Document:

Exhibit 10.1

 

FOCUS ENHANCEMENTS, INC.

 

AMENDED AND RESTATED SENIOR SECURED NOTE

PURCHASE AGREEMENT

 

 

TABLE
OF CONTENTS

 

	
   

  	
   

  	
  Page

  
	
   

  	
   

  	
   

  
	
  RECITALS;
  AGREEMENT

  	
   

  	
  1

  
	
   

  	
   

  	
   

  
	
  1.

  	
   

  	
  DEFINITIONS

  	
   

  	
  2

  
	
   

  	
   

  	
  1.1

  	
  “Affiliate”

  	
   

  	
  2

  
	
   

  	
   

  	
  1.2

  	
  “Amended
  Intercreditor Agreement”

  	
   

  	
  3

  
	
   

  	
   

  	
  1.3

  	
  [INTENTIONALLY
  OMITTED]

  	
   

  	
  3

  
	
   

  	
   

  	
  1.4

  	
  [INTENTIONALLY
  OMITTED]

  	
   

  	
  3

  
	
   

  	
   

  	
  1.5

  	
  “Business
  Day”

  	
   

  	
  3

  
	
   

  	
   

  	
  1.6

  	
  “Capital
  Stock”

  	
   

  	
  3

  
	
   

  	
   

  	
  1.7

  	
  [INTENTIONALLY
  OMITTED]

  	
   

  	
  3

  
	
   

  	
   

  	
  1.8

  	
  “Common
  Stock”

  	
   

  	
  3

  
	
   

  	
   

  	
  1.9

  	
  “Company”

  	
   

  	
  3

  
	
   

  	
   

  	
  1.10

  	
  “Continuing
  Director”

  	
   

  	
  3

  
	
   

  	
   

  	
  1.11

  	
  “Exchange
  Act”

  	
   

  	
  4

  
	
   

  	
   

  	
  1.12

  	
  “Final
  Maturity Date”

  	
   

  	
  4

  
	
   

  	
   

  	
  1.13

  	
  “Fundamental
  Change”

  	
   

  	
  4

  
	
   

  	
   

  	
  1.14

  	
  “Fundamental
  Change Repurchase Date”

  	
   

  	
  5

  
	
   

  	
   

  	
  1.15

  	
  “GAAP”

  	
   

  	
  5

  
	
   

  	
   

  	
  1.16

  	
  “Guaranty”

  	
   

  	
  5

  
	
   

  	
   

  	
  1.17

  	
  “Holder”

  	
   

  	
  5

  
	
   

  	
   

  	
  1.18

  	
  “Indebtedness”

  	
   

  	
  5

  
	
   

  	
   

  	
  1.19

  	
  [INTENTIONALLY
  OMITTED]

  	
   

  	
  6

  
	
   

  	
   

  	
  1.20

  	
  “Lien”

  	
   

  	
  6

  
	
   

  	
   

  	
  1.21

  	
  “Loan
  Documents”

  	
   

  	
  6

  
	
   

  	
   

  	
  1.22

  	
  “Majority-in-Interest
  of the Notes” or “Majority-in-Interest”

  	
   

  	
  6

  
	
   

  	
   

  	
  1.23

  	
  “New
  Intercreditor Agreement”

  	
   

  	
  6

  
	
   

  	
   

  	
  1.24

  	
  “Obligations”

  	
   

  	
  6

  
	
   

  	
   

  	
  1.25

  	
  [INTENTIONALLY
  OMITTED]

  	
   

  	
  7

  
	
   

  	
   

  	
  1.26

  	
  “Permitted
  Liens”

  	
   

  	
  7

  
	
   

  	
   

  	
  1.27

  	
  “Person” or
  “person”

  	
   

  	
  7

  
	
   

  	
   

  	
  1.28

  	
  “Purchasers’
  Agent” means Thomas O. Boucher. Jr

  	
   

  	
  7

  
	
   

  	
   

  	
  1.29

  	
  “Redemption
  Date”

  	
   

  	
  7

  
	
   

  	
   

  	
  1.30

  	
  “Registration
  Rights Agreement”

  	
   

  	
  7

  
	
   

  	
   

  	
  1.31

  	
  “SEC”

  	
   

  	
  7

  
	
   

  	
   

  	
  1.32

  	
  “Securities
  Act”

  	
   

  	
  7

  
	
   

  	
   

  	
  1.33

  	
  “Security
  Agreement”

  	
   

  	
  7

  
	
   

  	
   

  	
  1.34

  	
  [INTENTIONALLY
  OMITTED]

  	
   

  	
  8

  
	
   

  	
   

  	
  1.35

  	
  [INTENTIONALLY
  OMITTED]

  	
   

  	
  8

  
	
   

  	
   

  	
  1.36

  	
  “Subsidiaries”

  	
   

  	
  8

  
	
   

  	
   

  	
  1.37

  	
  “Trading
  Day”

  	
   

  	
  8

  
	
   

  	
   

  	
   

  
	
  2.

  	
   

  	
  PURCHASE
  AND SALE OF NOTES AND WARRANTS

  	
   

  	
  8

  
	
   

  	
   

  	
  2.1

  	
  Note
  Issuance, Cancellation of Original Notes, Warrants Issuance

  	
   

  	
  8

  

 

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  Page

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  2.2

  	
  Closing Date

  	
   

  	
  8

  
	
   

  	
   

  	
  2.3

  	
  Separate
  Agreements

  	
   

  	
  9

  
	
   

  	
   

  	
  2.4

  	
  Security
  Interest and Security Agreement

  	
   

  	
  9

  
	
   

  	
   

  	
  2.5

  	
  Registration
  Rights Agreement; January 24, 2006 Registration Rights Agreement
  Terminated

  	
   

  	
  9

  
	
   

  	
   

  	
  2.6

  	
  Eligibility

  	
   

  	
  9

  
	
   

  	
   

  	
  2.7

  	
  Transfer and
  Exchange

  	
   

  	
  9

  
	
   

  	
   

  	
  2.8

  	
  Replacement
  Notes

  	
   

  	
  10

  
	
   

  	
   

  	
  2.9

  	
  Optional
  Redemption

  	
   

  	
  11

  
	
   

  	
   

  	
  2.10

  	
  Payment of
  Interest

  	
   

  	
  11

  
	
   

  	
   

  	
   

  
	
  3.

  	
   

  	
  REPURCHASE
  UPON A FUNDAMENTAL CHANGE

  	
   

  	
  12

  
	
   

  	
   

  	
  3.1

  	
  Repurchase
  at Option of the Holder upon a Fundamental Change

  	
   

  	
  12

  
	
   

  	
   

  	
  3.2

  	
  [INTENTIONALLY
  OMITTED]

  	
   

  	
  14

  
	
   

  	
   

  	
   

  
	
  4.

  	
   

  	
  [INTENTIONALLY
  OMITTED]

  	
   

  	
  14

  
	
   

  	
   

  	
   

  
	
  5.

  	
   

  	
  REPRESENTATIONS
  AND WARRANTIES OF THE COMPANY

  	
   

  	
  13

  
	
   

  	
   

  	
  5.1

  	
  Organization
  and Standing; Organization Documents

  	
   

  	
  14

  
	
   

  	
   

  	
  5.2

  	
  Corporate
  Power

  	
   

  	
  14

  
	
   

  	
   

  	
  5.3

  	
  Subsidiaries

  	
   

  	
  14

  
	
   

  	
   

  	
  5.4

  	
  Capitalization

  	
   

  	
  15

  
	
   

  	
   

  	
  5.5

  	
  Authorization

  	
   

  	
  15

  
	
   

  	
   

  	
  5.6

  	
  SEC Reports;
  Financial Statements

  	
   

  	
  15

  
	
   

  	
   

  	
  5.7

  	
  Material
  Contracts and Commitments

  	
   

  	
  16

  
	
   

  	
   

  	
  5.8

  	
  Title to
  Properties and Assets, Liens, Etc

  	
   

  	
  16

  
	
   

  	
   

  	
  5.9

  	
  Obligations
  to Related Parties; Interested Party Transaction

  	
   

  	
  16

  
	
   

  	
   

  	
  5.10

  	
  Compliance
  with Other Instruments; Laws

  	
   

  	
  17

  
	
   

  	
   

  	
  5.11

  	
  Changes

  	
   

  	
  17

  
	
   

  	
   

  	
  5.12

  	
  Litigation,
  Etc

  	
   

  	
  18

  
	
   

  	
   

  	
  5.13

  	
  Employees

  	
   

  	
  18

  
	
   

  	
   

  	
  5.14

  	
  Proprietary
  Information Agreements

  	
   

  	
  19

  
	
   

  	
   

  	
  5.15

  	
  Intellectual
  Property

  	
   

  	
  19

  
	
   

  	
   

  	
  5.16

  	
  Permits

  	
   

  	
  19

  
	
   

  	
   

  	
  5.17

  	
  Governmental
  Consent, Etc

  	
   

  	
  20

  
	
   

  	
   

  	
  5.18

  	
  Offering

  	
   

  	
  20

  
	
   

  	
   

  	
  5.19

  	
  Brokers or
  Finders; Other Offers

  	
   

  	
  20

  
	
   

  	
   

  	
  5.20

  	
  Tax Returns
  and Payments

  	
   

  	
  20

  
	
   

  	
   

  	
  5.21

  	
  Environmental
  Matters.

  	
   

  	
  20

  
	
   

  	
   

  	
   

  
	
  6.

  	
   

  	
  REPRESENTATIONS
  AND WARRANTIES OF THE PURCHASERS

  	
   

  	
  21

  
	
   

  	
   

  	
  6.1

  	
  Investment
  Experience

  	
   

  	
  21

  
	
   

  	
   

  	
  6.2

  	
  Investment;
  Legend

  	
   

  	
  21

  
	
   

  	
   

  	
  6.3

  	
  No Public
  Market

  	
   

  	
  22

  
	
   

  	
   

  	
  6.4

  	
  Authorization

  	
   

  	
  22

  
							

 

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  Page

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  6.5

  	
  Brokers or
  Finders

  	
   

  	
  22

  
	
   

  	
   

  	
  6.6

  	
  Tax
  Liability

  	
   

  	
  22

  
	
   

  	
   

  	
   

  
	
  7.

  	
   

  	
  COVENANTS

  	
   

  	
  22

  
	
   

  	
   

  	
  7.1

  	
  Payment of
  Notes

  	
   

  	
  22

  
	
   

  	
   

  	
  7.2

  	
  SEC Reports

  	
   

  	
  22

  
	
   

  	
   

  	
  7.3

  	
  Compliance
  Certificates

  	
   

  	
  22

  
	
   

  	
   

  	
  7.4

  	
  Further
  Instruments and Acts

  	
   

  	
  23

  
	
   

  	
   

  	
  7.5

  	
  Registration
  of Warrants And Warrant Shares.

  	
   

  	
  23

  
	
   

  	
   

  	
  7.6

  	
  Maintenance
  of Corporate Existence

  	
   

  	
  23

  
	
   

  	
   

  	
  7.7

  	
  Stay,
  Extension and Usury Laws

  	
   

  	
  23

  
	
   

  	
   

  	
  7.8

  	
  Application
  of Proceeds Upon Sale or Other Disposition of Company Assets

  	
   

  	
  24

  
	
   

  	
   

  	
   

  
	
  8.

  	
   

  	
  NEGATIVE
  COVENANTS

  	
   

  	
  24

  
	
   

  	
   

  	
  8.1

  	
  Company
  May Consolidate, etc. Only on Certain Terms and Shall Not Sell,
  Transfer, or Spin-Off Assets for other than Cash Consideration

  	
   

  	
  24

  
	
   

  	
   

  	
  8.2

  	
  [INTENTIONALLY
  OMITTED]

  	
   

  	
  24

  
	
   

  	
   

  	
  8.3

  	
  Additional
  Debt

  	
   

  	
  24

  
	
   

  	
   

  	
   

  
	
  9.

  	
   

  	
  DEFAULT
  AND REMEDIES

  	
   

  	
  24

  
	
   

  	
   

  	
  9.1

  	
  Events of a
  Default

  	
   

  	
  24

  
	
   

  	
   

  	
  9.2

  	
  Acceleration

  	
   

  	
  26

  
	
   

  	
   

  	
  9.3

  	
  Other
  Remedies

  	
   

  	
  26

  
	
   

  	
   

  	
  9.4

  	
  Waiver of
  Defaults and Events of Default

  	
   

  	
  26

  
	
   

  	
   

  	
  9.5

  	
  Limitations
  on Suits

  	
   

  	
  27

  
	
   

  	
   

  	
  9.6

  	
  Rights of
  Holders to Receive Payment

  	
   

  	
  27

  
	
   

  	
   

  	
   

  
	
  10.

  	
   

  	
  CONDITIONS
  TO CLOSING

  	
   

  	
  27

  
	
   

  	
   

  	
  10.1

  	
  Conditions
  to Closing of the Purchasers

  	
   

  	
  27

  
	
   

  	
   

  	
  10.2

  	
  Conditions
  to Closing of the Company

  	
   

  	
  28

  
	
   

  	
   

  	
   

  
	
  11.

  	
   

  	
  APPOINTMENT
  OF PURCHASERS’ AGENT

  	
   

  	
  28

  
	
   

  	
   

  	
  11.1

  	
  Appointment;
  Joint Action

  	
   

  	
  28

  
	
   

  	
   

  	
  11.2

  	
  Duties

  	
   

  	
  28

  
	
   

  	
   

  	
  11.3

  	
  Reliance by
  Purchasers’ Agent

  	
   

  	
  29

  
	
   

  	
   

  	
  11.4

  	
  Indemnification

  	
   

  	
  29

  
	
   

  	
   

  	
  11.5

  	
  Resignation
  or Removal of Purchasers’ Agent

  	
   

  	
  29

  
	
   

  	
   

  	
   

  
	
  12.

  	
   

  	
  MISCELLANEOUS

  	
   

  	
  30

  
	
   

  	
   

  	
  12.1

  	
  Governing
  Law

  	
   

  	
  30

  
	
   

  	
   

  	
  12.2

  	
  Survival

  	
   

  	
  30

  
	
   

  	
   

  	
  12.3

  	
  Successors
  and Assigns

  	
   

  	
  30

  
	
   

  	
   

  	
  12.4

  	
  Entire Agreement; Amendment

  	
   

  	
  30

  
	
   

  	
   

  	
  12.5

  	
  Notices, Etc

  	
   

  	
  30

  
	
   

  	
   

  	
  12.6

  	
  Delay or
  Omissions

  	
   

  	
  31

  
	
   

  	
   

  	
  12.7

  	
  Severability

  	
   

  	
  31

  

 

iii

 

TABLE OF CONTENTS

(continued)

 

	
   

  	
   

  	
   

  	
   

  	
  Page

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  12.8

  	
  Attorneys’
  Fees

  	
   

  	
  31

  
	
   

  	
   

  	
  12.9

  	
  Counterparts;
  Faxed and PDF Counterparts

  	
   

  	
  31

  
	
   

  	
   

  	
  12.10

  	
  Confidentiality

  	
   

  	
  31

  

 

iv

 

FOCUS ENHANCEMENTS, INC.

 

AMENDED AND RESTATED SENIOR SECURED NOTE

PURCHASE AGREEMENT

 

THIS AMENDED
AND RESTATED SENIOR SECURED NOTE PURCHASE AGREEMENT (this “ Agreement “)
is made as of February 7, 2008 (“effective date”) by and among Focus
Enhancements, Inc., a Delaware corporation (the “ Company “), and
Purchasers’ Agent (as defined below), on behalf of each of the “Original
Purchasers” set forth in Exhibit A (as defined below), and each “New
Purchaser” defined below (as set forth in Exhibit A hereto) of an
Amended and Restated Senior Secured Note Due January 1, 2011 (as defined
below)  (each of the Original Purchasers
and the New Purchasers is a “Purchaser” and collectively are referred to herein
as the “Purchasers”).  Capitalized terms not otherwise defined in this
Agreement shall have the meanings ascribed to them in Section 1 below.

 

RECITALS

 

A.                                                                 The
Company and the Original Purchasers 
previously entered into a Senior Secured Convertible Note Purchase
Agreement dated as of January 24, 2006 relating to loans in the amount of
$10,000,000 (the “Original Purchase Agreement”) pursuant to which Senior
Secured Convertible Notes were issued to the Original Purchasers (“Original
Notes”).  The Company has issued
additional Notes under the Original Purchase Agreement via payment-in-kind so
the approximate amount of all Original Notes on December 30, 2007 totals
$11,493,417.  The Company, Purchasers’
Agent, and the Original Purchasers, desire to amend and restate the Original
Purchase Agreement and re-issue the Original Notes on the terms stated herein,
which include, without limitation, increasing the principal amount evidenced by
this Agreement to $20,800,000, 
making  additional loans to Company
under this Agreement up to such 
$20,800,000 (with the difference in cash payable to the Company), and to
add the New Purchasers as parties hereto. This Agreement is intended to and
does completely amend and restate, without novation, the Original Purchase
Agreement.  All security interests
granted under the Original Purchase Agreement are hereby confirmed and ratified
and shall continue to secure all obligations under this Agreement.  The Original Purchasers, the Company, and the
Purchasers’ Agent also entered into a January 24, 2006 Registration Rights
Agreement for the registration of the securities into which the Original Notes
were convertible, and as the underlying securities into which such Original
Notes are convertible will disappear upon the effective date of this Agreement,
the Original Purchasers and Company desire to terminate the January 24,
2006 Registration Rights Agreement.

 

B.                                                                   In
addition to the Original Purchasers, the New Purchasers wish to extend
loans  to Company memorialized as “new”
Notes pursuant to the terms of this Agreement pari passu with the Original
Purchasers.

 

C.                                                                   As
partial consideration for the amendment and restatement of the Original
Purchase Agreement, the Company shall issue new Notes and a total of 26,000,002
warrants (“Warrants”) in the form of Exhibit B-1 to purchase common
stock of the Company, with each of the Purchasers receiving Warrants in an
amount equal to its prorata percentage of the outstanding principal under all
new Notes as set forth on Exhibit B hereof.

