Document:

Exhibit
10.24.1

 

FIRST AMENDMENT TO

 

LICENSE TRANSFER AND TRANSITION SERVICES AGREEMENT

 

THIS FIRST
AMENDMENT TO LICENSE TRANSFER AND TRANSITION SERVICES AGREEMENT (this “Amendment”)
is made and entered into this      day of February 2005, by
and among Refocus Group, Inc., a Delaware corporation (“Refocus”), Refocus
Ocular, Inc., a Delaware corporation that is a wholly-owned subsidiary of
Refocus (“Licensor”), CIBA Vision AG, a Swiss corporation (“Licensee”),
and CIBA Vision Corporation, a Delaware corporation (“CIBA”).  All initially capitalized terms not defined
herein shall have the meanings attributable to them in the License Transfer Agreement
(as defined herein).

 

RECITALS

 

WHEREAS, each
of Refocus, Licensor, Licensee and CIBA is a party to that certain License Transfer
and Transition Services Agreement, dated January 30, 2004 (the “License Transfer
Agreement”);

 

WHEREAS, Refocus,
Licensor, Licensee and CIBA desire to amend the License Transfer Agreement to
the extent provided in this Amendment; and

 

WHEREAS,
Refocus and Licensor desire to waive certain alleged defaults under the License
Transfer Agreement to the extent provided in this Amendment.

 

AGREEMENT

 

NOW THEREFORE,
in consideration of the mutual covenants and conditions contained herein and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged by the execution and delivery hereof, the parties,
intending to be legally bound hereby, hereby agree as follows:

 

A.            Amendment
to the License Transfer Agreement. 
The License Transfer Agreement is hereby amended as follows:

 

1.             Subsection 1 of
Section D of the License Transfer Agreement is deleted in its entirety and
replaced with the following:

 

“1.           As
compensation for the termination of the License Agreement, the forgiveness of
any and all royalties paid under the License Agreement, and the services to be
performed under this Agreement by Licensee, CIBA and their respective
affiliates, and in consideration for the other promises and covenants of Licensee,
CIBA and their respective affiliates, Licensor shall pay to CIBA, in lawful
money of the United States of America, a royalty (“Royalty” or “Royalties”)
equal to four percent (4%) of Net Sales (as defined herein) from February    ,
2005, until the earlier of (i) December 31, 2009, and (ii) the date that CIBA
shall  

 

1

 

have received
Royalty payments in the aggregate amount of $3,250,000 (the “Royalty Term”),
it being understood that the maximum amount of Royalties required to be paid to
CIBA hereunder shall be $3,250,000.  All Royalties
earned under this Agreement during a calendar quarter in the Royalty Term shall
be paid by Licensor to CIBA within 45 days of the last day of such calendar
quarter.  At the written request of CIBA,
Licensor will provide a reasonable accounting of all Royalties earned by CIBA
hereunder during the prior calendar quarter within 15 days following Licensor’s
receipt of such request.  The Chief
Financial Officer of Refocus will certify that such accounting is complete and
accurate in all material respects.  In
the event that the aggregate amount of Royalties paid to CIBA for the Royalty
Term is less than $3,250,000, Licensor shall pay to CIBA, on or prior to
February 15, 2010, the difference between the aggregate amount of Royalties
paid to CIBA under this Agreement and $3,250,000.  Notwithstanding anything to the contrary
herein, Licensor may terminate its obligation to pay Royalties hereunder by
paying to CIBA, on or before January 1, 2006, the amount of $2,000,000, less
the amount of Royalties previously paid to CIBA as of such date, and such payment
shall constitute full and final payment of any and all amounts due and payable
to CIBA or Licensee by Licensor or Refocus pursuant to this Section D.

 

For purposes
of this Agreement, “Net Sales” means the gross amount received by Licensor,
Refocus, their respective affiliates and approved sublicensees from third
parties for the sale or other disposition of the Products less (i) returns,
(ii) the cost of samples distributed, and (iii) discounts, credits or
allowances actually granted in the ordinary course of business and consistent
with Licensor’s or Refocus’ general practices. 
All non-U.S. sales shall be converted into U.S. Dollars using the
exchange rate quoted in the Wall Street Journal as of the last day of the
calendar quarter for which the calculation of Net Sales is made.”

 

B.            Waiver
and Liquidated Damages.

 

1.             Refocus and Licensor
hereby forever waive any and all defaults under Section C of the License
Transfer Agreement with respect to the non-performance of the Services by CIBA,
Licensee and their respective affiliates, including, but not limited to, any
failure to finalize and issue, or cause to be finalized and issued, on a timely
basis appropriate CE Mark certifications on the implant and blade;  provided, however, Refocus and
Licensor do not waive any default under Section C of the License Transfer
Agreement with respect to the performance or nonperformance of the Services in
violation of any applicable codes, ordinances or other requirements of
governmental or regulatory authorities having jurisdiction over the services
and work performed pursuant to the License Transfer Agreement (the “Non-Waived
Services”).  Notwithstanding anything
to the contrary herein, Refocus and Licensor shall be entitled to continue to
rely on the certifications, test results, conformance to Quality System
Regulations and other 

 

2

 

representations
made with respect to the Products by CIBA, Licensee or their respective
affiliates (“Reliance Provisions,” and together with the Non-Waived
Services, collectively, the “Non-Waived Provisions”).

 

2.             In the event that Licensee,
CIBA or their respective affiliates shall default in their respective obligations
pursuant to Non-Waived Provisions or materially breach the Non-Waived
Provisions, Licensor’s and Refocus’ sole and exclusive remedy will be the
payment by Licensee or CIBA to Licensor or Refocus of an amount equal to Ten
Thousand and No/100 Dollars ($10,000.00), as liquidated damages.  Licensor, Refocus, Licensee and CIBA hereby
acknowledge and agree that Licensor’s and Refocus’ damages relating to Licensee’s,
CIBA’s or their respective affiliates’ default of the Non-Waived Provisions are
difficult to ascertain with certainty, and therefore, Licensor, Refocus,
Licensee and CIBA hereby agree that Ten Thousand and No/100 Dollars
($10,000.00) is a fair estimate of Licensor’s and Refocus’ damages arising out of,
or caused by, the default of the Non-Waived Provisions and that CIBA’s maximum
total liability to Licensor and Refocus pursuant to the License Transfer
Agreement and this Amendment shall be Ten Thousand and No/100 Dollars
($10,000.00), regardless of the number of instances of default or whether such
instances of default relate to the same or different Non-Waived Provisions.

