Document:

<PAGE>

                                                                    Exhibit 10.4

                          CONWAY-STUART MEDICAL, INC.

                           SERIES C PREFERRED STOCK

                              PURCHASE AGREEMENT

                                August 30, 1999
<PAGE>

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>
1.       Purchase and Sale of Shares........................................   1

         1.1      Sale of Shares............................................   1
         1.2      Closing...................................................   1

2.       Representations and Warranties of the Company......................   1

         2.1      Organization, Good Standing and Qualification.............   1
         2.2      Capitalization............................................   2
         2.3      Subsidiaries..............................................   2
         2.4      Authorization.............................................   2
         2.5      Valid Issuance of Preferred and Common Stock..............   3
         2.6      Governmental Consents.....................................   3
         2.7      Litigation................................................   3
         2.8      Proprietary Information and Inventions Agreements.........   4
         2.9      Patents and Trademarks....................................   4
         2.10     Compliance with Other Instruments.........................   4
         2.11     Agreements; Action........................................   4
         2.12     Disclosure................................................   5
         2.13     Registration Rights.......................................   5
         2.14     Title to Property and Assets..............................   5
         2.15     Minute Books..............................................   6
         2.16     Section 83(b) Elections...................................   6
         2.17     Financial Statements......................................   6
         2.18     Liabilities...............................................   6
         2.19     Changes...................................................   6
         2.20     Tax Returns, Payments and Elections.......................   7
         2.21     Insurance.................................................   8
         2.22     Labor Agreements and Actions..............................   8
         2.23     Employees.................................................   8
         2.24     Real Property Holding Corporation.........................   8
         2.25     Investment Company Act....................................   8
         2.26     Permits...................................................   9
         2.27     Environmental and Safety Laws.............................   9
         2.28     Food, Drug and Cosmetic Act...............................   9
         2.29     Year 2000.................................................   9
         2.30     Qualified Small Business Stock............................   9

3.       Representations and Warranties of the Investors....................  10

         3.1      Authorization.............................................  10
         3.2      Purchase Entirely for Own Account.........................  10
         3.3      No Public Market..........................................  10
         3.4      Disclosure of Information.................................  10
         3.5      Investment Experience.....................................  10
</TABLE>

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<TABLE>
<S>                                                                         <C>
         3.6      Restricted Securities.....................................  10
         3.7      Further Limitations on Disposition........................  11
         3.8      Legends...................................................  11

4.       Conditions of Investor's Obligations at the Closing................  11

         4.1      Representations and Warranties Correct....................  11
         4.2      Covenants.................................................  11
         4.3      Election of Directors.....................................  11
         4.4      Amended Certificate.......................................  11
         4.5      Stockholder Rights Agreement..............................  12
         4.6      Opinion of Company's Counsel..............................  12
         4.7      Compliance Certificate....................................  12
         4.8      Material Adverse Event....................................  12
         4.9      Proceedings and Documents.................................  12
         4.10     Operating Plan............................................  12
         4.11     Generator Production Plan.................................  12
         4.12     Minimum Investment........................................  12

5.       Conditions of the Company's Obligations at the Closing.............  12

         5.1      Representations and Warranties............................  12
         5.2      Payment of Purchase Price.................................  12
         5.3      Amended Certificate.......................................  13
         5.4      Qualifications, Legal Investment..........................  13
         5.5      Stockholder Rights Agreement..............................  13

6.       Covenants of the Company...........................................  13

         6.1      Market Standoff Agreements................................  13
         6.2      Board Meetings............................................  13
         6.3      Assignment of Repurchase Rights and Right of First Refusal  13
         6.4      Qualified Small Business Stock............................  13
         6.5      Proprietary Information and Inventions Agreement..........  14
         6.6      Changes to Series C Liquidation Preference................  14
         6.7      Termination of Covenants..................................  14

7.       Miscellaneous......................................................  14

         7.1      Successors and Assigns....................................  14
         7.2      Survival..................................................  14
         7.3      Governing Law.............................................  14
         7.4      Counterparts..............................................  14
         7.5      Titles and Subtitles......................................  14
         7.6      Notices...................................................  14
         7.7      Finder's Fee..............................................  15
         7.8      Amendments and Waivers....................................  15
         7.9      California Corporate Securities Law.......................  15
         7.10     Expenses..................................................  15
</TABLE>

                                     -ii-

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<TABLE>
<S>                                                                          <C>
         7.11     Severability..............................................  15
         7.12     Aggregation of Stock......................................  16
         7.13     Entire Agreement..........................................  16
EXHIBITS
</TABLE>

                  A        Schedule of Investors
                  B        Amended and Restated Certificate of Incorporation
                  C        Schedule of Exceptions
                  D        Amended and Restated Stockholder Rights Agreement
                  E        Opinion of Company Counsel

                                     -iii-
<PAGE>

                  SERIES C PREFERRED STOCK PURCHASE AGREEMENT

     THIS SERIES C PREFERRED STOCK PURCHASE AGREEMENT (the "Agreement") is made
as of the 30th day of August 1999, by and between Conway-Stuart Medical, Inc., a
Delaware corporation, located at 735 Palomar Avenue, Sunnyvale, CA, 94086 (the
"Company"), and the investors listed on Exhibit A hereto, each of which is
                                        ---------
herein referred to as an "Investor."

     THE PARTIES HEREBY AGREE AS FOLLOWS:

     1.   Purchase and Sale of Shares.
          ---------------------------

          1.1  Sale of Shares.
               --------------

               (a)  The Company shall adopt and file with the Secretary of State
of Delaware on or before the Closing (as defined below) an Amended and Restated
Certificate of Incorporation in the form attached hereto as Exhibit B (the
                                                            ---------
"Amended Certificate") which provides for the creation and issuance
of 10,500,000 shares of Series C Preferred Stock.

               (b)  Subject to the terms and conditions of this Agreement, each
Investor agrees to purchase and the Company agrees to sell and issue to each
Investor, that number of shares of the Company's Series C Preferred Stock, up to
a total of 10,333,333 shares, set forth opposite such Investor's name in
Exhibit A hereto at the purchase price of $1.50 per share.
---------

               (c)  The up to 10,333,333 shares of Series C Preferred Stock sold
to the Investors pursuant to this Agreement are hereinafter referred to as the
"Shares." The total amount of Common Stock and other securities issuable upon
conversion of the Shares is hereinafter referred to as the "Conversion Stock."
The Shares and the Conversion Stock are hereinafter collectively referred to as
the "Securities."

          1.2  Closing. The purchase and sale of the Shares shall take place at
               -------
the offices of Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo Alto,
California at 1:00 p.m., on August 30, 1999, or at such other time and place as
the Company and Investors mutually agree upon (which time and place are
designated as the "Closing"). At the Closing the Company shall deliver to each
Investor a certificate representing the Shares which such Investor is purchasing
against delivery to the Company by such Investor of a check, wire transfer or
cancellation of indebtedness in the aggregate amount of the purchase price
therefor payable to the Company's order.

     2.   Representations and Warranties of the Company. The Company hereby
          ---------------------------------------------
represents and warrants to each Investor that, as of the Closing and except as
set forth on a Schedule of Exceptions attached hereto as Exhibit C, which
                                                         ---------
exceptions shall be deemed to be representations and warranties as if made
hereunder:

          2.1  Organization, Good Standing and Qualification. The Company is a
               ---------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has all requisite corporate power and authority to
carry on its business as now
<PAGE>

conducted and as proposed to be conducted. The Company is duly qualified to
transact business and is in good standing in each jurisdiction in which the
failure so to qualify would have a material adverse effect on its business,
properties or financial condition or prospects.

          2.2  Capitalization. Immediately prior to the Closing, the authorized
               --------------
capital of the Company consists, or will consist, of:

               (a)  17,800,000 shares of Preferred Stock with a par value of
$0.001 (the "Preferred Stock"), of which 2,100,000 shares have been designated
Series A Preferred Stock, 5,200,000 shares have been designated Series B
--------                                                        --------
Preferred Stock and 10,500,000 shares have been designated Series C Preferred
Stock. Immediately prior to the Closing, the Company has issued and outstanding
1,871,000 shares of Series A Preferred Stock, 5,132,744 shares of Series B
Preferred Stock and warrants for the purchase of 210,000 shares of Series A
Preferred Stock. Up to 10,500,000 shares of Series C Preferred Stock will be
sold pursuant to this Agreement. The rights, preferences, privileges and
restrictions of the Shares will be as stated in the Amended Certificate.

               (b)  30,000,000 shares of Common Stock (the "Common Stock"), of
which 4,970,139 shares and warrants for the purchase of 64,000 shares are issued
and outstanding.

               (c)  4,700,000 shares of Common Stock reserved for issuance
pursuant to the Company's 1997 Stock Option Plan, under which no options have
been exercised and options exercisable for up to 1,998,000 shares of Common
Stock are issued and outstanding.

               (d)  Except as provided herein and except for (i) the conversion
privileges of the Preferred Stock and (ii) the right of first offer provided in
the Amended and Restated Stockholder Rights Agreement, the form of which is
attached hereto as Exhibit D (the "Rights Agreement"), there are no other
                   ---------
outstanding options, warrants, rights (including conversion or preemptive
rights) or agreements for the purchase or acquisition from the Company of any
shares of its capital stock.

          2.3  Subsidiaries. The Company does not presently own or control,
               ------------
directly or indirectly, any interest in any other corporation, association,
joint venture, partnership or other business entity.

          2.4  Authorization. All corporate action on the part of the Company,
               -------------
its officers, directors and stockholders necessary for the authorization,
execution and delivery of this Agreement and the Rights Agreement (collectively
the "Financing Documents"), the performance of all obligations of the Company
hereunder and thereunder and the authorization, issuance (or reservation for
issuance) and delivery of the Shares being sold hereunder and the Conversion
Stock has been taken or will be taken prior to the Closing, and the Financing
Documents constitute valid and legally binding obligations of the Company,
enforceable in accordance with their respective terms, subject to the effect of
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
federal or state laws affecting the rights of creditors and the effect of rules
of law governing specific performance, injunctive relief or other equitable
remedies.

                                      -2-
<PAGE>

          2.5  Valid Issuance of Preferred and Common Stock.
               --------------------------------------------

               (a)  The Securities, when issued, sold and delivered in
accordance with the terms hereof for the consideration expressed herein and
therein, (i) will be duly and validly issued, fully paid and nonassessable, (ii)
will not be subject to any preemptive rights or liens, claims or encumbrances
other than restrictions on transfer imposed pursuant hereto or any agreement
required hereunder or under applicable federal or state securities laws, and
(iii) based in part upon the representations of the Investors in this Agreement,
will be issued in compliance with all applicable federal and state securities
laws. The Conversion Stock has been duly and validly reserved for issuance and,
upon issuance in accordance with the terms of the Amended Certificate, shall be
duly and validly issued, fully paid and nonassessable, and issued in compliance
with all applicable securities laws, as presently in effect, of the United
States and each of the states whose securities laws govern the issuance of any
of the Shares hereunder.

               (b)  The outstanding shares of Common Stock and Preferred Stock
are all duly and validly authorized and issued, fully paid and nonassessable,
and were issued in compliance with all applicable federal and state securities
laws.

          2.6  Governmental Consents. No consent, approval, order or
               ---------------------
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state, local or provincial governmental authority on
the part of the Company is required in connection with the consummation of the
transactions contemplated by this Agreement, except for filings pursuant to any
state or federal securities laws.

          2.7  Litigation. There is no action, suit, proceeding or investigation
               ----------
pending or currently threatened against the Company which questions the validity
of the Financing Documents, or the right of the Company to enter into each such
agreement, or to consummate the transactions contemplated thereby, or which
might result, either individually or in the aggregate, in any material adverse
change in the assets, condition, affairs or prospects of the Company,
financially or otherwise, or any material change in the current equity ownership
of the Company, nor is the Company aware that there is any basis for the
foregoing. The foregoing includes, without limitation, actions pending or
threatened (or any basis therefor known to the Company) involving the prior
employment of any of the Company's employees, the use in connection with the
Company's business of any information or techniques allegedly proprietary to any
of the prior employment of the Company's employees, or their obligations under
any agreements with prior employers. The Company is not a party to, nor subject
to the provisions of, any order, writ, injunction, judgment or decree of any
court or government agency or instrumentality. There is no action, suit,
proceeding or investigation by the Company currently pending or which the
Company intends to initiate.

          2.8  Proprietary Information and Inventions Agreements. As of the date
               -------------------------------------------------
of the Closing, each current and former employee, consultant and officer of the
Company will have executed a Proprietary Information and Inventions Agreement.

                                      -3-
<PAGE>

          2.9   Patents and Trademarks. The Company has sufficient title and
                ----------------------
ownership of all patents, trademarks, service marks, trade names, copyrights,
trade secrets, information, proprietary rights and processes necessary for its
business as now conducted and as proposed to be conducted without any conflict
with or infringement of the rights of others. There are no outstanding options,
licenses, or agreements of any kind relating to the foregoing, nor is the
Company bound by or a party to any options, licenses or agreements of any kind
with respect to the patents, trademarks, service marks, trade names, copyrights,
trade secrets, licenses, information, proprietary rights and processes of any
other person or entity. The Company has not received any communications alleging
that the Company has violated or, by conducting its business as proposed, would
violate any of the patents, trademarks, service marks, trade names, copyrights
or trade secrets or other proprietary rights of any other person or entity. The
Company is not aware that any of its employees 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 nor delivery of the Financing
Documents, nor the carrying on of the Company's business by the employees of the
Company, nor the conduct 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 of such employees is now obligated. The
Company does not believe it is or will be necessary to utilize any inventions of
any of its employees (or people it currently intends to hire) made prior to
their employment by the Company.

          2.10  Compliance with Other Instruments. The Company is not in
                ---------------------------------
violation or default of any provisions of its Amended Certificate or Bylaws or
of any instrument, judgment, order, writ, decree or contract to which it is a
party or by which it is bound or, to its knowledge, of any provision of federal
or state statute, rule or regulation applicable to the Company. The execution,
delivery and performance of the Financing Documents, and the consummation of the
transactions contemplated hereby and thereby will not result in any such
violation or be in conflict with or constitute, with or without the passage of
time and giving of notice, either a default under any such provision,
instrument, judgment, order, writ, decree or contract or an event which results
in the creation of any lien, charge or encumbrance upon any assets of the
Company.

