None of the Company’s assets is treated as “tax-exempt use property,” within the meaningof Section 168(h) of the Code.               (viii) The Company duly elected to be treated as an S corporation for federal and allpertinent state and local tax purposes as of the formation of the Company on December 20, 1993.The Company has at all times met the requirements for treatment as an S corporation and willcontinue to meet such requirements through the Closing Date.               (ix) The Company is not a party to any tax sharing, indemnification or allocation agreementnor does the Company owe any amount under any such agreement.               (x) The Company’s tax basis in its assets for purposes of determining its future amortization,depreciation and other federal income Tax deductions is accurately reflected in all materialrespects on the Company’s tax books and records.
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               (xi) The Company is not, and has not been at any time, a “United States Real Property HoldingCorporation” within the meaning of Section 897(c)(2) of the Code.               (xii) There is no contract, agreement, plan or arrangement to which the Company is a party asof the date hereof, including but not limited to the provisions of this Agreement, covering anyemployee or former employee of the Company, which, individually or collectively, could give rise tothe payment of any amount that would not be deductible pursuant to Section 404 of the Code.               (xiii) Neither the Company nor any corporation that is or was a member of a consolidated groupwith the Company has been a distributing corporation or a controlled corporation in a transactiondescribed in Section 355 of the Code during the past two years.     3.12 **Restrictions on Business Activities**. There is no agreement (non-compete orotherwise), commitment, judgment, injunction, order or decree to which the Company, theStockholders or the Company Principals is a party or otherwise binding upon the Company, theStockholders or the Company Principals which has or may reasonably be expected to have the effectof prohibiting or impairing in any material respect any business practice of the Company, anyacquisition of property (tangible or intangible) by the Company or the conduct of business by theCompany. Without limiting the foregoing, the Company has not entered into any agreement underwhich the Company is, and neither the Stockholders nor the Company Principals have entered anyagreement pursuant to which the Company reasonably could be, restricted from selling, licensing orotherwise distributing any of its technology or products to or providing services to, customers orpotential customers or any class of customers, in any geographic area, during any period of time orin any segment of the market.     3.13 **Title to Properties; Absence of Liens and Encumbrances; Condition of Equipment**.          (a) The Company and each Subsidiary has good and marketable title to all of its respectiveproperties and assets, real, personal and mixed, reflected in the Company Current Balance Sheet oracquired after the date of the Company Current Balance Sheet (except properties, interests inproperties and assets sold or otherwise disposed of since the date of the Company Current BalanceSheet in the ordinary course of business), or with respect to leased properties and assets, validleasehold interests in, free and clear of all mortgages, liens, pledges, charges or encumbrances ofany kind or character, except (i) the lien of current taxes not yet due and payable, (ii) suchimperfections of title, liens and easements as do not and will not materially detract from orinterfere with the use of the properties subject thereto or affected thereby, or otherwisematerially impair business operations involving such properties and (iii) liens securing debt whichis reflected on the Company Current Balance Sheet (such liens referenced in subsections (i)-(iii)herein referred to as “Permitted Liens”). The plants, property and equipment of the Company andSubsidiaries that are used in the operations of their businesses are in good operating conditionand repair. All properties used in the operations of the Company and its Subsidiaries arereflected in the Company Current Balance Sheet to the extent GAAP requires the same to bereflected. Section 3.13(a) of the Company Disclosure Schedule sets forth a true, correctand complete list of all real property owned or leased by the Company and by each Subsidiary, thename of the lessor, the date of the lease and each amendment thereto and the aggregate annualrental and other fees payable under such lease. Such leases are in good standing, are valid andeffective in accordance with their respective terms, and there is not under any such leases anyexisting default or event of default (or event which with notice or lapse of time, or both, wouldconstitute a default).
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          (b) Section 3.13(b) of the Company Disclosure Schedule lists all items of equipment(the “Equipment”) owned or leased by Company and its Subsidiaries, and such Equipment is,taken as a whole, (i) adequate for the conduct of the business of the Company as currentlyconducted, and (ii) in good operating condition, regularly and properly maintained, subject tonormal wear and tear.          (c) None of the Company, the Stockholders or the Company Principals has sold or otherwisereleased for distribution any of the Company’s customer files and other customer informationrelating to the Company’s current and former customers (the “Customer Information”). Noperson other than Company possesses any claims or rights with respect to use of the CustomerInformation.     3.14 **Intellectual Property**.          (a) For the purposes of this Agreement, the following terms have the following definitions:               (i) “Intellectual Property” shall mean any or all of the following and all rights in,arising out of, or associated therewith: (i) all United States and foreign patents and applicationstherefor and all reissues, divisions, renewals, extensions, provisionals, continuations and continuations-in-part thereof; (ii) all inventions (whether patentable or not), inventiondisclosures, improvements, trade secrets, proprietary information, know how, technology, technicaldata and customer lists, and all documentation relating to any of the foregoing; (iii) allcopyrights, copyright registrations and applications therefor and all other rights correspondingthereto throughout the world; (iv) all mask works, mask work registrations and applicationstherefor; (v) all industrial designs and any registrations and applications therefor throughout theworld; (vi) all trade names, logos, common law trademarks and service marks; trademark and servicemark registrations and applications therefor and all goodwill associated therewith throughout theworld; (vii) all databases and data collections and all rights therein throughout the world; (viii)all computer software including all source code, object code, firmware, development tools, testsuites, files, records and data, all media on which any of the foregoing is recorded, all Webaddresses, sites and domain names; and (ix) all documentation related to any of the foregoingirrespective of the media on which it is recorded.               (ii) “Company Intellectual Property” shall mean any Intellectual Property that isowned by or exclusively licensed to the Company.               (iii) “Registered Intellectual Property” shall mean all United States, internationaland foreign: (i) patents and patent applications (including provisional applications); (ii)registered trademarks, applications to register trademarks, intent-to-use applications, or otherregistrations or applications related to trademarks; (iii) registered copyrights and applicationsfor copyright registration; (iv) any mask work registrations and applications to register maskworks; and (v) any other Intellectual Property that is the subject of an application, certificate,filing, registration or other document issued by, filed with, or recorded by, any state, governmentor other public legal authority.
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          (b) Section 3.14(b) of the Company Disclosure Schedule lists all RegisteredIntellectual Property owned by, or filed in the name of, the Company (the “Company RegisteredIntellectual Property”) and lists any commencement or notice or to the knowledge of theStockholders, threat of any proceedings or actions before any court, tribunal (including the UnitedStates Patent and Trademark Office (the “PTO”) or equivalent authority anywhere in theworld) related to any of the Company Registered Intellectual Property.          (c) Each item of the Company Intellectual Property, including all Company RegisteredIntellectual Property listed in Section 3.14(b) of the Company Disclosure Schedule and allIntellectual Property licensed to Company, is free and clear of any Liens. The Company (i) is theexclusive owner of all trademarks and trade names used in connection with the operation or conductof the business of the Company, including the sale of any products or technology or the provisionof any services by the Company, and (ii) owns exclusively, and has good title to, all copyrightedworks that are Company products or other works of authorship that the Company otherwise purports toown.          (d) To the extent that any Intellectual Property has been developed or created by any personother than the Company for which the Company has, directly or indirectly, paid, the Company has awritten agreement with such person with respect thereto and the Company thereby has obtainedownership of, and is the exclusive owner of, all such Intellectual Property by operation of law orby valid assignment.          (e) The Company has not transferred ownership of or, except pursuant to the contracts,licenses and agreements listed in Section 3.14(g) of the Company Disclosure Schedulegranted any exclusive license of or exclusive right to use or authorized the retention of anyrights to use any Intellectual Property that is or was Company Intellectual Property, to any otherperson.          (f) The Company owns, or has the right to use, all the Intellectual Property necessary to theconduct of its business as it currently is conducted or is reasonably contemplated to be conductedby the Company, including, without limitation, the design, development, manufacture, marketing,use, import and sale of the products, technology and services of the Company (including products,technology or services currently under development). For the avoidance of doubt, none of theCompany, the Stockholders or the Company Principals makes any representation regarding theownership or right to use any Intellectual Property of the Purchaser made available to the Companyin connection with the development of any Jointly Developed Products approved in accordance withthe terms of this Agreement.          (g) Other than (i) “shrink-wrap” and similar widely available commercial end-user licenses or(ii) other third party shareware that is generally available to the public and does not impose anymonetary obligations on the Company, the contracts, licenses and agreements listed in Section3.14(g) of the Company Disclosure Schedule include all contracts, licenses and agreements towhich the Company is a party with respect to any Intellectual Property. No person who has licensedIntellectual Property to the Company has ownership rights or license rights to improvements made bythe Company in such Intellectual Property which has been licensed to the Company.