 

C.            Miscellaneous.

 

1.             This Amendment, the
License Transfer Agreement, the Secrecy Agreement and any other agreement
contemplated herein or therein, and the exhibits attached hereto or thereto,
constitute the entire agreement between the parties pertaining to the subject
matter hereof and thereof, and supersede all prior and contemporaneous
agreements, understandings, negotiations and discussions of the parties,
whether oral or written, and there are no warranties, representations or other
agreements among the parties in connection with the subject matter hereof or
thereof, except as specifically set forth herein or therein.  This Amendment may only be amended or
modified by an instrument in writing executed by Licensor, Refocus, Licensee
and CIBA.  No waiver of any of the
provisions of this Amendment shall be deemed, or shall constitute, a waiver of
any other provision of this Amendment, whether or not similar, nor shall such
waiver constitute a continuing waiver unless otherwise expressly provided.

 

2.             By executing this Amendment,
Licensor, Refocus, Licensee and CIBA, for themselves and their respective
Designees, represent and warrant that each of them has the right and authority
to enter into and accept the terms and covenants of this Amendment.

 

3.             This Amendment shall
be construed and interpreted according to the laws of the State of Texas,
without regard to the conflicts of law provisions thereof.

 

4.             This Amendment may be
executed in several counterparts, each of which shall be deemed an original,
but all such counterparts shall together constitute one and the same agreement.

 

3

 

5.             Except as specifically
provided herein, the License Transfer Agreement shall remain in full force and
effect.

 

IN WITNESS
WHEREOF, the parties hereto have duly executed, sealed and delivered this Amendment,
formed by four (4) pages, on the day and year first above written.

 

	
   

  	
  REFOCUS:

  	
  REFOCUS GROUP,
  INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Terence A. Walts

  	
   

  
	
   

  	
   

  	
  Title:

  	
  President

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  LICENSOR:

  	
  REFOCUS OCULAR,
  INC.

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Terence A. Walts

  	
   

  
	
   

  	
   

  	
  Title:

  	
  President

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  LICENSEE:

  	
  CIBA VISION AG

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  CIBA:

  	
  CIBA VISION
  CORPORATION

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
   

  	
  Title:

  	
   

  	
   

  

 

4Exhibit 10.27

 

SECURITIES PURCHASE AGREEMENT

 

between

 

REFOCUS GROUP, INC.,

 

and

 

MEDCARE INVESTMENT FUND III, LTD.

 

Dated as of March 1, 2005

 

 

TABLE OF CONTENTS

 

	
  ARTICLE I. THE SECURITIES

  	
   

  
	
  SECTION 1.01

  	
  Issuance, Sale and
  Delivery of the Series A-1 Shares and Warrant at the First Closing

  	
   

  
	
  SECTION 1.02

  	
  Issuance, Sale and
  Delivery of the Series A-2 Shares at Second Closing

  	
   

  
	
  SECTION 1.03

  	
  First Closing

  	
   

  
	
  SECTION 1.04

  	
  Second Closing

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE II.
  REPRESENTATIONS AND WARRANTIES OF THE COMPANY 3

  	
   

  
	
  SECTION 2.01

  	
  Organization,
  Qualifications and Corporate Power

  	
   

  
	
  SECTION 2.02

  	
  Authorization; No
  Conflict; No Violation

  	
   

  
	
  SECTION 2.03

  	
  Consents and Approvals

  	
   

  
	
  SECTION 2.04

  	
  Validity

  	
   

  
	
  SECTION 2.05

  	
  Authorized Capital Stock

  	
   

  
	
  SECTION 2.06

  	
  Reports and Financial
  Statements

  	
   

  
	
  SECTION 2.07

  	
  Disclosure Controls and
  Procedures

  	
   

  
	
  SECTION 2.08

  	
  No Undisclosed Liabilities

  	
   

  
	
  SECTION 2.09

  	
  Events Subsequent to the
  Balance Sheet Date

  	
   

  
	
  SECTION 2.10

  	
  Litigation; Compliance
  with Law

  	
   

  
	
  SECTION 2.11

  	
  Proprietary Information

  	
   

  
	
  SECTION 2.12

  	
  Intellectual Property

  	
   

  
	
  SECTION 2.13

  	
  Real Property

  	
   

  
	
  SECTION 2.14

  	
  Assets

  	
   

  
	
  SECTION 2.15

  	
  Insurance

  	
   

  
	
  SECTION 2.16

  	
  Taxes

  	
   

  
	
  SECTION 2.17

  	
  Agreements

  	
   

  
	
  SECTION 2.18

  	
  Loans and Advances

  	
   

  
	
  SECTION 2.19

  	
  Assumptions, Guaranties,
  Etc. of Indebtedness of Other Persons

  	
   

  
	
  SECTION 2.20

  	
  Significant Customers and
  Suppliers

  	
   

  
	
  SECTION 2.21

  	
  Offerings

  	
   

  
	
  SECTION 2.22

  	
  Brokers; Financial
  Advisors

  	
   

  
	
  SECTION 2.23

  	
  Transactions With
  Affiliates

  	
   

  
	
  SECTION 2.24

  	
  Employees

  	
   

  
	
  SECTION 2.25

  	
  Environmental and Safety
  Laws

  	
   

  
	
  SECTION 2.26

  	
  Employee Benefits

  	
   

  
	
  SECTION 2.27

  	
  Foreign Corrupt Practices
  Act

  	
   

  
	
  SECTION 2.28

  	
  Illegal or Unauthorized
  Payments; Political Contributions

  	
   

  
	
  SECTION 2.29

  	
  Pending Changes

  	
   

  
	
  SECTION 2.30

  	
  Investment Company Act

  	
   

  
	
  SECTION 2.31

  	
  Product Liability

  	
   

  
	
  SECTION 2.32

  	
  Passive Foreign Investment
  Company

  	
   

  
	
  SECTION 2.33

  	
  Registration Rights

  	
   

  
	
  SECTION 2.34

  	
  Books and Records

  	
   

  
	
  SECTION 2.35

  	
  Disclosure

  	
   

  

 

i

 

	
  SECTION 2.36

  	
  FDA Trials

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE III. REPRESENTATIONS, WARRANTIES AND COVENANTS OF
  THE PURCHASER

  	
   

  
	
  SECTION 3.01

  	
  Representations and
  Warranties of the Purchaser

  	
   

  
	
  SECTION 3.02

  	
  Certain Covenants of the
  Purchaser

  	
   

  
	
  SECTION 3.03

  	
  Legend

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE IV. CONDITIONS TO
  THE OBLIGATIONS OF THE PURCHASER AND THE COMPANY

  	
   

  
	
  SECTION 4.01

  	
  Conditions to the
  Purchaser’s Obligations at the Closings

  	
   

  
	
  SECTION 4.02

  	
  Conditions to the
  Company’s Obligations at each Closing

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE V. COVENANTS OF
  THE COMPANY

  	
   

  
	
  SECTION 5.01

  	
  Reserve for Warrant Shares
  and Preferred Stock Conversion Shares

  	
   

  
	
  SECTION 5.02

  	
  Corporate Existence

  	
   

  
	
  SECTION 5.03

  	
  Preservation of Property
  and Assets

  	
   

  
	
  SECTION 5.04

  	
  Properties, Business,
  Insurance

  	
   