          2.11  Agreements; Action.
                ------------------

               (a)  Except for agreements explicitly contemplated hereby, there
are no material agreements, understandings or proposed transactions between the
Company and any of its officers, directors, affiliates, or any affiliates
thereof.

               (b)  There are no agreements, understandings, instruments,
contracts or proposed transactions, judgments, orders, writs or decrees to which
the Company is a party or by which it is bound which involve (i) obligations of,
or payments to the Company in excess of

                                      -4-
<PAGE>

$25,000, or (ii) the license of any patent, copyright, trade secret or other
proprietary right to or from the Company.

               (c)  The Company has not (i) declared or paid any dividends, or
authorized or made any distribution upon or with respect to any class or series
of its capital stock, (ii) incurred any indebtedness for money borrowed or
incurred any other liabilities individually in excess of $25,000 or in excess of
$50,000 in the aggregate, (iii) made any loans or advances to any person, other
than ordinary advances for travel expenses, or (iv) sold, exchanged or otherwise
disposed of any of its assets or rights, other than in the ordinary course of
business.

               (d)  The Company is not a party to and is not bound by any
contract, agreement or instrument, or subject to any restriction under its
Amended Certificate or Bylaws, which materially adversely affects its business
as now conducted or as proposed to be conducted, its properties or its financial
condition.

               (e)  The Company has not engaged in the past twelve (12) months
in any discussion (i) with any representative of any person regarding the
consolidation or merger of the Company with or into any such person, (ii) with
any corporation, partnership, association or other business entity or any
individual regarding the sale, conveyance or disposition of all or substantially
all of the assets of the Company, or a transaction or series of related
transactions in which more than fifty percent (50%) of the voting power of the
Company is disposed of, or (iii) regarding any other form of liquidation,
dissolution or winding up of the Company.

          2.12 Disclosure. The Company has fully provided each Investor with all
               ----------
the information which such Investor has requested for deciding whether to
purchase the Shares and all information which the Company believes is reasonably
necessary to enable such Investor to make such decision, including the Company's
current Business Plan. Neither the Financing Documents, nor any other statements
or certificates made or delivered in connection herewith, including the
Company's current Business Plan, contains any untrue statement of a material
fact or omits to state a material fact necessary to make the statements herein
or therein not misleading.

          2.13 Registration Rights. Except as provided in the Rights Agreement,
               -------------------
the Company has not granted or agreed to grant any registration rights,
including piggyback rights, to any person or entity.

          2.14 Title to Property and Assets. The Company owns its property and
               ----------------------------
assets free and clear of all mortgages, liens, loans and encumbrances, except
such encumbrances and liens which arise in the ordinary course of business and
do not impair the Company's ownership or use of such property or assets. With
respect to the property and assets it leases, the Company is in compliance with
such leases and, to its knowledge, holds a valid leasehold interest free of any
liens, claims or encumbrances.

                                      -5-
<PAGE>

          2.15 Minute Books. The minute books of the Company contains a complete
               ------------
and correct summary of all meetings of directors and stockholders since the time
of incorporation and reflect all transactions referred to in such minutes
accurately in all material respects.

          2.16 Section 83(b) Elections. To the best of the Company's knowledge,
               -----------------------
all elections and notices required by Section 83(b) of the Internal Revenue
Code, as amended (the "Code") and any analogous provisions of applicable state
tax laws have been timely filed by all individuals who have purchased shares of
the Company's Common Stock.

          2.17 Financial Statements. The Company has made available to each
               --------------------
Investor its unaudited financial statements (balance sheet, statement of
operations and cash flow) for the period of inception through the year ended as
of December 31, 1998 and its unaudited financial statements (balance sheet,
statement of operations, cash flow and related footnotes) for January 1, 1999
through June 30, 1999 (the "Financial Statements"). The Financial Statements
have been prepared in accordance with generally accepted accounting principles
applied on a consistent basis throughout the periods indicated and with each
other, except that the Financial Statements may not contain all footnotes
required by generally accepted accounting principles. The Financial Statements
fairly present the financial condition and operating results of the Company as
of the dates, and for the periods, indicated therein, subject, in the case of
unaudited financial statements, to normal year-end audit adjustments. Except as
set forth in the Financial Statements, the Company has no material liabilities,
contingent or otherwise, other than (i) liabilities incurred in the ordinary
course of business subsequent to the date of the Financial Statements, not to
exceed $25,000, and (ii) obligations under contracts and commitments incurred in
the ordinary course of business, not to exceed $25,000, and not required under
generally accepted accounting principles to be reflected in the Financial
Statements, which, in both cases, individually or in the aggregate, are not
material to the financial condition or operating results of the Company.

          2.18 Liabilities. The Company has no material liabilities and, to its
               -----------
knowledge, knows of no material contingent liabilities not disclosed in the
Financial Statements, except current liabilities incurred in the ordinary course
of business subsequent to the date of the Financial Statements which have not
been, either in any individual case or in the aggregate, materially adverse.

          2.19 Changes. Since June 30, 1999, there has not been:
               -------

               (a)  any change in the assets, liabilities, condition (financial
or otherwise), affairs, earnings, business, operations or prospects of the
Company from that reflected in the Financial Statements, except changes in the
ordinary course of business and consistent with past practice which have not
been, either in any case or in the aggregate, materially adverse to the Company;

               (b)  any change, except in the ordinary course of business, in
the contingent obligations of the Company by way of guaranty or any assurance of
performance or payment, endorsement, indemnity, warranty or otherwise, which
obligation is individually in excess of $25,000 or in excess of $50,000 in the
aggregate;

                                      -6-
<PAGE>

               (c)  any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the properties or business of the
Company;

               (d)  any waiver by the Company of a valuable right or of a
material debt owed to it;

               (e)  any material loan made by the Company to its employees,
officers or directors other than advances of expenses made in the ordinary
course of business and consistent with past practice;

               (f)  any material increase (or agreement or commitment to
materially increase) in the compensation of any of the Company's executive
employees, officers or directors;

               (g)  any declaration or payment of any dividend or other
distribution of the assets of the Company or any direct or indirect redemption,
purchase or acquisition of any of the Company's securities other than
repurchases of Common Stock from terminated employees, consultants, officers and
directors pursuant to written agreements;

               (h)  any debt, obligation or liability incurred, assumed or
guaranteed by the Company, except those for immaterial amounts or for current
liabilities incurred in the ordinary course of business;

               (i)  any sale, assignment or transfer of any patents, trademarks,
copyrights, trade secrets or other intangible assets;

               (j)  any change in any material agreement to which the Company is
a party or by which it is bound which materially and adversely affects the
business, assets, liabilities, financial condition, operations or prospects of
the Company, including compensation agreements with the Company's employees; or

               (k)  any other event or condition of any character which has or,
to the Company's knowledge, will likely in the future, materially and adversely
affect the Company's business, prospects, condition, affairs, operations,
properties or assets.

          2.20 Tax Returns, Payments and Elections. The Company has timely filed
               -----------------------------------
all tax returns and reports as required by law. These returns and reports are
true and correct in all material respects. The Company has paid all taxes and
other assessments due, except those contested by it in good faith that are
listed in the Schedule of Exceptions.

          2.21 Insurance. The Company maintains in full force and effect fire
               ---------
and casualty insurance policies, with coverage in sufficient amounts to allow it
to replace any of its properties that might be damaged or destroyed.

                                      -7-
<PAGE>

          2.22 Labor Agreements and Actions. The Company is not bound by or
               ----------------------------
subject to (and none of its assets or properties is bound by or subject to) any
written or oral, express or implied, contract, commitment or arrangement with
any labor union, and no labor union has requested or, to the best of the
Company's knowledge, has sought to represent any of the employees,
representatives or agents of the Company. There is no strike or other labor
dispute involving the Company pending, or to the best of the Company's
knowledge, threatened, that could have a material adverse effect on the assets,
properties, financial condition, operating results, or business of the Company
(as such business is presently conducted and as it is proposed to be conducted),
nor is the Company aware of any labor organization activity involving its
employees. The Company is not aware that any officer or key employee, or that
any group of key employees, intends to terminate their employment with the
Company, nor does the Company have a present intention to terminate the
employment of any of the foregoing. The employment of each officer and employee
of the Company is terminable at the will of the Company.

          2.23 Employees. The Company has no 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 has any agreement or contract, written or verbal, regarding his
employment. To the Company's knowledge, no employee of the Company, nor any
consultant with whom the Company has contracted, is in violation of any term of
any employment contract, proprietary information agreement or any other
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 with its
independent contractors, will not result in any such violation. The Company has
not received any notice alleging that any such violation has occurred. 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. The Company is not aware that any officer or key employee, or
that any group of key employees, 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.

          2.24 Real Property Holding Corporation. The Company is not a real
               ---------------------------------
property holding corporation within the meaning of Code Section 897(c)(2) and
any regulations promulgated thereunder.

          2.25 Investment Company Act. The Company is not an "investment
               ----------------------
company," or a company "controlled" by an "investment company," within the
meaning of the Investment Company Act of 1940, as amended.

          2.26 Permits. The Company 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 could materially and adversely affect the
business, properties, prospects, or financial condition of the Company and
believes it can obtain, without undue burden or expense, any similar authority
for the

                                      -8-
<PAGE>

conduct of its business as planned to be conducted. The Company is not in
default in any material respect under any of such franchises, permits, licenses,
or other similar authority.

          2.27 Environmental and Safety Laws. To the best of its knowledge, the
               -----------------------------
Company is not in violation of any applicable statute, law, or regulation
relating to the environment or occupational health and safety, and to the best
of its knowledge, no material expenditures are or will be required in order to
comply with any such existing statute, law, or regulation.

          2.28 Food, Drug and Cosmetic Act. To the best of its knowledge, the
               ---------------------------
Company is in compliance with the rules and regulations of the Federal Food,
Drug and Cosmetic Act, as amended, and any other applicable federal or state
law, regulation or statute related thereto.

          2.29 Year 2000. To the best of its knowledge, (i) the cost to the
               ---------
Company to complete any reprogramming required to permit the proper functioning,
in and following the year 2000, of the Company's software products, devices and
programs, whether currently in use or under development, and the computer
systems and equipment containing embedded microchips used in the Company's
business, and (ii) the reasonably foreseeable consequences for year 2000 to the
Company (including, without limitation, reprogramming errors, the performance of
software products or services provided by the Company and the failure of others'
systems or equipment) will not have a material adverse effect on the Company's
business.

          2.30 Qualified Small Business Stock.
               ------------------------------

               (a)  As of and immediately following the Closing Date, the Shares
will meet each of the requirements for qualification as "qualified small
business stock" set forth in Section 1202(c) of the Internal Revenue Code of
1986, as amended (the "Code"), including without limitation the following: (i)
the Company will be a domestic C corporation, (ii) the Company will not have
made any purchases of its own stock described in Code Section 1202(c)(3)(B)
during the one-year period preceding the Closing, and (iii) the Company's (and
any predecessor's) aggregate gross assets, as defined by Code Section
1202(d)(2), at no time between inception and through the Closing Date have
exceeded or will exceed $50 million, taking into account the assets of any
corporations required to be aggregated with the Company in accordance with Code
Section 1202(d)(3).

               (b)  As of the Closing Date, at least 80% (by value) of the
assets of the Company are used by it in the active conduct of one or more
qualified trades or businesses, as defined by Code Section 1202(e)(3), and the
Company is an eligible corporation, as defined by Code Section 1202(e)(4).

     3.   Representations and Warranties of the Investors. Each Investor hereby
          -----------------------------------------------
severally and not jointly represents and warrants that:

          3.1  Authorization. This Agreement constitutes its valid and legally
               -------------
binding obligation, enforceable in accordance with its terms, subject to the
effect of applicable bankruptcy,

                                      -9-
<PAGE>

insolvency, reorganization, moratorium or other similar federal or state laws
affecting the rights of creditors and the effect of rules of law governing
specific performance, injunctive relief or other equitable remedies.

          3.2  Purchase Entirely for Own Account. This Agreement is made with
               ---------------------------------
each Investor in reliance upon such Investor's representation to the Company,
which by such Investor's execution of this Agreement such Investor hereby
confirms, that the Shares will be acquired for investment for such Investor's
own account, not as a nominee or agent, and not with a view to the resale or
distribution of any part thereof, and that such Investor has no present
intention of selling, granting any participation in, or otherwise distributing
the same. By executing this Agreement, each Investor further represents that
such Investor does not have any contract, undertaking, agreement or arrangement
with any person to sell, transfer or grant participation to such person or to
any third person, with respect to any of the Securities. Each Investor
represents that it has full power and authority to enter into this Agreement.

          3.3  No Public Market. The Investor understands that no public market
               ----------------
now exists for any of the securities issued by the Company and that it is
uncertain whether a public market will ever exist for the Shares or the
Underlying Stock.

          3.4  Disclosure of Information. Each Investor believes it has received
               -------------------------
all the information it considers necessary or appropriate for deciding whether
to purchase the Shares. Each Investor further represents that it has had an
opportunity to ask questions and receive answers from the Company regarding the
terms and conditions of the offering of the Shares. The foregoing, however, does
not limit or modify the representations and warranties of the Company in
Section 2 of this Agreement, nor the right of the Investors to rely thereon.
---------

          3.5  Investment Experience. Each Investor is an investor in
               ---------------------
securities of companies in the development stage and acknowledges that it is
able to fend for itself, and bear the economic risk of the complete loss of its
investment and has such knowledge and experience in financial or business
matters that it is capable of evaluating the merits and risks of the investment
in the Shares. If other than an individual, Investor also represents that it has
not been organized for the purpose of acquiring the Shares.

          3.6  Restricted Securities. Each Investor understands that the Shares
               ---------------------
it is purchasing are characterized as "restricted securities" under the federal
securities laws inasmuch as they are being acquired from the Company in a
transaction not involving a public offering and that under such laws and
applicable regulations such securities may be resold without registration under
the Securities Act of 1933, as amended (the "Act") only in certain limited
circumstances. In this connection, each Investor represents that it is familiar
with Rule 144, as presently in effect, and understands the resale limitations
     --------
imposed thereby and by the Act.