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          (h) Other than Company customer sales contracts and licenses entered into in the ordinarycourse of business in form substantially similar to the Company’s standard from customer salescontracts and standard form license appended to Section 3.14(h) of the Company DisclosureSchedule, Section 3.14(h) of the Company Disclosure Schedule lists all contracts, licensesand agreements between the Company and any other person wherein or whereby Company has agreed to,or assumed, any obligation or duty to warrant, indemnify, reimburse, defend, hold harmless,guaranty or otherwise assume or incur any obligation or liability or provide a right of rescissionwith respect to the infringement or misappropriation by the Company or such other person of theIntellectual Property of any person other than the Company.          (i) To the knowledge of the Company and the Stockholders, the operation of the business of theCompany as it currently is conducted, or as is currently contemplated to be conducted by theCompany, including but not limited to Company’s design, development, use, import, manufacture and sale of the products, technology or services (including products,technology or services currently under development) of the Company does not infringe upon ormisappropriate the Intellectual Property of any person, violate the rights of any person (includingrights to privacy or publicity), or constitute unfair competition or trade practices under the lawsof any jurisdiction, and the Company has not received notice or threat in writing thereof from anyperson claiming that such operation or any act, product, technology or service (including products,technology or services currently under development) of the Company infringes or misappropriates theIntellectual Property of any person or constitutes unfair competition or trade practices under thelaws of any jurisdiction (nor is the Company, the Stockholders or the Company Principals aware ofany valid basis therefor). For the avoidance of doubt, none of the Company, the Stockholders orthe Company Principals makes any non-infringement or non-misappropriation representation withrespect to any Intellectual Property of the Purchaser made available to the Company in connectionwith the development of any Jointly Developed Products approved in accordance with the terms ofthis Agreement.          (j) Each item of Company Registered Intellectual Property is valid and subsisting, allnecessary registration, maintenance and renewal fees due as of the date hereof in connection withsuch Registered Intellectual Property have been paid and all necessary documents and certificatesin connection with such Registered Intellectual Property have been filed with the relevant patent,copyright, trademark or other authorities in the United States, as the case may be, for thepurposes of maintaining such Registered Intellectual Property. Except as set forth in Section3.14(j) of the Company Disclosure Schedule, there are no actions that have not been taken bythe Company as of the date hereof nor any actions that must be taken by the Company within sixty(60) days of the date hereof (including the payment of any registration, maintenance or renewalfees or the filing of any documents, applications or certificates for the purpose of maintaining,perfecting or preserving or renewing any Company Registered Intellectual Property. In each case inwhich the Company has acquired any Intellectual Property rights from any person, the Company hasobtained a valid and enforceable assignment sufficient to irrevocably transfer all rights in suchIntellectual Property (including the right to seek past and future damages with respect to suchIntellectual Property) to the Company.
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          (k) There are no contracts, licenses or agreements between the Company and any other personwith respect to Company Intellectual Property under which there is any dispute known to theCompany, the Stockholders or the Company Principals regarding the scope of such agreement, orperformance under such agreement, including with respect to any payments to be made or received bythe Company thereunder.          (l) To the knowledge of the Company and the Stockholders, no person is infringing ormisappropriating any Company Intellectual Property.          (m) The Company has taken reasonable steps to protect the Company’s rights in confidentialinformation and trade secrets of the Company or provided by any other person to the Company.Except as set forth in Section 3.14(m) of the Company Disclosure Schedule, all employees of the Company and all consultants and contractors of the Company that had anyinvolvement in the development of Company Intellectual Property have signed the Company’s standardform of Confidential Information and Invention Assignment Agreement, which is appended toSection 3.14(m) of the Company Disclosure Schedule, pursuant to which all IntellectualProperty Rights developed by such employees, consultants and contractors within the scope of theiremployment or other relationships with the Company are assigned to the Company.          (n) No Company Intellectual Property or product, technology or service of the Company issubject to any proceeding or outstanding decree, order, judgment, agreement or stipulation thatrestricts in any manner the use, transfer or licensing thereof by the Company or may affect thevalidity, use or enforceability of the Company Intellectual Property.          (o) The Company does not have any escrow agreement or arrangement between the Company and alicensee that would permit such licensee or any other party to obtain a copy of the Company’ssource code and program documentation upon the liquidation, dissolution or winding up of theStockholders.     3.15 **Agreements, Contracts and Commitments**.          (a) The Company is not a party to nor is it bound by:               (i) any employment or consulting agreement, contract or commitment with an employee orindividual consultant or salesperson or consulting or sales agreement, contract or commitment witha firm or other organization, other than standard offer letters provided to employees (who are notofficers of the Company) in the ordinary course of business consistent with past practice, all ofwhich offer letters create “at will” relationships and none of which create any contractualobligation of the Company to the other party thereto upon termination of such relationship (whetherin the form of severance or benefit obligation or otherwise);
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               (ii) any agreement or plan, including, without limitation, any stock option plan, stockappreciation rights plan or stock purchase plan, any of the benefits of which will be increased, orthe vesting of benefits of which will be accelerated, by the occurrence of any of the transactionscontemplated by this Agreement or the value of any of the benefits of which will be calculated onthe basis of any of the transactions contemplated by this Agreement;               (iii) any fidelity or surety bond or completion bond;               (iv) any lease of personal property that involves a remaining obligation in excess of $10,000;               (v) any agreement, contract or commitment containing any covenant limiting the freedom of theCompany to engage in any line of business or to compete with any person,               (vi) any agreement, contract or commitment relating to capital expenditures and involvingfuture payments that involves a remaining obligation in excess of $10,000;               (vii) any agreement, contract or commitment relating to the leasing, licensing, disposition oracquisition of assets or any interest in any business enterprise outside the ordinary course of theCompany’s business;               (viii) any mortgage, indenture, loan or credit agreement, security agreement or otheragreement or instrument relating to the borrowing of money or extension of credit;               (ix) any purchase order or contract for the purchase of materials that involves a remainingobligation in excess of $20,000;               (x) any construction contracts;               (xi) any dealer, distribution, joint marketing or development agreement;               (xii) any sales representative, original equipment manufacturer, value added, remarketer orother agreement for distribution of the Company’s products or services, or the products or servicesof any person; or               (xiii) any other material agreement, contract or commitment.          (b) The Company is in compliance in all material respects with and has not breached, violatedor defaulted under, in each case in any material respect, or received notice that it has breached,violated or defaulted under, any of the terms or conditions of any agreement, contract, covenant,instrument, lease, license or commitment listed in Section 3.15(a) of the CompanyDisclosure Schedule to which the Company is a party or by which it is bound (each, a “CompanyContract”), nor is the Company, the Stockholders or the Company Principals
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aware of any event that would constitute such a breach, violation or default with the lapse of time, giving of noticeor both. Each Company Contract is in full force and effect and, to the knowledge of theStockholders, is not subject to any default thereunder by any party obligated to the Companypursuant thereto. The Company has obtained or will obtain prior to the Closing all necessaryconsents, waivers and approvals of parties to any Company Contract as are required thereunder inconnection with the Acquisition for such Company Contracts to remain in effect without modificationafter the date hereof. The Company Contracts requiring such consents, waivers and approvals aredescribed in Section 3.15(b) of the Company Disclosure Schedule. Following the date hereof and subject to the fulfillment of all obligations of the Company thereunder, theCompany will be permitted to exercise all of the Company’s rights under the Company Contractswithout the payment of any additional amounts or consideration other than ongoing fees, royaltiesor payments which Company would otherwise be required to pay had the transactions contemplated bythis Agreement not occurred.     3.16 **Governmental Authorization**. Section 3.16 of the Company DisclosureSchedule accurately lists each consent, license, permit, grant or other authorization issued to theCompany by a Governmental Entity presently held by the Company in connection with the conduct ofits business (herein collectively called “Company Authorizations”). The CompanyAuthorizations are in full force and effect and constitute all Company Authorizations required topermit the Company to operate or conduct its business as presently conducted or hold any interestin its properties or assets.     3.17 **Litigation**. There is no action, suit or proceeding of any nature pending, or, tothe Company’s or the Stockholders’ knowledge, threatened, before any court or administrative agencyagainst the Company its properties or any of its officers or directors, nor, to the knowledge ofthe Company or the Stockholders, is there any reasonable basis therefor. There is no investigationpending or, to the Company’s or the Stockholders’ knowledge, threatened against the Company, itsproperties or any of its officers or directors in their capacities as such (nor, to the knowledgeof the Company or the Stockholders, is there any reasonable valid basis therefor) by or before anyGovernmental Entity. No Governmental Entity has at any time challenged or questioned the legalright of the Company to conduct its operations as presently or previously conducted.     3.18 **Minute Books**. The minutes of the Company made available to counsel for Purchaserare the only minutes of the board of directors and stockholders of the Company and contain true andaccurate copies of all resolutions adopted by the Board of Directors (or committees thereof) of theCompany and its stockholders since the time of incorporation of the Company.     3.19 **Environmental Matters**.          (a) Hazardous Material. The Company has not: (i) operated any underground storagetanks at any property that the Company has at any time owned, operated, occupied or leased; or (ii)illegally released any material amount of any substance that has been designated by anyGovernmental Entity or by applicable federal, state or local law to be radioactive, toxic,hazardous or otherwise a danger to health or the environment, including, without limitation, PCBs,asbestos, petroleum, and urea-formaldehyde and all substances listed as hazardous