  
	
  SECTION 5.05

  	
  Directors and Officers
  Insurance

  	
   

  
	
  SECTION 5.06

  	
  Inspection, Consultation
  and Advice

  	
   

  
	
  SECTION 5.07

  	
  Restrictive Agreements
  Prohibited

  	
   

  
	
  SECTION 5.08

  	
  Transactions with
  Affiliates

  	
   

  
	
  SECTION 5.09

  	
  Compensation and Expenses

  	
   

  
	
  SECTION 5.10

  	
  Use of Proceeds

  	
   

  
	
  SECTION 5.11

  	
  Financial Reporting

  	
   

  
	
  SECTION 5.12

  	
  Non-Disclosure,
  Non-Solicitation and Proprietary Information and Inventions Agreement

  	
   

  
	
  SECTION 5.13

  	
  Key Person Insurance

  	
   

  
	
  SECTION 5.14

  	
  Payment of Taxes; Trade
  Debt

  	
   

  
	
  SECTION 5.15

  	
  Internal Accounting
  Controls

  	
   

  
	
  SECTION 5.16

  	
  Indemnity

  	
   

  
	
  SECTION 5.17

  	
  Compliance with Laws

  	
   

  
	
  SECTION 5.18

  	
  Keeping of Records and
  Books of Account

  	
   

  
	
  SECTION 5.19

  	
  PFIC Covenant

  	
   

  
	
  SECTION 5.20

  	
  Publicity

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE VI. ADDITIONAL
  COVENANTS OF THE COMPANY

  	
   

  
	
  SECTION 6.01

  	
  Protective Provisions
  Requiring Stockholder Approval

  	
   

  
	
  SECTION 6.02

  	
  Protective Provisions
  Requiring Board Approval

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE VII. MISCELLANEOUS

  	
   

  
	
  SECTION 7.01

  	
  Expenses

  	
   

  
	
  SECTION 7.02

  	
  Survival of Agreements

  	
   

  
	
  SECTION 7.03

  	
  Entire Agreement

  	
   

  
	
  SECTION 7.04

  	
  Assignment; Binding Effect

  	
   

  
	
  SECTION 7.05

  	
  Notices

  	
   

  
	
  SECTION 7.06

  	
  Specific Performance;
  Remedies

  	
   

  

 

ii

 

	
  SECTION 7.07

  	
  Submission to
  Jurisdiction; Waiver of Jury Trial

  	
   

  
	
  SECTION 7.08

  	
  Headings

  	
   

  
	
  SECTION 7.09

  	
  Governing Law

  	
   

  
	
  SECTION 7.10

  	
  Amendments

  	
   

  
	
  SECTION 7.11

  	
  Extensions; Waivers

  	
   

  
	
  SECTION 7.12

  	
  Severability

  	
   

  
	
  SECTION 7.13

  	
  Counterparts;
  Effectiveness

  	
   

  
	
  SECTION 7.14

  	
  Construction

  	
   

  
	
  SECTION 7.15

  	
  Attorneys’ Fees

  	
   

  
	
  SECTION 7.16

  	
  Brokerage

  	
   

  
	
  SECTION 7.17

  	
  Adjustments for Stock
  Splits, Etc

  	
   

  
	
  SECTION 7.18

  	
  Aggregation of Stock

  	
   

  
	
  SECTION 7.19

  	
  Certain Defined Terms

  	
   

  
	
  SECTION 7.20

  	
  Incorporation of Exhibits,
  Annexes and Schedules

  	
   

  
	
   

  	
   

  	
   

  
	
  INDEX TO SCHEDULES

  	
   

  
	
  Disclosure Schedules

  	
   

  	
   

  
	
  SCHEDULE 2.01(B)

  	
  Subsidiaries

  	
   

  
	
  SCHEDULE 2.02

  	
  Authorization of Preferred Stock

  	
   

  
	
  SCHEDULE 2.05(A)

  	
  Outstanding Capital Stock

  	
   

  
	
  SCHEDULE 2.05(B)

  	
  Authorization of Capital Stock

  	
   

  
	
  SCHEDULE 2.05(C)

  	
  Percentage Ownership

  	
   

  
	
  SCHEDULE 2.08

  	
  Liabilities

  	
   

  
	
  SCHEDULE 2.09

  	
  Events Subsequent to the Audited Balance Sheet
  Date

  	
   

  
	
  SCHEDULE 2.10

  	
  Litigation

  	
   

  
	
  SCHEDULE 2.12(A)

  	
  Authorization to Intellectual Property

  	
   

  
	
  SCHEDULE 2.12(C)

  	
  List of Intellectual Property

  	
   

  
	
  SCHEDULE 2.12(D)

  	
  Agreements Concerning Intellectual Property

  	
   

  
	
  SCHEDULE 2.12(G)

  	
  Subsidiary Intellectual Property

  	
   

  
	
  SCHEDULE 2.13(B)

  	
  Real Property

  	
   

  
	
  SCHEDULE 2.15

  	
  Insurance

  	
   

  
	
   

  	
   

  	
   

  
	
  INDEX TO EXHIBITS

  	
   

  
	
  EXHIBIT A

  	
  Certificate of Designation

  	
   

  
	
  EXHIBIT B

  	
  Warrant

  	
   

  
	
  EXHIBIT C

  	
  Form of Investors’ Rights Agreement

  	
   

  

 

iii

 

SECURITIES PURCHASE AGREEMENT

 

This
SECURITIES PURCHASE AGREEMENT
(this “Agreement”), dated as of March 1, 2005, is
entered into by and between Refocus Group, Inc., a Delaware corporation (the “Company”), and
Medcare Investment Fund III, Ltd. (the “Purchaser”). 
Certain capitalized terms used herein are defined in Section 7.19
of this Agreement.

 

A.            The Company has filed a Certificate
of Designation, Rights and Preferences (the “Certificate of Designation”) in the
form attached hereto as Exhibit A and incorporated herein by reference,
establishing three series of convertible preferred stock, namely, the Series
A-1 Convertible Preferred Stock, par value $0.0001 per share (the “Series A-1 Preferred Stock”),
and the Series A-2 Convertible Preferred Stock, par value $0.0001 per share
(the “Series A-2 Preferred
Stock”), and the Series A-3 Convertible Preferred Stock, par
value $0.0001 per share (the “Series A-3 Preferred Stock”).

 

B.            The Company desires to issue and
sell to the Purchaser, and the Purchaser desires to purchase from the Company,
280,000 shares of the Series A-1 Preferred Stock (the “Series A-1 Shares”),
and 280,000 shares of the Series A-2 Preferred Stock (the “Series A-2 Shares”
and together with the Series A-1 Shares, the “Shares”) on the terms and subject to
the conditions set forth in this Agreement.