          3.7  Further Limitations on Disposition. Without in any way limiting
               ----------------------------------
the representations set forth above, each Investor further agrees not to make
any disposition of all or any portion of the Shares (or the Conversion Stock)
except in compliance with the Rights Agreement.

                                      -10-
<PAGE>

          3.8  Legends. It is understood that the certificates evidencing the
               -------
Shares (and the Conversion Stock) may bear a legend in substantially the
following form:

               (a)  "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT
TO THE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE
144 OF SUCH ACT."

               (b)  Any legend required by the law of the State of California or
any other applicable state.

     4.   Conditions of Investor's Obligations at the Closing. The obligations
          ---------------------------------------------------
of each Investor under Section 1.1(b) of this Agreement are subject to the
fulfillment of each of the following conditions, the waiver of which shall not
be effective against any Investor who does not consent in writing thereto:

          4.1  Representations and Warranties Correct. The representations and
               --------------------------------------
warranties made in Section 2 hereof shall be true and correct when made, and
                   ---------
shall be true and correct on the Closing Date.

          4.2  Covenants. 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 respects.

          4.3  Election of Directors. The members of the Board of Directors as
               ---------------------
of the Closing shall be selected as set out in the Amended Certificate.
Additionally, the Bylaws shall provide for an authorized number of four to seven
directors, fixed at four directors. Immediately after the Closing the Board
shall consist of the following individuals: Tom Winter and Alan Kaganov, who
shall be the Series B Preferred Stock representatives, David Fann, who shall be
the Series C Preferred Stock representative and Stuart Edwards, who shall be the
designee of the holders of Series A Preferred Stock and Common Stock. Two Board
seats shall remain open, to be filled by a new Chief Executive Officer and an
outside independent director.

          4.4  Amended Certificate. The Amended Certificate, attached hereto as
               -------------------
Exhibit B, shall have been filed with the Secretary of State of the State of
---------
Delaware.

          4.5  Stockholder Rights Agreement. The Company and the Investors
               ----------------------------
shall have entered into the Rights Agreement attached hereto as Exhibit D.
                                                                ---------

          4.6  Opinion of Company's Counsel. At the Closing the Investors shall
               ----------------------------
have received from Wilson Sonsini Goodrich & Rosati, counsel to the Company, an
opinion in substantially the form attached hereto as Exhibit E.
                                                     ---------

                                      -11-
<PAGE>

          4.7  Compliance Certificate. The Company shall have delivered to the
               ----------------------
Investors a certificate, executed by the President of the Company, dated the
Closing Date, certifying to the fulfillment of the conditions specified in
Sections 4.1 and 4.2 of this Agreement.

          4.8  Material Adverse Event. No event that has or could be reasonably
               ----------------------
expected to have a material adverse affect on the Company's business, prospects,
financial condition, or results of operations shall have occurred after the date
of this Agreement.

          4.9  Proceedings and Documents. All corporate and other proceedings in
               -------------------------
connection with the transactions contemplated at the Closing hereby and all
documents and instruments incident to such transactions shall be reasonably
satisfactory in substance and form to the Investors and their special counsel,
and the Investors and their special counsel shall have received all such
counterpart originals or certified or other copies of such documents as they may
reasonably request.

          4.10 Operating Plan. The Company shall have completed a year 2000
               --------------
Operating Plan satisfactory to the Investors.

          4.11 Generator Production Plan. The Company shall have completed to
               -------------------------
the satisfaction of the Company's Board of Directors and Excelsior Private
Equity Fund II, Inc. ("Excelsior") a Generator Production Plan that includes
cash requirements.

          4.12 Minimum Investment. The Company shall have on the date hereof
               ------------------
accepted and received at least $12,500,000 in investments from Investors
pursuant to the terms of this Agreement.

     5.   Conditions of the Company's Obligations at the Closing. The
          ------------------------------------------------------
obligations of the Company to each Investor under this Agreement are subject to
the fulfillment on or before the Closing of each of the following conditions,
the waiver of which shall not be effective unless consented to in writing by the
Company:

          5.1  Representations and Warranties. The representations and
               ------------------------------
warranties of each Investor contained in Section 3 shall be true on and as of
the Closing with the same effect as though such representations and warranties
had been made on and as of such Closing.

          5.2  Payment of Purchase Price. All of the Investors shall have
               -------------------------
delivered the purchase price specified in Section 1.1(b).

          5.3  Amended Certificate. The Amended Certificate shall have been
               -------------------
accepted for filing by the Delaware Secretary of State.

          5.4  Qualifications, Legal Investment. All authorizations, approvals,
               --------------------------------
or permits, if any, of any governmental authority or regulatory body of the
United States or of any state that are required in connection with the lawful
sale and issuance of the Shares pursuant to this Agreement shall have been duly
obtained and shall be effective on and as of the Closing. No stop order or other
order

                                      -12-
<PAGE>

enjoining the sale of the Shares or the proposed issuance of the Underlying
Stock shall have been issued and no proceedings for such purpose shall be
pending or, to the knowledge of the Company, threatened by the Securities and
Exchange Commission, the California Commissioner of Corporations, or any
commissioner of corporations or similar officer of any other state having
jurisdiction over this transaction. At the time of the Closing, the sale and
issuance of the Shares and the proposed issuance of the Underlying Stock shall
be legally permitted by all laws and regulations to which the Investors and the
Company are subject.

          5.5  Stockholder Rights Agreement. The Company, each Investor, and
               ----------------------------
the requisite holders of Preferred Stock shall have entered into the Rights
Agreement.

     6.   Covenants of the Company. The Company hereby covenants to each
          ------------------------
Investor that:

          6.1  Market Standoff Agreements. The Company shall ensure that all
               --------------------------
current and future stockholders execute a Market Standoff Agreement or are bound
by the provisions of a Market Standoff Agreement pursuant to which such holders
will agree, if so requested by the Company or any underwriter's representative
in connection with the first public offering of the Company's Common, not to
sell or otherwise transfer any securities of the Company during a period of up
to 180 days following the effective date of the applicable registration
statement.

          6.2  Board Meetings. Except as otherwise agreed by a majority of the
               --------------
Directors, the Board of Directors shall meet quarterly. The Company shall
reimburse outside directors for all reasonable out-of-pocket travel and expenses
incurred in attending meetings of the Board or any Board committees.

          6.3  Assignment of Repurchase Rights and Right of First Refusal. If
               ----------------------------------------------------------
the Company elects not to exercise its repurchase rights or right of first
refusal with respect to the Company's Common Stock, to the extent these rights
are assignable, it will assign these rights pro-rata to all Major Investors, as
defined in the Rights Agreement.

          6.4  Qualified Small Business Stock. The Company shall use
               ------------------------------
commercially reasonable efforts to ensure that the Shares meet each of the
requirements for qualification as qualified small business stock, as set forth
in Section 1202(c) of the Code.

          6.5  Proprietary Information and Inventions Agreement. The Company
               ------------------------------------------------
shall require all employees and consultants to execute and deliver a Proprietary
Information and Inventions Agreement in the form delivered to counsel for the
Investors.

          6.6  Changes to Series C Liquidation Preference. So long as any
               ------------------------------------------
Series C Preferred Stock shall be outstanding, the corporation shall not,
without first obtaining the approval of the holders of a majority of the
outstanding Series C Preferred Stock, which, in any event, shall include the
affirmative vote of those Series C Preferred shares held by Excelsior, make any
change to the liquidation preference of the Series C Preferred Stock, as
provided in Article IV(2)(a) of the Amended Certificate.

                                      -13-
<PAGE>

          6.7  Termination of Covenants. The covenants set forth in this
               ------------------------
Section 6 shall terminate and be of no further force or effect upon the sale of
securities pursuant to a registration statement filed by the Company under the
Act in connection with the firm commitment underwritten offering of its
securities to the general public which results in the conversion of the
Preferred Stock into Common Stock in accordance with the Company's Certificate
of Incorporation as in effect at the time of the offering.

     7.  Miscellaneous.
         -------------

          7.1  Successors and Assigns. The terms and conditions of this
               ----------------------
Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties. Nothing in this Agreement, express or
implied, is intended to confer upon any party other than the parties hereto or
their respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.

          7.2  Survival. The representations, warranties, covenants and
               --------
agreements made herein shall survive any investigation made by any  Investor
and the closing of the transactions contemplated hereby.

          7.3  Governing Law. This Agreement shall be governed by and construed
               -------------
under the laws of the State of California as applied to agreements among
California residents entered into and to be performed entirely within
California.

          7.4  Counterparts. This Agreement may be executed in two or more
               ------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

          7.5  Titles and Subtitles. The titles and subtitles used in this
               --------------------
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.

          7.6  Notices. Unless otherwise provided, any notice required or
               -------
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery or facsimile to the party to be
notified or upon deposit with the United States Post Office, by registered or
certified mail, postage prepaid and addressed to the party to be notified at the
address indicated for such party in Exhibit A or, in the case of the Company, on
                                    ---------
the first page of this Agreement, or at such other address as such party may
designate by ten (10) days' advance written notice to the other parties.

          7.7  Finder's Fee. Each party represents that it neither is nor will
               ------------
be obligated for any finders' fee or commission in connection with this
transaction. Each Investor agrees to indemnify and to hold harmless the Company
from any liability for any commission or compensation in the nature of a
finders' fee (and the costs and expenses of defending against such liability or
asserted liability) for which the Investor or any of its officers, partners,
employees, or representatives is responsible. The Company agrees to indemnify
and hold harmless each Investor from any liability

                                      -14-
<PAGE>

for any commission or compensation in the nature of a finders' fee (and the
costs and expenses of defending against such liability or asserted liability)
for which the Company or any of its officers, employees or representatives is
responsible.

          7.8  Amendments and Waivers. Any term of this Agreement may be amended
               ----------------------
and the observance of any term of this Agreement may be waived (either generally
or in a particular instance and either retroactively or prospectively), only
with the written consent of the Company and the holders of at least two-thirds
of the Securities. Any amendment or waiver effected in accordance with this
Section shall be binding upon each holder of any securities purchased under this
Agreement at the time outstanding (including securities into which such
securities are convertible), each future holder of all such securities, and the
Company.

          7.9  California Corporate Securities Law. THE SALE OF THE SECURITIES
               -----------------------------------
WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE
COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH
SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR
PRIOR TO SUCH QUALIFICATION OR IN THE ABSENCE OF AN EXEMPTION FROM SUCH
QUALIFICATION IS UNLAWFUL. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE
EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED OR AN EXEMPTION
FROM SUCH QUALIFICATION BEING AVAILABLE.

          7.10 Expenses. Upon the Closing, the Company shall reimburse the
               --------
reasonable fees and expenses of two counsel for the Investors (one counsel to
new Investors and one counsel to those who were also prior Investors) as well as
any consulting and intellectual property reviews, provided that such expenses
shall be reimbursed up to an aggregate of $25,000 (which amount includes up to
$5,000 allocated to counsel for prior Investors).

          7.11 Severability. If one or more provisions of this Agreement are
               ------------
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of the Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.

          7.12  Aggregation of Stock. All Shares held or acquired by affiliated
                --------------------
entities or persons shall be aggregated together for the purpose of determining
the availability of any rights under this Agreement.

          7.13  Entire Agreement. This Agreement, together with all exhibits
                ----------------
attached hereto, constitutes the entire agreement between the parties hereto
pertaining to the subject matter hereof, and any and all other written or oral
agreements existing between the parties hereto are expressly canceled.

                                      -15-
<PAGE>

     IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.

                                        Conway-Stuart Medical, Inc.

                                        By:  /s/ Stuart D. Edwards
                                           -------------------------------
                                        Title:   CEO
                                              ----------------------------
<PAGE>

                                      EXCELSIOR PRIVATE EQUITY FUND II, INC.

                                      By:      /s/ David I. Fann
                                         -----------------------------------
                                      Name:    David I. Fann
                                           ---------------------------------
                                      Title:   President & CEO
                                            --------------------------------
<PAGE>

                                      ONSET ENTERPRISE ASSOCIATES III, L.P.
                                      By Managing Director
                                      OEA III Management LLC
                                      The General Partner of ONSET Enterprise
                                      Associates III, L.P.

                                      By:  /s/ Thomas E. Winter
                                         ---------------------------------------
                                           Thomas E. Winter
<PAGE>

                                      U.S. VENTURE PARTNERS V, L.P.
                                      USVP V INTERNATIONAL V, L.P.
                                      2180 ASSOCIATES FUND V, L.P.
                                      USVP V ENTREPRENEUR PARTNERS, L.P.
                                      By Presidio Management Group V, L.L.C.
                                      Its General Partner

                                      By: /s/ Irwin Federman
                                         ---------------------------------------
                                          Irwin Federman
                                          Managing Member
<PAGE>

                                      /s/ Alan L. Kaganov
                                      ---------------------------------------
                                      Alan L. Kaganov
<PAGE>

                                      /s/ Leslie Bottorff
                                      ----------------------------------------
                                      Leslie Bottorff
<PAGE>

                                      /s/ David B. Musket
                                      -----------------------------------------
                                      David B. Musket
<PAGE>

                                      By:       /s/ Jordan M. Stitzer
                                         --------------------------------------

                                      Print Name:   Jordan M. Stitzer
                                                 ------------------------------

                                      Title:        Vice President
                                            -----------------------------------
<PAGE>

                                   EXHIBIT A
                                   ---------

                             SCHEDULE OF INVESTORS
<TABLE>
<CAPTION>
Investors                                             Number of Shares         Purchase Price
<S>                                                   <C>                      <C>
Excelsior Private Equity Fund II, Inc.                  4,000,000               $6,000,000.00
114 W. 47/th/ Street
New York, NY 10036-1532
Attn: David Fann

ONSET Enterprise Associates III, L.P./1/                1,666,667                2,500,000.50
2490 Sand Hill Road
Menlo Park, CA 94025
Attn: Thomas E. Winter

U. S. Venture Partners V, L.P./2/                       2,400,000                3,600,000.00
2180 Sand Hill Road, Suite 300
Menlo Park, CA  94025
Attn: Alan L. Kaganov

USVP V International, L.P./3/                             133,333                  199,999.50
2180 Sand Hill Road, Suite 300
Menlo Park, CA  94025
Attn: Alan L. Kaganov

2180 Associates Fund V, L.P./4/                            74,667                  112,000.50
2180 Sand Hill Road, Suite 300
Menlo Park, CA  94025
Attn: Alan L. Kaganov
</TABLE>
_______________

     /1/ Of the amount purchased, 267,850 shares are issues upon conversion of
the principal and interest owing on a promissory note issued to Onset Enterprise
Associates III, L.P.