 

D.                                                                        The
Company and each Purchaser wish to either amend and restate or consummate new
loan transactions in an aggregate amount of up to $20,800,000 through the
issuance to the Purchasers of certain 

 

1

 

Amended and
Restated Senior Secured Notes Due January 1, 2011 in the form of Exhibit C
hereto (the “Notes”).

 

E.                                                                              The
Company is a party to a Loan and Security Agreement, as amended to date, with
the Venture Banking Group, a division of Greater Bay Bancorp (the “Bank”) for a
$4,000,000 revolving line of credit and a term loan of $2,500,000 (collectively
the “Bank Loan”) that is secured by accounts and other payment rights (“Bank’s
Security Interest”).

 

F.                                                                              The
Company is a beneficiary of a Guaranty of the Bank Loan by Carl E. Berg (“ Berg
”), which guaranty is secured by all of the Company’s assets pursuant to a
Security Agreement, as amended, and a Collateral Assignment, Patent Mortgage
and a Security Agreement (“Berg’s Security Interest”).

 

G.                                                                             Pursuant
to an Amended and Restated Security Agreement substantially in the form of Exhibit D
(“Security Agreement”) being entered into concurrently herewith, the Notes
shall be secured by all of the assets of the Company (“Purchasers’ Security
Interest”).

 

H.                                                                            The
Bank and Berg are parties to an Intercreditor Agreement dated as of November 15,
2004, as amended by that certain Amendment No. 1 to Intercreditor
Agreement dated as of January 24, 2006, which sets forth their relative
rights and priorities as between themselves with respect to the shared
collateral subject to Bank’s Security Interest and Berg’s Security Interest, to
which Intercreditor Agreement the Purchasers shall be added as parties by an
Amendment  No. 2 to Intercreditor
Agreement in the form of Exhibit E (“Amended Intercreditor
Agreement”).

 

I.                                                                         The
Purchasers and Berg will share interests in the same Company collateral on a
pro rata basis and will enter into an Amended and Restated Intercreditor
Agreement substantially in the form of Exhibit F (“New Intercreditor
Agreement”) hereto with respect to the shared collateral subject to Berg’s
Security Interest and the Purchasers’ Security Interest.

 

J.                                                                        The
Purchasers will subordinate the Purchasers’ Security Interest to the Bank’s
Security Interest with respect to a maximum of $6,500,000, plus any accrued but
unpaid interest under the Bank Loan.

 

NOW,
THEREFORE, in consideration of the foregoing and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties agree as follows:

 

The recitals
set forth above are hereby incorporated by this reference as if they were part
of the body of this Agreement.

 

1.                                       DEFINITIONS.  Capitalized terms not otherwise defined in
this Agreement shall have the following definitions:

 

1.1                                 “Affiliate”
means, with respect to any specified person, any other person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified person.  For
the purposes of this definition, “control,” when used with respect to any
person, means the power to direct the management and policies of such person,
directly or indirectly, whether through the ownership of voting 

 

2

 

securities, by
contract or otherwise; and the terms “controlling” and “controlled” have
meanings correlative to the foregoing.

 

1.2                                 “Amended
Intercreditor Agreement” means the Amendment No. 2 to the
Intercreditor Agreement dated as of November 15, 2004 between Berg and
Bank which adds the Purchasers as parties to such Agreement.

 

1.3                                 [INTENTIONALLY OMITTED]

 

1.4                                 [INTENTIONALLY OMITTED]

 

1.5                                 “Business
Day” means each day that is not a Saturday, Sunday or legal holiday.

 

1.6                                 “Capital
Stock” means (a) in the case of a corporation, corporate stock, (b) in
the case of an association or business entity, shares, interests,
participations, rights or other equivalents (however designated) of corporate
stock, (c) in the case of a partnership or limited liability company,
partnership or membership interests (whether general or limited) and (d) any
other interest or participation that confers on a person the right to receive a
share of the profits and losses of, or distribution of the assets of, the
issuing person.

 

1.7                                 [INTENTIONALLY OMITTED]

 

1.8                                 “Common
Stock” means the common stock of the Company, $0.01 par value per share, as
it exists on the date of this Agreement, and any shares of any class or classes
of capital stock of the Company resulting from any reclassification or
reclassifications thereof and which have no preference in respect of dividends
or of amounts payable in the event of any voluntary or involuntary liquidation,
dissolution or winding-up of the Company and which are not subject to
redemption by the Company; provided , however , that if at any
time there shall be more than one such resulting class, the shares of each such
class then so issuable shall be substantially in the proportion which the total
number of shares of such class resulting from all such reclassifications bears
to the total number of shares of all such classes resulting from all such
reclassifications.

 

1.9                                 “Company”
means the party named as such in the first paragraph of this Agreement until a
successor replaces it pursuant to the applicable provisions of this Agreement,
and thereafter “Company” shall mean such successor Company.

 

1.10                           “Continuing
Director” means, as of any date of determination, any member of the board
of directors who (a) was a member of the board of directors of the Company
on the date of this Agreement or (b) becomes a member of the board of
directors subsequent to the date of this Agreement and was appointed, 

 

3

 

nominated for
election or elected to the board of directors with the approval of a majority
of the Continuing Directors who were members of the board of directors at the
time of such appointment, nomination or election.

 

1.11                           “Exchange
Act” means the Securities and Exchange Act of 1934, as amended, and the rules and
regulations promulgated thereunder, as in effect from time to time.

 

1.12                           “Final
Maturity Date” means January 1, 2011.

 

1.13                           “Fundamental
Change” means the occurrence of any of the following at a time after the
Notes are originally issued:

 

(a)                              
the Common Stock  is neither traded on
the New York Stock Exchange or another U.S. national securities exchange nor
quoted on the NASDAQ Stock Market or another established automated
over-the-counter trading market in the United States; or

 

(b)                             
any Person acquires beneficial ownership, directly or indirectly, through a
purchase, merger or other acquisition transaction or series of transactions, of
shares of the Company’s Capital Stock entitling the Person to exercise 50% or
more of the total voting power of all shares of the Company’s Capital Stock
entitled to vote generally in elections of directors, other than an acquisition
by the Company, any of its Subsidiaries or any of its employee benefit plans;
or

 

(c)                              
the Company merges or consolidates with or into any other Person (other than a
Subsidiary of the Company), another Person merges with or into the Company or
the Company conveys, sells, transfers or leases all or substantially all of its
assets to another Person, other than any transaction:

 

(i)                                   
that does not result in a reclassification, conversion, exchange or
cancellation of any outstanding Common Stock; or

 

(ii)                                
pursuant to which the holders of Common Stock immediately prior to the
transaction have the entitlement to exercise, directly or indirectly, 50% or
more of the total voting power of all shares of the Capital Stock entitled to
vote generally in the election of directors of the continuing or surviving
corporation immediately after the transaction; or

 

(iii)                             
that is effected solely to change the Company’s jurisdiction of incorporation
and results in a reclassification, conversion or exchange of outstanding shares
of Common Stock solely into shares of common stock of the surviving entity; or

 

(d)                             
the Continuing Directors cease to constitute a majority of the board of
directors of the Company (or, if applicable, the board of directors of a
successor Person to the Company) within 

 

4

 

a 12- month
period (it being understood that if any current director resigns his/her
position or refuses to stand for reelection, such current director’s
replacement shall be deemed to be a “Continuing Director”).

 

For purposes
of this definition, whether a Person is a “beneficial owner” will be determined
in accordance with Rule 13d-3 under the Exchange Act and “Person” includes
any syndicate or group that would be deemed to be a “person” under Section 13(d)(3) of
the Exchange Act.

 

1.14                           “Fundamental
Change Repurchase Date” means the date specified as such in the Fundamental
Change Repurchase Right Notice delivered to Holders pursuant to Section 3.1
(b).

 

1.15                           “GAAP”
means generally accepted accounting principles in the United States of America
as in effect as of the date of this Agreement, including those set forth in (1) the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants, (2) the statements and
pronouncements of the Financial Accounting Standards Board, (3) such other
statements by such other entity as approved by a significant segment of the
accounting profession, and (4) the rules and regulations of the SEC
governing the inclusion of financial statements (including pro forma financial
statements) in registration statements filed under the Securities Act and
periodic reports required to be filed pursuant to Section 13 of the Exchange
Act, including opinions and pronouncements in staff accounting bulletins and
similar written statements from the accounting staff of the SEC.

 

1.16                           “Guaranty”
means the Unconditional Guaranty dated as of November 15, 2004 by Berg of
the Bank Loan, which is secured by the Berg Security Interest.

 

1.17                           “Holder”
means the Person in whose name a Note is registered on the Company’s books.

 

1.18                           “Indebtedness”
means, with respect to any Person, without duplication, (a) all
indebtedness, obligations and other liabilities (contingent or otherwise) of
such Person for borrowed money (including obligations of such Person in respect
of overdrafts, foreign exchange contracts, currency exchange agreements,
interest rate protection agreements, and any loans or advances from banks,
whether or not evidenced by notes or similar instruments) or evidenced by
credit or loan agreements, bonds, debentures, notes or other written
obligations (whether or not the recourse of the lender is to the whole of the
assets of such Person or to only a portion thereof) (other than any accounts
payable or other accrued current liability or obligation incurred in the
ordinary course of business in connection with the obtaining of materials or
services), (b) all reimbursement obligations and other liabilities
(contingent or otherwise) of such Person with respect to letters of credit,
bank guarantees or bankers’ acceptances, (c) all obligations and
liabilities (contingent or otherwise) of such Person in respect of leases of
such Person required, in conformity with GAAP, to be accounted for as
capitalized lease obligations on the balance sheet of such Person, (d) all
obligations of such Person evidenced by a note or similar instrument given in
connection with the acquisition of any business, properties or assets of any
kinds, (e) all obligations of such Person issued or assumed as the
deferred purchase price of property or services (excluding trade accounts
payable and accrued liabilities arising in the ordinary course of business), (f) all
obligations and other liabilities (contingent or otherwise) of such Person
under any lease or related document (including a purchase agreement) in
connection with the lease of real property or improvements (or any personal
property 

 

5

 

included as
part of any such lease) that provides that such Person is contractually
obligated to purchase or cause a third party to purchase the leased property
and thereby guarantee a minimum residual value of the leased property to the
lessor and the obligations of such Person under such lease or related document
to purchase or to cause a third party to purchase such leased property (whether
or not such lease transaction is characterized as an operating lease or a
capitalized lease in accordance with GAAP), (g) all obligations
(contingent or otherwise) of such Person with respect to any interest rate,
currency or other swap, cap, floor or collar agreement, hedge agreement,
forward contract, or other similar instrument or agreement or foreign currency
hedge, exchange, purchase or similar instrument or agreement, (h) all
direct or indirect guarantees, agreements to be jointly liable or similar
agreements by such Person in respect of, and obligations or liabilities
(contingent or otherwise) of such Person to purchase or otherwise acquire or
otherwise assure a creditor against loss in respect of, indebtedness,
obligations or liabilities of another Person of the kind described in clauses (a) through
(g), and (i) any and all deferrals, renewals, extensions, restatements,
replacements, refinancings and refundings of, or amendments, modifications, or
supplements to, or any indebtedness or obligation issued in exchange for, any
indebtedness, obligation or liability of the kind described in clauses (a) through
(h).

 

1.19                           [INTENTIONALLY OMITTED]

 

1.20                           “Lien”
means any lien (statutory or other), mortgage, pledge, hypothecation,
assignment, deposit arrangement, security interest, charge, claim or other
encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof, and any agreement to give
any security interest) and any agreement to give or refrain from giving a lien,
mortgage, pledge, hypothecation, assignment, deposit arrangement, security interest,
charge, claim or other encumbrance of any kind.

 

1.21                           “Loan
Documents” means this Purchase Agreement, the Notes, the Security
Agreement, all financing statements and instruments of perfection filed
pursuant to the Security Agreement, the Registration Rights Agreement, the
Amended Intercreditor Agreement, and the New Intercreditor Agreement and such
other documents and instruments as are signed and delivered by Purchasers or
the Company for the transactions contemplated by this Agreement.

 

1.22                           “Majority-in-Interest
of the Notes” or “Majority-in-Interest” means the Holders of Notes
representing more than 50% of the total amount of Notes principal outstanding.

 

1.23                           “New
Intercreditor Agreement” means the Amended and Restated Intercreditor
Agreement dated as of the date of this Agreement among  Berg and the Purchasers pursuant to which
they will share collateral subject to the Berg Security Interest and the
Purchasers’ Security Interest.

 

1.24                           “Obligations”
means any principal, interest, penalties, fees, indemnifications,
reimbursements, attorneys’ fees and expenses, damages and other liabilities
payable under the documentation governing any Indebtedness.

 

6

 

1.25                           [INTENTIONALLY OMITTED]

 

1.26                           “Permitted
Liens” means: (i) Liens imposed by law, such as carriers’,
warehousemen’s, materialmen’s and mechanics’ liens, or Liens arising out of
judgments or awards against the Company which the Company do not constitute an
Event of Default; (ii) Liens for taxes not yet subject to penalties for
non-payment and Liens for taxes the payment of which is being contested in good
faith and by appropriate proceedings and for which, to the extent required by
generally accepted accounting principles then in effect, proper and adequate
book reserves relating thereto are established by the Company; (iii) Liens
(A) upon or in any equipment acquired or held by the Company to secure the
purchase price of such equipment or indebtedness incurred solely for the
purpose of financing the acquisition of such equipment, or (B) existing on
such equipment at the time of its acquisition, provided that the Lien is
confined solely to the property so acquired and improvements thereon, and the
proceeds of such equipment and other equipment financed by the holder of such
Lien; (iv) Liens consisting of leases or subleases and licenses and
sublicenses granted to others in the ordinary course of either the Company’s
business not interfering in any material respect with the business of the
Company and any interest or title of a lessor or licensor under any lease or
license, as applicable; (v) Liens incurred or deposits made in the
ordinary course of either the Company’s business in connection with worker’s compensation,
unemployment insurance, social security and other like laws; (vi) Liens in
favour of customs and revenue authorities arising as a matter of law to secure
payment of customs duties in connection with the importation of goods; (viii) Liens
to which the Purchasers have each expressly consented in writing; (ix) the
Bank Security Interests; (x) the Berg Security Interest; and (xi) Liens in
favour of the Purchasers.

 

1.27                           “Person”
or “person” means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.

 

1.28                           “Purchasers’
Agent” means Thomas O. Boucher. Jr. 
and any of his successors as appointed from time to time in accordance
with this Agreement.

 

1.29                           “Redemption
Date” when used with respect to any Note to be redeemed, means the date
fixed for such redemption pursuant to this Agreement.

 

1.30                           “Registration
Rights Agreement” means the Amended and Restated Registration Rights
Agreement substantially in the form of Exhibit G among the Company,
the Purchasers’ Agent and the Purchasers, dated as of the date of this
Agreement with respect to the Company’s 
registration of the Warrants  and
Warrant Shares under the Securities Act.

 

1.31                           “SEC”
means the Securities and Exchange Commission.

 

1.32                           “Securities
Act” means the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder, as in effect from time to time.

 

7

 

1.33                           “Security
Agreement” means the Amended and Restated Security Agreement dated as of
the date of this Agreement by and among the Company, the Purchasers’ Agent, and
the  Purchasers.

 

1.34                           [INTENTIONALLY OMITTED]

 

1.35                           [INTENTIONALLY OMITTED]

 

1.36                           “Subsidiaries”
means COMO Computer and Motion GmbH, Focus Enhancements, Korea and Focus
Enhancements Japan K.K.

 

1.37                           “Trading
Day” means a day during which trading in securities generally occurs on the
NASDAQ Stock Market or, if the Common Stock is not quoted on the NASDAQ Stock
Market, on the principal national or regional securities exchange on which the
Common Stock is then listed or, if the Common Stock is not listed on a national
or regional securities exchange, on the National Association of Notes Dealers
Automated Quotation System or other established automated over-the-counter
trading market in the United States or, if the Common Stock is not quoted on
the National Association of Notes Dealers Automated Quotation System or another
established automated over-the-counter trading market in the United States, on
the principal other market on which the Common Stock is then traded ( provided
that no day on which trading of the Common Stock is suspended shall count as a
Trading Day).

 

2.                                       PURCHASE
AND SALE OF NOTES AND WARRANTS

 

2.1                                 Note
Issuance, Cancellation of Original Notes, Warrants Issuance.  Subject to the terms and conditions of this
Agreement, in return for the Purchase Price provided by each Purchaser (which,
in the case of  (i) Original
Purchasers, shall be the exchange of the Original Notes, any additional Notes
issued in lieu of interest cash payments, 
and any new cash consideration as the Original Purchasers shall advance
and (ii) New Purchasers, shall be new cash consideration), the Company
shall sell and issue to such Purchaser a new one or more Notes  Each such
Note shall have a principal balance equal to the Purchase Price paid by such
Purchaser for the Note, as set forth in the Schedule of Purchasers.  Any Purchase Prices previously evidenced by
the Original Notes issued under the Original Purchase Agreement shall be
amended and restated by the Notes and any Purchase Price amounts related thereto
shall be deemed already paid to Company.  All Original Notes shall be canceled and no
longer outstanding, even if not surrendered, upon the Purchase Agreement
Closing Date set forth below.  
Concurrently with the issuance of the Notes, the Company shall issue
that  number of Warrants to each respective
Purchaser in accordance with the proportion that each Purchaser’s Note
principal bears to the total outstanding principal amount of all $20,800,000 in
Notes issued under this Agreement multiplied by 26,000,002, with  each such Purchaser’s number of Warrants set
forth in Exhibit B (every 0.5 or more being rounded up and less
than 0.5 being rounded down, in each case to the nearest whole Warrant
number).  At Company’s option, Company
may  pay in kind any Note interest due
on  June 30, 2008 and/or  December 30, 2008. As used herein, “pay
in kind” means that in lieu of paying cash as the interest payment, Company
shall  issue a new Note in the  amount of the interest payment then  due. 
If Company pays  any interest in
kind on any 

 

8

 

Note on either
of such dates,  all interest payments
then due on all  outstanding Notes shall
be similarly paid in kind.   Upon payment
in kind of  any interest, the person
receiving such payment  shall also be
entitled to receive,  on the same terms
as set forth in the Warrants issued under this Purchase Agreement, additional
Warrants for a number of Common Stock Shares of the Company equal to the  additional new  Note amount divided by $0.80, subject to
further adjustment as set forth in the Warrants issued under this  Purchase Agreement.