 

C.            The Company desires to grant the
Purchaser a warrant to purchase 133,334 shares of Series A-3 Preferred Stock at
a price of $30.00 per share (“Warrant Shares”), such Warrant Shares to be issued in
accordance with the warrant agreement in substantially the form attached hereto
as Exhibit B (the “Warrant”),
and the Purchaser desires to purchase the Warrant, on the terms and subject to
the conditions set forth in this Agreement.

 

D.            Each Share and each Warrant Share
will be convertible into 100 shares of the Company’s common stock, par value
$0.0001 (the “Common Stock”), subject to adjustment as provided in the
Certificate of Designation (defined herein).

 

AGREEMENT

 

NOW, THEREFORE, in consideration of the premises,
representations, warranties and the mutual covenants contained in this
Agreement, the parties agree as follows:

 

ARTICLE I.

 

THE
SECURITIES

 

SECTION
1.01               Issuance, Sale and Delivery of
the Series A-1 Shares and Warrant at the First Closing.  At the First Closing (as defined in Section
1.03 hereof), on the terms and subject to the conditions of this Agreement,
the Company shall issue and sell to the Purchaser, and the Purchaser shall
purchase from the Company, the Series A-1 Shares, at a price of $25.00 per
share (the “Share
Purchase Price”) for an aggregate purchase price of $7 million,
and the Company shall issue and sell to the Purchaser, and the Purchaser shall
purchase from the Company, the Warrant, the purchase price of which shall be
$1,000 (“Warrant
Purchase 

 

 

Price”), which
the Company and the Purchaser agree to be the fair market value of the Warrant
as of the date hereof.

 

SECTION
1.02               Issuance, Sale and Delivery of
the Series A-2 Shares at Second Closing.   At the Second Closing (as defined in Section
1.04 hereof), on the terms and subject to the conditions of this Agreement, the
Company shall issue and sell to the Purchaser, and the Purchaser shall purchase
from the Company, the Series A-2 Shares at the Share Purchase Price for an
aggregate purchase price of $7 million.

 

SECTION
1.03               First Closing.   The First Closing shall take place at 10:00
a.m. at the offices of Akin Gump Strauss Hauer & Feld LLP, 300 Convent
Street, Suite 1500, San Antonio, Texas 78205, on March 1, 2005, or at such
other location, date and time as may be agreed upon between the Company and the
Purchaser (such closing being called the “First  Closing”
and such date and time being called the “First Closing Date”).  At the First Closing, the Company shall issue
and deliver to the Purchaser a certificate representing the 280,000 Series A-1
Shares and the Warrant.  As payment in
full for the Series A-1 Shares and the Warrant, on the First Closing Date the
Purchaser shall pay in immediately available funds to the Company $7,001,000 by
wire transfer or by such other method as may be reasonably acceptable to the
Company.  Such amounts shall be paid to
the account of the Company as shall have been designated in writing a
reasonable time in advance to the Purchaser by the Company.

 

SECTION
1.04               Second Closing.  If the Second Closing Milestones (as defined
in Section 4.01(q)) are met, the Second Closing shall take place within
thirty (30) days after the Company provides the Purchaser with written notice,
accompanied by satisfactory documentation, that the Second Closing Milestones
have been met; provided, however, the Second Closing shall not occur prior to
March 1, 2006.  Notwithstanding the
foregoing, upon 30-days prior written notice to the Company, the Purchaser
shall have the right, but not the obligation, to cause the Second Closing to
occur at any time after the First Closing. 
The Second Closing shall take place at 10:00 a.m. at the offices of Akin
Gump Strauss Hauer & Feld LLP, 300 Convent Street, Suite 1500, San Antonio,
Texas 78205, or at such other location, on a date and time as may be agreed
upon between the Company and the Purchaser in accordance with the terms as set
forth in this Section 1.04 (such closing being called the “Second Closing” and
such date and time being called the “Second Closing Date”).  At the Second Closing, the Company shall
issue and deliver to the Purchaser a certificate representing the 280,000
Series A-2 Shares.  As payment in full
for the Series A-2 Shares, on the Second Closing Date the Purchaser shall pay
in immediately available funds to the Company $7,000,000 by wire transfer or by
such other method as may be reasonably acceptable to the Company.  Such amounts shall be paid to the account of
the Company as shall have been designated in writing a reasonable time in
advance to the Purchaser by the Company. 
The First Closing and Second Closing, if any, shall hereinafter be
referred to individually as a “Closing” and collectively as the “Closings.”  For purposes of this Agreement, the First
Closing Date and Second Closing Date, if any, shall be deemed a “Closing Date” as such
term is used in this Agreement.

 

2

 

ARTICLE II.

 

REPRESENTATIONS
AND WARRANTIES OF THE COMPANY

 

The
Company represents and warrants to the Purchaser, as of each Closing Date, that
except as set forth in the Schedules attached hereto which shall be amended
upon the Second Closing, if any:

 

SECTION
2.01               Organization, Qualifications
and Corporate Power.

 

(a)                                     The
Company is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware. 
The Company is duly licensed or qualified to transact business as a
foreign corporation and is in good standing in each jurisdiction in which the nature
of the business transacted by it or the character of the properties owned or
leased by it requires such licensing or qualification, except where the failure
to be so licensed, qualified or in good standing would not result in a Material
Adverse Change.  The Company has full
corporate power and authority to own and hold its properties and to carry on
its business as now conducted and as proposed to be conducted, to execute,
deliver and perform this Agreement and each of the other Transaction Documents,
to issue, sell and deliver the Shares and the Warrant, to issue and deliver the
Warrant Shares upon exercise of the Warrant, and to issue and deliver the
shares of Common Stock issuable upon conversion of the Shares and the Warrant
Shares (collectively, the “Preferred
Stock Conversion Shares”).

 

(b)           Except as set forth on Schedule
2.01(b), the Company has no Subsidiaries and the Company does not (i) own
of record or beneficially, directly or indirectly, (A) any shares of capital
stock or securities exercisable or exchangeable for, or convertible into,
capital stock of any other entity or (B) any participating interest in any
partnership, joint venture or other non-corporate business enterprise or (ii)
control, directly or indirectly, any other entity. The Company has no
commitments or plans to establish any additional Subsidiaries.

 

SECTION
2.02               Authorization; No
Conflict; No Violation.   The Company’s: (a) execution and
delivery of this Agreement and each of the other Transaction Documents and
performance of its obligations hereunder and thereunder, (b) issuance, sale and
delivery of the Shares, (c) issuance and delivery of the Warrant and the
Warrant Shares and (d) issuance and delivery of the Preferred Stock Conversion
Shares have been duly authorized by all requisite corporate action and will not
(v) result in a violation of the Company’s Certificate of Incorporation, as
amended or modified (the “Charter”)
or the Company’s Bylaws, as amended or modified (the “Bylaws”), (w) result
in a violation of any applicable law, rule or regulation, or any applicable
order, injunction, judgment or decree of any court or other agency of
government, except such violations that would not result in a Material Adverse
Change, (x) conflict with, result in a breach of, or constitute (or, with due
notice or lapse of time or both, would constitute) a default under, or give
rise to any right of termination, acceleration or cancellation under, any
indenture, agreement, contract, license, arrangement, understanding, evidence
of indebtedness, note, lease or other instrument to which the Company or any of
its properties or assets is bound, except as set forth on Schedule 2.02,
(y) result in the creation or imposition of any Lien, charge, restriction,
claim or encumbrance of any nature whatsoever upon the Company or any of the 

 

3

 

Company’s properties or assets
or (z) require any consent, approval, notification, waiver or other similar
action from any third party.