     /2/ Of the amount purchased, 241,065 shares are issues upon conversion of
the principal and interest owing on a promissory note issued to U.S. Venture
Partners V, L.P.

     /3/ Of the amount purchased, 13,392 shares are issues upon conversion of
the principal and interest owing on a promissory note issued to USVP V
International, L.P.

     /4/ Of the amount purchased, 7,499 shares are issues upon conversion of the
principal and interest owing on a promissory note issued to 2180 Associates Fund
V, L.P.
<PAGE>

<TABLE>
<S>                                                        <C>                       <C>
USVP V Entrepreneur Partners, L.P./5/                      58,667                    88,000.50
2180 Sand Hill Road, Suite 300
Menlo Park, CA  94025
Attn:  Alan L. Kaganov

Alan L. Kaganov                                            33,333                    49,999.50
2180 Sand Hill Road, Suite 300
Menlo Park, CA  94025

Leslie Bottorff                                            33,333                    49,999.50
2490 Sand Hill Road
Menlo Park, CA  94025

David B. Musket                                           100,000                         0.00/6/
125 Cambridgepark Drive, 1st. Flr.
Cambridge, MA  02140

Travelers Insurance Co.                                 1,333,333                 1,999,999.50
One Tower Square
Nine Plaza Building
Hartford, CT 06183
  Attn: John Britt

Total:                                                  9,833,333               $14,599,999.50
</TABLE>

_______________

     /5/ Of the amount purchased, 5,892 shares are issues upon conversion of the
principal and interest owing on a promissory note issued to USVP V Entrepreneur
Partners, L.P.

     /6/ As partial consideration for Placement Agent fees.

                                      -2-<PAGE>

                                                                    Exhibit 10.5

                              AMENDED AND RESTATED

                          STOCKHOLDER RIGHTS AGREEMENT

     This Amended and Restated Stockholder Rights Agreement (the "Agreement") is
entered into as of August 30, 1999, by and among Conway-Stuart Medical, Inc., a
Delaware corporation (the "Company"), and the parties listed on Schedule A
                                                                ----------
hereto (the "Stockholders"). This Agreement amends and restates the Stockholder
Rights Agreement executed in conjunction with the sale and purchase of the
Company's Series B Preferred Stock on December 10, 1998 (the "Prior Agreement").
This Agreement is being executed in conjunction with the Company's Series C
Preferred Stock Purchase Agreement of even date herewith (the "Series C Purchase
Agreement").

     In consideration of the mutual covenants set forth herein, the parties
agree as follows:

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

          "Commission" shall mean the Securities and Exchange Commission or any
           ----------
other federal agency at the time administering the Securities Act.

          "Common Holder" shall mean Stuart Edwards or David Utley, M.D., or
           -------------
their transferees, successor or assigns intended to be bound pursuant to the
terms of this Agreement.

          "Common Stock" shall mean the Company's Common Stock, par value
           ------------
$0.001, and shares of Common Stock issued or issuable upon conversion of the
Company's Preferred Stock.

          "Co-Sale Shares" shall mean shares of the Company's Common Stock now
           --------------
owned or subsequently acquired by a Common Holder.

          "Exchange Act" shall mean the Securities Exchange Act of 1934, as
           ------------
amended.

          "Holder" shall mean any holder of outstanding Registrable Securities.
           ------

          "Initiating Holders" shall mean any Holder or Holders of not less than
           ------------------
forty percent (40%) of the then outstanding Registrable Securities.

          "Major Holder" shall mean any holder of more than 250,000 shares of
           ------------
Registrable Securities, not including shares of Series A Preferred Stock.

          "Preferred Holder" shall mean a holder of shares of the Company's (i)
           ----------------
Preferred Stock and (ii) Common Stock issued or issuable upon conversion of the
Company's Preferred Stock.

          "Registrable Securities" means (i) shares of Common Stock issued or
           ----------------------
issuable pursuant to the conversion of the Shares and (ii) shares of Common
Stock issued as a dividend or other distribution with respect to, or in exchange
or in replacement of, the Shares, excluding in all cases, however, any
Registrable Securities sold by a holder (y) pursuant to a registration statement
<PAGE>

under this Agreement or (z) in a transaction in which his rights under this
Agreement are not transferred, including a transaction pursuant to a
registration statement under this Agreement.

          The number of shares of "Registrable Securities then outstanding"
                                   ---------------------------------------
shall be determined by the number of shares of Common Stock outstanding which
are, and the number of shares of Common Stock issuable pursuant to then
exercisable or convertible securities which are, Registrable Securities.

          The terms "register," "registered" and "registration" refer to a
                     --------    ----------       ------------
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement by the Commission.

          "Registration Expenses" shall mean all expenses incurred by the
           ---------------------
Company in complying with Sections 4.1 and 4.2 hereof and all expenses incurred
in complying with Section 4.9 hereof, including, without limitation, all
registration and filing fees, printing expenses, fees and disbursements of
counsel for the Company, reasonable fees and disbursements of a single special
counsel for the Holders, blue sky fees and expenses, and the expense of any
special audits incident to or required by any such registration (but excluding
the compensation of regular employees of the Company which shall be paid in any
event by the Company and Selling Expenses).

          "Restricted Securities" shall mean the securities of the Company
           ---------------------
required to bear the legend set forth in Section 6.1 hereof.

          "Securities Act" shall mean the Securities Act of 1933, as amended, or
           --------------
any similar federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in affect at the time.

          "Selling Expenses" shall mean all underwriting discounts and selling
           ----------------
commissions applicable to the sale of Registrable Securities.

          "Shares" shall mean the Series A Preferred Stock, Series B Preferred
           ------
Stock and Series C Preferred Stock of the Company held by the Investors listed
on Schedule A.
   -----------

     2.   Rights of First Refusal.
          -----------------------

          2.1  Restrictions on Transfer of Shares. All shares of capital stock
               ----------------------------------
of the Company now or hereafter owned by the Common Holders and all shares of
the capital stock and other securities of the Company or any successor received
by each Common Holder or his or her personal representatives, heirs, successors,
or assigns, as distributions on, splits or reverse splits of, in exchange for or
otherwise with respect to, such capital stock (the "Stock") shall not be sold,
except upon satisfaction of the conditions specified in this Section 2, and any
sale of the Stock other than in accordance with the terms hereof, is void and
transfers no right, title or interest in or to said Stock, or any of it, whether
now owned or hereafter acquired, to the purported buyer.

          2.2  Transfer During Lifetime to Members of Family or Partners of a
               --------------------------------------------------------------
Partnership. A Common Holder may be permitted to transfer during his or her
-----------
lifetime all or a part of the Stock

                                      -2-
<PAGE>

by gift or to or for the benefit of his or her spouse, children or other issue
or to a trust for his or their benefit or, if the Common Holder is a partnership
or a corporation, by distribution to its partners or shareholders, respectively;
provided, however, that before such transfer is consummated, the transferee
shall first agree in writing to assume and be bound by the terms and provisions
of this Section 2.

          2.3  Offer. Each Common Holder or any transferee bound hereby may sell
               -----
any of the shares of Stock which may now or hereafter be owned by such Common
Holder, only if such Common Holder (the "Offeror"), shall have given to the
Company and the Major Holders a right of first refusal in accordance with the
following terms and conditions:

               (a)  Notice of Offer. The Offeror shall first give written notice
                    ---------------
(the "Offeror's Notice") by certified or registered mail to the Company, of the
proposed sale, giving the name and address of the proposed purchaser(s), the
number of shares of stock proposed to be sold (the "Offered Stock"), and the
terms and conditions of the proposed sale, accompanied by an offer to the
Company and the Major Holders to sell the Offered Stock at the price and on the
terms stated in the notice.

               (b)  Company's Option. Within twenty (20) days from and after the
                    ----------------
date of receipt of such notice by the Company (the "Company Record Date"), the
Company shall have the option to purchase all or any portion of the Offered
Stock at the price and upon the terms and conditions specified in the Offeror's
Notice. Within such twenty (20) day period, the Company shall give notice to the
Offeror, by certified or registered mail, of the number of shares it desires to
purchase and shall transmit the Offeror's Notice to the Major Holders and give
notice (the "Company Notice") to the Major Holders of the number of shares
available for purchase by such Major Holders, if any shares remain available
once the Company has exercised its purchase option.

               (c)  Major Holders' Option. Within ten (10) days from and after
                    ---------------------
the date of receipt of the Company Notice, the Major Holders shall have the
option to purchase all or any portion of the Offered Stock not elected to be
purchased by the Company at the price and upon the terms and conditions
specified in the Offeror's Notice and subject to the pro rata calculation set
forth below. Within such ten (10) day period, the Major Holders shall give
notice to the Offeror, by certified or registered mail, of the number of shares
they desire to purchase.

               (d)  Pro Rata Calculation. Each Major Holder shall have the right
                    --------------------
to purchase that number of shares of Offered Stock equal to the product obtained
by multiplying the aggregate number of shares of Offered Stock less the number
of shares purchased by the Company pursuant to Subsection 2.3(b) by a fraction
(A) the numerator of which is the sum of (x) the number of shares of Common
Stock owned by such Major Holder, plus (y) the number of shares of Common Stock
issuable upon conversion of the Preferred Stock owned by such Major Holder at
the time of the Offeror's Notice; and (B) the denominator of which is the sum of
(a) the total number of shares of Common Stock owned by all Major Holders at the
time of the Offeror's Notice, plus (b) the number of shares of Common Stock
issuable upon conversion of Preferred Stock owned by all Major Holders
outstanding at the time of the Offeror's Notice.

                                      -3-
<PAGE>

               (e)  Offeror's Rights. If the total number of shares of stock
                    ----------------
accepted by the Company and the Major Holders does not equal the number of
shares of Offered Stock, then the Offeror shall, subject to the provisions of
Section 5 below, be free to sell that portion of the Offered Stock not being
purchased by the Company or the Major Holders pursuant to this Section 2 to the
proposed purchaser, but only in accordance with the terms and conditions stated
in the original notice, and the purchaser shall take such shares of the Offered
Stock free of the provisions of this Agreement; provided, however, that in the
event the Offeror or any affiliate or associate (as defined in Rule 12b-2 under
the Securities Exchange Act of 1934, as amended) of the Offeror obtains direct
or indirect beneficial ownership of all or any portion of such Offered Stock
during the period in which this Agreement is in effect, then such shares shall,
at the time such shares are reacquired by the Offeror or any affiliate or
associate thereof, be once again subject to the provisions of this Agreement.

               (f)  Closing. Within sixty (60) days after the Company Record
                    -------
Date, the purchase and sale of any shares of Offered Stock which the Company and
the Major Holders are to purchase pursuant to the foregoing provisions shall be
closed at the principal office of the Company. The purchase price for Offered
Stock may be paid in cash in an amount equal to the present value of any
payments to be made over a period of time according to the terms of the offer,
or, if the terms specified in such offer state that payment is to be made in
property, in an amount equal to the fair market value of such property, as
conclusively determined in good faith by the Board of Directors of the Company
on the date of receipt of such offer. For purposes of any computation made
pursuant to the foregoing sentence, the present value of any amount to be paid
in the future shall be determined by discounting such amount to present value
using an interest rate of ten percent (10%). Notwithstanding the failure of the
selling Common Holder to deliver any certificate evidencing all or any portion
of the shares of Stock purchased pursuant hereto, upon tender by the Company or
the Major Holders of the purchase price for any such shares of Stock in
accordance with the terms of this Agreement, such shares of Stock and the
certificates representing same shall forthwith and without further action be
deemed to be transferred to the Company and the Major Holders, as the case may
be.

     3.   Right of First Refusal on Company Issuances.
          -------------------------------------------

          3.1  Right of First Refusal. The Company hereby grants to each Major
               ----------------------
Holder the right of first refusal to purchase, pro rata, all (or any part) of
New Securities (as defined in this Section 3.1) that the Company may, from time
to time propose to sell and issue. Such Major Holder's pro rata share, for
purposes of this right of first refusal, is the ratio of the number of shares of
Common Stock then owned or issuable upon conversion of the Preferred Stock of
the Company then owned by such Major Holder to the total number of shares of
Common Stock outstanding immediately prior to the issuance of the New
Securities, assuming full conversion of all outstanding shares of Preferred
Stock of the Company and exercise of all outstanding rights, options and
warrants to acquire, directly or indirectly, Common Stock of the Company. This
right of first refusal shall be subject to the following provisions:

               (a)  "New Securities" shall mean any capital stock of the
                     --------------
Company, whether now authorized or not, and rights, options, or warrants to
purchase said capital stock, and

                                      -4-
<PAGE>

securities of any type whatsoever that are, or may become, convertible into said
capital stock; provided, however, that "New Securities" does not include (i)
securities issued pursuant to the acquisition of another corporation by the
Company by merger, purchase of substantially all of the assets, or other
reorganization whereby the Company owns more than fifty percent (50%) of the
voting power of such corporation (provided that such acquisition by merger,
purchase of substantially all of the assets, or other reorganization is approved
pursuant to the Company's then-current Certificate of Incorporation); (ii) up to
4,700,000 shares (as presently constituted) of the Company's Common Stock (or
related options) issued to employees, officers, directors, consultants or
advisers of the Company pursuant to any employee stock offering, plan, or
arrangement approved by the Board of Directors; (iii) shares of the Company's
Common Stock or Preferred Stock issued in connection with any stock split, stock
dividend, or similar recapitalization by the Company; (iv) securities issued in
connection with equipment or debt financing or leases (including securities
issued in consideration of guarantees of such financing or leases) which are
approved by the Company's Board of Directors; (v) securities issued to vendors,
customers or coventurers or to other persons in similar commercial or corporate
partnering situations with the Company if such issuance is approved by the Board
of Directors; or (vi) warrants for the purchase of shares of the Company's
Common Stock or Preferred Stock which are currently outstanding or warrants to
lending or leasing institutions which are issued in the future pursuant to a
plan, agreement or arrangement approved by the Company's Board of Directors.