 

2.2                                 Closing
Date.  The purchase and sale of the
Notes shall take place at the offices of Ingalls & Snyder LLC, 61
Broadway, New York, New York  at   such 
place and time as the Company and the Purchasers’ Agent shall agree (the
“ Purchase Agreement Closing Date ”), but no later than February 15,
2008.  Each Purchaser shall deliver to
the Company the Purchase Price together with an executed counterpart to this
Agreement, and each of the other Loan Documents, and the Company shall deliver
to each Purchaser one or more executed Notes together with fully executed
copies of the Loan Documents. Any Original Purchaser shall deliver the Original
Notes as part of the Purchase Price or provide an indemnity reasonably
satisfactory to Company if such Original Note cannot be located.

 

2.3                                 Separate
Agreements.  The Company’s agreements
with each of the Purchasers are separate agreements and the sales of the Notes
are separate transactions.

 

2.4                                 Security
Interest and Security Agreement.  The
indebtedness represented by the Notes shall be secured by all of the assets of
the Company in accordance with the terms and conditions of the Security
Agreement, which shall be subject to the terms of the Amended Intercreditor
Agreement and the New Intercreditor Agreement. 
All parties signatory thereto shall execute the Amended Intercreditor
Agreement. All parties signatory thereto shall execute the Amended Security
Agreement to memorialize the security interest.

 

2.5                                 Registration
Rights Agreement; January 24, 2006 Registration Rights Agreement
Terminated. The Original Purchasers, Purchasers’ Agent, and Company
hereby terminate the January 24, 2006 Registration Rights Agreement.  In connection with the transactions contemplated
hereby, the Company, the Purchasers’ Agent and each Purchaser shall
execute  the Registration Rights
Agreement.

 

2.6                                 Eligibility.  Each Purchaser must be an “ accredited
” investor as such term is defined in Rule 501 of Regulation D promulgated
by the U.S. Notes and Exchange Commission.

 

2.7                                 Transfer
and Exchange.

 

(a)                                   Subject
to compliance with any applicable additional requirements contained in Section 3,
when a Note is presented to the Company with a request to register a transfer
thereof or to exchange such Note for an equal principal amount of Notes of
other authorized denominations, the Company shall register the transfer or make
the exchange as requested; provided, however, that every Note
presented or surrendered for registration of transfer or exchange shall be duly
endorsed or accompanied by an assignment 

 

9

 

form and, if
applicable, a transfer certificate each in the form included in the Note, and
in form satisfactory to the Company duly executed by the Holder thereof or its
attorney duly authorized in writing.  Any exchange or registration of
transfer shall be without charge, except that the Company may require payment
of a sum sufficient to cover any tax or other governmental charge that may be imposed
in relation thereto, and provided, that this sentence shall not apply to any
exchange pursuant to Section 2.9.

 

(b)                                   The
Company shall not be required to exchange or register a transfer of (i) any
Notes for the 15-day period immediately preceding the date of mailing of a
notice of Notes to be redeemed, (ii) any Notes or portions thereof
selected or called for redemption (except, in the case of redemption of a Note
in part, the portion thereof not to be redeemed) or (iii) any Notes or
portions thereof in respect of which a notice pursuant to Section 3.1(c) hereof
has been delivered and not withdrawn by the Holder thereof (except, in the case
of the purchase of a Note in part, the portion thereof not to be purchased).

 

(c)                                   All
Notes issued upon any transfer or exchange of Notes shall be valid obligations
of the Company, evidencing the same debt and entitled to the same benefits
under this Agreement, as the Notes surrendered upon such transfer or exchange.

 

(d)                                   Each
Holder agrees severally to indemnify the Company against any liability that may
result from the registration of transfer, exchange or assignment of such Holder’s
Note in violation of any provision of this Agreement and/or applicable United
States federal or state securities law, but only to the extent of the damages
caused to the Company by such Holder’s violation.  The Holder will not be
liable for breaches by any other Holder pursuant to this provision.

 

2.8                                 Replacement
Notes.

 

(a)                                   If
any mutilated Note is surrendered to the Company, and there is delivered to the
Company such security or indemnity as will be required by the Company to save
it harmless, then, in the absence of notice to the Company that such Note has
been acquired by a protected purchaser, the Company shall execute and deliver, in
exchange for any such mutilated Note or in lieu of any such destroyed, lost or
stolen Note, a new Note of like tenor and principal amount, bearing a number
not contemporaneously outstanding.  In case any such mutilated, destroyed,
lost or stolen Note has become or is about to become due and payable, or is
about to be redeemed or purchased by the Company pursuant to Section 2.9,
the Company in its discretion may, instead of issuing a new Note, pay, redeem
or purchase such Note, as the case may be.

 

(b)                                   Upon
the issuance of any new Notes under this Section 2.8, the Company may
require the payment of a sum sufficient to cover any tax or other governmental
charge that may be imposed in relation thereto and any other reasonable
expenses in connection therewith.

 

(c)                                   The
provisions of this Section 2.8 are (to the extent lawful) exclusive and
shall preclude (to the extent lawful) all other rights and remedies with
respect to the replacement or payment of mutilated, destroyed, lost or stolen
Notes.

 

10

 

2.9           Optional
Redemption.

 

(a)                                   The
Company shall have the option to redeem the Notes pursuant to this Section 2.9
at any time, in whole or in part (or any portion thereof equal to $1,000,000 or
any integral multiple of $1,000,000 in excess thereof), upon 30 days’ prior
written notice, at a redemption price in cash equal to 100% of the principal
amount of the Notes (the “ Redemption Price ”) to be redeemed
together with accrued and unpaid interest, if any, on the principal amount of
the Notes redeemed to the Redemption Date.

 

(b)                                   At
least 30 days before a Redemption Date, the Company shall deliver a notice of
redemption to each Holder of Notes to be redeemed at such Holder’s address on
the Company’s books.  The notice shall identify the Notes to be redeemed
and shall state:

 

(1)                                   the
Redemption Date;

 

(2)                                   the
Redemption Price;

 

(3)                                  
that Notes called for redemption must be presented and surrendered to the
Company to collect the Redemption Price;

 

(4)                                   [INTENTIONALLY
OMITTED];

 

(5)                                   that,
unless the Company defaults in making the payment of the Redemption Price,
interest on Notes called for redemption shall cease accruing on and after the
Redemption Date and the only remaining right of the Holder shall be to receive
payment of the Redemption Price plus accrued interest, if any, up to but not
including the Redemption Date, upon presentation and surrender of the Notes by
the Holders to the Company; and

 

(6)                                   if
any Note is being redeemed in part, the portion of the principal amount of such
Note to be redeemed and that, after the Redemption Date, upon presentation and
surrender of such Note, a new Note or Notes in aggregate principal amount equal
to the unredeemed portion thereof will be issued.

 

(c)                                   Once
notice of redemption is mailed, Notes called for redemption become due and
payable on the Redemption Date and at the Redemption Price stated in the
notice, together with accrued and unpaid interest, if any.  Upon
presentation and surrender to the Company, Notes called for redemption shall be
paid at the Redemption Price, plus accrued interest up to but not including the
Redemption Date.

 

2.10                           Payment
of Interest.

 

(a)                                   The
Company agrees to pay the Holders interest on the Note principal outstanding
from time to time in cash at the rate and times specified in the Note. 
The Company will pay interest by check mailed to the address of each  Holder on the Company’s books and records on
the dates specified in the Note; provided that the Company will make payments
of interest to such  Holder’s account by
wire transfer on the Business Day immediately preceding the interest payment
date if such  Holder has provided wire
transfer instructions to the Company at least five Business Days prior to the
scheduled interest payment date.

 

11

 

(b)                                   Notwithstanding
the foregoing, the Company, at its sole option, may pay interest due on each
of  June 30, 2008 and/or December 30,
2008 through the issuance of new Notes in the principal amount of the interest
due to the Holders, if there is no pending Event of Default as of such interest
payment date (however, in no event shall the face amount of the Notes exceed
$30,100,000).  The Company shall issue and deliver the new Notes to the
Holders within three Business Days after the interest payment date.  The
Company shall notify the Purchasers’ Agent and the Holders of any election
pursuant to this Section 2.10(b) at least 10 days prior to the
related interest payment date.  Any election by the Company pursuant to
this Section 2.10(b) shall apply to all Notes outstanding as of the
related interest payment date, other than Notes as to which the Holder has
submitted a Fundamental Change Repurchase Right Notice prior to the date the
Company sends a notice pursuant to this Section 2.10(b).

 

3.                                       REPURCHASE
UPON A FUNDAMENTAL CHANGE

 

3.1                                 Repurchase
at Option of the Holder upon a Fundamental Change.

 

(a)                                   Subject
to the satisfaction of the requirements of this Section 3.1, if a
Fundamental Change  occurs at any time
prior to the Final Maturity Date, each Holder will, upon receipt of the notice
of the occurrence of a Fundamental Change described in Section 3.1(c),
have the right to require the Company to repurchase any or all of such Holder’s
Notes for cash in an amount equal to 101% of the principal amount of the Notes
to be repurchased plus accrued and unpaid interest, if any, to (but not
including) the Fundamental Change Repurchase Date (the “ Fundamental Change
Repurchase Price ”).

 

(b)                                   on
or before the 15th Business Day prior to the effective date of a Fundamental
Change (which Fundamental Change results in the Holders of such Notes having
the right to cause the Company to repurchase their Notes), the Company will
provide to all Holders of the Notes, a notice of the occurrence of the
Fundamental Change and of the resulting repurchase right (the “ Fundamental
Change Repurchase Right Notice ”).  The Fundamental Change Repurchase
Right Notice shall state:

 

(1)                                   the
event or events giving rise to the Fundamental Change;

 

(2)                                   the
effective date of the Fundamental Change, if applicable;

 

(3)                                   the
last date on which a Holder may exercise its repurchase right;

 

(4)                                   the
Fundamental Change Repurchase Price;

 

(5)                                   the
Fundamental Change Repurchase Date;

 

(6)                                   [INTENTIONALLY
OMITTED]; and

 

(7)                                   the
procedures that Holders must follow to require the Company to repurchase their
Notes and to withdraw any Repurchase Exercise Notice.

 

12

 

(c)                                   To
exercise the repurchase right in connection with a Fundamental Change, a Holder
must, prior to midnight, New York City time, on the second Business Day
immediately preceding the Fundamental Change Repurchase Date, deliver the Notes
to be purchased to the Company, duly endorsed for transfer, and must deliver a
written notice of repurchase (a “ Repurchase Exercise Notice ”),
substantially in the form included in the Note.  The Repurchase Exercise
Notice must state:

 

(1)                                   the
portion of the principal amount of the Notes to be repurchased, which must be
equal to $100,000 or an integral multiple thereof (unless the total is $100,000
or less); and

 

(2)                                   that
the Notes are to be repurchased by the Company as of the Fundamental Change
Repurchase Date pursuant to the applicable provisions of the Notes and this
Agreement.

 

(d)                                   A
Holder may withdraw any Repurchase Exercise Notice (in whole or in part) by a
written notice of withdrawal delivered to the Company prior to midnight, New
York City time, on the second Business Day immediately preceding the
Fundamental Change Repurchase Date.  The notice of withdrawal must state:

 

(1)                                   the
principal amount of the Notes for which the Repurchase Exercise Notice has been
withdrawn; and

 

(2)                                   the
principal amount, if any, that remains subject to the Repurchase Exercise
Notice.

 

(e)                                   The
Company must repurchase the Notes for which a Fundamental Change Repurchase
Right Notice has been delivered and not withdrawn no less than 20 and no more
than 35 Business Days after the date of the Fundamental Change Repurchase Right
Notice with respect to the occurrence of the relevant Fundamental Change,
subject to extension to comply with applicable law, from all Holders who have
complied with Section 3.1(c).  Holders will receive payment of the
Fundamental Change Repurchase Price promptly following the later of the
Fundamental Change Repurchase Date and the time of book-entry transfer or the
delivery of the Notes.  If the Company holds money sufficient to pay the
Fundamental Change Repurchase Price of the Notes on or prior to the Business
Day following the Fundamental Change Repurchase Date, then:

 

(1)                                   the
Notes will cease to be outstanding and interest, if any, will cease to accrue;
and

 

(2)                                   all
other rights of the Holder will terminate (other than the right to receive the
Fundamental Change Repurchase Price plus any accrued but unpaid interest upon
delivery or transfer of the Notes).

 

(f)                                    In
connection with any offer to purchase or purchase of Notes under Section 3.1,
the Company shall comply with all tender offer rules applicable to the
Company under the Exchange Act.  In the absence of an available exemption
as determined by the Company in its sole discretion, the Company shall (a) comply
with Rule 13e-4 and Rule 14e-l (or any successor to either such
Rule), if applicable, under the Exchange Act, (b) file the related
Schedule TO (or any successor or similar schedule, form 

 

13

 

or report) if
required under the Exchange Act, and (c) otherwise comply with all federal
and state securities laws in connection with such offer to purchase or purchase
of Notes, all so as to permit the rights of the Holders and obligations of the
Company under Section 3.1 to be exercised in the time and in the manner
specified therein.

 

3.2                                 [INTENTIONALLY OMITTED]

 

4.                                       [INTENTIONALLY OMITTED]

 

5.                                       REPRESENTATIONS
AND WARRANTIES OF THE COMPANY

 

In connection
with the transactions provided for herein, the Company hereby makes the
additional representations and warranties set forth below as qualified by the
Schedule of Exceptions attached as Exhibit H hereto.

 

5.1                                 Organization
and Standing; Organization Documents. 
The Company is a corporation duly organized, validly existing and in
good standing under the laws of Delaware. 
Each Subsidiary is duly organized, validly existing and in good standing
under the laws of its jurisdiction.  The
Company and each Subsidiary have all requisite power and authority to own and
operate their properties and assets, and to carry on their business as
currently conducted and as proposed to be conducted.  Neither the Company nor any Subsidiary has
failed to qualify to do business as a foreign corporation in any jurisdiction,
where the failure to be so qualified would not have a material adverse effect
on the Company’s or any Subsidiary’s respective businesses as currently conducted
or as currently proposed to be conducted. 
The Company has delivered or made available to the Purchasers’ Agent
correct and complete copies of the certificate of incorporation of the Company
as amended to date.  The minute books
(containing the records of stockholders, directors or board committees), the
shares transfer records of each of the Company and its Subsidiaries are correct
and complete.  Neither the Company nor
any of its Subsidiaries is in default under or in violation of any provisions of
their respective charter documents.

 

5.2                                 Corporate
Power.  The Company has all requisite
legal and corporate power and corporate authority to execute and deliver the
Agreement, to issue the Notes, and to carry out and perform its obligations
under the terms of this Agreement and all other agreements, instruments and
other documents executed and delivered by the Company in connection with the
transactions contemplated by this Agreement.

 

5.3                                 Subsidiaries.  Except for the Subsidiaries, the Company does
not control, directly or indirectly, any other corporation, association or
other business entity or own any equity security or other interest in any
corporation, association or other business entity.  Neither the Company nor any Subsidiary is a
participant in any joint venture, partnership or similar arrangement.  No person or entity holds any options,
warrants or other rights to purchase any Subsidiary’s authorized and issued or
unissued capital stock.

 

14

 

5.4                                 Capitalization.

 

(a)                                   The
authorized capital stock of the Company consists of (A) 150,000,000
shares, of which 84,731,527 shares are issued and outstanding as of December 31,
2007; (B) 3,000,000 Preferred Stock, of which 3,000 shares of Series B
Preferred Stock have been authorized 2,744 shares of which are issued and
outstanding as of the date hereof; and 500 shares of Series C Preferred
Stock have been authorized, 417 shares of which are issued and outstanding as
of the date hereof.  The outstanding shares have been duly authorized and
validly issued, and are fully paid and nonassessable.

 

(b)                                   The
Company has reserved (A) 5,732,447 shares of Common Stock for issuance
pursuant to the exercise of certain warrants, (B) 26,000,002 shares of
Common Stock for issuance pursuant to the exercise of  the Warrants relating to this Agreement, (C) 2,744,000
shares of Common Stock for issuance upon conversion of the Series B
Preferred Stock, and (D) 417,000 shares of Common Stock for issuance upon
conversion of the Series C Preferred Stock.  In addition, the Company
has reserved 8,474,186 shares of Common Stock for issuance to employees,
consultants, or directors pursuant to the Company’s Stock Option Plans (the “ Option
Plans ”).  Of the foregoing shares, as of the date hereof, 5,602,798
shares remain subject to outstanding options.

 

(c)                                   Unless
otherwise noted in the Schedule of Exceptions and the Company’s Restated
Certificate of Incorporation, (1) there are (A) no other options,
warrants or other rights to purchase any of the Company’s authorized and issued
or unissued capital shares, and (B) no obligations (contingent or
otherwise) of the Company to purchase, redeem or otherwise acquire any shares
of its capital shares or any interest therein or to pay any dividend or make
any other distribution in respect thereof and (2) the Company has not
declared or paid any dividends or authorized or made any distribution upon or
with respect to any class or series of its capital stock other than dividends
paid in Common Stock.  Except as set forth in the Schedule of
Exceptions, all issued and outstanding shares of capital stock of the Company
and each Subsidiary and all shares issuable upon exercise of the Warrants  have been duly authorized and validly issued,
are fully paid and nonassessable and were issued in accordance with the
registration or qualification provisions of the Securities Act, and any
relevant state securities laws, or pursuant to valid exemptions therefrom.