 

SECTION
2.03               Consents and Approvals.   Subject to the accuracy of the Purchaser’s
representations and warranties set forth in Article III hereof, no
registration or filing with, or consent or approval of or other action by, any
federal, state or other governmental agency or instrumentality or any third
party is or will be necessary for (a) the Company’s valid execution, delivery
and performance of this Agreement and the other Transaction Documents, (b) the
Company’s issuance, sale and delivery of the Shares, (c) the Company’s issuance
and delivery of the Warrant and Warrant Shares upon exercise of the Warrant,
(d) the Company’s issuance and delivery of the Preferred Stock Conversion
Shares upon conversion of the Shares and Warrant Shares, other than (x) the
Certificate of Designation that will be filed with the Secretary of State of
the State of Delaware on or before the First Closing Date, (y) those which have
previously been obtained or made or (z) those which are required to be made
under federal or state securities laws, which will be obtained or made, and
will be effective within the time periods required by law.

 

SECTION
2.04               Validity.  This Agreement and each of the other
Transaction Documents have been duly executed and delivered by the Company and
constitute the legal, valid and binding obligations of the Company, enforceable
against the Company in accordance with their terms.

 

SECTION
2.05               Authorized Capital
Stock.

 

(a)           The Company’s authorized capital
stock consists of 10 million shares of preferred stock, par value $.0001 per
share (the “Preferred
Stock”), of which 280,000 shares have been designated Series A-1
Preferred Stock, 280,000 shares have been designated Series A-2 Preferred
Stock, 133,334 shares have been designated Series A-3 Preferred Stock and 120
million shares of Common Stock. 
Immediately after the Closing, the number of shares of Preferred Stock
and the number shares of Common Stock set forth on Schedule 2.05(a) will
be validly issued and outstanding, fully paid and nonassessable.  In addition, immediately prior to the First
Closing, 81,544,004 shares of Common Stock will be reserved for issuance upon
conversion of the Preferred Stock Conversion Shares and exercise of outstanding
options, warrants or other securities exchangeable for or convertible into
Common Stock.  No shares are held in the
Company’s treasury.  The stockholders of
record and holders of subscriptions, warrants, options, convertible securities,
and other rights (contingent or other) to purchase or otherwise acquire equity
securities of the Company, and the number of shares of Common Stock and the
number of such subscriptions, warrants, options, convertible securities, and
other such rights held by each are as set forth in Schedule 2.05(a)
hereto as of the date indicated therein. 
The designations, powers, preferences, rights, qualifications,
limitations and restrictions in respect of each class and series of the
Company’s authorized capital stock, are as set forth in the Charter, and all
such designations, powers, preferences, rights, qualifications, limitations and
restrictions are valid, binding and enforceable and in accordance with all
applicable laws.  Except as set forth in Schedule
2.05(a) hereto: (i) no Person owns of record any share of the Company’s
capital stock, (ii) no subscription, warrant, option, convertible security, or
other right (contingent or other) to purchase or otherwise acquire equity
securities or equity related securities of the Company is authorized or
outstanding and (iii) there is no commitment by the 

 

4

 

Company to issue shares, subscriptions, warrants,
options, convertible or exchangeable securities, or other such rights or to
distribute to holders of any of its equity securities any evidence of
indebtedness or asset. Except as set forth in Schedule 2.05(a) hereto,
the Company has no obligation (contingent or other) to purchase, repurchase,
redeem, retire or otherwise acquire any of its equity securities or equity
related securities or any interest therein or to pay any dividend or make any
other distribution in respect thereof. 
Except as set forth in Schedule 2.05(a), no stock plan, stock
purchase plan, stock option or other agreement or understanding between the
Company and any holder of any equity securities of the Company or rights to
purchase equity securities of the Company provides for acceleration or other
changes in the vesting provisions or other terms of such securities, as the
result of any merger, sale of stock or assets, change in control or other
similar transaction by the Company. 
Other than as set forth in this Agreement, to the Company’s knowledge,
there are no voting trusts or agreements, stockholders’ agreements, pledge
agreements, buy-sell agreements, rights of first refusal, preemptive rights or
other similar rights or proxies relating to any of the Company’s securities, or
agreements relating to the issuance, sale, redemption, transfer or other
disposition of the Company’s securities. 
All of the outstanding securities of the Company were issued in
compliance with all applicable federal and state securities laws.

 

(b)           The Shares and Warrant Shares have
been duly authorized by the Company. 
When the Shares and Warrant Shares are issued and delivered against
payment therefor, and in accordance with the terms and conditions of this Agreement
and the Warrant, respectively, the Shares and Warrant Shares will be duly and
validly issued, fully paid and nonassessable and will be free of restrictions
on transfer other than restrictions on transfer imposed by this Agreement, the
Securities Act and applicable state securities laws.  The Preferred Stock Conversion Shares have
been duly reserved for issuance upon conversion of the Series A-1 Preferred
Stock, the Series A-2 Preferred Stock and the Series A-3 Preferred Stock and,
when so issued in accordance therewith, will be duly authorized, validly
issued, fully paid and nonassessable shares of Common Stock and will be free
and clear of all Liens, charges, restrictions, claims and encumbrances, other
than Liens, charges, restrictions, claims and encumbrances that were created by
the Purchaser and restrictions on transfer imposed by this Agreement, the
Securities Act and applicable state securities laws.  Neither the issuance, sale or delivery of the
Shares or Warrant Shares, nor the issuance or delivery of the Preferred Stock
Conversion Shares is subject to any preemptive right of the Company’s
stockholders or to any right of first refusal or other right in favor of any
Person.  The consummation of the
transactions contemplated hereunder will not result in any anti-dilution
adjustment or other similar adjustment to any of the Company’s outstanding
securities.  Any Person with any right
(other than the Purchaser) to purchase securities of the Company, which would
be triggered as a result of the transactions contemplated under this Agreement,
has waived such rights.

 

(c)           Immediately after the Closing, the
Series A-1 Shares will represent 53.2% of the outstanding Common Stock
(assuming conversion of the Series A-1 Shares into Common Stock).  In addition, Schedule 2.5(c) sets
forth the percentage ownership that the Shares and the Warrant Shares represent
immediately after the Closing under the various circumstances described in such
Schedule.