               (b)  In the event that the Company proposes to undertake an
issuance of New Securities, it shall give each Major Holder written notice of
its intention, describing the type of New Securities, the price, and the general
terms upon which the Company proposes to issue the same. Each Major Holder shall
have fifteen (15) days from the date of mailing of any such notice to agree to
purchase its pro rata share of such New Securities, in whole or in part, for the
price and upon the general terms specified in the notice by giving written
notice to the Company and stating therein the quantity of New Securities to be
purchased. Each Major Holder shall have a right of over allotment such that if
any Major Holder fails to exercise its right hereunder to purchase its full pro
rata portion of New Securities, the Company shall so notify the other Major
Holders who are purchasing their full pro rata portion, and such fully-
exercising Major Holders may purchase that portion of the Shares not subscribed
for on a pro rata basis, within five (5) days from the date of such notice.

               (c)  In the event that Major Holders fail to exercise in full the
right of first refusal within said fifteen (15) day period (plus five (5) day
period, if applicable) the Company shall have sixty (60) days thereafter to sell
or enter into an agreement providing for the closing of the sale of the New
Securities respecting which the Major Holders' rights were not exercised at a
price and upon general terms no more favorable to the purchasers thereon than
specified in the Company's notice. In the event the Company has not sold the New
Securities within such sixty (60) day period, the Company shall not thereafter
issue or sell any New Securities, without first offering such securities to the
Major Holders in the manner provided above.

               (d)  The right of first refusal granted under this Agreement
shall not apply to and shall expire upon the closing of the first firmly
underwritten public offering of Common Stock of the Company that is pursuant to
a registration statement filed with, and declared effective by, the

                                      -5-
<PAGE>

Commission under the Securities Act, covering the offer and sale of Common Stock
to the public at a per share price (prior to underwriter commissions and
expenses) of at least five dollars ($5.00) (as shares are presently constituted)
and at an aggregate offering price (before deduction for underwriter commissions
and expenses) of not less than fifteen million dollars ($15,000,000) (a
"Qualified IPO").

               (e)  This right of first refusal is assignable only to an
affiliate of a Holder or in connection with a sale or transfer of Registrable
Securities where the assignee holds sufficient Registrable Securities to qualify
as a Major Holder after such transfer.

     4.   Registration Rights.
          -------------------

          4.1  Requested Registration. Prior to such time as the Company has
               ----------------------
effected three (3) registrations pursuant to this Section 4.1 and such
registrations have been declared or ordered effective, if the Company shall
receive from Initiating Holders a written request that the Company effect any
registration (other than a registration on Form S-3 or any related form of
registration statement) with respect to Registrable Securities representing at
least twenty percent (20%) of the outstanding Registrable Securities (or any
lesser percentage if the anticipated aggregate offering price to the public is
at least five million dollars ($5,000,000)), the Company will:

               (a)  promptly give written notice of the proposed registration to
all other Holders; and

               (b)  as soon as practicable but in any event within ninety (90)
days, use its diligent best efforts to effect such registration (including,
without limitation, the execution of an undertaking to file post-effective
amendments, appropriate qualification under applicable blue sky or other state
securities laws and appropriate compliance with applicable regulations issued
under the Securities Act) as may be so requested and as would permit or
facilitate the sale and distribution of all or such portion of such Registrable
Securities as are specified in such request, together with all or such portion
of the Registrable Securities of any Holder or Holders joining in such request
as are specified in a written request given within fifteen (15) days after
receipt of such written notice from the Company; provided that the Company shall
not be obligated to take any action to effect any such registration,
qualification or compliance pursuant to this Section 4.1:

                    (i)   In any particular jurisdiction in which the Company
would be required to execute a general consent to service of process in
effecting such registration, qualification or compliance unless the Company is
already subject to service in such jurisdiction and except as may be required by
the Securities Act;

                    (ii)  Prior to the earlier of three (3) years after the date
of this Agreement or six (6) months following closing of the first underwritten
public offering of Common Stock of the Company for its own account pursuant to a
registration statement filed under to the Securities Act; or

                                      -6-
<PAGE>

                    (iii) If at the time of the request to register Registrable
Securities the Company in good faith gives notice within thirty (30) days of
such request that it is engaged or has fixed plans to engage within sixty (60)
days of the time of the request in an initial firmly underwritten registered
public offering; provided, however, such notice may not be given more than once
in any six (6) month period.

     Subject to the foregoing clauses (i) through (iii) and to Section 4.1(d),
the Company shall file a registration statement covering the Registrable
Securities so requested to be registered as soon as practicable after receipt of
the request of the Initiating Holders.

               (c)  Underwriting. If the Initiating Holders intend to distribute
                    ------------
the Registrable Securities covered by their request by means of an underwriting,
they shall so advise the Company as a part of their request made pursuant to
Section 4.1 and the Company shall include such information in the written notice
referred to in Section 4.1(a). The right of any Holder to registration pursuant
to Section 4.1 shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable Securities in the
underwriting to the extent requested (unless otherwise mutually agreed by a
majority in interest of the Holders and such Holder) to the extent provided
herein.

     The Company shall (together with all Holders proposing to distribute their
securities through such underwriting) enter into an underwriting agreement in
customary form with the underwriter or underwriters selected for such
underwriting by a majority in interest of the Initiating Holders with the
approval of the Company, which approval shall not be unreasonably withheld.
Notwithstanding any other provision of this Section 4.1, if the underwriter
determines that marketing factors require a limitation of the number of shares
to be underwritten and so advises the Initiating Holders in writing, then the
Initiating Holders shall so advise all Holders (except those Holders who have
indicated to the Company their decision not to distribute any of their
Registrable Securities through such underwriting) and the number of shares of
Registrable Securities that may be included in the registration and underwriting
shall be allocated among all such Holders in proportion, as nearly as
practicable, to the respective amounts of Registrable Securities owned by such
Holders at the time of filing the registration statement. No Registrable
Securities excluded from the underwriting by reason of the underwriter's
marketing limitation shall be included in such registration.

     If any Holder disapproves of the terms of the underwriting, such person may
elect to withdraw therefrom by written notice to the Company, the underwriter
and the Initiating Holders. The Registrable Securities and/or other securities
so withdrawn from such underwriting shall also be withdrawn from such
registration; provided, however, that, if by the withdrawal of such Registrable
Securities a greater number of Registrable Securities held by other Holders may
be included in such registration (up to the maximum of any limitation imposed by
the underwriters), then the Company shall offer to all Holders who have included
Registrable Securities in the registration the right to include additional
Registrable Securities in the same proportion used above in determining the
underwriter limitation; and, provided further that in the event that the
withdrawal of a Holder, and the subsequent inclusion of additional Registrable
Securities by other Holders, results in the offering of Shares representing less
than twenty percent (20%) of the Registrable Securities (or any lesser
percentage if the anticipated aggregate offering price to the public is less
than five million dollars

                                      -7-
<PAGE>

($5,000,000)), the Company shall no longer be required to effect such
registration pursuant to this Section 4.1.

     If the underwriter has not limited the number of Registrable Securities to
be underwritten, the Company may include securities for its own account or the
account of others in such registration if the underwriter so agrees and if the
number of Registrable Securities which would otherwise have been included in
such registration and underwriting will not thereby be limited.

               (d)  Delay of Registration. If the Company shall furnish to the
                    ---------------------
Initiating Holders a certificate signed by the President of the Company stating
that, in the good faith judgment of the Board of Directors of the Company, it
would be seriously detrimental to the Company and its stockholders for such
registration statement to be filed on or before the date filing would be
required and it is therefore essential to defer the filing of such registration
statement, then the Company may direct that such request for registration be
delayed for a period not in excess of ninety (90) days, such right to delay a
request to be exercised by the Company not more than once in any one-year
period.

          4.2  Company Registration.
               --------------------

               (a)  If at any time or from time to time, the Company shall
determine to register any of its Common Stock, for its own account or for the
account of others (other than the Holders), other than a registration relating
solely to employee benefit plans or a registration relating solely to a
Commission Rule 145 transaction or a registration on any registration form which
does not include substantially the same information as would be required to be
included in a registration statement covering the sale of Registrable
Securities, the Company will:

                    (i)   promptly give to each Holder written notice thereof
(which shall include a list of the jurisdictions in which the Company intends to
attempt to qualify such securities under the applicable blue sky or other state
securities laws); and

                    (ii)  subject to Section 4.2, below, include in such
registration (and any related qualification under blue sky laws or other
compliance), and in any underwriting involved therein, all the Registrable
Securities specified in a written request or requests, made within ten (10) days
after receipt of such written notice from the Company, by any Holder or Holders.

               (b)  Underwriting. If the registration of which the Company gives
                    ------------
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to Section 4.2(a)(i). In such event the right of any Holder to
registration pursuant to Section 4.2 shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their securities through such underwriting shall
(together with the Company) enter into an underwriting agreement in customary
form with the underwriter or underwriters selected for such underwriting by the
Company. Notwithstanding any other provision of this Section 4.2, if the
underwriter determines that marketing factors require a limitation of the number
of shares to be underwritten, the underwriter may limit the number of
Registrable Securities and shares of Common Stock to be included in the
registration and

                                      -8-
<PAGE>

underwriting to (i) in the case of the first underwritten public offering of the
securities of the Company, any amount or no amount, as the underwriter may
determine, or (ii) in the case of any registration subsequent to the first
underwritten public offering of the securities of the Company, to not less than
thirty percent (30%) of the total securities covered by the registration. The
Company shall so advise all Holders (except those Holders who have indicated to
the Company their decision not to distribute any of their Registrable Securities
through such underwriting), and the number of shares of Registrable Securities
that may be included in the registration and underwriting shall be allocated
among all Holders in proportion, as nearly as practicable, to the respective
amounts of Registrable Securities owned by the Holders at the time of filing the
registration statement.

     No Registrable Securities excluded from the underwriting by reason of the
underwriter's marketing limitation shall be included in such registration. If
any Holder disapproves of the terms of any such underwriting, such person may
elect to withdraw therefrom by written notice to the Company and the
underwriter. The securities so withdrawn from such underwriting shall also be
withdrawn from such registration; provided, however, that, if by the withdrawal
of such securities a greater number of Registrable Securities held by other
Holders may be included in such registration (up to the maximum of any
limitation imposed by the underwriters), then the Company shall offer to all
Holders who have included Registrable Securities in the registration the right
to include additional Registrable Securities in the same proportion used above
in determining the underwriter limitation.

          4.3  Expenses of Registration. All Registration Expenses incurred in
               ------------------------
connection with any registration pursuant to Section 4.1, Section 4.2 or Section
4.9 hereunder shall be borne by the Company. All Selling Expenses incurred in
connection with any registrations hereunder, shall be borne by the Holders of
the Registrable Securities so registered pro-rata on the basis of the number of
shares so registered. The Company shall not, however, be required to pay for
expenses of any registration proceeding begun pursuant to Section 4.1, the
request of which has been subsequently withdrawn by the Initiating Holders
(unless the withdrawal is based upon material adverse information concerning the
Company of which the Initiating Holders were not aware at the time of such
request or unless the Holders of a majority of Registrable Securities agree to
forfeit their right to one requested registration pursuant to Section 4.1 in
which event such right shall be forfeited by all Holders), in which case such
expenses shall be borne by the holders of Registrable Securities requesting such
registration in proportion to the number of shares for which registration was
requested.

          4.4  Registration Procedures. In the case of each registration,
               -----------------------
qualification or compliance effected by the Company pursuant to this Section 4,
the Company will keep each Holder advised in writing as to the initiation of
each registration, qualification and compliance and as to the completion
thereof. At its expense the Company will:

               (a)  Keep such registration, qualification or compliance
effective for a period of one hundred twenty (120) days or until the Holder or
Holders have completed the distribution described in the registration statement
relating thereto, whichever first occurs.

                                      -9-
<PAGE>

               (b)  Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement for the period set forth in
paragraph (a) above.

               (c)  Furnish to the Holders such number of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as they may
reasonably request in order to facilitate the disposition of Registrable
Securities owned by them.

               (d)  Use its reasonable best efforts to register and qualify the
securities covered by such registration statement under such other securities or
Blue Sky laws of such jurisdictions as shall be reasonably requested by the
Holders; provided that the Company shall not be required in connection therewith
or as a condition thereto to qualify to do business or to file a general consent
to service of process in any such states or jurisdictions.

               (e)  In the event of any underwritten public offering, enter into
and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter(s) of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.

               (f)  Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing.
               (g)  Use its best efforts to furnish, on the date that such
Registrable Securities are delivered to the underwriters for sale, if such
securities are being sold through underwriters, (i) an opinion, dated as of such
date, of the counsel representing the Company for the purposes of such
registration, in form and substance as is customarily given to underwriters in
an underwritten public offering, addressed to the underwriters, if any, and (ii)
a letter dated as of such date, from the independent certified public
accountants of the Company, in form and substance as is customarily given by
independent certified public accountants to underwriters in an underwritten
public offering addressed to the underwriters.