 

5.5                                 Authorization.  All corporate action on the part of the
Company, its Subsidiaries and their respective directors, officers and
stockholders necessary for the authorization, execution, delivery and
performance of all of its obligations under the Loan Documents and
authorization, issuance, and delivery of the Notes has been taken or will be
taken prior to the Closing.  All of the
Loan Documents, when executed and delivered by the Company, shall constitute
valid and legally binding obligations of the Company, legally enforceable
against the Company in accordance with their terms, except as subject to laws
of general application relating to bankruptcy, insolvency and the relief of
debtors and rules of law governing specific performance, injunctive relief
or other equitable remedies.

 

5.6                                 SEC
Reports; Financial Statements.  The
Company has filed all reports required to be filed by it under the Exchange
Act, including pursuant to Section 13(a) or 15(d) thereof, for
the years ended December 31, 2004, December 31, 2005, and December 31,
2006 and the three quarterly periods ended March 31, June 30 and September 30,
2007 (the foregoing materials being collectively referred to herein as the “SEC
Reports”) on a timely basis or has received a valid extension of such time of
filing and has filed any such SEC Reports prior to the expiration of any such
extension.  As of their respective dates,
the SEC Reports complied in all material respects with the requirements of the
Exchange Act and the rules and regulations of the SEC promulgated 

 

15

 

thereunder,
and none of the SEC Reports, when filed, contained any untrue statement of a
material act or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein, in the light of the circumstances
under which they were made, not misleading. 
The Company is in compliance with the Sarbanes-Oxley Act of 2002, and
the rules and regulations promulgated thereunder by all government and
regulatory authorities and agencies.  The
financial statements of the Company included in the SEC Reports (“ Financial
Statements ”) comply in all material respects with applicable accounting
requirements and the rules and regulations of the SEC with respect thereto
as in effect at the time of filing.  Such
Financial Statements have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis during the periods involved
(“GAAP”), except as may be otherwise specified in such Financial Statements or
the notes thereto, and fairly present in all material respects the financial
position of the Company and its consolidated subsidiaries as of and for the
dates thereof and the results of operations and cash flows for the periods then
ended, subject, in the case of unaudited statements, to normal, immaterial,
year-end audit adjustments.  To the
Company’s knowledge, neither the Company nor any Subsidiary has any material
liabilities or obligations which have not been disclosed in the SEC Reports for
the periods included in such reports.

 

5.7                                 Material
Contracts and Commitments.  The
Company has filed with the SEC all agreements of a material nature which it (or
any Subsidiary) is required to file with the SEC, including, but not limited
to, those which are included with the SEC Reports (collectively, the “ Contracts
”).  Neither the Company nor any
Subsidiary is in material default under any of such Contracts, which default
would have a material adverse effect on the Company and the Subsidiaries taken
as a whole.  To the Company’s knowledge,
no other party to any of the Contracts is in material default thereunder, which
default would have a material adverse effect on the Company and the
Subsidiaries taken as a whole.  Neither
the Company nor any Subsidiary is a party to and or bound by any contract,
agreement or instrument, or subject to any restriction under its Restated
Certificate or Bylaws, that materially and adversely affects its business as
now conducted or as proposed to be conducted, its properties or its financial
condition.

 

5.8                                 Title
to Properties and Assets, Liens, Etc. 
The Company and each of the Subsidiaries have good and marketable title
to their properties and assets, and have valid leasehold interests, in each
case free and clear of all conditional sale agreements, mortgages, pledges,
liens, leases, encumbrances or charges, other than (a) Permitted Liens,
and (b) minor imperfections which do not, individually or in the
aggregate, materially detract from the value of the property subject thereto or
materially impair the operations of the Company, and which have not arisen
other than in the ordinary course of business.

 

5.9                                 Obligations
to Related Parties; Interested Party Transaction.  Other than the Berg Guaranty and Berg
Security Interest, or as disclosed in the SEC Reports, there are no obligations
of the Company or the Subsidiaries to officers, directors, stockholder owning
5% or more in interest of the Company, or employees of the Company or the
Subsidiaries other than (a) for payment of salary for services rendered to
the Company or its Subsidiaries in the ordinary course of business, (b) for
reimbursement for reasonable expenses incurred on behalf of the Company or a
Subsidiary, and (c) for other standard employee benefits made generally
available to all employees.  Except as
set forth in SEC Reports, none of the officers, directors or stockholders
owning 5% or more in interest of the Company or the Subsidiaries are indebted
to the Company or the Subsidiaries, or have any direct or indirect ownership
interest in any firm or corporation with which the Company or the Subsidiaries 

 

16

 

is affiliated
or with which the Company or the Subsidiaries has a business relationship, or
any firm or corporation which competes with the Company or the Subsidiaries,
except that officers, directors and/or stockholders owning 5% or more in
interest of the Company may own stock in publicly traded companies which may
compete with the Company and its Subsidiaries. 
No officer, director or stockholder owning 5% or more in interest of the
Company is, directly or indirectly, interested in any material contract with
the Company or the Subsidiaries (other than such contracts as relate to any
such person’s ownership of capital shares or other securities of the Company or
the Subsidiaries).

 

5.10                           Compliance
with Other Instruments; Laws.

 

(a)                                   Neither
the Company nor any Subsidiary is in violation of any term of its respective
charter documents, each as amended to date.  Neither the Company nor any
Subsidiary is in violation of, or in default in any material respect under, the
terms of any mortgage, indenture, contract, agreement, instrument, judgment or
decree applicable to it or to which it is a party.  The execution,
delivery and performance of and compliance with the Loan Documents, and the
issuance of the Warrant Shares, will not result in any such violation, or be in
conflict with or constitute a default under any such term, or result in the
creation of any mortgage, pledge, lien, encumbrance or charge upon any of the
properties or assets of the Company pursuant to any such term or the
suspension, revocation, impairment, forfeiture or nonrenewal of any material
permit, license, authorization, or approval applicable to the Company, its
business or operations or any of its assets or properties.

 

(b)                                   The
Company and each Subsidiary is in compliance with all applicable statutes,
rules, regulations, orders or restrictions of any domestic or foreign
government or any instrumentality or agency thereof in respect of the conduct
of its business or the ownership of its properties, the violation of which
would have a material adverse affect on the Company’s business or properties.

 

(c)                                   Neither
the Company nor any of its Subsidiaries is a party to nor is bound by any contract,
agreement or instrument, or subject to any restriction under its respective
origination documents, that materially and adversely affects its respective
business as now conducted or as proposed to be conducted, its respective
properties or its respective financial condition.  Neither the Company nor
any of its Subsidiaries is subject to any asserted violation of any provision
of any of the Contracts.

 

5.11                           Changes.  Since the date of the Company’s last filed
SEC Report, there has not been:

 

(a)                                   any
change in the assets, liabilities, financial condition or operating results of
the Company or any Subsidiary from that reflected in the Financial Statements,
except changes in the ordinary course of business (such as continuing losses
from operations and uses of cash for such operations) that have not been,
individually or in the aggregate, materially adverse to the Company and its
Subsidiaries taken as a whole;

 

(b)                                   any
damage, destruction or loss, whether or not covered by insurance, materially
and adversely affecting the assets, properties, financial condition or
operating results of the Company or any Subsidiary;

 

17

 

(c)                                   any
satisfaction or discharge of any lien, claim or encumbrance or payment of any
obligation by the Company or any Subsidiary, except in the ordinary course of
business and that is not material to the assets, properties, financial
condition, operating results or business of the Company or any Subsidiary (as
such business is presently conducted and as it is proposed to be conducted);

 

(d)                                   any
material change or amendment to a material Contract;

 

(e)                                   any
sale, exchange or other disposition of any of the Company’s assets or rights,
other than the sale of the Company’s or any Subsidiary’s inventory in the
ordinary course of business;

 

(f)                                    any
agreement by the Company by the Company or any Subsidiary to take any action
described in clauses (c)-(e) immediately above; or

 

(g)                                   to
the Company’s knowledge, any other events or conditions of any character that
might individually or in the aggregate materially and adversely affect the
assets, properties, financial condition, operating results or business of the
Company and the Subsidiaries taken as a whole such business is presently
conducted and as it is proposed to be conducted.

 

5.12         Litigation, Etc.  Section 5.12 of the Schedule of
Exceptions sets forth each instance in which the Company or any of its
Subsidiaries or, to its knowledge, its officers, directors, employees or
stockholders: (i) is subject to any outstanding injunction, judgment,
decree, order, ruling or charge which would have a material and adverse effect
on the business of the Company or any of its Subsidiaries; or (ii) is a
party to or, to the knowledge of the Company, any Subsidiary or any management
person affiliated therewith, is threatened to be made a party to any action,
suit, proceeding, hearing, investigation of, in, or before any court or quasi-judicial
or administrative agency of any federal, state, local, foreign or international
jurisdiction or before an arbitrator which could have a material and adverse
effect on the business of the Company or any of its Subsidiaries.  Other than the items referenced in the
immediately preceding sentence, there is no action, suit, proceeding or
investigation pending before any court or administrative agency or, to the best
of Company’s knowledge, currently threatened against the Company or a
Subsidiary which questions the validity of the Loan Documents or to consummate
the transactions contemplated therein or which might result, either
individually or in the aggregate, in any material adverse change in the
condition (financial or otherwise), business, property, prospects, assets or
liabilities of the Company.  Neither the
Company nor any of the Subsidiaries is a party or subject to, and none of their
assets are bound by the provisions of any order, writ, injunction, judgment or
decree of any court or government agency or instrumentality.  The foregoing includes, without limitation,
actions known to the Company or a Subsidiary, pending or threatened, involving
the prior employment of any of the Company’s or a Subsidiary’s employees, their
use in connection with the Company’s or a Subsidiary’s business of any
information or techniques allegedly proprietary to any of their former
employers, or their obligations under any agreements with prior employers.

 

5.13         Employees.  The Company and each Subsidiary does not have
any collective bargaining agreements with any of its employees.  There is no labor union organizing activity
pending or, to the Company’s knowledge, threatened with respect to the
Company.  No employee of the Company has
been granted the right to continued employment by the Company or to any
material compensation following termination of employment with the Company,
except as disclosed in the Company’s SEC filings.  Neither the 

 

18

 

Company nor
any Subsidiary is aware that any officer or key employee, or that any group of
key employees of the Company, intends to terminate their employment with the
Company, nor does the Company have a present intention to terminate the
employment of any officer, key employee or group of key employees.  To the Company’s knowledge, no employee of
the Company, nor any consultant with whom the Company has contracted, is in
violation of any material term of any agreement relating to the right of any
such individual to be employed by, or to contract with, the Company because of
the nature of the business to be conducted by the Company; and to the Company’s
knowledge the continued employment by the Company of its present employees, and
the performance of the Company’s contracts with its independent contractors,
will not result in any such violation. 
Neither the Company nor any Subsidiary has received notice alleging that
any such violation has occurred.

 

5.14         Proprietary
Information Agreements.  Each current
and former employee and consultant of the Company has executed an agreement
with the Company, in the form made available to the Purchasers, agreeing to
maintain the confidentiality of proprietary information and agreeing to assign
certain inventions to the Company. 
Except as set forth on the Schedule of Exceptions and to the
Company’s knowledge, none of its employees or consultants is obligated under
any contract (including licenses, covenants, or commitments of any nature) or
other agreement, or subject to any judgment, decree or order of any court or
administrative agency, that would interfere with the use of his or her best
efforts to promote the interests of the Company or that would conflict with the
Company’s business as proposed to be conducted. 
Neither the execution or delivery of any of this Agreement, nor the
carrying on of the Company’s business as proposed, will, to the Company’s
knowledge, conflict with or result in a breach of the terms, conditions, or
provisions of, or constitute a default under, any contract, covenant or
instrument under which any such employee or consultant is now obligated.  Neither the Company nor any Subsidiary has
received any notice alleging that any such violation has occurred.  The Company does not believe it is or will be
necessary to use any inventions of its employees or consultants (or persons it
currently intends to hire or retain) made prior to their employment or
retention by the Company.

 

5.15         Intellectual Property.  Except as set forth in the SEC Reports, the
Company and its Subsidiaries have, or have rights to use, all patents, patent
applications, trademarks, trademark applications, service marks, trade names,
copyrights, licenses and other similar rights (collectively, the “ Intellectual
Property Rights ’’that are necessary or material for use in connection with
their respective businesses as described in the SEC Reports and which the
failure to so have could have or reasonably be expected to result in a material
adverse effect.  To the knowledge of the
Company (after due inquiry), the Intellectual Property Rights owned and
licensed by the Company and/or its Subsidiaries, do not violate or infringe
upon the rights of any Person.  To the
knowledge of the Company, all such Company Intellectual Property Rights are
enforceable.

 

5.16         Permits.  The Company and each Subsidiary has all
franchises, permits, licenses, and any similar authority necessary for the
conduct of its business as now being conducted by it, the lack of which would
materially and adversely affect the business, properties, prospects, or
financial condition of the Company, and the Company believes it can obtain,
without undue burden or expense, any similar authority for the conduct of its
business as planned to be conducted. 
Neither the Company nor any Subsidiary is in default in any material
respect under any of such franchises, permits, licenses, or other similar
authority.

 

19

 

5.17         Governmental Consent,
Etc.  No consent, approval or
authorization of or designation, declaration or filing with any governmental
authority on the part of the Company is required in connection with the valid
execution, delivery and performance of this Agreement, the offer or issuance of
the Notes, Warrants,  or Warrant
Shares,  the consummation of any other
transaction contemplated hereby or thereby, except qualification (or taking
such action as may be necessary to secure an exemption from qualification, if
available) of the offer and issuance of the Notes under the applicable
national, federal and state securities laws, which filings and qualifications,
if required, will be accomplished in a timely manner.  Except (i) as contemplated by the
execution of this Agreement and the Loan Documents and all parties signatory
thereto and (ii)  for the consent of the Bank and Berg, no authorizations,
consents or approvals or other actions by, and no notice to, any other person
or entity is required for the due execution and delivery by the Company of the
Loan Documents, or the offer, sale or issuance of the Notes, Warrants or
Warrant Shares.

 

5.18         Offering.  Subject to the accuracy of the Purchasers’
representations in Section 6 of this Agreement, the offer and issuance of
the Notes to be issued in conformity with the terms of this Agreement
constitutes a transaction exempt from the registration requirements of the
Securities Act, and applicable blue sky laws, which filings or qualifications,
if required, will be timely filed or obtained. 
The Company and all persons acting on its behalf have complied with the
provisions relating to the manner of offering and sale contained in Rule 502(c) as
promulgated under the Securities Act, with respect to the offer, sale and
issuance of the Notes.

 

5.19         Brokers or Finders;
Other Offers.  The Company has not
incurred, and will not incur, directly or indirectly, as a result of any action
taken by the Company, any liability for brokerage or finders’ fees or agents’
commissions or any similar charges in connection with the sale of the Notes to
the Purchasers.

 

5.20         Tax Returns and
Payments.  The Company and each
Subsidiary has timely filed all tax returns (federal, state, and local in both
domestic and foreign jurisdictions) required to be filed by it.  All taxes shown to be due and payable on such
returns, any assessments imposed, and to the Company’s and each Subsidiary’s
knowledge, all other taxes due and payable on or before the Purchase Agreement
Closing Date, have been paid or will be paid prior to the time they become
delinquent.  Neither the Company nor any
Subsidiary has any knowledge of any liability of any tax to be imposed upon its
properties or assets as of the date of this Agreement that is not adequately
provided for.  The Company and each
Subsidiary has filed all tax returns and reports required to be filed by each
of them and these returns are true and correct in all material respects.

 

5.21         Environmental Matters.  The Company and its Subsidiaries are and have
been in material compliance with all Environmental Laws (as defined below); (ii) there
has been no release or threatened release of any pollutant, contaminant or
toxic or hazardous material, substance or waste, or petroleum or any fraction
thereof (each a “Hazardous Substance”) on, upon, into or from any site
currently or heretofore owned, leased or otherwise used by the Company or its
Subsidiaries which could reasonably be expected to result in a material
liability of the Company or its Subsidiaries; (iii) there have been no
Hazardous Substances generated by the Company or its Subsidiaries that have
been disposed of or come to rest at any site that has been included in any
published U.S. federal, state or local “superfund” site list or any other
similar list of hazardous or toxic waste sites published by any Governmental
Entity within or outside the United States which could reasonably be 

 

20

 

expected to
result in a material liability of the Company or its Subsidiaries; (iv) there
are no underground storage tanks located on, no polychlorinated biphenyls (“PCBs”)
or PCB-containing equipment used or stored on, and no hazardous waste as
defined by the Resource Conservation and Recovery Act, as amended, stored on,
any site owned or operated by the Company or its Subsidiaries, except for the
storage of hazardous waste in compliance with Environmental Laws.  For purposes of this Section 5.21, “Environmental
Laws” means any law, regulation, or other applicable requirement (whether
domestic or foreign) relating to (i) releases or threatened release of any
Hazardous Substance; (ii) pollution or protection of employee health or
safety, public health or the environment; or (iii) the manufacture,
handling, transport, use, treatment, storage, or disposal of any Hazardous
Substance.

 

6.             REPRESENTATIONS AND
WARRANTIES OF THE PURCHASERS

 

Each of the
Purchasers hereby severally and for itself alone represents and warrants to the
Company with respect to its purchase or acquisition of the  Notes, Warrants and Warrant Shares (upon
exercise of the Warrants) as follows:

 

6.1           Investment
Experience.  Such Purchaser (i) is
an “ accredited investor ’’as that term is defined in Rule 501(a) promulgated
under the Securities Act, (ii) is an investor experienced in the
evaluation of businesses similar to the Company, (iii) is able to fend for
himself or itself in the transactions contemplated by this Agreement, (iv) has
such knowledge and experience of financial, business and investment matters as
to be capable of evaluating the merits and risks of this investment, (v) has
the ability to bear the economic risks of this investment, (vi) was not
organized or reorganized for the specific purpose of acquiring the Notes and/or
Warrants, and (vii) has been afforded the opportunity to ask questions of,
and to receive answers from, the Company and to obtain additional information,
to the extent the Company has such information or could have acquired it
without unreasonable effort or expense, all as necessary for the Purchaser to
make an informed investment decision with respect to the purchase and/or acquisition
of the Notes and/or Warrants; provided, that the foregoing shall not limit or
impair any representation, warranty, covenant or agreement of the Company
contained in any of this Agreement, or the right of such Purchaser to rely
thereon.