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substances pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, asamended, or defined as a hazardous waste pursuant to the United States Resource Conservation andRecovery Act of 1976, as amended, and the regulations promulgated pursuant to said laws (a“Hazardous Material”), but excluding office and janitorial supplies properly and safely maintained. No Hazardous Materials are present, as a result of thedeliberate actions of the Company, or, to the knowledge of the Stockholders, as a result of anyactions of third parties or otherwise, in, on or under any property in a manner that would violateapplicable law in effect on or before the date hereof, including the land and the improvements,ground water and surface water thereof, that the Company has at any time owned, operated, occupiedor leased.          (b) Hazardous Materials Activities. The Company has not transported, stored, used,manufactured, disposed of, released or exposed its employees or others to Hazardous Materials inviolation of any law in effect on or before the date hereof, nor has the Company disposed of,transported, sold, or manufactured any product containing a Hazardous Material (any or all of theforegoing being collectively referred to as “Hazardous Materials Activities”) in violationof any rule, regulation, treaty or statute promulgated by any Governmental Entity in effect priorto or as of the date hereof to prohibit, regulate or control Hazardous Materials or any HazardousMaterial Activity.          (c) Permits. The Company currently holds all environmental approvals, permits,licenses, clearances and consents (the “Environmental Permits”) necessary for the conductof the Company’s Hazardous Material Activities, respectively, and other businesses of the Companyas such activities and businesses are currently being conducted.          (d) Environmental Liabilities. No action, proceeding, revocation proceeding,amendment procedure, writ, injunction or claim is pending, or to the Company’s or the Stockholders’knowledge, threatened concerning any Environmental Permit, Hazardous Material or any HazardousMaterials Activity of the Company. None of the Company, the Stockholders or the Company Principalsis aware of any fact or circumstance which could involve the Company in any environmentallitigation or impose upon the Company any environmental liability.     3.20 **Brokers’ and Finders’ Fees; Third Party Expenses**. The Company has not incurred,nor will it incur, directly or indirectly, any liability for brokerage or finders’ fees or agents’commissions or any similar charges in connection with the Agreement or any transaction contemplatedhereby.     3.21 **Employee and Employee Benefit Matters**. All past and current employees of theCompany (the “Company Employees”) are listed in Section 3.21 of the CompanyDisclosure Schedule. Except for unpaid but earned salaries, bonuses and commissions since the lastregularly scheduled payroll date prior to the Closing Date that will be paid in full on the firstregularly scheduled payroll date following the Closing Date, none of the Company, the Stockholdersor the Company Principals owe any amounts to the Company Employees including, without limitation,any back wages or other unpaid salaries. There are no claims from or on behalf of the CompanyEmployees threatened or pending against the Company, the Stockholders or the Company Principals.Except for the Company’s SIMPLE IRA Retirement
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Plan (the “**Company Plan**”), the Company has no employee benefit plans, programs, policies or agreements, including but not limited to any pension plans, multiemployer plans or 401(k)plans. The Company has performed all obligations required to be performed by it under, is not indefault or violation of, and neither the Company nor the Stockholders have any knowledge of anydefault or violation by any other party to, the Company Plan, and the Company Plan has beenestablished and maintained in accordance with its terms and in compliance with all applicable laws,statutes, orders, rules and regulations, including the Employee Retirement Income Security Act of1974, as amended, and the Code. The Company Plan can be amended, terminated or otherwisediscontinued after the Closing Date in accordance with its terms, without liability to Purchaser orthe Company.     3.22 **Insurance**. Section 3.22 of the Company Disclosure Schedule lists allinsurance policies and fidelity bonds covering the assets, business, equipment, properties,operations, employees, officers and directors of the Company. There is no claim by the Companypending under any of such policies or bonds as to which coverage has been denied or disputed by theunderwriters of such policies or bonds. All premiums due and payable under all such policies andbonds have been paid, and the Company is otherwise in material compliance with the terms of suchpolicies and bonds (or other policies and bonds providing substantially similar insurancecoverage). Neither the Company nor the Stockholders has knowledge of any threatened terminationof, or premium increase with respect to, any of such policies.     3.23 **Certain Advances; Guaranties**. There are no receivables of the Company owing byany director, officer, employee, consultant of the Company (including, without limitation, theCompany Principals) or by the Stockholders or owing by any affiliated person or entity of anydirector, officer, employee, consultant of the Company (including, without limitation, the CompanyPrincipals) or the Stockholders. Neither the Stockholders nor the Company Principals have agreedto, or assumed, any obligation or duty to guaranty or otherwise assume or incur any obligation orliability of the Company. The Company has not agreed to, or assumed, any obligation or duty toguaranty or otherwise assume or incur any obligation or liability of the Stockholders or theCompany Principals.     3.24 **FDA and Regulatory Matters**.          (a) (i) With respect to all of the Company’s existing products and, to the extent applicable,products currently under development by the Company (collectively, the “**Products**”), (A) the Companyand each of its Subsidiaries has obtained all necessary and applicable approvals, clearances,authorizations, licenses and registrations required by United States or foreign governments orgovernment agencies, to permit the design, development and pre-clinical testing of its Products injurisdictions where it currently conducts such activities or contemplated conducting suchactivities (the “**Activities To Date**”) with respect to each Product (collectively, the “**RegulatoryLicenses**”); (B) the Company and each of its Subsidiaries, as the case may be, is in compliance withall terms and conditions of each Regulatory License and with all applicable Laws pertaining toActivities To Date with respect to each Product which is not required to be the subject of aRegulatory License; (C) the Company and each of its Subsidiaries, as the case may be, is in compliance with all applicable Laws regarding registration, license,and certification for each site at which a Product is manufactured orused; (D) to the extent any Product has been exported from the United States,
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the Company or, as applicable, a Subsidiary ofthe Company exporting such Product, has exported such Product in compliance in all materialrespects with applicable Law; and (E) the Company is licensed to export its Products in therespective jurisdictions set forth in the Company Disclosure Schedule; (ii) all manufacturingoperations performed by or on behalf of the Company or its Subsidiaries have been and are beingconducted in all material respects in compliance with the applicable regulations of the U.S. Foodand Drug Administration (the “FDA”) and, to the extent applicable to the Company or any of itsSubsidiaries, counterpart regulations in all other countries where compliance is required; and(iii) the Company and each of its Subsidiaries is in compliance with all applicable reportingrequirements for all Regulatory Licenses or plant registrations describe in clause (i) above,including, but not limited to, applicable adverse event reporting requirements in the United Statesand outside the United States under applicable Law.          (b) Neither the Company nor any of its Subsidiaries has received any written notice or otherwritten communication from the FDA or any other Governmental Authority (i) contesting thepre-market clearance or approval of, the uses of or the labeling and promotion of any of theProducts or (ii) otherwise alleging any violation of any Laws by the Company or any of itsSubsidiaries with respect to the research, development, testing, manufacturing or use of theProducts.          (c) All filings with and submissions to the FDA and any corollary entity in any otherjurisdiction made by the Company or any of its Subsidiaries with regard to the Products, whetheroral, written or electronically delivered, were true, accurate and complete as of the date made,and, to the extent required to be updated, as so updated remain true, accurate and complete as ofthe date hereof, and do not materially misstate any of the statements or information includedtherein, or omit to state a material fact necessary to make the statements therein not misleading.     3.25 **Warranties; Indemnities**. Except for the warranties and indemnities set forth inthe Company’s standard form customer sales contracts and form license as appended to Section3.14(h) of the Company Disclosure Schedule, the Company has not given any warranties or indemnitiesrelating to products or technology sold or services rendered by the Company.     3.26 **Product Development**. Section 3.26 of the Company Disclosure Schedule setforth certain representations of the Company, the Stockholders and the Company Principals regardingthe stage of, or prior progress on, the development of the Company’s products.     3.27 **Complete Copies of Materials**. The Company has delivered or made available trueand complete copies of each document (or summaries of same) that has been requested by Purchaser orits counsel.     3.28 **Disclosure**. No representation or warranty or other statement made by the Companyor any of the Stockholders or Company Principals in this Agreement, the Company Disclosure Scheduleor the certificates delivered pursuant to Section 7.3(c) contains any untrue statement oromits to state a material fact necessary to make any of them, in light of the circumstances inwhich it was made, not misleading.