 

SECTION
2.06               Reports and
Financial Statements.   The Company has furnished or made available
to the Purchaser true and complete copies of all reports or registration 

 

5

 

statements it has filed with
the Securities and Exchange Commission (the “SEC”) under the Securities Act and the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), for all periods
subsequent to December 31, 2001, all in the form so filed (collectively the “Company SEC Documents”).  As of their respective filing dates, the
Company SEC Documents complied in all material respects with the requirements
of the Securities Act or the Exchange Act, as applicable, and, as of its
respective filing date, no Company SEC Document filed under the Exchange Act
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
made therein, in the light of the circumstances in which they were made, not
misleading, except to the extent corrected by a subsequently filed document with
the SEC.  No Company SEC Document filed
under the Securities Act contained an untrue statement of material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading at the time such Company SEC
Documents became effective under the Securities Act.  The Company’s financial statements, including
the notes thereto, included in the Company SEC Documents (the “Financial Statements”)
comply as to form in all material respects with applicable accounting
requirements and with the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with generally accepted
accounting principles consistently applied (“GAAP”) and present fairly the Company’s
consolidated financial position at the dates thereof and of its operations and
cash flows for the periods specified (subject, in the case of unaudited
statements, to normal audit adjustments). Since the date of the most recent
Company SEC Document, the Company has not effected any change in any method of
accounting or accounting practice, except for any such change required because
of a concurrent change in GAAP.  No event
since November 15, 2004 has occurred that requires the filing of a Current
Report on Form 8-K (an “8-K”)
with the SEC for which an 8-K has not been so filed.  Since September 30, 2002 the Company has
timely filed all material reports, registration statements and other filings
required by the SEC.

 

SECTION
2.07     Disclosure
Controls and Procedures.

 

(a)           The Company has established and
maintains disclosure controls and procedures (as such term is defined in Rules
13a-15 and 15d-15 under the Exchange Act) that (i) are designed to ensure that
material information relating to the Company, including its consolidated
subsidiaries, is made known to the Company’s Chief Executive Officer and its
Chief Financial Officer by others within those entities, particularly during
the periods in which the filings made by the Company with the SEC under
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act are being prepared, (ii)
have been evaluated for effectiveness as of a date within 90 days prior to the
filing of the Company’s most recent Annual Report on Form 10-KSB or Quarterly
Report on Form 10-QSB, as the case may be, filed with the SEC, and (iii) are
effective to perform the functions for which they were established; and

 

(b)           The independent registered public
accountants and the Audit Committee of the Board of Directors (the “Board”) of the
Company have been advised of (i) any significant deficiencies in the design or
operation of internal controls which could adversely affect the Company’s
ability to record, process, summarize and report financial data and (ii) any
fraud, whether or not material, that involves management or other employees who
have a role in the Company’s internal controls; any material weaknesses in
internal controls have been identified for the accountants; and since the date
of the most recent evaluation of such disclosure controls 

 

6

 

and procedures, there have been no significant changes
in internal controls or in other factors that could significantly affect
internal controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.

 

(c)           The principal executive officer and
principal financial officer of the Company have made all certifications
required by the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) and any related
rules and regulations promulgated by the SEC, each in effect on the date
thereof, and the statements contained in any such certification were complete
and correct as of their respective dates. 
The Company is otherwise in material compliance with all applicable
provisions of the Sarbanes-Oxley Act that are effective.

 

SECTION
2.08               No Undisclosed Liabilities.
  The Company has no
liabilities (whether accrued, absolute, contingent or otherwise, known or
unknown, and whether due or to become due or asserted or unasserted), except
(a) liabilities provided for in the Financial Statements (other than
liabilities which, in accordance with GAAP, need not be disclosed), (b)
liabilities (including accounts payable) incurred since December 31, 2004 (the “Balance Sheet Date”)
in the ordinary course of business consistent with past practice that are no
greater than $50,000 in the aggregate, (c) such other liabilities which are no
more than $50,000 individually or $100,000 in the aggregate or (d) as set forth
on Schedule 2.08.  Except as set
forth on Schedule 2.08, the Company knows of no basis for the assertion
against the Company of any liabilities not adequately reflected or reserved
against in the Financial Statements.

 

SECTION
2.09               Events Subsequent to the
Balance Sheet Date.   Except as set forth on Schedule 2.09,
since the Balance Sheet Date:

 

(a)           there has been no Material Adverse
Change nor has any event occurred which could reasonably be expected to result
in any Material Adverse Change;

 

(b)           there has not been any payment of,
setting of a record date for, or declaration, setting aside or authorizing the
payment of, any dividend or other distribution in respect of any shares of
capital stock of the Company or any purchase, repurchase, retirement,
redemption or other acquisition by the Company, of any of the outstanding
shares of capital stock or other securities of, or other ownership interest in,
the Company;

 

(c)           there has not been any transfer,
issue, sale or other disposition by the Company of any shares of capital stock
or other securities of the Company or any grant of options, warrants, calls or
other rights to purchase or otherwise acquire shares of such capital stock or
such other securities;

 

(d)           the Company has not increased the
compensation payable or to become payable, or awarded or paid any bonuses to
employees, officers, directors, consultants, advisors, agents, stockholders or
representatives of the Company nor has the Company either entered into any
employment, deferred compensation, severance or similar agreements (nor amended
any such agreement) or agreed to increase the compensation payable or to become
payable by it to any of the Company’s employees, officers, directors,
consultants, independent contractors, advisors, agents, stockholders or
representatives or agreed to increase the coverage or benefits available under
any severance pay, deferred compensation, bonus or other incentive
compensation, 

 

7

 

pension or other employee benefit plan, payment or
arrangement made to, for or with such employees, officers, directors,
consultants, independent contractors, advisors, agents, stockholders or
representatives;

 

(e)           the Company has not made any loans,
advances, guarantees or capital contributions to, or investments in, any
Person, or acquired any assets or securities of any Person involving more than
$50,000 individually or $100,000 in the aggregate, other than ordinary advances
for expenses incurred in the ordinary course of business;

 

(f)            there has not been satisfaction or
discharge of any Lien, claim or encumbrance or payment of any obligation by the
Company, except in the ordinary course of business and that has not resulted in
a Material Adverse Change;

 

(g)           there has not been any termination
of, or change to, a material contract or arrangement by which the Company or
any of its assets is bound or subject;

 

(h)           there has not been any resignation or
termination of employment of any employees, officers, directors, consultants,
advisors, agents or representatives of the Company;

 

(i)            other than to the Purchaser, the
Company has not transferred or granted any rights under any contracts, leases,
licenses, agreements or Intellectual Property (as defined in Section 2.11
hereof) used by the Company in its business;

 

(j)            there has not been any damage,
destruction or loss, whether or not covered by insurance, with respect to the
property or assets of the Company having a replacement cost of more than
$50,000 for any single loss or $100,000 for all such losses in the aggregate;

 