 

6.2           Investment; Legend.  The Purchaser is acquiring the Notes and/or
Warrants for investment for its own account, not as a nominee or agent, and not
with the view to, or for resale in connection with, any distribution thereof.  The Purchaser understands that the Notes
and/or Warrants to be purchased and/or acquired have not been, and will not be,
registered under the Securities Act by reason of a specific exemption from the
registration provisions of the Securities Act, the availability of which
depends upon, among other things, the bona fide nature of the investment intent
and the accuracy of such Purchaser’s representations as expressed herein.  The Purchaser understands and acknowledges
that the Warrants and any certificates representing the Warrants or Warrant
Shares will bear a legend substantially in the form set forth below:

 

THESE
SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR UNDER ANY STATE SECURITIES LAWS.  THESE SECURITIES MAY NOT
BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN OPINION
OF 

 

21

 

COUNSEL
SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS
SOLD PURSUANT TO RULE 144 OF SUCH ACT.

 

6.3           No Public Market.  The Purchaser understands that no public
market now exists for any of the Notes or Warrants issued by the Company and
that the Company has made no assurances that a public market will ever exist
for the Notes or Warrants (excluding Company’s obligations to register the
Warrants and Warrant Shares under the Registration Rights Agreement).

 

6.4           Authorization.  This Agreement when executed and delivered by
the Purchaser will constitute a valid and legally binding obligation of the
Purchaser, enforceable in accordance with its terms, except as subject to laws
of general application relating to bankruptcy, insolvency and the relief of
debtors and rules of law governing specific performance, injunctive relief
or other equitable remedies.

 

6.5           Brokers or Finders.  The Purchaser has not incurred, and will not
incur, directly or indirectly, as a result of any action taken by the
Purchaser, any liability for brokerage or finders’ fees or agents’ commissions
or any similar charges in connection with the Loan Documents or any transaction
contemplated thereby.

 

6.6           Tax Liability.  The Purchaser understands that the Purchaser
(and not the Company) shall be responsible for the Purchaser’s own tax
liability that may arise as a result of this investment or the transactions
contemplated by this.

 

7.             COVENANTS

 

7.1           Payment of Notes.  The Company shall promptly make all payments
in respect of the Notes on the dates and in the manner provided in the Notes
and this Agreement.  Principal, premium,
if any, and interest, shall be considered paid on the date it is due if the
Purchasers’ Agent holds as of 11:00 a.m., New York City time, on the due
date, money, deposited by the Company or an Affiliate thereof in immediately
available funds, designated for and sufficient to pay all principal, premium,
if any, and interest then due.  The
Company shall, to the fullest extent permitted by law, pay interest on overdue
principal (including premium, if any) and overdue installments of interest at
the rate borne by the Notes per annum.

 

7.2           SEC Reports.  The Company shall file all reports and other
information and documents that it is required to file with the SEC pursuant to Section 13
or 15(d) of the Exchange Act, and, if requested by the Purchasers’ Agent,
within 15 days after it files them with the SEC, the Company shall send copies
of all such reports, information and other documents to the Purchasers’
Agent.  It is agreed that the filing of
such reports via the SEC’s EDGAR system shall constitute distribution of such
reports to the Purchasers for purposes of this Section 7.2.

 

7.3           Compliance
Certificates.  The Company shall
deliver to the Purchasers’ Agent, within 120 days after the end of each fiscal
year, an officers’ certificate stating that a review of the activities of the
Company 

 

22

 

and its
Subsidiaries during the preceding fiscal year has been made under the
supervision of the signing officers with a view to determining whether the
Company has kept, observed, performed and fulfilled its obligations under this
Agreement, and further stating, as to each such officer signing such
certificate, that to the best of his or her knowledge, in such officer’s
capacity as an officer of the Company:

 

(1)                                   the
Company has kept, observed, performed and fulfilled each and every covenant
contained in this Agreement and is not in default (without regard to grace
periods or notice requirements) in the performance or observance of any of the
terms, provisions and conditions of this Agreement, or, if an Event of Default
shall have occurred, describing all such Events of Default of which he or she
may have knowledge and what action the Company is taking or proposes to take
with respect thereto; and

 

(2)                                   no
event has occurred and remains in existence by reason of which payments on
account of the principal of, premium, if any, or interest on the Notes is
prohibited or if such event has occurred, a description of the event and what
action the Company is taking or proposes to take with respect thereto.

 

7.4           Further Instruments
and Acts.  Upon request of the
Purchasers’ Agent, the Company will execute and deliver such further
instruments and do such further acts as may be reasonably necessary or proper
to carry out more effectively the purposes of this Agreement.

 

7.5           Registration of
Warrants And Warrant Shares.  Within
90 days after the Closing Date under this Agreement the Company shall file a
registration statement with the SEC to register all of the Warrants and Warrant
Shares in accordance with the terms of the Registration Rights Agreement.  The Company agrees to take the actions
reasonably necessary and within the Company’s power to have the SEC declare
such registration effective and to maintain the effectiveness of such
registration statement for as long as any Warrants or Warrant Shares remain
outstanding, except as otherwise provided in the Registration Rights Agreement.

 

7.6           Maintenance of
Corporate Existence.  Subject to Section 3
and Section 8.1, the Company will do or cause to be done all things
necessary to preserve and keep in full force and effect its corporate
existence.

 

7.7           Stay, Extension and
Usury Laws.  The Company covenants
(to the extent that it may lawfully do so) that it shall not at any time insist
upon, plead, or in any manner whatsoever claim or take the benefit or advantage
of, any stay, extension or usury law or other law which would prohibit or
forgive the Company from paying all or any portion of the principal of or
interest on the Notes as contemplated herein, wherever enacted, now or at any
time hereafter in force, or which may affect the covenants or the performance
of this Agreement, and the Company (to the extent it may lawfully do so) hereby
expressly waives all benefit or advantage of any such law and covenants that it
will not, by resort to any such law, hinder, delay or impede the execution of
any power herein granted to the Purchasers, but will suffer and permit the
execution of every such power as though no such law had been enacted.

 

23

 

7.8           Application of
Proceeds Upon Sale or Other Disposition of Company Assets.  If (1) the Company shall sell or dispose
of any of its assets, in whole or in part in any one transaction or in any
series of related transactions within a ninety (90) day period and (2) the
net proceeds therefrom exceeds $1,000,000 (One Million Dollars), then Company
shall apply not less than eighty percent (80%) of such proceeds to retire
outstanding indebtedness as it determines in its discretion, which indebtedness  may include the Notes, in whole or in part.

 

8.             NEGATIVE COVENANTS

 

8.1           Company May Consolidate,
etc. Only on Certain Terms and Shall Not Sell, Transfer, or Spin-Off Assets for
other than Cash Consideration. 
Without the written consent of the Holders of a Majority-In-Interest,
the Company shall not:

 

(x) 
directly or indirectly consolidate with or merge into any other Person (in a
transaction in which the Company is not the surviving corporation) or convey,
transfer or lease a substantial amount of its properties and assets to any
Person outside the ordinary course of business; or

 

(y) 
sell, dispose of, or transfer its business operations or  assets to any third party for other than cash
consideration (including consideration readily convertible into cash).

 

This Section 8.1
shall not apply to a merger of the Company with an Affiliate solely for the
purpose of reincorporating the Company in another jurisdiction, or to a
Fundamental Change.

 

8.2           [INTENTIONALLY OMITTED]

 

8.3           Additional Debt.  The Company shall not without the prior
written consent of the Purchaser’s Agent or the Holders of a
Majority-in-Interest of the Notes incur any debt for borrowed money subsequent
to the Purchase Agreement Closing Date in excess of $30,100,000 (Thirty Million
One Hundred Thousand Dollars), excluding any debt for accounts payable in the
ordinary course of business, and, in any case, any other debt shall be
subordinate to the Purchasers’ Security Interest in respect to the priority and
enforcement of any security interest in property of the Company securing such
new debt.

 

9.             DEFAULT AND REMEDIES

 

9.1           Events of a Default.  An “Event of Default” shall occur if:

 

(1)                                           the
Company defaults in the payment of any interest on any Note when the same
becomes due and payable and the default continues for a period of five days;

 

24

 

(2)                                           the
Company defaults in the payment of any principal of (including, without
limitation, premium, if any, on) any Note when the same becomes due and payable
(whether at maturity, upon redemption, on a Fundamental Change Repurchase Date
or otherwise);

 

(3)                                           the
Company fails to comply with any of its other agreements contained in the Loan
Documents and the default continues for the period and after the notice
specified below;

 

(4)                                           the
Company defaults in the payment of the Redemption Price or Fundamental Change
Repurchase Price of any Note when the same becomes due and payable;

 

(5)                                           any
Indebtedness of the Company or any Subsidiary with an aggregate principal
amount then outstanding in excess of $1,000,000, whether such Indebtedness now
exists or shall hereafter be created, is not paid at final maturity (either at
its stated maturity or upon acceleration thereof), and such Indebtedness is not
discharged, or such acceleration is not rescinded or annulled, within a period
of 30 days after there shall have been given to the Company by the Purchasers’
Agent or to the Company by the Holders of a Majority-in-Interest of the Notes a
written notice specifying such default and requiring the Company to cause such
Indebtedness to be discharged or cause such default to be cured or waived or
such acceleration to be rescinded or annulled and stating that such notice is a
“Notice of Default” hereunder; or

 

(6)                                           the
Company, pursuant to or within the meaning of any Bankruptcy Law:

 

(A)                                  commences
a voluntary case or proceeding;

 

(B)                                   consents
to the entry of an order for relief against it in an involuntary case or
proceeding;

 

(C)                                   consents
to the appointment of a Custodian of it or for all or substantially all of its
property; or

 

(D)                                  makes
a general assignment for the benefit of its creditors; or

 

(E)                                   has
an  involuntary action filed against it
and fails to have such action stayed or dismissed within sixty (60) days
thereafter; or

 

(7)                                           a
court of competent jurisdiction enters an order or decree under any Bankruptcy
Law that:

 

(A)                                  is
for relief against the Company or any Subsidiary in an involuntary case or
proceeding;

 

(B)                                   appoints
a Custodian of the Company or any Subsidiary or for all or substantially all of
the property of the Company (on a consolidated basis); or

 

(C)                                   orders
the liquidation of the Company; and in each case the order or decree remains
unstayed and in effect for 60 consecutive days;

 

25

 

(8)                                           the
Company’s termination or suspension of its business, or the filing by or
against the Company of a petition seeking the liquidation or dissolution of the
Company or the commencement of any other procedure to liquidate or dissolve the
Company, or the occurrence of any event, condition or circumstances which
causes the liquidation or dissolution of the Company, which is not dismissed
within 60 days of the date of filing or petition;

 

(9)                                           The
rendering of final money judgments in the aggregate during the term of this
Agreement of at least $1,000,000 against the Company which remain unsatisfied
and unstayed for at least 60 days.

 

The term “Bankruptcy
Law” means Title 11 of the United States Code (or any successor thereto) or any
similar federal or state law for the relief of debtors.  The term “Custodian”
means any receiver, trustee, assignee, liquidator, sequestrator or similar
official under any Bankruptcy Law.

 

When any
default under this Section 9.1 is cured, it ceases.

 

9.2           Acceleration.  If an Event of Default (other than an Event
of Default specified in clause (6) or (7) of Section 9.1) occurs
and is continuing, the Purchasers’ Agent may, by notice to the Company, or the
Holders of at least a Majority-in-Interest of the Notes then outstanding may,
by notice to the Company, declare all unpaid principal to the date of
acceleration on the Notes then outstanding (if not then due and payable) to be
due and payable upon any such declaration, and the same shall become and be
immediately due and payable.  If an Event
of Default specified in clause (6) or (7) of Section 9.1 occurs,
all unpaid principal of the Notes then outstanding shall ipso facto become and
be immediately due and payable without any declaration or other act on the part
of the Purchasers’ Agent or any Holder. 
The Holders of a Majority-in-Interest of the Notes then outstanding by
notice to the Company may rescind an acceleration and its consequences if (a) all
existing Events of Default, other than the nonpayment of the principal of the
Notes which has become due solely by such declaration of acceleration, have
been cured or waived; (b) to the extent the payment of such interest is
lawful, interest (calculated at the rate per annum borne by the Notes) on
overdue installments of interest and overdue principal, which has become due
otherwise than by such declaration of acceleration, has been paid; and (c) the
rescission would not conflict with any judgment or decree of a court of
competent jurisdiction.  No such
rescission shall affect any subsequent default or impair any right consequent
thereto.

 

9.3           Other Remedies.  If an Event of Default occurs and is
continuing, the Holders and the Purchasers’ Agent may, but shall not be
obligated to, pursue any available remedy by proceeding at law or in equity to
collect the payment of the principal of or interest on the Notes or to enforce
the performance of any provision of the Notes or this Agreement. A delay or
omission in exercising any right or remedy accruing upon an Event of Default
shall not impair the right or remedy or constitute a waiver of or acquiescence
in the Event of Default.  No remedy is
exclusive of any other remedy.  All
available remedies are cumulative to the extent permitted by law.

 

9.4           Waiver of Defaults
and Events of Default.  Subject to Section 9.6,
the Holders of a Majority-in-Interest of the Notes then outstanding by notice
to the Company may waive an existing default or Event of Default and its
consequence, except a default or Event of Default in the payment of the
principal of, premium, if any, or interest on any Note, or any default or Event
of Default in respect of any provision of this Agreement or 

 

26

 

the Notes
which, under Section 9.6, cannot be modified or amended without the consent
of the Holder of each Note affected. 
When a default or Event of Default is waived, it is cured and ceases.

 

9.5           Limitations on Suits.  A Holder may not pursue any remedy with
respect to this Agreement or the Notes (except actions for payment of overdue
principal or interest) unless:

 

(1)                                   the
Holder gives to the Company written notice of a continuing Event of Default;
and

 

(2)                                   the
Holders of at least 25% in aggregate principal amount of the then outstanding
Notes make a written request to the Purchasers’ Agent to pursue the remedy.

 

A Holder may
not use this Agreement to prejudice the rights of another Holder or to obtain a
preference or priority over such other Holder.

 

9.6           Rights of Holders to
Receive Payment.  Notwithstanding any
other provision of this Agreement, the right of any Holder of a Note to receive
payment of the principal of and interest on the Note, on or after the
respective due dates expressed in the Note and this Agreement, to bring suit
for the enforcement of any such payment on or after such respective dates, is
absolute and unconditional and shall not be impaired or affected without the
consent of the Holder.

 

10.           CONDITIONS TO CLOSING

 

10.1         Conditions to Closing
of the Purchasers.  Each Purchaser’s
obligations to purchase and/or acquire the Notes at the Closing shall be
subject to the fulfillment of the following conditions, any one or more of
which may be waived by each Purchaser, or Purchasers’ Agent (with the approval
of a Majority- In- Interest in its sole discretion:

 

(a)                                   Approvals. 
The receipt of the Bank’s consent and any other necessary approval of the Loan
Documents and the transactions contemplated thereby, including from the board
of directors of the Company.

 

(b)                                   Representations
and Warranties.  The representations and warranties made by the
Company in Section 5 shall be true and correct when made and on the
Closing Date.

 

(c)                                   Performance. 
All covenants, agreements and conditions contained in this Agreement to be
performed by the Company on or prior to the Closing Date shall have been
performed or complied with in all material respects.

 

27

 

(d)                                   Compliance
with Securities Laws.  The Company shall have obtained all necessary
permits and qualifications, or have the availability of exemptions therefrom,
required by any applicable jurisdiction for the offer and issuance of the
Notes.

 

(e)                                   Compliance
Certificate.  The Company shall have delivered to the Purchasers’
Agent a certificate in a form satisfactory to the Purchasers’ Agent, executed
by the Chief Executive Officer and Chief Financial Officer of the Company,
dated as of the Closing Date, and certifying, among other things, to the
fulfillment of the conditions specified in Section 10.1 of this Agreement.

 

10.2         Conditions to Closing
of the Company.  The Company’s
obligation to issue the Notes and Warrants at the Closing shall be subject to
the fulfillment of the following conditions, any one or more of which may be
waived by the Company in its sole discretion:

 

(a)                                   Payment
of Consideration, Delivery of Signature Pages.  Each of the Purchasers
shall have delivered to the Company the Purchase Price for the Notes to be
subscribed for by such Purchaser at the Closing, and the Purchasers’ Agent and
each Purchaser shall have delivered to the Company signature pages to each
of the Loan Documents to be signed by the Purchaser and the Purchasers’ Agent.

 

(b)                                   Compliance
With Securities Laws.  The Company shall have obtained all necessary
permits and qualifications, or have the availability of exemptions therefrom
required by any jurisdiction for the offer of and subscription for the Notes.

 

(c)                                   Professional
Fees. If Purchasers shall hire counsel to represent the interest of all
Purchasers, then Company shall pay the reasonably itemized fees and expenses of
such counsel, not to exceed $50,000 (Fifty Thousand Dollars).

 

11.           APPOINTMENT OF
PURCHASERS’ AGENT

 

11.1         Appointment; Joint
Action; Purchaser Covenants Regarding Control.  Each Purchaser hereby irrevocably appoints
and authorizes the Purchasers’ Agent to act as its agent under this Agreement
and the other Loan Documents with such powers as are specifically delegated to
the Purchasers’ Agent by the terms of such Loan Documents, together with such
other powers as are reasonably incidental to such powers.  Notwithstanding the foregoing or any other
provision of this Agreement, each Purchaser agrees that under no circumstances
shall such Purchaser aggregate or combine any of the securities issued upon exercise
of the Warrants with other securities issued to other Purchasers upon exercise
of the Warrants such that same constitutes 19.9% or more of the Company’s then
outstanding voting power or then outstanding securities.