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**SECTION 4****FURTHER REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS**     Each Stockholder (which, in the case of the Griffin Trust, shall include Mr. Griffin forpurposes of this Section 4) further represents and warrants to Purchaser, subject to suchexceptions as are specifically disclosed in the Company Disclosure Schedule, as follows:     4.1 **Ownership of Shares**. Such Stockholder is the sole record and beneficial owner ofthe Shares set forth adjacent his or its name in Section 1.1 of the Company DisclosureSchedule, and such Shares are to be sold pursuant to this Agreement. Such Shares are not subjectto any Liens or to any rights of first refusal of any kind, and such Stockholder has not grantedany rights to purchase such Shares to any other person or entity. The Stockholder has the soleright to transfer the Shares set forth adjacent his or its name in Section 1.1 of theCompany Disclosure Schedule to Purchaser. Such Shares constitute all of the Company Common Stockowned, beneficially or of record by such Stockholder, and such Stockholder has no options, warrantsor other rights to acquire Company Common Stock. On the Closing Date, Purchaser will receive goodtitle to such Shares, subject to no Liens retained, granted or permitted by the Stockholders or theCompany. Such Stockholder has not engaged in any sale or other transfer of any Company CommonStock in contemplation of the Acquisition.     4.2 **Tax Matters**. Such Stockholder has had an opportunity to review with its own taxadvisors the tax consequences to the Stockholder of the Acquisition and the other transactionscontemplated by this Agreement. Such Stockholder understands that he or it must rely solely on hisor its advisors and not on any statements or representations by Purchaser, the Company or any oftheir agents. Such Stockholder understands that he or it (and not Purchaser or the Company) shallbe responsible for his or its own tax liability that may arise as a result of the Acquisition orthe other transactions contemplated by this Agreement.     4.3 **Absence of Claims by the Stockholders**. Such Stockholder does not have any claimagainst the Company, contingent or unconditional, fixed or variable under any contract or on anyother basis whatsoever, whether in equity or at law (other than for accrued compensation and otheremployee benefits and other than with respect to any rights to indemnification that suchStockholder may now or hereafter be entitled to under the Company’s Articles of Incorporation orBylaws).     4.4 **Authority**. Such Stockholder has all requisite power and authority to enter intothis Agreement and any Related Agreements (as hereinafter defined) to which he or it is a party andto consummate the transactions contemplated hereby. This Agreement and the Related Agreements havebeen duly executed and delivered by such Stockholder, and, assuming the due authorization,execution and delivery by the other parties hereto, constitute a valid and binding obligation ofsuch Stockholder, enforceable in accordance with their respective terms except (i) as limited byapplicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, and otherlaws of general application affecting enforcement of creditors’ rights generally or (ii) as limitedby laws relating to the availability of specific performance, injunctive relief, or other equitableremedies. The “Related Agreements” shall mean all ancillary agreements required in this Agreement to be executed and delivered in connection with thetransactions contemplated hereby, including, without limitation, the Employment Agreements.
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     4.5 **No Conflict**. The execution and delivery by such Stockholder of this Agreement andany Related Agreement to which he is a party does not, and the consummation of the transactionscontemplated hereby and thereby will not, conflict with (i) any mortgage, indenture, lease,contract or other agreement or instrument, permit, concession, franchise or license to which suchStockholder or any of his properties or assets is subject, or (ii) any judgment, order, decree,statute, law, ordinance, rule or regulation applicable to such Stockholder or his or its propertiesor assets.**SECTION 5****REPRESENTATIONS AND WARRANTIES OF THE PURCHASER**     Purchaser represents and warrants to the Company, the Stockholders and the Company Principalsthat the statements contained in this Section 5 are true and correct.     5.1 **Organization, Good Standing and Qualification****.**Purchaser is a corporation dulyorganized, validly existing and in good standing under the laws of the State of Delaware and hasall requisite corporate power and authority to carry on its business and to carry out thetransactions contemplated in the Agreement. Purchaser is duly qualified to transact business andis in good standing in each jurisdiction in which the failure so to qualify would have a MaterialAdverse Effect on its business or properties.     5.2 **Authorization****.**All corporate action on the part of Purchaser, its officers,directors and stockholders necessary for the authorization, execution and delivery of thisAgreement, the performance of all obligations of Purchaser hereunder has been taken or will betaken prior to the Closing, and the Agreement, when executed and delivered by Purchaser, shallconstitute the valid and legally binding obligation of Purchaser, enforceable against Purchaser inaccordance with their respective terms except (i) as limited by applicable bankruptcy, insolvency,reorganization, moratorium, fraudulent conveyance, and other laws of general application affectingenforcement of creditors’ rights generally, or (ii) as limited by laws relating to the availabilityof specific performance, injunctive relief, or other equitable remedies.     5.3 **Governmental Consents****.**No consent, approval, order or authorization of, orregistration, qualification, designation, declaration or filing with, any Governmental Entity,foreign or domestic, authority on the part of Purchaser is required in connection with theconsummation of the transactions contemplated by this Agreement.     5.4 **No Violation****.**Neither the execution and delivery of this Agreement nor theconsummation of the transactions contemplated hereby will violate any provisions of the Certificateof Incorporation or Bylaws of Purchaser; violate, or be in conflict with, or constitute a default under or cause or permit the acceleration of the maturity of any debt or obligationpursuant to, any agreement or commitment to which Purchaser is a party or by which Purchaser isbound, or violate any statute or law or any judgment, decree, order, regulation, or rule of anycourt or Governmental Entity.