(k)           the Company has not mortgaged,
pledged or subjected to any Lien or encumbrance any of its assets, other than
with respect to the Purchaser, acquired any assets, or sold, assigned,
transferred, conveyed, leased or otherwise disposed of any assets, except for
assets acquired or sold, assigned, transferred, conveyed, leased or otherwise
disposed of in the ordinary course of business consistent with the Company’s
past practice or Liens for taxes not yet due or payable;

 

(l)            the Company has not canceled or
compromised any debt or claim, or amended, canceled, terminated, relinquished,
waived or released any contract or right or settled any claim;

 

(m)          the Company has not made, or entered
into any binding commitment to make, any capital expenditures or capital
additions or betterments in excess of $100,000 in the aggregate;

 

(n)           the Company has not incurred any
debts, obligations or liabilities, whether due or to become due, except current
liabilities incurred in the usual and ordinary course of business, none of
which current liabilities (individually or in the aggregate) has resulted in,
or could reasonably be expected to result in, a Material Adverse Change;

 

(o)           the Company has not entered into any
material transaction except for this Agreement and the other Transaction Documents;

 

8

 

(p)           the Company has not encountered, or
to its knowledge, been threatened with, any labor disputes, strikes, slowdowns,
work stoppages or labor union organizing activities;

 

(q)           the Company has not made any change
in the Company’s accounting principles, methods or practices or depreciation or
amortization policies or rates theretofore adopted;

 

(r)            the Company has not disclosed to any
Person any trade secrets or confidential information, except for disclosures
made to Persons subject to valid and enforceable confidentiality agreements or
as required by applicable law;

 

(s)           the Company has not suffered or
experienced any change in the relationship or course of dealings between the
Company and any of its suppliers or customers which supply goods or services to
the Company or purchase goods or services from the Company;

 

(t)            the Company has not made any payment
to, or received any payment from, or made or received any investment in, or
entered into any transaction or series of related transactions (including,
without limitation, the purchase, sale, exchange or lease of assets, property
or services, or the making of a loan or guarantee) with any Affiliate or any
members of their immediate families or any legal entity controlled by either
one of them; and

 

(u)           the Company has not entered into any
agreement or commitment (contingent or otherwise) to do any of the foregoing.

 

SECTION
2.10               Litigation;
Compliance with Law.

 

(a)           Except as set forth on Schedule
2.10, there is no (i) action, suit, claim, proceeding or investigation
pending or, to the best of the Company’s knowledge, threatened, against or
affecting the Company or its properties or assets, at law or in equity, or
before or by any federal, state, municipal or other governmental body,
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, (ii) arbitration proceeding pending or, to the best of the Company’s
knowledge, threatened, against or affecting the Company or its properties or
assets or (iii) governmental inquiry pending or, to the best of the Company’s
knowledge, threatened, against or affecting the Company or its properties or
assets (including, without limitation, any inquiry as to the Company’s
qualification to hold or receive any license or permit), and to the best of the
Company’s knowledge, there is no basis for any of the foregoing.  The Company is not in default with respect to
any order, writ, judgment, injunction or decree known to or served upon the
Company of any court or of any federal, state, municipal or other governmental
body, department, commission, board, bureau, agency or instrumentality,
domestic or foreign.  Except as set forth
on Schedule 2.10, there is no action, suit, proceeding or investigation
by the Company pending, threatened or contemplated against others.

 

(b)           The Company has not received any
opinion or memorandum or legal advice from legal counsel to the effect that it
is exposed, from a legal standpoint, to any liability or disadvantage which may
be material to its business, prospects, financial condition, operations,
property or affairs.  The Company has
complied, in all material respects, with all laws, rules, regulations and
orders applicable to its business, operations, properties, assets, products and
services, the Company has all material permits, licenses and other
authorizations required to conduct its business as presently conducted and the
Company has been operating its business 

 

9

 

pursuant to and in compliance with the terms of all
such permits, licenses and other authorizations.  There is no existing law, rule, regulation or
order, and the Company is not aware of any proposed law, rule, regulation or
order, whether federal, state, county or local, which would prohibit or
restrict the Company from, or otherwise adversely affect the Company in,
conducting its business in any jurisdiction in which it is now conducting
business.

 

SECTION
2.11               Proprietary
Information.

 

(a)           No third party has claimed or, to the
best of the Company’s knowledge, has reason to claim, that any Person employed
or retained by or affiliated with the Company has (i) violated or may be
violating any of the terms or conditions of an employment, non-competition or non-disclosure
agreement with such third party, (ii) disclosed or may be disclosing or
utilized or may be utilizing any trade secret or proprietary information or
documentation of such third party or (iii) interfered or may be interfering in
the employment relationship between such third party and any of its present or
former employees.  No third party has
requested information from the Company which suggests that such a claim might
be contemplated.  To the Company’s
knowledge, no Person employed by the Company or an Affiliate of the Company has
employed or proposes to employ any trade secret or any information or
documentation proprietary to any former employer, and, to the Company’s
knowledge, no Person employed by the Company or an Affiliate of the Company has
violated any confidential relationship which such Person may have had with any
third party in connection with the development, manufacture or sale of any
product or proposed product of the Company or the development or sale of any
service or proposed service of the Company, and the Company has no reason to
believe there will be any such employment or violation.  Neither the execution or delivery of this
Agreement or any of the other Transaction Documents, nor the conduct or
proposed conduct of the Company’s business, nor the participation of any of the
Company’s officers, directors or employees in the conduct of the Company’s
business, will conflict with or result in a breach of the terms, conditions or
provisions of or constitute a default under any contract, covenant or
instrument under which any such Person is obligated to a third party.

 

(b)           Each employee, officer, consultant,
advisor, agent and representative of the Company has entered into and executed
a Employee Non-Disclosure, Non-Solicitation and Proprietary Information and
Inventions Agreement or Non-Employee Non-Disclosure, Non-Solicitation and
Proprietary Information and Inventions Agreement, as the case may be,
substantially in the forms which have been delivered to the Purchaser
(collectively, the “Non-Disclosure
and Proprietary Information and Inventions Agreement”), or an
employment or consulting agreement containing substantially similar terms, and
such agreements are in full force and effect. 
The Company is not aware that any of its employees, officers,
consultants, advisors, agents and representatives is in violation of such
agreements, and the Company will use its best efforts to prevent any such
violation.  In addition, to the best of
the Company’s knowledge, no current or former employee, officer, director,
consultant, advisor, agent, or representative has excluded works or inventions
made prior to his or her employment or consulting relationship with the Company
from his or her assignment of inventions pursuant to their Non-Disclosure and
Proprietary Information and Inventions Agreement.

 

10

 

SECTION
2.12               Intellectual
Property.