                                      -10-
<PAGE>

          4.5  Indemnification.
               ---------------

               (a)  The Company will indemnify each Holder, each of its
officers, directors, partners and legal counsel, and each person controlling
such Holder within the meaning of the Securities Act, with respect to which
registration, qualification or compliance has been effected pursuant to this
Section 4, against all claims, losses, damages and liabilities (or actions in
respect thereof) arising out of or based on (i) any untrue statement (or alleged
untrue statement) of a material fact contained in any prospectus, offering
circular or other similar document (including any related registration
statement, notification or the like) incident to any such registration,
qualification or compliance, or based on any omission (or alleged omission) to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading in the light of the circumstances under
which they were made, or (ii) any violation by the Company of any federal, state
or common law rule or regulation applicable to the Company in connection with
any such registration, qualification or compliance, and will reimburse each such
Holder, each of its officers, directors, partners and legal counsel, and each
person controlling such Holder, for any legal and any other expenses reasonably
incurred in connection with investigating or defending any such claim, loss,
damage, liability or action, as incurred, provided that the Company will not be
liable in any such case to the extent that any such claim, loss, damage,
liability or expense arises out of or is based on any untrue statement or
omission based upon written information furnished to the Company by an
instrument duly executed by such Holder and stated to be specifically for use
therein or written information furnished by the Holder to the Company in
response to a request by the Company stating specifically that such information
will be used by the Company therein.

               (b)  Each Holder will, if Registrable Securities held by such
Holder are included in the securities as to which such registration,
qualification or compliance is being effected, indemnify the Company, each of
its directors and officers, each legal counsel and independent accountant of the
Company, each person who controls the Company within the meaning of the
Securities Act, and each other such Holder, each of its officers, directors, and
partners and each person controlling such Holder within the meaning of the
Securities Act, against all claims, losses, damages and liabilities (or actions
in respect thereof) arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any such registration
statement, prospectus, offering circular or other similar document, or any
omission (or alleged omission) to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading in the
light of the circumstances under which they were made, and will reimburse the
Company, such Holders, such directors, officers, persons, or control persons for
any legal or any other expenses reasonably incurred in connection with
investigating or defending any such claim, loss, damage, liability or action, as
incurred, in each case to the extent, but only to the extent, that such untrue
statement (or alleged untrue statement) or omission (or alleged omission) is
made in such registration statement, prospectus, offering circular or other
document in reliance upon and in conformity with written information furnished
to the Company by an instrument duly executed by such Holder and stated to be
specifically for use therein or written information furnished by the Holder to
the Company in response to a request by the Company stating specifically that
such information will be used by the Company therein; provided, however, that
the obligations of such Holders hereunder shall be limited to an amount equal to
the net proceeds to each such Holder of Registrable Securities sold as
contemplated herein.

                                      -11-
<PAGE>

               (c)  Each party entitled to indemnification under this Section
4.5 (the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has received written notice of any claim as to which indemnity may be sought,
and shall permit the Indemnifying Party to assume the defense of any such claim
or any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or litigation,
shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld). The Indemnified Party may participate in such defense
at such party's expense; provided, however, that the Indemnifying Party shall
bear the expense of such defense of the Indemnified Party if representation of
both parties by the same counsel would be inappropriate due to actual or
potential conflicts of interest. The failure of any Indemnified Party to give
notice within a reasonable period of time as provided herein shall relieve the
Indemnifying Party of its obligations under this Section 4.5 only to the extent
that such failure to give notice shall materially adversely prejudice the
Indemnifying Party in the defense of any such claim or any such litigation. No
Indemnifying Party, in the defense of any such claim or litigation, shall,
except with the consent of each Indemnified Party, consent to entry of any
judgment or enter into any settlement which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such Indemnified Party
of a release from all liability in respect to such claim or litigation.

               (d)  If the indemnification provided for paragraphs (a) through
(c) of this Section 4.5 is unavailable or insufficient to hold harmless an
Indemnified Party under such paragraphs in respect of any losses, claims,
damages or liabilities or actions in respect thereof referred to therein, then
each Indemnifying Party shall in lieu of indemnifying such Indemnified Party
contribute to the amount paid or payable by such Indemnified Party as a result
of such losses, claims, damages, liabilities or actions in such proportion as
appropriate to reflect the relative fault of the Company, on the one hand, and
the underwriters and the Holder of such Registrable Securities, on the other, in
connection with the statements or omissions which resulted in such losses,
claims, damages, liabilities or actions as well as any other relevant equitable
considerations, including the failure to give any notice under paragraph (c).
The relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact relates to
information supplied by the Company, on the one hand, or the underwriters or the
Holders of such Registrable Securities, on the other, and to the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company and each of the Holders agrees
that it would not be just and equitable if contributions pursuant to this
paragraph were determined by pro rata allocation (even if all of the Holders of
such Registrable Securities were treated as one entity for such purpose) or by
any other method of allocation which did not take account of the equitable
considerations referred to above in this paragraph. The amount paid or payable
by an Indemnified Party as a result of the losses, claims, damages, liabilities
or action in respect thereof, referred to above in this paragraph, shall be
deemed to include any legal or other expenses reasonably incurred by such
Indemnified Party in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this paragraph, no Holder shall be
required to contribute any amount in excess of the lesser of (i) the proportion
that the public offering price of shares sold by such Holder under such
registration statement bears to the total public offering price of all
securities sold thereunder, but not to exceed the proceeds received by

                                      -12-
<PAGE>

such Holder for the sale of Registrable Securities covered by such registration
statement and (ii) the amount of any damages which they would have otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission. No person guilty of fraudulent misrepresentations (within the meaning
of Section 11(f) of the Securities Act), shall be entitled to contribution from
any person who is not guilty of such fraudulent misrepresentation.

               (e)  The obligations of the Company and Holders under this
Section 4.5 shall survive the completion of any offering of Registrable
Securities in a registration statement under this Section 4, and otherwise.

          4.6  Information by Holder. Each Holder including securities of the
               ---------------------
Company in any registration shall furnish to the Company such information
regarding such Holder and the distribution proposed by such Holder as the
Company may request in writing and as shall be required in connection with any
registration, qualification or compliance referred to in this Section 4.

          4.7  Rule 144 Reporting. With a view to making available the benefits
               ------------------
of certain rules and regulations of the Commission which may at any time permit
the sale of the Restricted Securities to the public without registration, after
such time as a public market exists for the Common Stock of the Company, the
Company agrees to:

               (a)  Use its best efforts to facilitate the sale of the
Restricted Securities to the public, without registration under the Securities
Act, pursuant to Rule 144 under the Securities Act, provided that this shall not
require the Company to file reports under the Securities Act and the Exchange
Act at anytime prior to the Company's being otherwise required to file such
reports.

               (b)  Make and keep public information available, as those terms
are understood and defined in Rule 144 under the Securities Act at all times
after ninety (90) days after the effective date of the first registration under
the Securities Act filed by the Company for an offering of its securities to the
general public;

               (c)  File with the Commission in a timely manner all reports and
other documents required of the Company under the Securities Act and the
Exchange Act, (at any time after it has become subject to such reporting
requirements);
               (d)  So long as a Holder owns any Restricted Securities to
furnish to the Holder forthwith upon request a written statement by the Company
as to its compliance with the reporting requirements of said Rule 144 (at any
time after ninety (90) days after the effective date of the first registration
statement filed by the Company for an offering of its securities to the general
public), and of the Securities Act and the Exchange Act (at any time after it
has become subject to such reporting requirements), a copy of the most recent
annual or quarterly report of the Company, and such other reports and documents
so filed by the Company as such Holder may reasonably request in availing itself
of any rule or regulation of the Commission allowing a Holder to sell any such
securities without registration.

                                      -13-
<PAGE>

          4.8  "Market Stand-off" Agreement. Each Holder agrees not to sell or
                ---------------------------
otherwise transfer or dispose of any Common Stock (or other securities) of the
Company held by it for a period not to exceed one hundred eighty (180) days
following the effective date of a registration statement of the Company filed
under the Securities Act if so requested by the Company and underwriter of
Common Stock (or other securities) of the Company, provided that:

               (a) such agreement shall apply only to the first underwritten
registered public offering of the Company; and

               (b) all officers, directors and 5% stockholders of the Company
enter into similar agreements. The Company may impose stop-transfer instructions
with respect to the shares (or securities) subject to the foregoing restriction
until the end of such period.

          4.9  Form S-3. The Company shall use its best efforts to qualify for
               --------
registration on Form S-3 and to that end the Company shall register (whether or
not required by law to do so) its Common Stock under the Exchange Act within
twelve (12) months following the effective date of the first registration of any
securities of the Company on Form S-1. After the Company has qualified for the
use of Form S-3, in addition to the rights contained in the foregoing provisions
of this Section 4, the Holders of Registrable Securities shall have the right to
request registrations on Form S-3 thereafter under this Section 4.9 (such
requests shall be in a writing and shall state the number of shares of
Registrable Securities to be disposed of and the intended method of disposition
of such shares by such Holder or Holders), provided that the Company shall not
be required to effect a registration pursuant to this Section 4.9 unless the
Holder or Holders requesting registration propose to dispose of shares of
Registrable Securities which they reasonably anticipate will have an aggregate
disposition price (before deduction of underwriting discounts and expenses of
sale) of at least one million five hundred thousand dollars ($1,500,000),
provided further that the Company shall not be required to effect a registration
pursuant to this Section 4.9 if at the time of the request for a registration on
Form S-3 the Company in good faith gives notice within thirty (30) days of such
request that it is engaged or has fixed plans to engage within sixty (60) days
of the time of the request in a firmly underwritten registered public offering
(but such notice may not be given more than once in any six (6) month period),
provided further that the Company shall not be required to effect more than one
registration pursuant to this Section 4.9 in any twelve (12) month period.

     The Company shall give notice to all Holders of Registrable Securities of
the receipt of a request for registration pursuant to this Section 4.9 and shall
provide a reasonable opportunity for other Holders to participate in the
registration. Subject to the foregoing, the Company will use its best efforts to
effect promptly the registration of all shares of Registrable Securities on Form
S-3, as the case may be, to the extent requested by the Holder or Holders
thereof for purposes of disposition.

          4.10 Transfer of Registration Rights. Except as otherwise provided
               -------------------------------
herein, the rights contained in this Section 4 may be assigned or otherwise
conveyed to a transferee or assignee of Registrable Securities, who shall be
considered a "Holder" for purposes of this Section 4, provided that (i) such
transfer is effected in accordance with applicable federal and state securities
laws, (ii) such transferee or assignee becomes a party to this Agreement or
agrees in writing to be subject to the terms hereof to the same extent as if he
were an original purchaser hereunder and

                                      -14-
<PAGE>

(iii) such transferee or assignee (A) is a wholly owned subsidiary or
constituent partner (including limited partners) or affiliate of the
transferring Holder, or (B) acquires at least 20% of the Registrable Securities
(as shares are presently constituted) originally held by the transferring Holder
and, provided further, that the Company is given written notice by such Holder
at the time of or within a reasonable time after said transfer, stating the name
and address of said transferee or assignee and identifying the securities with
respect to which such registration rights are being assigned. For the purposes
of determining the number of shares of Registrable Securities held by a
transferee or assignee, the holdings of transferees and assignees of a
partnership who are partners or retired partners of such partnership (including
spouses and ancestors, lineal descendants and siblings of such partners or
spouses who acquire Registrable Securities by gift, will or intestate
succession) shall be aggregated together and with the partnership; provided that
all assignees and transferees who would not qualify individually for assignment
of registration rights shall have a single attorney-in-fact for the purpose of
exercising any rights, receiving notices or taking any action under this Section
4.

          4.11 Certain Limitations in Connection with Future Grants of
               -------------------------------------------------------
Registration Rights. From and after the date of this Agreement, the Company
-------------------
shall not, without the prior written consent of the Holders of at least a two-
thirds of the outstanding Registrable Securities, enter into any agreement with
any person or persons providing for the granting to such holder of registration
rights superior to those granted to Holders pursuant to this Section 4, or of
registration rights which might cause a reduction in the number of shares
includable by the Holders in any offering pursuant to Section 4.1 or in any
offering subject to Section 4.2.

          4.12 Delay of Registration. No Holder shall have any right to obtain
               ---------------------
or seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Section 4.

          4.13 Amendment of Registration Rights. The registration rights
               --------------------------------
provided in this Section may be amended with the written consent of the Company
and the holders of a two-thirds of the outstanding Registrable Securities. Any
amendment effected in accordance with this Section 4.14 shall be binding upon
each Holder and the Company.

     5.   Co-Sale Agreement.
          -----------------

          5.1  Notice. If any Common Holder proposes to sell Common Stock in one
               ------
or more related transactions (a "Selling Common Holder"), then such Selling
Common Holder shall promptly give written notice (the "Co-Sale Notice") to the
Major Holders at least twenty (20) days prior to the proposed closing of such
sale. The Co-Sale Notice shall describe in reasonable detail the proposed sale
including, without limitation, the number of Co-Sale Shares to be sold, the
nature of such sale, the consideration to be paid, and the name and address of
each prospective purchaser.

          5.2  Participation. The Major Holders shall have the right,
               -------------
exercisable upon written notice to the Selling Common Holder within ten (10)
days after receipt of the Co-Sale Notice, to participate in such sale on the
same terms and conditions specified in the Co-Sale Notice. To the extent any
Major Holder exercises such right of participation in accordance with the terms

                                      -15-
<PAGE>

and conditions set forth below, the number of Co-Sale Shares that the Selling
Common Holder may sell in the transaction shall be correspondingly reduced.

          5.3  Pro Rata Calculation. Each Major Holder may sell all or any part
               --------------------
of that number of shares of Common Stock equal to the product obtained by
multiplying the aggregate number of Co-Sale Shares covered by the Co-Sale Notice
by a fraction (i) the numerator of which is the sum of (A) the number of shares
of Common Stock owned by such Major Holder, plus (B) the number of shares of
Common Stock issuable upon conversion of Preferred Stock owned by such Major
Holder at the time of the sale; plus (C) the number of shares of Common Stock
issuable upon exercise of outstanding options or warrants held by such Major
Holder or the time of the sale; and (ii) the denominator of which is the total
number of shares of Common Stock held by the Major Holders and the Selling
Common Holder, including the number of shares of Common Stock issuable upon
conversion of the shares of Preferred Stock then owned by such Major Holders.