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**SECTION 6****ADDITIONAL AGREEMENTS**     6.1 **Expenses**. Whether or not the Acquisition is consummated, all fees and expensesincurred in connection with this Agreement and the transactions contemplated hereby (including,without limitation, all legal, accounting, financial advisory, consulting and all other fees andexpenses of third parties) shall be borne by the party incurring such expense (which party, in thecase of such fees and expenses incurred by the Company, shall be deemed to be fees and expenses ofthe Stockholders if the Closing occurs); provided, however, if the Closing occurson or prior to April 30, 2006, Purchaser shall pay up to $40,000 of the legal fees and expenses ofthe Company’s and/or the Stockholders’ local California counsel incurred in connection with thetransactions contemplated hereby.     6.2 **[Intentionally Omitted]**.     6.3 **No Solicitation**. None of the Company, the Stockholders, the Company Principals,or the officers, directors, employees or other agents of the Company and the Stockholders will,directly or indirectly, (i) take any action to solicit, initiate or encourage any Takeover Proposal(defined below) or (ii) subject to the terms of the immediately following sentence, engage innegotiations with, continue negotiations with or disclose any nonpublic information relating to theCompany, the Stockholders or the Company Principals to, or afford access to the properties, booksor records of the Company, the Stockholders or the Company Principals to, any person that hasadvised the Company, the Stockholders or the Company Principals that it may be considering making,or that has made, a Takeover Proposal. The Company, the Stockholders or the Company Principalswill promptly notify Purchaser after receipt of any Takeover Proposal or any notice that any personis considering making a Takeover Proposal or any request for nonpublic information relating to theCompany, the Stockholders or the Company Principals or for access to the properties, books orrecords of the Company, the Stockholders or the Company Principals by any person that has advisedthe Company or the Stockholders that it may be considering making, or that has made, a TakeoverProposal and will keep Purchaser fully informed of the status and details of any such TakeoverProposal notice or request. For purposes of this Agreement, “Takeover Proposal” means anyoffer or proposal for, or any indication of interest in, a purchase or other business combinationinvolving the Company or the Stockholders or the acquisition of any significant equity interest in,or a significant portion of the assets of, the Company, other than the transactions contemplated bythis Agreement.     6.4 **Access; Confidentiality**. Each party agrees to make available all books, records,facilities, employees, non-employee agents (such as patent and regulatory counsel) and informationreasonably necessary for the other party to evaluate the respective businesses, operations,properties and financial condition. Each party shall keep confidential and shall not make use ofany information treated by the other party as confidential (including, without limitation, theexistence of this Agreement or the consummation of the Acquisition or the failure of such aconsummation), obtained from the other party concerning the assets, properties, business oroperations of the other party other than to legal counsel, consultants, financial advisors, keyemployees, lenders and investment bankers where such disclosure is related to the
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performance of obligations under this Agreement or the consummation of the transactions contemplated under thisAgreement (all of whom shall be similarly bound by the provisions of this Section 6.4),except as may be required to be disclosed by applicable law or as may be required to obtain theconsents, waivers or releases from any Governmental Entity or other third party. Notwithstandingthe foregoing, the foregoing confidentiality restrictions shall not apply to any information which(a) becomes generally available to the public through no fault of the receiving party or itsemployees, agents or representatives; (b) is independently developed by the receiving party withoutbenefit of the above-described information (and such independent development is substantiated inwriting), or rightfully received from another source on a non-confidential basis; (c) when suchdisclosure is required by a court or governmental authority or is otherwise required by law or isnecessary to establish rights under this Agreement or any agreement contemplated hereby(and thedisclosing party has taken all reasonable efforts to limit the scope of such disclosure and toprotect the confidential nature of the information disclosed).     6.5 **Public Announcements**. No party hereto shall without the prior written consent ofthe other parties (which consent shall not be unreasonably withheld) disclose to any third party(other than to legal counsel, consultants, financial advisors, key employees, lenders andinvestment bankers where such disclosure is related to the performance of obligations under thisAgreement or the consummation of the transactions contemplated hereunder) the existence of thisAgreement, the identity of the other parties hereto or the transactions contemplated hereby except(i) as required by law, (ii) as reasonably necessary to obtain any consents, waivers or releasesfrom any Governmental Entity or other third party, or (iii) as reasonably requested by anyGovernmental Entity.     6.6 **Cooperation**. Each party hereto will fully cooperate with the other parties, theircounsel and accountants in connection with any steps required to be taken as part of itsobligations under this Agreement. Each party will use reasonable efforts to cause all conditionsto this Agreement to be satisfied as promptly as possible and to obtain all consents and approvalsnecessary for the due and timely performance of this Agreement and for the satisfaction of theconditions hereof. No party will undertake any course of action inconsistent with this Agreementor which would make any representations, warranties or agreements made by such party in thisAgreement untrue or any conditions precedent to this Agreement unable to be satisfied at or priorto the Closing.     6.7 **Employees of the Company’s Business**. Between the date of this Agreement and theClosing Date, the Company Principals shall allow Purchaser to have reasonable access to themutually agreed to key employees of the Company for discussions regarding employment with Purchasercontingent upon the Closing of the Closing Date. The Company and the Company Principals will usetheir respective commercially reasonable efforts to cooperate with Purchaser to offer employees ofthe Company selected by Purchaser employment with Purchaser.     6.8 **Notification of Claims**. From the date of this Agreement to and including theClosing Date, the Company, the Stockholders and the Company Principals shall promptly notifyPurchaser in writing of the commencement or threat of any claims, litigation or proceedings againstor affecting the Company, the Stockholders or the Company Principals.
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     6.9 **Section ****338(h)(10)****Election**.          (a) Upon the request of Purchaser made no later than 90 days after the Closing Date, theStockholders shall join with Purchaser in making an election under Section 338(h)(10) of the Codeand any corresponding or similar elections under state or local law (collectively, the “Section338(h)(10) Election”) with respect to the purchase and sale of the stock of the Company. Inthe event Purchaser does not request that the Stockholders join in making the Section 338(h)(10)Election, the remainder of the provisions of this Section 6.9 shall not apply.          (b) Purchaser shall determine and allocate the “aggregate deemed sales price” (“ADSP”)with respect to the assets of the Company in accordance with Section 338 of the Code and theapplicable Treasury Regulations promulgated thereunder or comparable provisions of state or locallaw (the “ADSP Allocation”). Purchaser shall forward a draft of the ADSP Allocation to theStockholders for their consent, which consent shall not be unreasonably withheld or delayed.Purchaser and the Stockholders shall be bound by the ADSP Allocation for all Tax purposes.Purchaser and the Stockholders shall file all Tax Returns in a manner consistent with the Section338(h)(10) Election and the ADSP Allocation and shall take no position contrary thereto unlessrequired to do so by applicable Tax laws.          (c) Purchaser shall not have any obligation to the Stockholders to pay any additionalconsideration for the purchase of their Shares, over and above the Initial Payment Amount, as anoff-set to any marginal Taxes resulting to such Stockholders from the Section 338(h)(10) Election.     6.10 **Operational Covenants of the Company Following the Closing**.          (a) General. During the Restricted Period, Purchaser shall cause the Company to beoperated as a separate subsidiary or division of Purchaser. From and after the Closing Date, noneof the Stockholders or the Company Principals, without the Purchaser’s prior written consent, shalltake any action that would cause the Company (or otherwise intentionally permit the Company) to do any of the actions described below, except as otherwise expressly permittedby, but subject to the limitations set forth in, the Baseline Budget:               (i) Charter Documents. Cause or permit any amendments to its Articles ofIncorporation or Bylaws;               (ii) Issuance of Securities. Issue, deliver or sell or authorize or propose theissuance, delivery or sale of, or purchase or propose the purchase of, any shares of its capitalstock or securities convertible into, or subscriptions, rights, warrants or options to acquire, orother agreements or commitments of any character obligating it to issue any such shares or otherconvertible securities.               (iii) Dividends; Changes in Capital Stock. Declare or pay any dividends on or makeany other distributions (whether in cash, stock or property) in respect of any of its capitalstock, or split, combine or reclassify any of its capital stock or issue or authorize the issuanceof any other securities in respect of, in lieu of or in substitution for shares of its capitalstock, or repurchase or otherwise acquire, directly or indirectly, any shares of its capital stockexcept from former employees, directors and consultants in accordance with agreements providing forthe repurchase of shares in connection with any termination of service to it or its subsidiaries;
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               (iv) Material Contracts. Enter into any material contract or commitment, or violate,amend or otherwise modify or waive any of the terms of any of its material contracts, other than inthe ordinary course of business consistent with past practice;               (v) Intellectual Property. Transfer to any person or entity any rights to itsIntellectual Property other than in the ordinary course of business consistent with past practice;               (vi) Exclusive Rights. Enter into or amend any agreements pursuant to which any otherparty is granted exclusive marketing or other exclusive rights of any type or scope with respect toany of its products or technology;               (vii) Dispositions. Sell, lease, license or otherwise dispose of or encumber any ofits properties or assets which are material, individually or in the aggregate, to its and itsSubsidiaries’ business, taken as a whole, except in the ordinary course of business consistent withpast practice;               (viii) Indebtedness. Incur any indebtedness for borrowed money or guarantee any suchindebtedness or issue or sell any debt securities or guarantee any debt securities of others;               (ix) Leases. Enter into operating leases;               (x) Payment of Obligations. Pay, discharge or satisfy any claim, liability orobligation (absolute, accrued, asserted or unasserted, contingent or otherwise) arising other thanin the ordinary course of business, other than the payment, discharge or satisfaction ofliabilities reflected or reserved against in the Company Financial Statements;               (xi) Capital Expenditures. Make any capital expenditures, capital additions orcapital improvements except in the ordinary course of business and consistent with past practice;               (xii) Insurance. Materially reduce the amount of any material insurance coverageprovided by existing insurance policies;               (xiii) Termination or Waiver. Terminate or waive any right of substantial value,other than in the ordinary course of business;               (xiv) Employee Benefit Plans; New Hires; Pay Increases. Except as required by law,adopt or amend any employee benefit or stock purchase or option plan, or hire or fire any directorlevel or officer level employee, pay any special bonus or special remuneration to any employee ordirector, or increase the salaries or wage rates of its employees;
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               (xv) Severance Arrangement. Grant any severance or termination pay (i) to anydirector or officer or (ii) to any other employee except (A) payments made pursuant to standardwritten agreements outstanding on the date hereof or (B) payments made in the ordinary course ofbusiness in accordance with its standard past practice;               (xvi) Lawsuits. Commence a lawsuit other than (i) for the routine collection ofbills, (ii) in such cases where it in good faith determines that failure to commence suit wouldresult in the material impairment of a valuable aspect of its business, provided that it consultswith Purchaser prior to the filing of such a suit, or (iii) for a breach of this Agreement;               (xvii) Acquisitions. Acquire or agree to acquire by merging or consolidating with, orby purchasing a substantial portion of the assets of, or by any other manner, any business or anycorporation, partnership, association or other business organization or division thereof, orotherwise acquire or agree to acquire any assets which are material, individually or in theaggregate, to its and its subsidiaries’ business, taken as a whole;               (xviii) Taxes. Other than in the ordinary course of business, make or change anymaterial election in respect of Taxes, adopt or change any accounting method in respect of Taxes,file any material Tax Return or any amendment to a material Tax Return, enter into any closingagreement, settle any claim or assessment in respect of Taxes, or consent to any extension orwaiver of the limitation period applicable to any claim or assessment in respect of Taxes;               (xix) Notices. Fail to give any notices or other information required to be given tothe employees of the Company or the Stockholders, any collective bargaining unit representing anygroup of employees of the Company or the Stockholders, and any applicable government authorityunder the National Labor Relations Act, the Code, the Consolidated Omnibus Budget ReconciliationAct, and other applicable law in connection with the transactions provided for in this Agreement;               (xx) Revaluation. Revalue any of its assets, including without limitation writingdown the value of inventory or writing off notes or accounts receivable other than in the ordinarycourse of business; or               (xxi) Other. Take, or agree in writing or otherwise to take, any of the actionsdescribed in clause (i) through (xx) above.          (b) Company Developed Products. None of the Stockholders or the Company Principalsshall independently pursue, or cause or permit the Company to independently pursue, any new productdevelopment activities unless Purchaser has authorized such activities in writing and Purchaser andthe Company Principals (if then employed by the Company) have mutually agreed upon the developmentparameters (including an acknowledgement from Purchaser that any new product resulting fromdevelopment activities conducted within such parameters will not require any developmentcontribution from Purchaser that would cause such new product to become a Jointly DevelopedProduct), timing and responsibilities as well as the revenue, cost structure and pre-tax profittargets applicable to such new products. For purposes of this Agreement, the Company’s 100WHolmium side-firing fiber described in Exhibit D hereto and the products currentlymanufactured and sold by the Company shall be deemed Company Developed Products.