 

11.2         Duties; Purchasers’
Agent Covenants.  The Purchasers’
Agent: (a) shall have no duties or responsibilities except those expressly
set forth in the Loan Documents, and shall not by reason of any Loan Document
be a trustee for any Purchaser; (b) shall not be responsible to the
Purchasers for any recitals, statements, representations or warranties
contained in any Loan Document, or in any certificate or other document
referred to or provided for in, or received by any of them under, any Loan
Document, or for the value, validity, effectiveness, genuineness,
enforceability or sufficiency or any Loan Document or any other

 

28

 

document
referred to or provided for in any Loan Document or for any failure by the
Company or any other person or entity to perform any of its obligations under
any Loan Document; (c) shall not be required to initiate or conduct any
litigation or collection proceedings under any Loan Document; and (d) shall
not be responsible for any action taken or omitted to be taken by it under any
Loan Document or under any other document or instrument referred to or provided
for in any Loan Document or in connection with any Loan Document. Purchasers’
Agent  agrees that under no circumstances
shall Purchasers’ Agent aggregate or combine any of the securities issued upon
exercise of the Warrants with other securities issued to other Purchasers upon
exercise of the Warrants such that same constitutes 19.9% or more of the
Company’s then Company’s then outstanding voting power or then outstanding
securities.

 

11.3        Reliance by Purchasers’
Agent.  The Purchasers’ Agent shall
be entitled to rely upon any certification, notice or other communication
(including any made by telephone, electronic facsimile transmission, and
electronic mail message) believed by it to be genuine and correct and to have
been signed or sent by or on behalf of the proper person or entity, and upon advice
and statements of legal counsel, independent accountants and other experts
selected by the Purchasers’ Agent.  As to
any matters not expressly provided for by any Loan Document, the Purchasers’
Agent shall in all cases be fully protected in acting, or in refraining from
acting, under any Loan Document in accordance with instructions given by the
Majority-in-Interest of the Notes or all of the Purchasers as is required in
such circumstance, and such instructions of such Purchasers and any action
taken or failure to act pursuant to such instructions shall be binding on all
of the Purchasers.

 

11.4        Indemnification.  The Purchasers agree to indemnify the
Purchasers’ Agent ratably in proportion to their respective amounts of Note
principal as set forth in Exhibit A , for any and all loss,
liabilities, damages or expenses incurred by any of them in connection with or
by reason of any actual or threatened investigation, litigation or other
proceedings (including any such investigation, litigation or other proceedings
between the Purchasers’ Agent and any Purchaser) relating to the extensions of
credit under, and the transactions contemplated by, the Loan Documents or any
actual or proposed use by the Company of the proceeds of any such extensions of
credit, including the reasonable fees and disbursements of counsel incurred in
connection with any such investigation, litigation or other proceedings.

 

11.5        Resignation or Removal
of Purchasers’ Agent.  Subject to the
appointment and acceptance of a successor Purchasers’ Agent as provided below,
the Purchasers’ Agent may resign at any time by notice to the Purchasers and
the Company, and either Purchasers’ Agent may be removed at any time with or
without cause by the Majority-in-Interest of the Notes.  Upon any such resignation or removal, the
Purchasers shall have the right to appoint a successor Purchasers’ Agent.  If no successor Purchasers’ Agent shall have
been so appointed by the Purchasers and shall have accepted such appointment
within 30 days after the retiring Purchasers’ Agent’s giving of notice of
resignation or the Majority-in-Interest of the Notes removal of the retiring
Purchasers’ Agent, then the retiring Purchasers’ Agent may, on behalf of the
Purchasers, appoint a successor Purchasers’ Agent, provided that any such
successor Purchasers’ Agent must be a Purchaser.  Upon the acceptance of any appointment as
Purchasers’ Agent by a successor Purchasers’ Agent, such successor Purchasers’
Agent shall thereupon succeed to and become vested with all the rights, remedies,
powers, privileges, duties and obligations of the retiring Purchasers’ Agent,
and the retiring Purchasers’ Agent shall be discharged from its duties and
obligations under this Agreement and the other Loan Documents.  After any 

 

29

 

retiring
Purchasers’ Agent’s resignation or removal as Purchasers’ Agent, the provisions
of this Section 11 shall continue in effect for its benefit in respect of
any actions taken or omitted to be taken by it while it was acting as
Purchasers’ Agent.

 

12.          MISCELLANEOUS

 

12.1        Governing Law.  This Agreement shall be governed by and
construed under the laws of the state of New York, without reference to its
principles of conflicts of laws.

 

12.2        Survival.  The representations, warranties, covenants
and agreements made herein shall survive the closing of the transactions
contemplated hereby.

 

12.3        Successors and Assigns.  Except as otherwise provided herein, the
provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto.

 

12.4        Entire Agreement;
Amendment.  This Agreement, together
with all other Loan Documents, and the other documents delivered pursuant
hereto, constitute the full and entire understanding and agreement between the
parties with regard to the subjects hereof and thereof and supersedes the
Original Purchase Agreement and all other agreements in their  entirety, including  prior agreements, representations,
warranties, commitments, whether written or oral, prior to the date hereof, and
no party shall be liable or bound to any other party in any manner by any
warranties, representations or covenants except as specifically set forth
herein or therein.  Any term of this Agreement
may be amended or waived only with the written consent of the Company and
Purchasers’ Agent.  Any amendment or
waiver effected with this paragraph shall be binding upon each holder of Notes
and/or Warrants then outstanding, each future holder of all such Notes
and/or  Warrants, Purchasers’ Agent and
the Company.

 

12.5        Notices, Etc.  All notices and other communications required
or permitted hereunder shall be in writing, shall be effective when given, and
shall in any event be deemed to be given upon receipt or, if earlier, (a) three
(3) days after deposit with the U.S. Postal Service or other applicable
postal service, if delivered by first class mail, postage prepaid, (b) upon
delivery, if delivered by hand or transmitted via facsimile (confirmed by letter
sent by first class mail, postage prepaid with the U.S. Postal Service), or (c) one
(1) business day after the business day of deposit with Federal Express or
similar overnight courier, freight prepaid and shall be addressed (i) if
to the Company, at the address set forth below, (ii) if to the Purchaser’s
Agent, at the address set forth below (iii) if to a Purchaser, at such
Purchaser’s address set forth on Exhibit A , or (iv) at such
other address as any party may designate by no less than ten days’ advance
written notice to the other parties pursuant to the provisions above.

 

30

 

	
  If to
  Company:

  	
   

  	
  Focus
  Enhancements, Inc.

  
	
   

  	
   

  	
  1370 Dell
  Avenue

  
	
   

  	
   

  	
  Campbell, CA
  95008

  
	
   

  	
   

  	
  Fax: (408)
  866-4795

  
	
   

  	
   

  	
  Email:
  gwilliams@focusinfo.com

  
	
   

  	
   

  	
  Attention:
  Chief Financial Officer

  
	
   

  	
   

  	
   

  
	
  If to
  Purchaser’s Agent:

  	
   

  	
  Ingalls &
  Snyder LLC

  
	
   

  	
   

  	
  61 Broadway

  
	
   

  	
   

  	
  New York, NY
  10006

  
	
   

  	
   

  	
  Fax: (212)
  269-7893

  
	
   

  	
   

  	
  Attention:
  Thomas O. Boucher, Jr.

  

 

12.6        Delay or Omissions.  Except as expressly provided herein, no delay
or omission to exercise any right, power or remedy accruing to any holder of
any Notes, upon any breach or default of the Company under this Agreement,
shall impair any such right, power or remedy of such holder nor shall it be
construed to be a waiver of any such breach or default, or an acquiescence
therein, or in any similar breach or default thereafter occurring; nor shall
any waiver of any single breach or default be deemed a waiver of any other
breach or default theretofore or thereafter occurring.  Any waiver, permit, consent or approval of
any kind or character on the part of any holder of any breach or default under
this Agreement, or any waiver on the part of any holder of any provisions or
conditions of this Agreement, must be in writing and shall be effective only to
the extent specifically set forth in such writing.

 

12.7        Severability.  In the event that any provision of this
Agreement becomes or is declared by a court of competent jurisdiction to be
illegal, unenforceable or void, this Agreement shall continue in full force and
effect without said provision; provided that no such severability shall be
effective if it materially changes the economic benefit of this Agreement to
any party.

 

12.8        Attorneys’ Fees.  If any action at law or in equity is
necessary to enforce or interpret the terms of this Agreement, the prevailing
party shall be entitled to reasonable attorneys’ fees, costs and necessary
disbursements in addition to any other relief to which such party may be
entitled.

 

12.9        Counterparts; Faxed and
PDF Counterparts.  This Agreement may
be executed in any number of counterparts, all of which taken together shall
constitute one and the same instrument, and any of the parties to this
Agreement may execute this Agreement by signing any such counterpart.  One or more counterparts may be delivered by
facsimile transmission or by PDF; any such counterpart shall have the same
force and effect as an original and shall constitute an effective, binding
agreement on the part of each of the undersigned.

 

12.10      Confidentiality.  Each Purchaser agrees that the terms of this
Agreement and all material information about the Company provided to such
Purchaser at any time pursuant to any of the Loan Documents is confidential and
shall be treated as confidential by the Purchaser and not disclosed to any
Person or used by such Purchaser unless and until disclosed publicly by the
Company in a registration statement or report filed with the SEC, or otherwise.

 

IN WITNESS
WHEREOF, the parties have caused this Agreement to be duly executed and
delivered as of the day and year first above written.

 

31

 

	
  COMPANY:

  	
  FOCUS
  ENHANCEMENTS, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Brett
  Moyer

  
	
   

  	
  Name:

  	
  Brett Moyer

  
	
   

  	
  Title:

  	
  President &
  CEO

  
	
   

  	
   

  	
   

  
	
  PURCHASERS’
  AGENT:

  	
   

  	
   

  
	
   

  	
  /s/ Thomas
  O. Boucher Jr.

  
	
   

  	
  THOMAS O.
  BOUCHER JR.

  

 

 

SIGNATURE PAGE TO AMENDED AND RESTATED SENIOR SECURED NOTE

PURCHASE AGREEMENT

 

 

EXHIBIT A

 

 ORIGINAL
PURCHASERS

 

	
  Name

  	
   

  	
  Address

  	
   

  	
  Original Principal

  Amount of Notes

  	
   

  	
  New Note Principal

  Amount*

  	
   

  
	
  Barbara Shingleton Trust

  	
   

  	
   

  	
   

  	
  $

  	
   250,000

  	
   

  	
  $

  	
   287,335

  	
   

  
	
  Brad Shingleton Trust

  	
   

  	
   

  	
   

  	
  $

  	
  250,000

  	
   

  	
  $

  	
  350,000

  	
   

  
	
  CFG Trust #1

  	
   

  	
   

  	
   

  	
  $

  	
  250,000

  	
   

  	
  $

  	
  350,000

  	
   

  
	
  David Foote

  	
   

  	
   

  	
   

  	
  $

  	
  500,000

  	
   

  	
  $

  	
  574,671

  	
   

  
	
  Donald L. Foote Trust #1

  	
   

  	
   

  	
   

  	
  $

  	
  250,000

  	
   

  	
  $

  	
  1,000,000

  	
   

  
	
  Heritage Mark Foundation, Inc.

  	
   

  	
   

  	
   

  	
  $

  	
  1,000,000

  	
   

  	
  $

  	
  1,149,342

  	
   

  
	
  Ingalls & Snyder Value Partners,
  L.P.

  	
   

  	
   

  	
   

  	
  $

  	
  5,000,000

  	
   

  	
  $

  	
  9,427,304

  	
   

  
	
  Kenneth Foote

  	
   

  	
   

  	
   

  	
  $

  	
  500,000

  	
   

  	
  $

  	
  574,671

  	
   

  
	
  Rhonda Foote-Judy

  	
   

  	
   

  	
   

  	
  $

  	
  250,000

  	
   

  	
  $

  	
  350,000

  	
   

  
	
  Ronald Altman

  	
   

  	
   

  	
   

  	
  $

  	
  500,000

  	
   

  	
  $

  	
  700,000

  	
   

  
	
  Steven Foote

  	
   

  	
   

  	
   

  	
  $

  	
  500,000

  	
   

  	
  $

  	
  574,671

  	
   

  
	
  Steven Foote IRA

  	
   

  	
   

  	
   

  	
  $

  	
  250,000

  	
   

  	
  $

  	
  287,335

  	
   

  
	
  Theresa Foote

  	
   

  	
   

  	
   

  	
  $

  	
  500,000

  	
   

  	
  $

  	
  574,671

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Total

  	
   

  	
  $

  	
  10,000,000

  	
   

  	
  $

  	
  16,200,000

  	
   

  

 

* Includes all
accrued interest as of December 30, 2007

 

 NEW
PURCHASERS

 

	
  Name

  	
   

  	
  Address

  	
   

  	
   

  	
   

  	
  New Note Principal

   Amount

  	
   

  
	
  First National Bancshares Inc

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  $

  	
  500,000

  	
   

  
	
  Blythefield Farms

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  $

  	
  500,000

  	
   

  
	
  Inky Investments

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  $

  	
  100,000

  	
   

  
	
  Steadfast LLC

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  $

  	
  500,000

  	
   

  
	
  Shannah Ferguson

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  $

  	
  1,000,000

  	
   

  
	
  Ferguson Children’s Trust

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  $

  	
  250,000

  	
   

  
	
  Blake Ashdown IRA

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  $

  	
  250,000

  	
   

  
	
  MacBay Partners

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  $

  	
  1,000,000

  	
   

  
	
  Horace Boone

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  $

  	
  350,000

  	
   

  
	
  John Boone

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  $

  	
  150,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Total

  	
   

  	
  $

  	
  4,600,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Combined Total

  	
   

  	
  $

  	
  20,800,000

  	
   

  

 

 

EXHIBIT B

 

ORIGINAL
PURCHASERS

 

	
  Name

  	
   

  	
  New Note Principal Amount

  	
   

  	
  Number of Warrants*

  	
   

  
	
  Barbara Shingleton Trust

  	
   

  	
  $

  	
  287,335

  	
   

  	
  359,169

  	
   

  
	
  Brad Shingleton Trust

  	
   

  	
  $

  	
  350,000

  	
   

  	
  437,500

  	
   

  
	
  CFG Trust #1

  	
   

  	
  $

  	
  350,000

  	
   

  	
  437,500

  	
   

  
	
  David Foote

  	
   

  	
  $

  	
  574,671

  	
   

  	
  718,339

  	
   

  
	
  Donald L. Foote Trust #1

  	
   

  	
  $

  	
  1,000,000

  	
   

  	
  1,250,000

  	
   

  
	
  Heritage Mark Foundation, Inc.

  	
   

  	
  $

  	
  1,149,342

  	
   

  	
  1,436,678

  	
   

  
	
  Ingalls & Snyder Value Partners,
  L.P.

  	
   

  	
  $

  	
  9,427,304

  	
   

  	
  11,784,130

  	
   

  
	
  Kenneth Foote

  	
   

  	
  $

  	
  574,671

  	
   

  	
  718,339

  	
   

  
	
  Rhonda Foote-Judy

  	
   

  	
  $

  	
  350,000

  	
   

  	
  437,500

  	
   

  
	
  Ronald Altman

  	
   

  	
  $

  	
  700,000

  	
   

  	
  875,000

  	
   

  
	
  Steven Foote

  	
   

  	
  $

  	
  574,671

  	
   

  	
  718,339

  	
   

  
	
  Steven Foote IRA

  	
   

  	
  $

  	
  287,335

  	
   

  	
  359,169

  	
   

  
	
  Theresa Foote

  	
   

  	
  $

  	
  574,671

  	
   

  	
  718,339

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Total

  	
   

  	
  $

  	
  16,200,000

  	
   

  	
  20,250,002

  	
   

  

 

NEW PURCHASERS

 

	
  Name

  	
   

  	
  New Note Principal Amount

  	
   

  	
  Number of Warrants*

  	
   

  
	
  First National Bancshares Inc

  	
   

  	
  $

  	
  500,000

  	
   

  	
  625,000

  	
   

  
	
  Blythefield Farms

  	
   

  	
  $

  	
  500,000

  	
   

  	
  625,000

  	
   

  
	
  Inky Investments

  	
   

  	
  $

  	
  100,000

  	
   

  	
  125,000

  	
   

  
	
  Steadfast LLC

  	
   

  	
  $

  	
  500,000

  	
   

  	
  625,000

  	
   

  
	
  Shannah Ferguson

  	
   

  	
  $

  	
  1,000,000

  	
   

  	
  1,250,000

  	
   

  
	
  Ferguson Children’s Trust

  	
   

  	
  $

  	
  250,000

  	
   

  	
  312,500

  	
   

  
	
  Blake Ashdown IRA

  	
   

  	
  $

  	
  250,000

  	
   

  	
  312,500

  	
   

  
	
  MacBay Partners

  	
   

  	
  $

  	
  1,000,000

  	
   

  	
  1,250,000

  	
   

  
	
  Horace Boone

  	
   

  	
  $

  	
  350,000

  	
   

  	
  437,500

  	
   

  
	
  John Boone

  	
   

  	
  $

  	
  150,000

  	
   

  	
  187,500

  	
   

  
	
  Total

  	
   

  	
  $

  	
  4,600,000

  	
   

  	
  5,750,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Combined Total

  	
   

  	
  $

  	
  20,800,000

  	
   

  	
  26,000,002

  	
   

  

 

*Calculated by
dividing the applicable New Note Principal Amount by $0.80

 

 

EXHIBIT B-1

 

FORM OF WARRANT

 

 

EXHIBIT C

 

FORM OF NOTE

 

 

EXHIBIT D

 

FORM OF AMENDED AND RESTATED SECURITY AGREEMENT

 

 

EXHIBIT E

 

FORM OF AMENDMENT NO.2 TO INTERCREDITOR AGREEMENT

 

 

EXHIBIT F

 

FORM OF AMENDED AND RESTATED INTERCREDITOR AGREEMENT

 

 

EXHIBIT G

 

FORM OF AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT

 

 

EXHIBIT H

 

SCHEDULE OF EXCEPTIONSExhibit 10.2

 

FOCUS ENHANCEMENTS, INC.