          5.4  Delivery. Each Major Holder shall effect such Major Holder's
               --------
participation in the sale by promptly delivering to the Selling Common Holder
one or more certificates, properly endorsed for transfer, which represent:

               (a)  the number of shares of Common Stock which such Major Holder
elects to sell; or

               (b)  that number of shares of Preferred Stock which is
convertible into the number of shares of Common Stock which such Major Holder
elects to sell; provided, however, that if the prospective purchaser objects to
the delivery of Preferred Stock in lieu of Common Stock, such Major Holder shall
convert such Preferred Stock into Common Stock and deliver Common Stock as
provided in Subsection 5.4(a) above. The Company agrees to make any such
conversion concurrent with the actual transfer of such shares to the purchaser.

          5.5  Proceeds. The Selling Common Holder shall remit to each Major
               --------
Holder that portion of the sale proceeds to which such Major Holder is entitled
by reason of such Major Holder's participation in such sale. To the extent that
any prospective purchaser or purchasers prohibits such assignment or otherwise
refuses to purchase shares or other securities from the Major Holders exercising
their rights of Co-Sale hereunder, the Selling Common Holder shall not sell to
such prospective purchaser or purchasers any Co-Sale Shares unless and until,
simultaneously with such sale, the Selling Common Holder shall purchase from the
Major Holders exercising their rights of co-sale hereunder all shares of Common
Stock or Preferred Stock (on an as-converted basis) as to which the Major
Holders have exercised their rights of co-sale hereunder on the same terms and
conditions as such selling Common Holder's shares are to be sold.

          5.6  Non-Exclusive Rights. The exercise or non-exercise of any Major
               --------------------
Holder's rights hereunder to participate in one or more sales of Co-Sale Shares
made by any Selling Common Holder shall not adversely affect such Major Holder's
right to participate in subsequent sales of Co-Sale Shares as provided in this
Agreement.

                                      -16-
<PAGE>

          5.7  Sales by Selling Common Holders. To the extent that the Major
               -------------------------------
Holders elect not to participate in the sale of the Co-Sale Shares subject to
the Co-Sale Notice, either by failure to deliver the written notice to a Selling
Common Holder within the period set forth in Subsection 5.2 above, or by
delivery of a notice electing not to participate or to participate in part only,
the Selling Common Holder may, not later than sixty (60) days following delivery
to the Major Holders of the Co-Sale Notice, enter into an agreement providing
for the closing of the sale of the Co-Sale Shares covered by the Co-Sale Notice
within thirty (30) days of such agreement on terms and conditions not more
favorable to the purchaser than those described in the Co-Sale Notice. Any
proposed sale on terms and conditions more favorable than those described in the
Co-Sale Notice, as well as any subsequent proposed sale of any of the Co-Sale
Shares by any Selling Common Holder, shall again be subject to the co-sale
rights of the Major Holders and shall require compliance by any Selling Common
Holder with the procedures described in this Section 5.

          5.8  Exempt Transfers.
               ----------------

               (a)  The provisions of Subsections 5.1 through 5.7 shall not
apply to (A) any pledge of Co-Sale Shares made pursuant to a bona fide loan
transaction that creates a mere security interest; (B) any transfer to the
ancestors, descendants or spouse of the Common Holder or to trusts for the
benefit of the Common Holders or (C) any bona fide gift. All such Co-Sale Shares
sold or transferred under the above clauses shall remain "Co-Sale Shares"
hereunder, and any such pledgee, transferee or donee shall be treated as a
"Common Holder" for purposes of this Agreement.

               (b)  The provisions of Subsections 5.1 to 5.7 shall not apply to
the sale of any Co-Sale Shares (A) to the public pursuant to a registration
statement filed with, and declared effective by, the SEC under the Securities
Act, where the shares of Series C Preferred Stock have converted to Common Stock
or (B) to the Company pursuant to the repurchase provisions of any stock
restriction agreements between the Company and any Common Holder.

          5.9  Prohibited Sales. Any attempt by a Selling Common Holder to sell
               ----------------
Co-Sale Shares in violation of this Section 5 shall be void and the Company
agrees it will not effect such a sale nor will it treat any alleged purchaser as
the holder of such shares without the written consent of all of the Major
Holders.

     6.   Restrictive Legends and Restrictions on Transfer.
          ------------------------------------------------

          6.1  Restrictive Legends.
               -------------------

               (a)  Each certificate representing shares of Common Stock and
Preferred Stock or any other securities issued in respect of such Common Stock
and Preferred Stock upon any stock split, stock dividend, recapitalization,
merger, consolidation, or similar event, shall (unless otherwise permitted by
the provisions of Section 6.2 be stamped or otherwise imprinted with legends in
substantially the following form (in addition to any legend required under
applicable state securities laws) now or hereafter owned by the Common Holders
or Preferred Holders shall be endorsed with the following legends:

                                      -17-
<PAGE>

          THE SALE, PLEDGE, HYPOTHECATION OR TRANSFER OF THE SECURITIES
          REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE TERMS AND CONDITIONS
          OF A CERTAIN STOCKHOLDER RIGHTS AGREEMENT BY AND BETWEEN THE
          CORPORATION AND CERTAIN STOCKHOLDERS OF THE CORPORATION. COPIES OF
          SUCH AGREEMENT MAY BE OBTAINED UPON REQUEST TO THE SECRETARY OF THE
          CORPORATION.

          THE SALE AND ISSUANCE OF THE SECURITIES REPRESENTED BY THIS
          CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
          AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAW OF ANY STATE OR
          OTHER JURISDICTION. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT
          AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE DISTRIBUTION
          THEREOF. THESE SECURITIES MAY NOT BE OFFERED, SOLD, PLEDGED, OR
          TRANSFERRED UNLESS A REGISTRATION STATEMENT UNDER THE ACT IS IN EFFECT
          AS TO THESE SECURITIES AND SUCH OFFER, SALE, PLEDGE, OR TRANSFER IS IN
          COMPLIANCE WITH APPLICABLE SECURITIES LAWS OF ANY STATE OR OTHER
          JURISDICTION OR THERE IS AN OPINION OF COUNSEL OR OTHER EVIDENCE,
          SATISFACTORY TO THE CORPORATION THAT AN EXEMPTION THEREFROM IS
          AVAILABLE AND THAT SUCH OFFER, SALE, PLEDGE, OR TRANSFER IS IN
          COMPLIANCE WITH APPLICABLE SECURITIES LAWS OF ANY STATE OR OTHER
          JURISDICTION.

               (b)  Each Common Holder and Preferred Holder agrees that the
Company may instruct its transfer agent to impose transfer restrictions on the
shares represented by certificates bearing the legends referred to in Section
6.1(a) above to enforce the provisions of this Agreement and the Company to
promptly do so.

          6.2  Permitted Transfers. The Company shall be obligated to reissue
               -------------------
promptly certificates without the second legend set forth in Section 6.1(a) at
the request of any Holder thereof if the holder shall have obtained an opinion
of counsel (which counsel may be counsel to the Company) reasonably acceptable
to the Company to the effect that the securities proposed to be disposed of may
lawfully be so disposed of without registration, qualification or legend. Any
legend endorsed on an instrument pursuant to applicable state securities laws
and the stop-transfer instructions with respect to such securities shall be
removed upon receipt by the Company of an order of the appropriate blue sky
authority authorizing such removal.

          6.3  Notice of Proposed Transfers.
               ----------------------------

               (a)  In addition to the rights of co-sale under Section 5, prior
to any proposed transfer of any Restricted Securities, unless there is in effect
a registration statement under the Securities Act covering the proposed
transfer, the Holder or Common Holder thereof shall give written notice (the
"Notice") to the Company of such Holder's or Common Holder's intention to make
such transfer. If reasonably requested by the Company prior to the transfer
being effected, the Holder or Common Holder shall provide to the Company a
written opinion of legal counsel who

                                      -18-
<PAGE>

shall be reasonably satisfactory to the Company, addressed to the Company
and reasonably satisfactory in form and substance to the Company's counsel, to
the effect that the proposed transfer of the Restricted Securities may be
effected without registration under the Securities Act. It is agreed that the
Company will not require opinions of counsel for transactions made pursuant to
Rule 144 under the Securities Act except in unusual circumstances.
Notwithstanding the foregoing provisions of this paragraph, no such registration
statement or opinion of counsel shall be necessary for a transfer by a holder
which is (i) a partnership to its partners or retired partners in accordance
with partnership interests, (ii) a corporation to its shareholders, officers or
directors, affiliated entities or persons or (iii) an individual to a family
member or trust for the benefit of such Holder, Common Holder or a family
member, provided the transferee will be subject to the terms of this Section 6.3
to the same extent as if he were an original Holder or Common Holder hereunder.
Each certificate evidencing the Restricted Securities so transferred shall bear
the appropriate restrictive legends set forth in Section 6.1, except that such
certificate shall not bear the second restrictive legend set forth in Section
6.1(a) if in the opinion of counsel for the Company such legend is not required
in order to establish compliance with any provisions of the securities laws.

               (b)  Each Holder and Common Holder consents to the Company making
a notation on its records and giving instructions to any transfer agent of the
Restricted Securities in order to implement the restrictions on transfer
described in this Section.

     7.   Information Rights.
          ------------------

          7.1  Financial Information. The Company will furnish the following
               ---------------------
information to each Major Holder:

               (a)  within twenty (20) days after the end of each monthly and
quarterly accounting period in each fiscal year,

                    (i)  unaudited statements of income and of cash flow of the
Company for such monthly or quarterly period and for the period from the
beginning of such fiscal year to the end of such monthly period, which
statements will be prepared in accordance with United States generally accepted
accounting principles, consistently and uniformly applied and

                    (ii) balance sheets of the Company as of the end of such
monthly or quarterly period, which statements will be prepared in accordance
with United States generally accepted accounting principles, consistently and
uniformly applied.

               (b)  not less than thirty (30) days prior to the end of each
fiscal year, annual consolidated budgets prepared on a monthly basis for the
Company for the succeeding fiscal year, as approved by the Board of Directors
(displaying anticipated statements of income and cash flow and balance sheets
and containing a brief description by the Chief Executive Officer of the
Company's plans for the subsequent year);

               (c)  within ninety (90) days after the end of each fiscal year,
statements of income and retained earnings and cash flows of the Company for
such fiscal year, and a balance

                                      -19-
<PAGE>

sheet of the Company as of the end of such fiscal year, which statements shall
be prepared in accordance with United States generally accepted accounting
principles, consistently and uniformly applied, and accompanied by the
unqualified opinion of an accounting firm of recognized national standing.

          7.2  Inspection Rights; Management Rights. The Company shall
               ------------------------------------
permit each Major Holder, its attorney, or its other representative to visit and
inspect the Company's properties, to examine the Company's books of account and
other records, to make copies or extracts therefrom and to discuss the Company's
affairs, finances and accounts with its officers, management employees and
independent accountants, all at such reasonable times and as often as such Major
Holder may reasonably request.

          7.3  Assignment of Rights to Information. The rights granted pursuant
               -----------------------------------
to Sections 7.1 and 7.2 may not be assigned or otherwise conveyed by any Major
Holder or by any subsequent transferee of any such rights without the written
consent of the Company, which consent shall not be unreasonably withheld;
provided that the Company may refuse such written consent if the proposed
transferee is a competitor of the Company as determined by the Company's Board
of Directors; and provided further, that no such written consent shall be
required if the transfer is made to a party who is not a competitor of the
Company and who is a parent, subsidiary, affiliate, partner, shareholder,
officer or director or group member of any Major Holder.

          7.4  Confidentiality. Each Major Holder agrees that it will keep
               ---------------
confidential and will not disclose or divulge any confidential, proprietary or
secret information which such Major Holder may obtain from the Company, and
which the Company has prominently marked "confidential", "proprietary" or
"secret" or has otherwise identified as being such, pursuant to financial
statements, reports and other materials submitted by the Company as required
hereunder, or pursuant to visitation or inspection rights granted hereunder
unless such information is or becomes known to the Major Holder from a source
other than the Company or is or becomes publicly known, or unless the Company
gives its written consent to the Major Holder's release of such information,
except that no such written consent shall be required (and Major Holder shall be
free to release such information) if such information is to be provided to an
Major Holder's counsel or accountant, or to an officer, director or general or
limited partner of an Major Holder or to employees of, or consultants to, an
Major Holder on a "need to know" basis, provided that the Major Holder shall
inform the recipient of the confidential nature of such information, and shall
instruct the recipient to treat the information as confidential.

     8.   Voting and Other Covenants.
          --------------------------

          8.1  Agreement to Vote. Each of the Preferred Holders and Common
               -----------------
Holders (and their permitted assigns) hereby agrees to vote all shares of the
Company's stock now or hereafter owned by it, whether beneficially or otherwise,
at any regular or special meeting of stockholders of the Company, or, in lieu of
any such meeting, to give their written consent, as provided in this Section 8.

                                      -20-
<PAGE>

          8.2  Election of Directors. During the term of this Agreement, the
               ---------------------
Preferred Holders and Common Holders agree that they shall vote all of their
respective shares of the Company's Preferred Stock or Common Stock, whether
beneficially or otherwise (the "Shares") in the following manner to elect
members to the Company's Board of Directors, as follows: (1) the Company's Chief
Executive Officer, (2) two people, who shall initially be Tom Winter and Alan
Kaganov, who shall be determined by a vote of the holders of a majority of the
Series B Preferred Stock, (3) one person, who shall initially be Stuart Edwards,
who shall be determined by a vote of the holders of a majority of the Series A
Preferred Stock and Common Stock, voting together as a single class, on an as-
converted basis, (4) one person, who shall initially be David Fann, who shall be
determined by a vote of the holders of a majority of the Series C Preferred
Stock and (5) any additional seats shall be filled with people who shall be
outside independent directors (designated "At-Large directors"). Any At-Large
director shall be a nominee that is mutually acceptable to a majority in
interest of the holders of Common Stock and majority in interest of the holders
of Preferred Stock. Any vote taken to remove any director elected pursuant to
this Section 8, or to fill any vacancy created by the resignation of a director
elected pursuant to this Section 8, shall also be subject to the provisions of
this Section 8.

          8.3  Successors in Interest. The provisions of Sections 8.1 and 8.2
               ----------------------
shall be binding upon the successors in interest of any of the Preferred Holders
and Common Holders. The Company shall not permit the transfer of any shares of
stock held by the Preferred Holders or Common Holders its books unless and until
the person to whom such security is transferred shall have executed a written
agreement pursuant to which such person becomes subject to the provisions of
this Section 8 and agrees to be bound by all the provisions hereof.