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          (c) Jointly Developed Products. Prior to pursuing any new product developmentactivities or product improvement projects pertaining to any Jointly Developed Product, the Companyshall first obtain Purchaser’s written consent and Purchaser and the Company Principals (if thenemployed by the Company) shall have mutually agreed in writing upon the development parameters(including an acknowledgement from the Company Principals that such activities or projects includethe development contributions of Purchaser specified in such parameters and, accordingly, any newproducts or product improvements resulting from such activities or projects shall be JointlyDeveloped Products subject to the percentage allocations of revenue from sales specified in suchparameters), timing and responsibilities as well as the revenue, cost structure and pre-tax profittargets applicable to such new products or product improvement projects. It is anticipated thatJointly Developed Products will not be included in the Baseline Budget. Jointly Developed Productsmay only be included in the Baseline Budget with the prior written consent of Purchaser.          (d) Purchaser Sales Activities. It is anticipated that Company Developed Productswill be sold to current customers of Purchaser by Purchaser’s sales representatives and that the Company’s sales director will train Purchaser’s sales representatives and coordinatesales activities related to Company Developed Products. The Company’s sales representatives willnot sell directly to Purchaser’s customers without Purchaser’s prior consent, provided that theCompany may sell Company Developed Products directly to Purchaser’s customers if Purchaser fails tomake its sales force available to the Company for such sales.          (e) Baseline Budget Updates. Purchaser, on the one hand, and the Stockholders andCompany Principals (if then employed by the Company), on the other hand, agree to cooperate in goodfaith to determine, from time to time during the Restricted Period, mutually agreeable andappropriate modifications to the Baseline Budget based on facts, circumstances or events thatwarrant revisions to the assumptions and methodology employed in the initial Baseline Budget orother relevant considerations. Subject to the foregoing, the Baseline Budget shall continue ineffect for all purposes of this Agreement unless and until all parties agree in writing to anyproposed revisions to the Baseline Budget. Each party hereto acknowledges and agrees that nothingin this Section 6.10(e) shall be construed to limit or otherwise effect the agreements ofthe parties set forth in Section 1.3(f)(i).     6.11 **Further Acts**. After the Closing Date, each party hereto, at the request of andwithout any further cost or expense to the other parties, will take any further actions necessaryor desirable to carry out the purposes of this Agreement and to vest in Purchaser full title to allproperties, assets and rights of the Company transferred pursuant to this Agreement. In addition,without in any way limiting the generality of the foregoing, the Company and, to the extentrequired, the Stockholders and the Company Principals hereby agree to take any and all furtheractions necessary or desirable to carry out the assignment to Purchaser of all Company IntellectualProperty.
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**SECTION 7****CLOSING ACTIONS; DELIVERABLES**     7.1 **Actions Being Taken at or Prior to Closing**. The following documents and suchother items are being delivered at or prior to the Closing and the following actions are beingtaken at or prior to the Closing:          (a) **No Injunctions or Restraints; Illegality**. No temporary restraining order,preliminary or permanent injunction or other order issued by any court of competent jurisdiction orother legal or regulatory restraint or prohibition preventing the consummation of the transactionscontemplated hereby shall be in effect, nor shall any proceeding brought by any GovernmentalEntity, foreign or domestic, seeking any of the foregoing be pending; nor shall there be any actiontaken, or any statute, rule, regulation or order enacted, entered, enforced or deemed applicable tothe transactions contemplated hereby, which makes the consummation of such transactions illegal.          (b) **Governmental Approval**. Purchaser, the Company and their respective subsidiariesshall have timely obtained from each Governmental Entity all approvals, waivers and consents, ifany, necessary for consummation of or in connection with the transactions contemplated hereby.     7.2 **Deliverables to the Company and the Stockholders; Actions Taken by Purchaser**. Thefollowing documents and such other items are being delivered to the Company and the Stockholders ator prior to the Closing and the following actions are being taken at or prior to the Closing:          (a) **Representations, Warranties and Covenants** (i) Each of the representations andwarranties of Purchaser in this Agreement that is expressly qualified by a reference to materialityshall be true in all respects as so qualified, and each of the representations and warranties ofPurchaser in this Agreement that is not so qualified shall be true and correct in all materialrespects, on and as of the Closing as though such representation or warranty had been made on andas of the Closing (except that those representations and warranties which address matters only asof a particular date shall remain true and correct as of such date), and (ii) Purchaser shall haveperformed and complied in all material respects with all covenants, obligations and conditions ofthis Agreement required to be performed and complied with by Purchaser as of the Closing.          (b) **Certificates of Purchaser****.**               (i) **Compliance Certificate of Purchaser****.**The Company shall have been provided with acertificate executed on behalf of Purchaser by its President, Chief Executive Officer or ChiefFinancial Officer to the effect that, as of the Closing, each of the conditions set forth inSection 7.2(a) above has been satisfied with respect to Purchaser.