 

AMENDED AND RESTATED SECURITY AGREEMENT

 

THIS AMENDED AND RESTATED SECURITY AGREEMENT (this “Agreement”) is
dated as of February 7, 2008 (the “ Effective Date “) and is made
by and among Focus Enhancements, Inc. (the “ Company “), the Senior
Secured Note Purchasers identified in Exhibit A hereto (“Purchasers”),
under that certain Amended and Restated Senior Secured Note Purchase Agreement
of even date herewith, and THOMAS O. BOUCHER, JR., in his capacity as
agent for such Purchasers (“ Purchasers’ Agent “).

 

RECITALS

 

A.                                   The
Company and certain of the  Purchasers
(the “Original Purchasers”) previously entered into a Security Agreement dated
as of January 24, 2006 relating to loans made by such Original Purchasers
to the Company in the initial amount of $10,000,000 (the “Original Security
Agreement”) which initial amount has subsequently increased. The Company, a
Majority-In-Interest of such Original Purchasers, and the Purchasers’ Agent
desire to amend and restate the Original Security Agreement and to add the New
Purchasers as identified below as beneficiaries and holders of the same
security interests granted to the Original Purchasers under the Original
Security Agreement. This Agreement is intended to and does completely amend and
restate, without novation, the Original Security Agreement.

 

B.                                     In
addition to the Original Purchasers, certain other persons have purchased Notes
under that Amended and Restated Senior Secured Note Purchase Agreement (the “New
Purchasers”) and wish to become a party to this Agreement on terms pari passu
with the Original Purchasers. The Original Purchasers and the New Purchasers
shall be referred to herein collectively as the “Purchasers,” each a “Purchaser.”

 

C.                                     The
Purchasers have agreed to lend the Company up to $20,800,000 pursuant to
certain Amended and Restated Senior Secured Notes Due January 1, 2011
issued by the Company (the “Notes”), pursuant to the terms of the Amended and
Restated Senior Secured Note Purchase Agreement dated the same date as this
Agreement (the “Purchase Agreement”).

 

D.                                    To
induce the Purchasers to lend to the Company under the Notes, the Company has
agreed to pledge and grant a security interest in the Collateral as security
for the Secured Obligations (each as defined below).

 

NOW, THEREFORE, the parties (which include a Majority-in-Interest of
the holders of the Original Notes under the Original Security Agreement) amend
and restate the Original Security Agreement and 
agree as follows:

 

1

 

1.
                                    
DEFINITIONS.

 

All capitalized terms defined in the Purchase Agreement have the same
meanings when used in this Agreement. In addition, the following capitalized
terms used in this Agreement shall have the following meanings under this
Agreement:

 

1.1
                                
“ Collateral “ means the property described in Exhibit B
hereto.

 

1.2                                 
“ Company Intellectual Property Rights “ means all of the Company’s: 
(i) United States and foreign letters patent, utility models, and
applications therefor, and other indicia of invention ownership, including any
such rights granted upon any reissue, division, continuation or
continuation-in-part applications; (ii) all copyright rights and all
other literary property, software (in both object and source code), and author
rights, whether or not copyrightable, all copyrights and copyrighted interests,
and all mask works and registered mask works, including any registrations and
renewals of any of the foregoing, which are owned by or licensed to the
Company; (iii) trade secrets and know how with respect to all of the
foregoing; (iv) trademarks and service marks; and (v) any and other
intellectual property rights of any nature owned or licensed by the Company
which are necessary to enable the Company to manufacture any of its products
and other products which incorporate, contain, or embody any and all of the
foregoing, including, without limitation, the registered intellectual property
rights as listed on Exhibit C attached hereto.

 

1.3
                                
“ Intellectual Property Security Agreement “ means the instruments for
perfecting security interests in Company Intellectual Property Rights referred
to in Section 2.3.

 

1.4
                                
“ Secured Obligations “ means the Company’s obligations and liabilities
to the Purchasers under and pursuant to the Notes (including, without
limitation, the Company’s obligation to timely pay the principal amount of, and
interest on, the Notes) and any fees or other amounts payable by either the
Company under any Loan Document.

 

1.5
                                
“ Uniform Commercial Code “ means the Uniform Commercial Code
as in effect in the state of California from time to time or, by reason of
mandatory application, any other applicable jurisdiction.

 

2.
                                    
GRANT OF SECURITY INTEREST; COLLATERAL .

 

2.1
                                
Grant. All security interests granted under the Original Security
Agreement are hereby confirmed and ratified in all respects and shall continue
to secure all obligations under this Agreement. Subject to the terms and
conditions of the Loan Documents and as collateral security for the prompt
payment in full when due (whether at stated maturity, by acceleration or
otherwise) and performance of the Secured Obligations, the Company hereby
pledges and grants to Purchasers and Purchasers’ Agent, for the exclusive
benefit of Purchasers, a continuing security interest in all of the Company’s
right, title and interest in and to the Collateral, whether now owned or
hereafter acquired by the Company and whether now existing or hereafter coming
into existence, which shall remain in effect until indefeasible payment and
performance in full of all of the Secured Obligations.

 

2

 

2.2
                                
The Company Remains Liable . The Company shall remain liable to perform its
duties and obligations under the contracts and agreements included in the
Collateral in accordance with their respective terms to the same extent as if
this Agreement had not been executed and delivered. The exercise by Purchasers’
Agent or any Purchaser of any right, remedy, power or privilege in respect of
this Agreement shall not release the Company from any of its duties and
obligations under such contracts and agreements. Neither Purchasers’ Agent nor
any Purchaser shall have any duty, obligation or liability under such contracts
and agreements or in respect to any government approval included in the
Collateral by reason of this Agreement or any other Loan Document, nor shall
Purchasers’ Agent or any Purchaser be obligated to perform any of the
duties or obligations of the Company under any such contract or agreement or
any such government approval or to take any action to collect or enforce any
claim (for payment) under any such contract or agreement or government
approval.

 

2.3
                                
Perfection; Financing Statement . Within ten (10) days of the
execution and delivery of this Agreement, the Company shall (a) file or
amend such existing financing statements and other documents on file in such
offices (including without limitation the filing of notices with the United
States Copyright Office and Patent and Trademark Office and any office in any
other country for the perfection of security interests in the Company
Intellectual Property Rights), including one or more Intellectual Property Security
Agreements, as shall be necessary or as Purchasers’ Agent may request to
perfect and establish the priority (subject only to Permitted Liens) of the
Liens granted by this Agreement, and (b) take all such other actions as
shall be necessary or as Purchasers’ Agent may request to perfect and
establish the priority (subject only to such Permitted Liens) of the Liens
granted by this Agreement. If any recording or filing thereof (or the filing of
any statements of continuation or assignment of any financing statement) is
required to protect and preserve such lien or security interest, the Company
shall at its cost execute the same at the time and in the manner requested by
the Purchasers. To the fullest extent permitted by applicable law, the Company
authorizes Purchasers’ Agent to file any such financing statements without the
signature of the Company.

 

2.4
                                
Use of Collateral . So long as an Event of Default does not exist, the
Company shall have the right (a) to use and possess the Collateral, (b) to
exercise its rights, title and interest in all contracts, agreements, licenses
and government approvals related thereto, and (c) to manage its property
and sell its inventory in the ordinary course of business.

 

2.5
                                
Intercreditor Arrangements . The parties agree that the rights of
Purchasers’ Agent and the Purchasers in the Collateral are subject to
subordination to the Bank Security Interest for the Bank Loan as set forth in
the Purchase Agreement and the Amended and Restated Intercreditor Agreement. The
Purchasers and Purchasers’ Agent acknowledge and agree that the rights and
remedies of the Purchasers with respect to the Collateral are further subject
to allocation and sharing arrangements with respect to the Berg Security
Interest that are set forth in the New Intercreditor Agreement.

 

3.
                                    
REPRESENTATIONS, WARRANTIES AND COVENANTS .

 

3.1
                                
Other Financing Statements . The Company represents and warrants to the
Purchasers and Purchasers’ Agent that, other than financing statements,
security 

 

3

 

agreements,
chattel mortgages, assignments, copyright security agreements or collateral
assignments, patent or trademark security agreements or collateral assignments,
fixture filings and other agreements or instruments executed, delivered, filed
or recorded for the purpose of granting or perfecting any Lien in connection
with any Permitted Lien and financing statements in favor of Purchasers’ Agent
and the Purchasers, no effective financing statement or similar document naming
the Company as debtor, assignor, grantor, mortgagor, pledgor or the like and
covering all or any part of the Collateral is on file in any filing or
recording office in any jurisdiction.

 

3.2
                                
Separate Obligations and Liens . The Company acknowledges and agrees
that, subject to Section 5: (a) the Secured Obligations represent
separate and distinct indebtedness, obligations and liabilities of the Company
to each of the Purchasers, which the Company is separately obligated to each
Purchaser to pay and perform, in each case regardless of whether or not any
indebtedness, obligation or liability to any other Purchaser or any other
person or entity, or any agreement, instrument or guaranty that evidences any
such other indebtedness, liability or obligation, or any provision thereof,
shall for any reason be or become void, voidable, unenforceable or discharged,
whether by payment, performance, avoidance or otherwise; and (b) the Lien
that secures each Purchaser’s respective Secured Obligations (i) is
separate and distinct from any and all other Liens on the Collateral, (ii) is
enforceable without regard to whether or not any other Lien shall be or become
void, voidable or unenforceable or the indebtedness, obligations or liabilities
secured by any such other Lien shall be discharged, whether by payment,
performance, avoidance or otherwise, and (iii) shall not merge with or be
impaired by any other Lien.

 

3.3
                                
Other Liens . Without the prior written consent of Purchasers’ Agent,
the Company shall not dispose of any Collateral, create, incur, assume or
suffer to exist any Liens, except Permitted Liens, upon any Collateral, or file
or suffer to be on file or authorize to be filed, in any jurisdiction, any
financing statement or like instrument with respect to all or any part of
the Collateral in which Purchasers Agent is not named as the sole lender for
the benefit of the Purchasers; provided that no such consent will be required
with respect to any disposition of Collateral pursuant to a Fundamental Change,
or in the ordinary course of the Company’s business;.

 

3.4
                                
Applicable laws . The Company shall not use the Collateral in violation
of any applicable statute, ordinance, law or regulation or in violation of any
insurance policy maintained by the Company with respect to the Collateral.

 

3.5                                 
Records; Insurance . The Company will at all times keep in a manner
reasonably satisfactory to Purchasers’ Agent accurate and complete records of
the Collateral and will keep such Collateral insured to the extent similarly
situated companies insure their assets. Purchasers’ Agent shall be entitled, at
reasonable times and intervals after reasonable notice to the Company, to enter
any of the Company’s premises for purposes of inspecting the Collateral and the
Company’s books and records relating thereto.

 

3.6
                                
Notices, Reports and Information . The Company will (i) notify
Purchasers’ Agent of any material claim made or asserted against the Collateral
by any person or 

 

4

 

entity and of
any material change in the composition of the Collateral or other event which
could materially adversely affect the value of the Collateral or any Purchaser’s
Lien thereon; (ii) furnish to Purchasers’ Agent such statements and
schedules further identifying and describing the Collateral and such other
reports and other information in connection with the Collateral as Purchasers’
Agent may reasonably request, all in reasonable detail; and (iii) upon
request of Purchasers’ Agent make such demands and requests for information and
reports as the Company is entitled to make in respect of the Collateral.

 

3.7
                                
Disposition of Collateral . The Company will not, except in the ordinary
course of its business, (i) surrender or lose possession of (other than to
Purchasers’ Agent), sell, lease, rent, or otherwise dispose of or transfer any
of the Collateral or any right or interest therein, except to the extent
permitted by this Agreement or the Purchase Agreement, or (ii) remove any
of the Collateral from its present location (other than disposals of Collateral
permitted by Section 3.7(i)) except upon at least 30 days’ prior written
notice to Purchasers’ Agent.

 

3.8
                                
Further Assurances . The Company agrees that, from time to time upon the
written request of Purchasers’ Agent, the Company will execute and deliver such
further documents and do such other acts and things as Purchasers’ Agent may reasonably
request in order fully to effect the purposes of this Agreement.

 

3.9
                                
Organization and Qualification . The Company is a corporation duly
organized, validly existing and in good standing under the laws of Delaware. The
Company has all requisite power and authority to conduct its business and own
its property.

 

3.10
                          
Intellectual Property . The Company represents and warrants that Exhibit C
lists all registered patents, trademarks, service marks, copyrights and mask
works of the Company, and any and all applications for each of the foregoing,
and the registration status of each of the foregoing.

 

4.
                                    
DEFAULT.

 

4.1
                                
Remedies Upon Default . Upon the occurrence and during the continuation
of any Event of Default, the Purchasers shall have, in addition to all other
rights and remedies provided under any of the Loan Documents or by applicable
law, all of the rights and remedies of a secured party under the Uniform Commercial
Code, including, but not limited to, the right to take possession of the
Collateral (subject, in all cases, to the provisions set forth in the Security
Agreement), and for that purpose Purchasers’ Agent may, and the Company hereby
authorizes Purchasers’ Agent and its authorized representatives to, enter upon
any premises on which Collateral may be located or situated and remove the
same therefrom or without removal render the same unusable and may use or
dispose of the Collateral on such premises without any liability for rent,
storage, utilities or other sums, and upon request the Company shall, to the
extent practicable, assemble and make the Collateral available to Purchasers’
Agent at a place to be designated by Purchasers’ Agent, which is reasonably
convenient to the Company and Purchasers’ Agent. The Company agrees that, to
the extent notice of sale shall be required by law, at least five days’ notice
to the Company of the time and place of any public sale or the time 

 

5

 

after which
any private sale or any other intended disposition is to be made shall
constitute reasonable notification of such sale or disposition. Purchasers’
Agent shall also have the right to apply for and have a receiver appointed by a
court of competent jurisdiction in any action taken by Purchasers’ Agent to
enforce its rights and remedies hereunder, to manage, protect and preserve the
Collateral or continue the operation of the business of the Company, and
Purchasers’ Agent shall be entitled to collect all revenues and profits thereof
and apply the same to the payment of all expenses and other charges of such
receivership, including the compensation of the receiver, and to the payment of
the Note until a sale or other disposition of such Collateral shall be finally
made and consummated. In the event of any disposition or collection of or any
other realization upon all or any part of the Collateral, Purchasers’
Agent shall apply the proceeds of such disposition, collection or other
realization as follows:

 

(1)                                  
First, to the payment of the reasonable costs and expenses of Purchasers’ Agent
and the Purchasers in exercising or enforcing their rights hereunder,
including, but not limited to, costs and expenses incurred in retaking, holding
or preparing the Collateral for sale, lease or other disposition, and to the
payment of all expenses of the Purchasers pursuant to Section 6.4;

 

(2)                                  
Second, to the payment of the Note and all other Obligations (as that term is
defined in the Security Agreement); and

 

(3)                                  
Third, the surplus, if any, shall be paid to the Company or to whomsoever may be
lawfully entitled to receive such surplus.

 

4.2                                 
NO WAIVER OF RIGHTS BY PURCHASERS’ AGENT OR THE PURCHASERS . PURCHASERS’
AGENT’S OR THE PURCHASERS’ ACCEPTANCE OF PARTIAL OR DELINQUENT PAYMENT FROM THE
COMPANY UNDER ANY NOTE OR HEREUNDER, OR PURCHASERS’ AGENT’S OR THE PURCHASERS’
FAILURE TO EXERCISE ANY RIGHT HEREUNDER, SHALL NOT CONSTITUTE A WAIVER OF ANY
OBLIGATION OF THE COMPANY HEREUNDER, OR ANY RIGHT OF PURCHASERS’ AGENT’S OR THE
PURCHASERS HEREUNDER, AND SHALL NOT AFFECT IN ANY WAY THE RIGHT TO REQUIRE FULL
PERFORMANCE AT ANY TIME THEREAFTER.

 

5.
                                             APPOINTMENT
OF AGENTS; LENDER AGREEMENTS.

 

5.1
                                
Appointment; Joint Action . Each Purchaser hereby irrevocably appoints
and authorizes Purchasers’ Agent to act as its agent under this Agreement with
such powers as are specifically delegated to Purchasers’ Agent by the terms of
the Purchase Agreement, together with such other powers as are reasonably
incidental to such powers; provided , however , that any action
required or permitted to be taken by Purchasers’ Agent under this Agreement or
any other Loan Documents shall require the consent of Purchasers’ Agent.

 

5.2
                                
Attorney-in-Fact . Purchasers’ Agent is hereby appointed
attorney-in-fact of the Company for the purpose of carrying out the provisions
of this Agreement and taking any action and executing any instruments which
Purchasers’ Agent may deem 

 

6

 

necessary or
advisable to accomplish the purposes of this Agreement, to preserve the
validity, perfection and priority of the Liens granted by this Agreement and,
following any Event of Default, to exercise his or their rights, remedies,
powers and privileges under this Agreement, the Amended Intercreditor Agreement
and the New Intercreditor Agreement. This appointment as attorney-in-fact is
irrevocable and coupled with an interest. Without limiting the generality of
the foregoing, Purchasers’ Agent shall be entitled under this Agreement upon
the occurrence and continuation of any Event of Default (i) to ask,
demand, collect, sue for, recover, receive and give receipt and discharge for
amounts due and to become due under and in respect of all or any part of
the Collateral; (ii) to receive, endorse and collect any instruments,
documents and chattel paper in connection with clause (i) above (including
any draft or check representing the proceeds of insurance or the return of
unearned premiums); (iii) to file any claims or take any action or
proceeding that Purchasers’ Agent may deem necessary or advisable for the
collection of all or any part of the Collateral, including the collection
of any compensation due and to become due under any contract or agreement with
respect to all or any part of the Collateral; and (iv) to execute, in
connection with any sale or disposition of the collateral under Section 4,
any endorsements, assignments, bills of sale or other instruments of conveyance
or transfer with respect to all or any part of the Collateral.