     9.   Miscellaneous.
          -------------

          9.1  Waiver of Right of First Refusal. Major Holders under the Prior
               --------------------------------
Agreement hereby agree to waive their right of first refusal contained in
Section 3, above, in conjunction with the issuance of the Series C Preferred
Stock to which this Agreement relates.

          9.2  Conditions to Exercise of Rights. Exercise of the Holders' rights
               --------------------------------
under this Agreement shall be subject to and conditioned upon, and each Holder
and the Company shall use its or his best efforts to assist each Holder in,
compliance with applicable laws.

          9.3  Repurchase Agreement. This Agreement is subject to, and shall in
               --------------------
no manner limit the right of the Company to repurchase securities from a Founder
at cost pursuant to any stock restriction agreement or other agreement between
the Company and the Founder.

          9.4  Governing Law. This Agreement shall be governed by and construed
               -------------
in accordance with the laws of the State of California.

          9.5  Amendment. Any provision may be amended and the observance
               ---------
thereof may waived (either generally or in a particular instance), only by the
written consent of the Company and Holders holding more than two-thirds in
interest of the Registrable Securities which are issued or issuable in respect
of Preferred Stock of the Company; provided, however, any amendment or waiver

                                      -21-
<PAGE>

of any provisions of Sections 2, 5 or 8 also requires the written consent of the
Common Holders holding more than fifty percent (50%) in interest of the Common
Stock held by Common Holders. Any amendment or waiver effected in accordance
with this paragraph shall be binding upon each Holder, Common Holder, its
successors and assigns, heirs, executors and the Company.

          9.6  Assignment of Rights. This Agreement and the rights and
               --------------------
obligations of the parties hereunder shall inure to benefit of and be binding
upon, their respective successors, assigns and legal representatives. The
provisions of Section 4.5 shall also inure to the benefit of each Indemnified
Party.

          9.7  Term.
               ----

               (a)  Sections 2, 3, 5, 7 and 8 of this Agreement shall terminate
upon the earlier of (i) the closing of a firm commitment underwritten public
offering pursuant to an effective registration statement under the Securities
Act of 1933, as amended, covering the offer and sale of Common Stock for the
account of the Company and/or selling stockholders to the public at a per share
price of not less than $5.00 (as adjusted for stock splits, reverse stock splits
and the like effected alter the date of this Agreement) and resulting in
aggregate net proceeds to the Company or the selling stockholders (after
deducting underwriters' discounts and expenses relating to the issuance) of not
less than $15,000,000, and (ii) the closing of the Company's sale of all or
substantially all of its assets or the acquisition of the Company by another
entity by means of merger or consolidation resulting in the exchange of the
outstanding shares of the Company's capital stock for securities or
consideration issued, or caused to be issued, by the acquiring entity or its
subsidiary.

               (b)  No Holder shall be entitled to exercise any rights provided
for in Section 4 of this Agreement after five (5) years following a firm
commitment offering of the type described in Section 9.6(a)(i).

          9.8  Notices. Unless otherwise stated herein, all notices required or
               -------
permitted hereunder shall be in writing and shall be deemed effectively given
upon personal delivery to the party to be notified or five days after deposit in
the United States mail, by registered or certified mail, postage prepaid, or
otherwise delivered by hand, facsimile or messenger and properly addressed to
the party to be notified as set forth on the signature page hereof or at such
other address as such party may designate by ten (10) days' advance written
notice to the other parties hereto.

          9.9  Severability. In the event one or more of the provisions of this
               ------------
Agreement should, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provisions of this Agreement, and this Agreement
shall be construed as if such invalid, illegal or unenforceable provision had
never been contained herein.

          9.10 Attorney Fees. In the event that any dispute among the parties to
               -------------
this Agreement should result in litigation, the prevailing party in such dispute
shall be entitled to recover from the losing party all fees, costs and expenses
of enforcing any right of such prevailing party under or with respect to this
Agreement, including without limitation, such reasonable fees and

                                      -22-
<PAGE>

expenses of attorneys and accountants, which shall include, without limitation,
all fees, costs and expenses of appeals.

          9.11 Counterparts. This Agreement may be executed in any number of
               ------------
counterparts, each of which shall be deemed an original and enforceable against
the parties actually executing such counterpart, and all of which together shall
constitute one instrument.

          9.12 Entire Agreement. This Agreement constitutes the entire agreement
               ----------------
between the parties relative to the specific subject matter hereof. Any previous
agreement among the parties relative to the specific subject matter hereof is
superseded by this Agreement.

                                      -23-
<PAGE>

     The foregoing Stockholder's Rights Agreement is hereby executed as of the
date first above written.

                                          Company:

                                          CONWAY-STUART MEDICAL, INC.

                                          By:      /s/ Stuart D. Edwards
                                             -----------------------------------

                                          Title:       CEO
                                                --------------------------------
<PAGE>

                                          Preferred Holder:

                                          EXCELSIOR PRIVATE EQUITY FUND II, INC.

                                          By: /s/ David I. Fann
                                             ---------------------------------

                                          Name:  David I. Fann
                                               -------------------------------

                                          Title:  President and CEO
                                                ------------------------------

                                          ONSET ENTERPRISE ASSOCIATES III, L.P.
                                          By Managing Director
                                          OEA III Management LLC
                                          The General Partner of ONSET
                                          Enterprise Associates III, L.P.

                                          By: /s/ Thomas E. Winter
                                             ---------------------------------
                                             Thomas E. Winter

                                          U.S. VENTURE PARTNERS V, L.P.
                                          USVP V INTERNATIONAL, L.P.
                                          2180 ASSOCIATES FUND V, L.P.
                                          USVP V ENTREPRENEUR PARTNERS, L.P.
                                          By Presidio Management Group V, L.L.C.
                                          Its General Partner

                                          By: /s/ Irwin Federman
                                             ---------------------------------
                                             Irwin Federman
                                             Managing Member

                                          /s/ Leslie Bottorff
                                          ------------------------------------
                                          Leslie Bottorff

                                          /s/ Alan L. Kaganov
                                          ------------------------------------
                                          Alan L. Kaganov

<PAGE>

                                          CMCA Profit sharing Plan, fbo Roger
                                          Winkle

                                          By:
                                             -----------------------------------

                                          Title:
                                                --------------------------------

                                          Geoffrey O. Hartzler, Trustee of the
                                          Geoffrey O. Hartzler Revocable Trust
                                          dated 1-8-97, as amended

                                          By:
                                             -----------------------------------

                                          Title:
                                                --------------------------------

                                          Adam Ventures, L.P.

                                          By:
                                             -----------------------------------

                                          Title:
                                                --------------------------------

                                          Steven M. Schwartz and Paula Mae
                                          Schwartz JTWROS

                                          By:
                                             -----------------------------------

                                          Title:
                                                --------------------------------

                                          G.B.P. Partners, Ltd., a Colo. Ltd.
                                          Partnership George. Pentz, General
                                          Partner

                                          By:
                                             -----------------------------------

                                          Title:
                                                --------------------------------

                                          Cowen & Co. Custodian, FBO David B.
                                          Musket SEP IRA

                                          By:         /s/ David Musket
                                             -----------------------------------

                                          Title:
                                                --------------------------------
<PAGE>

                                          R. Winkle & H. Mead & M. Ruder & E.
                                          Anderson & N. Smith & B. Benedick TTEE
                                          CARD MED PSP fbo Edward Anderson

                                          By:___________________________________

                                          Title:________________________________

                                          Gerald Berner Tr. and Harriet R.
                                          Berner Tr. of Family Trust dated
                                          10-7-81

                                          By:___________________________________

                                          Title:________________________________

                                          ______________________________________
                                          Michael Franz, M.D.

                                          ______________________________________
                                          Gregory A. Hartzler

                                          Joseph P. Ilvento and Judy C. Dean
                                          Pension Trust for Staff

                                          By:___________________________________

                                          Title:________________________________

                                          ______________________________________
                                          Ronald G. Lax

                                          ______________________________________
                                          Christian H. Lundquist

                                          ______________________________________
                                          R. Hardwin Mead

                                          ______________________________________
                                          Philip E. Oyer

<PAGE>

                                          --------------------------------------
                                          Zachary H. Shafran

                                          William N. Starling, Jr. and Dana
                                          Gregory Starling, Trustees of the
                                          Starling Family Trust, U/D/T August

                                          By:
                                             -----------------------------------

                                          Title:
                                                --------------------------------

                                          --------------------------------------
                                          Jack D. Utley

                                          /s/ David B. Musket
                                          --------------------------------------
                                          David B. Musket

                                          WS Investment Company 98A

                                          By:
                                             -----------------------------------

                                          Title:
                                                --------------------------------

                                          --------------------------------------
                                          Bruce A. Benedick

                                          --------------------------------------
                                          Frank H. Montgomery

                                          --------------------------------------
                                          Robert M. Stoesser

<PAGE>

                                          Joanne J. Chambers Trustee of the
                                          1994 Joanne J. Chambers Trust

                                          By:___________________________________

                                          Title:________________________________

                                          Orval M. & Ruth B. Eshelman, Family
                                          Trust

                                          By:___________________________________

                                          Title:________________________________

                                          The Rex and Leanor Lindsay Family
                                          Trust dated
                                          2/7/77

                                          By:___________________________________

                                          Title:________________________________

                                          Trustee, WSGR Retirement Plan, fbo
                                          J. Casey McGlynn

                                          By:___________________________________

                                          Title:________________________________

                                          Raymond James & Associates, Inc.
                                          Cust fbo Philip E. Oyer IRA

                                          By:___________________________________

                                          Title:________________________________

                                          Terrence J. Rose, Trustee Terrence &
                                          Trudy Rose 1979 Living Trust Dtd
                                          5/14/79

                                          By:___________________________________

                                          Title:________________________________

<PAGE>

                                          ______________________________________
                                          Henry C. Stockman

                                          ______________________________________
                                          William F. Stoesser

                                          ______________________________________
                                          Philip R. McCowan

                                          Robert D. McCulloch and Kathleen M.
                                          McCulloch, or their successor(s) of
                                          the R.D. McCulloch and K.M. McCulloch
                                          Family Trust Agreement, dtd 11/19/97

                                          By:___________________________________

                                          Title:________________________________

                                          ______________________________________
                                          Bryce Winkle

                                          ______________________________________
                                          Harold C. Hohbach

                                          ______________________________________
                                          Marilyn A. Hohbach

                                          ______________________________________
                                          Brooke Winkle

                                          ______________________________________
                                          Douglas P. Zipes and M. Joan Zipes

                                          ______________________________________
                                          Joel M. Harris

<PAGE>

                                          Somnus Medical Technologies, Inc.

                                          By:
                                             -----------------------------------

                                          Title:
                                                --------------------------------

                                          Common Holder:

                                          /s/ Stuart D. Edwards
                                          --------------------------------------
                                          Stuart D. Edwards

                                          --------------------------------------
                                          David Utley, M.D.

<PAGE>
                                          THE TRAVELERS INSURANCE COMPANY

                                          By: /s/ Jordan M. Stitzer
                                             -----------------------------------

                                          Print Name:  Jordan M. Stitzer
                                                     ---------------------------

                                          Title:       Vice President
                                                --------------------------------

<PAGE>

                                  SCHEDULE A
                                  ----------

                           SCHEDULE OF STOCKHOLDERS

COMMON HOLDERS

Stuart D. Edwards

David Utley, M.D.

PREFERRED HOLDERS

CMCA Profit sharing Plan, fbo Roger Winkle

Geoffrey O. Hartzler, Trustee of the Geoffrey O.
Hartzler Revocable Trust dated 1-8-97, as amended

Adam Ventures, L.P.

Steven M. Schwartz and Paula Mae Schwartz
JTWROS

G.B.P. Partners, Ltd., a Colo. Ltd. Partnership George
B. Pentz, General Partner

Cowen & Co. Custodian, FBO David B. Musket SEP
IRA

R. Winkle & H. Mead & M. Ruder & E. Anderson
& N. Smith & B. Benedick TTEE CARD MED PSP
fbo Edward Anderson

Gerald Berner Tr. and Harriet R. Berner Tr. of
Family Trust dated 10-7-81

Michael Franz, M.D.

Gregory A. Hartzler

Joseph P. Ilvento and Judy C. Dean Pension Trust for
Staff

Ronald G. Lax

Christian H. Lundquist

<PAGE>

R. Hardwin Mead

Philip E. Oyer

Zachary H. Shafran

William N. Starling, Jr. and Dana Gregory Starling,
Trustees of the Starling Family Trust, U/D/T August

Jack D. Utley

David B. Musket

WS Investment Company 98A

Bruce A. Benedick

Frank H. Montgomery

Robert M. Stoesser

Joanne J. Chambers Trustee of the 1994 Joanne J.
Chambers Trust

Orval M. & Ruth B. Eshelman, Family Trust

The Rex and Leanor Lindsay Family Trust dated 2/7/77

Trustee, WSGR Retirement Plan, fbo J. Casey
McGlynn

Raymond James & Associates, Inc. Cust fbo Philip
E. Oyer IRA

Terrence J. Rose, Trustee Terrence & Trudy Rose
1979 Living Trust Dtd 5/14/79

Henry C. Stockman

William F. Stoesser

Philip R. McCowan

<PAGE>

Robert D. McCulloch and Kathleen M. McCulloch,or
their successor(s) of the R.D. McCulloch and K.M.
McCulloch Family Trust Agreement, dtd 11/19/97

Bryce Winkle

Harold C. Hohbach

Marilyn A. Hohbach

Brooke Winkle

Douglas P. Zipes and M. Joan Zipes

Joel M. Harris

Onset Enterprise Associates III, L.P.

U.S. Venture Partners V, L.P.

USVP V International, L.P.

2180 Associates Fund V, L.P.

USVP V Entrepreneur Partners, L.P.

Alan L. Kaganov

Somnus Medical Technologies, Inc.

Excelsior Private Equity Fund II, Inc.

Leslie Bottorff

[Travelers Insurance Co.]

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