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               (ii) **Certificate of Secretary of Purchaser****.**The Company shall have been provided witha certificate executed by the Secretary or Assistant Secretary of Purchaser certifying:                    (A) resolutions duly adopted by the Board of Directors of Purchaser authorizing the executionof this Agreement and the execution, performance and delivery of all agreements, documents andtransactions contemplated hereby; and                    (B) the incumbency of the officers of Purchaser executing this Agreement and all agreementsand documents contemplated hereby.     7.3 **Deliverables to Purchaser; Actions Taken by the Company and the Stockholders**. Thefollowing documents and such other items are being delivered to Purchaser at or prior to theClosing and the following actions are being taken at or prior to the Closing:          (a) **Representations, Warranties and Covenants**. (i) Each of the representations andwarranties of the Company, the Stockholders and the Company Principals in this Agreement that isexpressly qualified by a reference to materiality shall be true in all respects as so qualified,and each of the representations and warranties of the Company, the Stockholders and the CompanyPrincipals in this Agreement that is not so qualified shall be true and correct in all materialrespects, on and as of the Closing as though such representation or warranty had been made on andas of the Closing (except that those representations and warranties which address matters only asof a particular date shall remain true and correct as of such date), and (ii) the Company, theStockholders and the Company Principals shall have performed and complied in all material respectswith all covenants, obligations and conditions of this Agreement required to be performed andcomplied with by them as of the Closing.          (b) **No Material Adverse Changes**. The Company shall not have suffered any MaterialAdverse Effect since the date of the Company Current Balance Sheet.          (c) **Certificates of the Company and the Stockholders**.               (i) **Compliance Certificate of the Company**. Purchaser shall have been provided with acertificate executed on behalf of the Company by its President and its Chief Financial Officer tothe effect that, as of the Closing, each of the conditions set forth in Sections 7.3(a) and(b) above has been satisfied.               (ii) **Compliance Certificate of the Stockholders**. Purchaser shall have been providedwith a certificate executed by the Stockholders and the Company Principals to the effect that, asof the Closing, each of the conditions set forth in Sections 7.3(a) and (b) abovehas been satisfied.               (iii) **Certificate of Secretary of the Company**. Purchaser shall have been providedwith a certificate executed by the Secretary of the Company certifying:
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                    (A) resolutions duly adopted by the Board of Directors of the Company authorizing theexecution of this Agreement and the execution, performance and delivery of all agreements,documents and transactions contemplated hereby;                    (B) the Articles of Incorporation and Bylaws of the Company, as in effect immediately prior tothe Closing, including all amendments thereto; and                    (C) the incumbency of the officers of the Company executing this Agreement and all agreementsand documents contemplated hereby.          (d) **Third Party Consents**. Purchaser shall have been furnished with evidencesatisfactory to it that the Company has obtained those consents, waivers, approvals or authorizations of those Governmental Entities and third parties disclosed on Sections3.5 and 3.6 of the Company Disclosure Schedule.          (e) **Injunctions or Restraints; Conduct of Business**. No proceeding brought by anyGovernmental Entity, foreign or domestic, seeking to prevent the consummation of the transactionscontemplated by this Agreement shall be pending. In addition, no temporary restraining order,preliminary or permanent injunction or other order issued by any court of competent jurisdiction orother legal or regulatory restraint provision limiting or restricting Purchaser’s conduct oroperation of the business of the Company and its subsidiaries, following the Closing shall be ineffect, nor shall any proceeding brought by an administrative agency or commission or otherGovernmental Entity, domestic or foreign, seeking the foregoing be pending.          (f) **Resignation of Directors and Officers**. Purchaser shall have received letters ofresignation from each of the directors and officers of the Company in office immediately prior tothe Closing, which resignations in each case shall be effective as of the Closing.          (g) **Employment Agreements; Consulting Agreement**. Each of the Company Principals shallhave executed and delivered to Purchaser his Employment Agreement. Teresanne Griffin shall haveexecuted and delivered to Purchaser a consulting agreement in the form attached hereto asExhibit E.          (h) **CIIAs**. Each of the individuals set forth in Section 3.14(m) of theCompany Disclosure Schedule shall have executed and delivered to Purchaser and the Company anconfidential information and invention assignment agreement in the form attached hereto asExhibit G.          (i) **FIRPTA Certificate**. The Stockholders shall, prior to the Closing Date, providePurchaser with a properly executed FIRPTA Notification Letter and a form of notice to the InternalRevenue Service in accordance with the requirements of Treasury Regulation Section 1.897-2(h)(2)along with written authorization to Purchaser to deliver such notice form to the Internal RevenueService on behalf of the Company upon the Closing.
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          (j) **Waiver of Community Property Rights**. Each of the Stockholders, if married, shalldeliver to Purchaser a written waiver executed by his spouse, in such form as is reasonablyacceptable to Purchaser, pursuant to which such spouse waives any and all community property rightsor other claims of interest in and to any of the Shares or any of the consideration payable inexchange therefor under this Agreement.**SECTION 8****INDEMNIFICATION**     8.1 **Survival of Representations and Warranties**. The Company’s, the Stockholders’ andthe Company Principals’ representations and warranties in this Agreement or in any instrumentdelivered pursuant to this Agreement shall terminate on the third anniversary of the Closing Date(the “Indemnification Termination Date”); provided, however, if any claimsfor indemnification have been asserted with respect to any such representations and warrantiesprior to the Indemnification Termination Date, the representations and warranties on which any suchclaims are based shall continue in effect until final resolution of any claims. Purchaser’srepresentations and warranties contained herein or in any instrument delivered pursuant to thisAgreement shall terminate as of the Closing.     8.2 **Indemnification**.          (a) Indemnification of Purchaser. Subject to the limitations set forth in Section8.2(b) below, the Stockholders shall, severally but not jointly in proportion to their respectiveShares sold pursuant hereto, indemnify and hold Purchaser and its officers, directors andaffiliates (including the Company after the Closing Date) harmless against all claims, losses,liabilities, damages, deficiencies, costs and expenses, including reasonable attorneys’ fees andexpenses of investigation and defense (hereinafter individually, a “Loss” and collectively“Losses”) incurred by Purchaser or its officers, directors or affiliates, directly orindirectly, as a result of (i) any inaccuracy or breach of any representation or warranty made bythe Company or the Stockholders in this Agreement, including any exhibit or schedule attachedhereto, (ii) the breach of any covenant in Section 6 hereof or any agreement made by theCompany or the Stockholders and Company Principals in this Agreement, or (iii) any personalliabilities or obligations of the Stockholders or the Company Principals.          (b) Limitation on Liability. The maximum aggregate liability of the Stockholdersunder this Section 8.2 shall be limited to 20% of the sum of all Earnout Amounts as theyare earned and become payable pursuant to Section 1.3 hereof but without giving effect toany reduction in the payment of such Earnout Amounts pursuant to Section 1.3(c) orSection 8.3 hereof; provided, however, that nothing herein shall limit theliability of the Stockholders in connection with a claim based, in whole or in part, on fraud orintentional or misrepresentation (a “**Fraud Claim**”). The Stockholders shall not have any right ofcontribution from the Company with respect to any Loss claimed by Purchaser and its officers,directors and affiliates. Notwithstanding the foregoing, the Stockholders shall not have anyliability for the Company’s failure to meet any projections so long as such projections werefraudulently derived. Notwithstanding anything to the contrary set forth herein, except for FraudClaims and breaches of Section 6.1 hereof, the Stockholders shall not have any liability underSection 8 unless the aggregate of all Losses hereunder exceeds $50,000 (the “**Loss Threshold**”), inwhich case the Parent Indemnified Persons shall be entitled to recover all Losses, including the amount equalto the Loss Threshold.
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          (c) Indemnification Procedure. Upon receipt by the Stockholders of a certificatesigned by any officer of Purchaser (an “Officer’s Certificate”) on or prior to theIndemnification Termination Date: (i) stating that Purchaser has paid or properly accrued orreasonably anticipates that it will have to pay or accrue Losses and (ii) specifying in reasonabledetail the individual items of Losses included in the amount so stated, the date each such item waspaid or properly accrued, or the basis for such anticipated liability, and the nature of theinaccuracy or breach of warranty or covenant to which such item is related, the Stockholders shallhave thirty (30) days to object in a written statement to the claim made in the Officer’sCertificate, and such statement shall have been delivered to Purchaser prior to the expiration ofsuch thirty (30) day period.          (d) Resolution of Conflicts; Arbitration.               (i) In the event that the Stockholders shall object in writing to any claim or claims made inany Officer’s Certificate within thirty (30) days after delivery of such Officer’s Certificate, theparties shall attempt in good faith to agree upon the rights of the respective parties with respectto each of such claims.               (ii) If no such agreement can be reached after good faith negotiation, either party may demandarbitration of the matter unless the amount of Loss is at issue in pending litigation with a thirdparty, in which event arbitration shall not be commenced until such amount is ascertained or bothparties agree to arbitration, and in either such event the matter shall be settled by arbitrationconducted by one arbitrator mutually agreeable to both parties. In the event that within thirty(30) days after submission of any dispute to arbitration, the parties cannot mutually agree on onearbitrator, the Stockholders and Purchaser shall each select one arbitrator, and the twoarbitrators so selected shall select a third arbitrator. The arbitrator or arbitrators, as thecase may be, shall set a limited time period and establish procedures designed to reduce the costand time for discovery while allowing the parties an opportunity, adequate in the sole judgment ofthe arbitrator or majority of the three arbitrators, as the case may be, to discover relevantinformation from the opposing parties about the subject matter of the dispute. The arbitrator or amajority of the three arbitrators, as the case may be, shall rule upon motions to compel or limitdiscovery and shall have the authority to impose sanctions, including attorneys’ fees and costs, tothe extent as a competent court of law or equity, should the arbitrators or a majority of the threearbitrators, as the case may be, determine that discovery was sought without substantialjustification or that discovery was refused or objected to without substantial justification. Thedecision of the arbitrator or a majority of the three arbitrators, as the case may be, as to thevalidity and amount of any claim in such Officer’s Certificate shall be binding and conclusive uponthe parties to this Agreement. Such decision shall be written and shall be supported by writtenfindings of fact and conclusions which shall set forth the award, judgment, decree or order awardedby the arbitrator(s).