 

5.3
                                
Payments Pro Rata . Purchasers’ Agent and the Purchasers agree that
payments to the Purchasers under the Notes shall be made in proportion to the
principal and accrued interest then outstanding under each Note on any such
date of payment to each, until such obligations are paid or retired in full.

 

5.4
                                
Sharing of Payments . If any Purchaser shall at any time receive any
payment of principal, interest or other charge arising under a Note, or upon
any other obligation of the Company or any sums by virtue of counterclaim,
offset, or other lien that may be exercised, or from any security, other
than payments made on the same date and pro rata to all the Purchasers, such
Purchaser shall return such payment to Purchasers’ Agent, who shall immediately
dispense such payment or payments ratably among all the Purchasers so as to
maintain as near as possible the unpaid balance of the loans pro rata according
to the Purchasers’ proportionate interests.

 

6.
                                    
MISCELLANEOUS .

 

6.1
                                
Termination . When all Secured Obligations shall have been paid in full,
this Agreement shall terminate, and Purchasers’ Agent shall forthwith cause to
be assigned, transferred and delivered, against receipt but without any
recourse, warranty or representation whatsoever, any remaining Collateral and
money received in respect of the Collateral, to or on the order of the Company
and to be released, canceled and granted back all licenses and rights referred
to in Section 2. Purchasers’ Agent shall also execute and deliver to the
Company upon such termination such Uniform Commercial Code termination
statements and such other documentation as shall be reasonably requested by the
Company to effect the termination and release of the Liens granted by this
Agreement on the Collateral.

 

6.2
                                
Waiver . No failure on the part of Purchasers’ Agent or any
Purchaser to exercise and no delay in exercising, and no course of dealing with
respect to, any 

 

7

 

right, remedy,
power or privilege under this Agreement shall operate as a waiver of such
right, remedy, power or privilege, nor shall any single or partial exercise of
any right, power or privilege under this Agreement preclude any other or
further exercise of any such right, remedy, power or privilege or the exercise
of any other right, remedy, power or privilege. The rights, remedies, powers
and privileges provided in this Agreement are cumulative and not exclusive of
any rights, remedies, powers and privileges provided by law.

 

6.3
                                
Notices . All notices and other communications given in accordance with
the provisions of Section 12.5 of the Purchase Agreement and addressed
shall be deemed to have been given and received for all purposes of this
Agreement and addressed to the intended recipient as follows, or to such other
address or number as may be specified from time to time by like notice to
the parties:

 

To the Company:

 

Focus Enhancements, Inc.

1370 Dell Avenue

Campbell, CA  95008

Facsimile No.: (408) 866-4795

Attention:  Chief Financial Officer

To Purchasers’ Agent:

 

Ingalls & Snyder, LLC

61 Broadway

New York, NY 10006

Facsimile No.:  (212) 269-7893

Attention:  Thomas O. Boucher, Jr.

 

To the Purchasers:

 

To the address of each Purchaser as set forth on Exhibit A.

 

Any party may from
time to time specify a different address for notices by like notice to the
other parties.

 

6.4
                                
Expenses . The Company agrees to pay or to reimburse Purchasers’ Agent
and the Purchasers for all costs and expenses (including reasonable attorney’s
fees and expenses) that may be incurred by Purchasers’ Agent or the
Purchasers in any effort to enforce any of the provisions of Section 4 or
any of the obligations of the Company in respect of the Collateral or in
connection with the preservation of the Lien of, or the rights of Purchasers’
Agent and the Purchasers, under this Agreement or with any actual or attempted
sale, lease, disposition, exchange, collection, compromise, settlement or other
realization in respect of, or care of the Collateral, including all such costs
and expenses (and reasonable attorney’s fees and expenses) incurred in any
bankruptcy, reorganization, workout or other similar proceeding.

 

8

 

6.5
                                
Amendments . Any provision of this Agreement may be modified,
supplemented or waived only by an instrument in writing duly executed by the
Company and Purchasers’ Agent (with the consent of the Majority-in-Interest of
the Notes). Any such modification, supplement or waiver shall be for such
period and subject to such conditions as shall be specified in the instrument
effecting the same and shall be binding upon Purchasers’ Agent and each
Purchaser, each holder of any of the Secured Obligations and the Company, and
any such waiver shall be effective only in the specific instance and for the
purposes for which given.

 

6.6
                                
Successors and Assigns . This Agreement shall be binding upon and inure
to the benefit of the Company, Purchasers’ Agent, the Purchasers and each
holder of any of the Secured Obligations and their respective successors and
permitted assigns.

 

6.7
                                
Survival . All representations and warranties made in this Agreement or
in any certificate or other document delivered pursuant to or in connection
with this Agreement shall survive the execution and delivery of this Agreement
or such certificate or other document (as the case may be) or any deemed
repetition of any such representation or warranty.

 

6.8
                                
Severability . Any provision of this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions of this Agreement, and any such
prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.

 

6.9
                                
Captions . The table of contents and captions and section headings
appearing in this Agreement are included solely for convenience of reference
and are not intended to affect the interpretation of any provision of this
Agreement.

 

6.10
                          
Counterparts . This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument and any of the parties to this Agreement may execute this
Agreement by signing any such counterpart.

 

6.11
                       
Governing Law; Submission to Jurisdiction . This Agreement shall be
governed by and construed under the laws of California, without reference to
its principles of conflicts of laws.

 

IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the day and year first above written.

 

9

 

	
  COMPANY:

  	
   

  	
   

  
	
   

  	
  FOCUS
  ENHANCEMENTS, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
  /s/ Brett
  Moyer

  
	
   

  	
   

  	
  Name:

  	
  Brett Moyer

  
	
   

  	
   

  	
  Title:

  	
  President &
  CEO

  
						

 

 

	
  PURCHASERS’ AGENT:

  	
   

  
	
   

  	
  /s/ Thomas
  O. Boucher, Jr.

  
	
   

  	
     THOMAS
  O. BOUCHER, JR.

  

 

 

	
  PURCHASERS:

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	 

									

 

[Add
required witness declarations for grant of power of attorney

in California or New York]

 

SIGNATURE PAGE FOR AMENDED AND RESTATED
SECURITY AGREEMENT

 

 

EXHIBIT A

 

PURCHASERS

 

ORIGINAL
PURCHASERS

	
  Name

  	
   

  
	
  Barbara
  Shingleton Trust

  	
   

  
	
  Brad
  Shingleton Trust

  	
   

  
	
  CFG Trust #1

  	
   

  
	
  David Foote

  	
   

  
	
  Donald L.
  Foote Trust #1

  	
   

  
	
  Heritage
  Mark Foundation, Inc.

  	
   

  
	
  Ingalls &
  Snyder Value Partners, L.P.

  	
   

  
	
  Kenneth
  Foote

  	
   

  
	
  Rhonda
  Foote-Judy

  	
   

  
	
  Ronald Altman

  	
   

  
	
  Steven Foote

  	
   

  
	
  Steven Foote
  IRA

  	
   

  
	
  Theresa
  Foote

  	
   

  

 

  NEW
PURCHASERS

	
  Name

  	
   

  
	
  First
  National Bancshares Inc.

  	
   

  
	
  Blythefield
  Farms

  	
   

  
	
  Inky
  Investments

  	
   

  
	
  Steadfast
  LLC

  	
   

  
	
  Shannah
  Ferguson

  	
   

  
	
  Ferguson
  Children’s Trust

  	
   

  
	
  Blake
  Ashdown IRA

  	
   

  
	
  MacBay
  Partners

  	
   

  
	
  Horace Boone

  	
   

  
	
  John Boone

  	
   

  
	
   

  	
   

  

 

 

 

EXHIBIT B

 

COLLATERAL

 

“ Collateral
“ means all current and hereafter acquired personal Property of the Company,
including all insurance relating thereto, and including all Accounts, Deposit
Accounts, Equipment, General Intangibles, Inventory and Negotiable Collateral,
and any and all proceeds, as defined in the UCC, thereof, to the extent that
the Company is not contractually prohibited from granting a security interest
in such Property.  For purposes of this definition of Collateral the
foregoing terms have the following meaning:

 

“ Account
Debtor “ means any Person who is or who may become obligated under, with
respect to or on account of an Account.

 

“ Accounts
“ means all of the Company’s currently existing and hereafter arising accounts,
as defined in UCC Section 9102(a)(2), including any contract rights to
payment arising out of the sale or lease of goods or the rendition of services
by the Company, irrespective of whether earned by performance, and any and all
credit insurance, guarantees or security therefor.

 

“ Deposit
Accounts “ means all deposit accounts, as defined in UCC Section 9102(a)(29),
now or hereafter held in the Company’s name.

 

“ Equipment
“ means all of the Company’s present and hereafter acquired machinery, machine
tools, motors, computers, equipment, furniture, furnishings, fixtures, vehicles
(including motor vehicles and trailers), tools, parts, goods, wherever located,
including all attachments, accessories, accessions, replacements,
substitutions, additions and improvements to any of the foregoing.

 

“ General
Intangibles “ means all of the Company’s present and future general
intangibles and other personal Property (including contract rights, rights
arising under common law, statutes or regulations, choses or other things in
action, goodwill, patents, trade names, trade secrets, trademarks, service
marks, copyrights, blueprints, drawings, purchase orders, customer lists,
monies due or recoverable from pension funds, route lists, rights to payment,
and other rights under any royalty or licensing agreements, infringement
claims, computer programs, information contained on computer disks or tapes,
literature, reports, catalogs, deposit accounts, insurance premium rebates, tax
refunds and tax refund claims), other than goods, Accounts and Negotiable
Collateral.

 

“ Inventory
“ means all present and future inventory in which the Company has any interest,
including goods held for sale or lease or to be furnished under a contract of
service and all of the Company’s present and future raw materials, work in
process, finished goods and packing and shipping materials, wherever located.

 

“ Negotiable
Collateral “ means all of the Company’s present and future letters of
credit, letter of credit rights, notes, drafts, instruments, investment
property, securities (including the 

 

 

shares of
capital stock or other equity or membership interests of United States
subsidiaries of the Company), documents, personal property leases (wherein the
Company is the lessor) and chattel paper.  (Any terms used in the
preceding sentence that are defined in the UCC shall have the meanings set
forth therein.)

 

 

EXHIBIT C

 

COMPANY INTELLECTUAL PROPERTY RIGHTS

 

 

COMPANY INTELLECTUAL PROPERTY RIGHTS

 

	
  Atty

  	
   

  	
  Docket

  No.

  	
   

  	
  Title

  	
   

  	
  App. No.

  	
   

  	
  Filing 

  Date

  	
   

  	
  Patent 

  No.

  	
   

  	
  Issue 

  Date

  	
   

  
	
  SH&B

  	
   

  	
  1490

  	
   

  	
  BILINEAR
  DECIMATOR WITH ERROR COMPENSATION

  	
   

  	
  08/822,810

  	
   

  	
  3/24/1997

  	
   

  	
  5,862,268

  	
   

  	
  1/19/1999

  	
   

  
	
  SH&B

  	
   

  	
  1490EP

  	
   

  	
   

  	
   

  	
  98913161.0

  	
   

  	
   

  	
   

  	
  0 970 582

  	
   

  	
  7/4/2001

  	
   

  
	
  SH&B

  	
   

  	
  2082

  	
   

  	
  TWO-DIMENSIONAL
  ADJUSTABLE FLICKER FILTER

  	
   

  	
  09/239,081

  	
   

  	
  1/27/1999

  	
   

  	
  6,346,970

  	
   

  	
  2/12/2002

  	
   

  
	
  SH&B

  	
   

  	
  2100

  	
   

  	
  IMPROVED
  CABLE-TO-BOARD ARRANGEMENTS FOR ENHANCED RF SHIELDING

  	
   

  	
  09/152,357

  	
   

  	
  9/14/1998

  	
   

  	
  6,004,145

  	
   

  	
  12/21/1999

  	
   

  
	
  SH&B

  	
   

  	
  2101

  	
   

  	
  MOTION ADAPTIVE DE-INTERLACE FILTER

  	
   

  	
  09/409,589

  	
   

  	
  9/30/1999

  	
   

  	
  6,330,032

  	
   

  	
  12/11/2001

  	
   

  
	
  SH&B

  	
   

  	
  2642

  	
   

  	
  METHOD AND
  APPARATUS FOR FREQUENCY DIVISION MULTIPLEXING

  	
   

  	
  10/778,699

  	
   

  	
  2/12/2004

  	
   

  	
  7,274,754

  	
   

  	
  9/25/2007

  	
   

  
	
  SH&B

  	
   

  	
  2642C1

  	
   

  	
   

  	
   

  	
  11/467,479

  	
   

  	
  8/25/2006

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  SH&B

  	
   

  	
  2642EP

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  SH&B

  	
   

  	
  2642JP

  	
   

  	
   

  	
   

  	
  2006-503524

  	
   

  	
  8/15/2005

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  SH&B

  	
   

  	
  2642K

  R

  	
   

  	
   

  	
   

  	
  10-2005-7015073

  	
   

  	
  8/16/2005

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  SH&B

  	
   

  	
  2642TW

  	
   

  	
   

  	
   

  	
  93103459

  	
   

  	
  2/13/2004

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  SH&B

  	
   

  	
  2642WO

  	
   

  	
   

  	
   

  	
  US04/04133

  	
   

  	
  2/12/2004

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  SH&B

  	
   

  	
  3155

  	
   

  	
  METHOD AND
  APPARATUS FOR TRANSMITTING DIGITAL VIDEO SIGNALS IN A DIGITAL VISUAL
  INTERFACE FORMAT OVE

  	
   

  	
  10/386,969

  	
   

  	
  3/11/2003

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

 

	
  SH&B

  	
   

  	
  3456

  	
   

  	
  ORTHOGONAL
  FREQUENCY MULTIPLEXING

  	
   

  	
  11/455,135

  	
   

  	
  6/16/2006

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  SH&B

  	
   

  	
  3456TW

  	
   

  	
   

  	
   

  	
  96121992

  	
   

  	
  6/20/2007

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  SH&B

  	
   

  	
  3456WO

  	
   

  	
   

  	
   

  	
  US07/70875

  	
   

  	
  6/11/2007

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  SH&B

  	
   

  	
  3648

  	
   

  	
  MULTI-BAND
  OFDM PASSBAND SAMPLING TRANSCIEVER

  	
   

  	
  60/949,300

  	
   

  	
  7/12/2007

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  SH&B

  	
   

  	
  3654

  	
   

  	
  A NEW DUAL CARRIER
  MODULATION (DCM) DEMAPPING SCHEME IN MB-UWB

  	
   

  	
  60/951,657

  	
   

  	
  7/24/2007

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  SH&B

  	
   

  	
  3710

  	
   

  	
  METHOD AND
  APPARATUS FOR 156 DCM MODULATION

  	
   

  	
  61/014,537

  	
   

  	
  12/18/2007

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  JPO

  	
   

  	
   

  	
   

  	
  SYSTEM AND METHODS FOR A RETAIL SYSTEM

  	
   

  	
  10/647,194

  	
   

  	
  8/15/2003

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

 

	
  Country

  	
   

  	
  Serial 

  Number

  	
   

  	
  Reg. Number

  	
   

  	
  Word Mark

  
	
  US

  	
   

  	
  78391047

  	
   

  	
  3056422

  	
   

  	
  PROXSYS

  
	
  EC

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  PROXSYS

  
	
  US

  	
   

  	
  78686382

  	
   

  	
   

  	
   

  	
  TALARIA

  
	
  US

  	
   

  	
  2854531

  	
   

  	
  2854531

  	
   

  	
  MEDIA
  MESSENGER

  
	
  US

  	
   

  	
  76381163

  	
   

  	
  2889669

  	
   

  	
  DIRECT TO
  EDIT

  
	
  EC

  	
   

  	
   

  	
   

  	
  2980902

  	
   

  	
  DIRECT TO
  EDIT

  
	
  Japan

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  DIRECT TO
  EDIT

  
	
  China

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  DIRECT TO
  EDIT

  
	
  US

  	
   

  	
  76379203

  	
   

  	
  2893741

  	
   

  	
  DTE
  TECHNOLOGY

  
	
  US

  	
   

  	
  76378376

  	
   

  	
  2757259

  	
   

  	
  CENTERSTAGE
  CS-1

  
	
  US

  	
   

  	
  75899886

  	
   

  	
  2636194

  	
   

  	
  COMMANDPOST

  
	
  US

  	
   

  	
  75461711

  	
   

  	
  2486481

  	
   

  	
  POPVIDEO

  
	
  US

  	
   

  	
  75295465

  	
   

  	
  2192896

  	
   

  	
  MXPRO

  
	
  US

  	
   

  	
  75231782

  	
   

  	
  2181934

  	
   

  	
  POWER SCRIPT

  
	
  US

  	
   

  	
  75061067

  	
   

  	
  2080244

  	
   

  	
  MEDIAMOTION

  
	
  US

  	
   

  	
  74728572

  	
   

  	
  1999714

  	
   

  	
  TVIEW

  
	
  US

  	
   

  	
  74599716

  	
   

  	
  2014303

  	
   

  	
  EDIT SUITE

  
	
  US

  	
   

  	
  76013735

  	
   

  	
  2541524

  	
   

  	
  DISTANCE DV

  
	
  US

  	
   

  	
  75831631

  	
   

  	
  2702867

  	
   

  	
  FIREWRITER

  
	
  US

  	
   

  	
  75282858

  	
   

  	
  2241914

  	
   

  	
  EFFETTO

  
	
  US

  	
   

  	
  73823590

  	
   

  	
  1622180

  	
   

  	
  VIDEONICS

  
	
  US

  	
   

  	
  77213760

  	
   

  	
   

  	
   

  	
  HD LESS WORK
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Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00136-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00136-of-00352.parquet"}]]