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               (iii) Judgment upon any award rendered by the arbitrator(s) may be entered in any court havingjurisdiction. Any such arbitration shall be held in Santa Clara County, California under the rulesthen in effect of the American Arbitration Association for commercial disputes. The fees andexpenses incurred in connection with an arbitration, including without limitation the fees of eacharbitrator, the administrative costs of the arbitration and the expenses, including, withoutlimitation, the reasonable attorneys’ fees and costs, incurred by the parties to the arbitration,shall be apportioned between the parties to the arbitration as determined by the arbitrator or amajority of the three arbitrators, as the case may be.          (e) Third-Party Claims.               (i) If any third party shall notify Purchaser with respect to any matter (hereinafter referredto as a “Third Party Claim”), which may result in Losses, then Purchaser shall give promptnotice to the Stockholders (and in any event within thirty (30) days) of Purchaser becoming awareof any such Third Party Claim or of facts upon which any such Third Party Claim will be basedsetting forth such material information with respect to the Third Party Claim as is reasonablyavailable to Purchaser; provided, however, that no delay or failure on the part ofPurchaser in notifying the Stockholders shall relieve the Stockholders from any obligationhereunder unless the Stockholders are thereby materially prejudiced (and then solely to the extentof such prejudice). The Stockholders shall not be liable for any attorneys fees or expensesincurred by Purchaser prior to Purchaser and its officers, directors and affiliates giving noticeto the Stockholders of a Third Party Claim.               (ii) In case any Third Party Claim is asserted against Purchaser, and Purchaser notifies theStockholders thereof pursuant to Section 8.2(e)(i) above, the Stockholders will beentitled, if they so elect by written notice delivered to Purchaser within thirty (30) days afterreceiving Purchaser’s notice, to assume the defense thereof, at the expense of the Stockholders;provided, that (A) prior to the expiration of such thirty-day period one or more of theEarnout Amounts has become due and payable in accordance with the terms of this Agreement,Purchaser has withheld from such Earnout Amounts the Maximum Set-Off Amount then available, andPurchaser has reasonably determined that Losses which may be incurred as a result of the ThirdParty Claim and any other claims then pending do not exceed either individually, or when aggregatedwith all other Third Party Claims and other pending claims, the then remaining portion of theMaximum Set-Off Amount not previously used to offset claims for indemnification determined to bevalid in accordance with this Agreement, (B) the Third Party Claim involves only money damages anddoes not seek an injunction or other equitable relief, (C) settlement of, or an adverse judgmentwith respect to, the Third Party Claim is not, in the good faith judgment of Purchaser, likely toestablish a precedential custom or practice adverse to the continuing business interests ofPurchaser which could have a material adverse effect on the business or operations of Purchaser,(D) the Third Party Claim does not involve any customers of the Company, and (E) counsel selectedby the Stockholders is reasonably acceptable to Purchaser. If the Stockholders so assume any suchdefense, the Stockholders shall conduct the defense of the Third Party Claim actively anddiligently. The Stockholders shall not compromise or settle such Third Party Claim or consent to entry of any judgment in respect thereofwithout the prior written consent of Purchaser, which consent shall not be unreasonablyconditioned, withheld or delayed.
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               (iii) In the event that the Stockholders assume the defense of the Third Party Claim inaccordance with Section 8.2(e)(ii) above, Purchaser may retain separate outside legalcounsel and participate in the defense of the Third Party Claim, but the fees and expenses of suchoutside legal counsel shall be at the expense of Purchaser unless Purchaser shall have been advisedin writing by counsel for the Purchaser that there is a material legal conflict of interest betweenor among Purchaser and the Stockholders with respect to such Third Party Claim, in which case thereasonable fees and expenses of such outside legal counsel will be borne by the Stockholders. TheIndemnified Party will not consent to the entry of any judgment or enter into any settlement withrespect to the Third Party Claim without the prior written consent of the Stockholders, whichconsent shall not be unreasonably conditioned, withheld or delayed. The Indemnified Party willcooperate in the defense of the Third Party Claim and will provide full access to documents,assets, properties, books and records reasonably requested by the Stockholders and material to theclaim and will make available all officers, directors and employees reasonably requested by theStockholders for investigation, depositions and trial.               (iv) In the event that the Stockholders fail or elect not to assume the defense of Purchaseragainst such Third Party Claim, which the Stockholders had the right to assume under Section8.2(e)(ii) above, (a) Purchaser shall have the right to undertake the defense and (b) Purchasershall not compromise or settle such Third Party Claim or consent to entry of any judgment inrespect thereof without the prior written consent of the Stockholders, which consent shall not beunreasonably conditioned, withheld or delayed. In the event that the Stockholders are not entitledto assume the defense of Purchaser or its affiliates against such Third Party Claim pursuant toSection 8.2(e)(ii) above, Purchaser or its affiliates shall have the right to undertake thedefense, consent to the entry of any judgment or enter into any settlement with respect to theThird Party Claim in any manner it may deem appropriate; provided, however, that nosettlement of any such claim or consent to the entry of any judgment with respect to such ThirdParty Claim shall be accepted by Purchaser without the consent of the Stockholders (which consentshall not be unreasonably conditioned, withheld or delayed). In each case, Purchaser shall conductthe defense of the Third Party Claim actively and diligently, and the Stockholders will cooperatewith Purchaser or its affiliates in the defense of that claim and will provide full access todocuments, assets, properties, books and records reasonably requested by Purchaser and material tothe claim and will make available all individuals reasonably requested by Purchaser forinvestigation, depositions and trial.          (f) Materiality. Any qualifications in the representations, warranties and covenantswith respect to a Material Adverse Effect, materiality, material or similar terms will not have anyeffect with respect to the calculation of the amount of any Losses pursuant to this Section 8.However, such qualifications will have their full effect in determining whether a breach hasoccurred.     8.3 **Set-Off Rights; Sole and Exclusive Remedy**.          (a) Set-Off Rights. Subject to the limitations set forth in Section 8.2(b),Purchaser shall be entitled to set-off the amount of any Losses from indemnification claimssubmitted on or prior to the Indemnification Expiration Date and determined to be valid in
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accordance with this Section 8 against the Earnout Amounts due or to become due to theStockholders pursuant to this Agreement. If at any time prior to the Indemnification EarnoutDate (i) Purchaser becomes obligated to pay any Earnout Amount under this Agreement and (ii) atsuch time the final determination of the validity of any previously submitted claim forindemnification remains pending, Purchaser shall be entitled to withhold from such Earnout Amountthe Maximum Set-Off Amount. If at any time prior to the Indemnification Earnout Date (x) Purchaserbecomes obligated to pay any Earnout Amount under this Agreement and (y) at such time the amount ofall previously submitted claims, if any, has been finally determined in accordance with the termsof this Agreement but any portion of the Losses incurred in connection with such claims has notbeen set-off against prior Earnout Amounts, Purchaser shall be entitled to withhold from suchEarnout Amount the remaining portion of such Losses. The parties acknowledge and agree that therights of recoupment and set-off set forth in this Section 8.3 are a condition to Purchaseragreeing to enter into and perform this Agreement and that the rights of the Stockholders underthis Agreement are subject to such rights. For purposes of this Agreement, the “**Maximum Set-OffAmount**” shall be an amount, determined as of each time Purchaser otherwise becomes obligated to payany Earnout Amount under this Agreement, equal to the *lesser* of (A) 100% of such EarnoutAmount, without giving effect to any reduction in the payment thereof pursuant to Section1.3(c) or this Section 8.3(a), *or* (B) 20% of the sum of all Earnout Amountsthen or previously due and payable, in each case without giving effect to any reduction in thepayment thereof pursuant to Section 1.3(c) or this Section 8.3(a).          (b) Sole and Exclusive Remedy. Except for Fraud Claims, any claim or cause of action(whether such claim sounds in tort, contract or otherwise and including statutory rights andremedies) based upon, relating to or arising out of this Agreement or the transactions contemplatedhereby or otherwise in respect of the status, operations, condition or ownership of the Company andits business or properties on or prior to the Closing Date must be brought by Purchaser inaccordance with the provisions and applicable limitations of this Section 8 (including withoutlimitation the set-off rights set forth in Section 8.3(a)), which, other than in the caseof Fraud Claims, shall constitute the sole and exclusive remedy of Purchaser, its Affiliates,successors and assigns and all Persons who may claim any rights through them, for any such claim orcause of action.**SECTION 9****MISCELLANEOUS**     9.1 **Notices**. Any notice required or permitted by this Agreement shall be in writingand shall be deemed sufficient upon receipt, when delivered personally or by courier, overnightdelivery service or confirmed facsimile, or forty-eight (48) hours after being deposited in theregular mail as certified or registered mail (airmail if sent internationally) with postageprepaid, if such notice is addressed to the party to be notified at such party’s address orfacsimile number as set forth below, or as subsequently modified by written notice,               (a) if to Purchaser, to:Laserscope