 

(a)           Except as previously granted or
assigned to the Purchaser and set forth in Schedule 2.12, the Company
has all right, title and interest in and to all patents and patent rights,
trademarks and trademark rights, trade names and trade name rights, service
marks and service mark rights, service names and service name rights, brand
names, inventions, processes, formulae, copyrights and copyright rights, trade
dress, business and product names, logos, slogans, trade secrets, industrial
models, processes, designs, methodologies, computer programs (including all
source codes) and related documentation, technical information, manufacturing,
engineering and technical drawings, know-how, concepts and all pending
applications for and registrations of patents, trademarks, service marks and
copyrights (together, “Intellectual
Property”) necessary for its business as now conducted and as
proposed to be conducted, without any conflict with or infringement upon the
rights of others.  Except as set forth in
Schedule 2.12, all registrations on behalf of the Company with and
applications to governmental or regulatory authorities in respect of all
Intellectual Property of the Company are valid and in full force and effect and
are not subject to (i) any suits or other judicial or administrative
proceedings challenging their validity or enforceability, or (ii) any other
actions by the Company to maintain their validity or effectiveness, except for
the routine payment of governmental fees and the submission of oaths or other
evidence required by statute.  Except as
set forth in Schedule 2.12(a) and Schedule 2.12(c) hereto, there
are no outstanding options, licenses, security interests, or other interests or
agreements of any kind relating to the Intellectual Property of the
Company.  Except as set forth in Schedule
2.12 hereto, no other person or entity (other than licensors of software
that is generally commercially available, licensors of Intellectual Property
under the agreements disclosed pursuant to paragraph (d) below and
non-exclusive licensees of the Company’s Intellectual Property in the ordinary
course of the Company’s business) has any rights to any of the Intellectual
Property owned or used by the Company, and, to the Company’s knowledge, no
other person or entity is infringing upon, violating or misappropriating any of
the Company’s Intellectual Property.

 

(b)           The Company has not, nor has it
received any communications alleging that the Company has violated, or, by
conducting its business as now conducted or as proposed to be conducted, would
violate any of the Intellectual Property of any other Person.  The Company is not aware that any employee of
the Company 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 business of the Company as now conducted or as
proposed to be conducted.  To the
Company’s knowledge, neither the execution and delivery of this Agreement or
any of the other Transaction Documents, nor the carrying on of the business of
the Company by the Company’s employees, nor the conduct of the business of the
Company as now conducted or as proposed to be conducted, will 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
is not aware of any instances where its employees, agents, advisors, consultants,
independent contractors or representatives, have transferred Intellectual
Property of the Company or its Subsidiaries without the Company’s consent.  To the Company’s knowledge, the Company is
not required to utilize any inventions of any of its employees (or people it
currently intends to hire) made prior to their employment by the Company.

 

11

 

(c)           Schedule 2.12(c) hereto sets
forth each (i) patent that has been issued or assigned to the Company with
respect to any of its Intellectual Property, (ii) pending patent application
that the Company has made with respect to any of its Intellectual Property,
(iii) any copyright or trademark registration or application with respect to
the Company’s Intellectual Property, and (iv) license or other agreements
pursuant to which the Company has granted any rights to any third party with
respect to any of its Intellectual Property.

 

(d)           Schedule 2.12(d) hereto sets
forth each agreement with a third party pursuant to which the Company obtains
rights to Intellectual Property material to the business of the Company (other
than software that is generally commercially available) that is owned by a
party other than the Company.  Other than
license fees for software that is generally commercially available and except
as disclosed on Schedule 2.12(d) hereto, the Company is not obligated to
pay any royalties or other compensation to any third party in respect of their
ownership, use or license of any of such third party’s Intellectual Property.

 

(e)           The Company has taken reasonable
precautions (i) to protect its rights in its Intellectual Property and (ii) to
maintain the confidentiality of its trade secrets, know-how and other
confidential Intellectual Property, and to the Company’s knowledge, there have
been no acts or omissions by the officers, directors, shareholders and
employees of the Company the result of which would be to compromise the rights
of any aspects of the Company to apply for or enforce appropriate legal protection
of any aspects of the Company’s Intellectual Property that are material to the
Company’s business as conducted or as proposed to be conducted at the time of
such acts or omissions.

 

(f)            The products, processes, proprietary
technology and other proprietary know-how owned or used by the Company were
developed by the Company’s present or former employees or independent
contractors or consultants.  The
concepts, inventions and original works of authorship owned or used by the
Company were developed or conceived by employees, independent contractors or
consultants within the scope of their employment or retention by the Company
and are connected with the Company’s underlying products, services, processes
and proprietary technology.  With respect
to any independent contractors or consultants who were used or employed by the
Company in the development of the products, processes, proprietary technology
and other proprietary know-how owned or used by the Company, each has executed
valid “work for hire” agreements and/or assignments of all rights to such
products, processes, proprietary technology and other proprietary
know-how.  No portion of the Company’s
Intellectual Property was jointly developed with any third party other than
those who have assigned their entire right, title and interest therein to the
Company.

 

(g)           Except as disclosed in Schedule
2.12(g) hereto, neither the Company nor any Subsidiary has granted or
assigned to any other person or entity the right to manufacture any products or
develop or conduct research on any Intellectual Property or other services of
the Company.

 

(h)           The Company is unaware that any of
its officers, employees or consultants has disclosed or may be disclosing or
has utilized or may be utilizing any trade secret or proprietary information of
any third party; or has unlawfully interfered or may be unlawfully interfering
in the employment relationship with any third party and any of its present or
former employees.

 

12

 

SECTION 2.13               Real Property.

 

(a)           The Company does not own any real
property.

 

(b)           Schedule 2.13(b) hereto sets
forth a complete list of all material real property and material interests in
real property leased by the Company (each a “Real Property Lease,” and collectively,
the “Real Property
Leases”) as lessee or lessor. 
The Real Property Lease identified in Schedule 2.13(b) is an
oral, month-to-month lease, and the Company is not in default under such lease.

 

SECTION
2.14               Assets.    The Company has good, legal and
marketable title to all of its personal property and assets, in each case free
and clear of all Liens, charges, restrictions, claims or encumbrances of any
nature whatsoever, except for such Liens, charges, restrictions, claims or
encumbrances granted to the Purchaser. 
With respect to the material personal property and material assets that
the Company leases (each a “Personal Property Lease”, and
collectively, the “Personal Property Leases”) (a)
the Company is in compliance with such Personal Property Leases, (b) the
Personal Property Leases are enforceable in accordance with their terms and (c)
the Company holds a valid leasehold interest free and clear of any Liens,
charges, restrictions, claims or encumbrances of any nature whatsoever.  Each of the Personal Property Leases is a
valid and subsisting agreement, duly authorized and entered into and
enforceable in accordance with its terms, and there is no default under any
Personal Property Lease by the Company or, to the Company’s knowledge, by any
other party thereto, and no event has occurred that with the lapse of time or
the giving of notice or both would constitute a default thereunder.  The Company has delivered or otherwise made
available to the Purchaser and its counsel true, correct and complete copies of
the Personal Property Leases, together with all amendments, modifications,
supplements or side letters affecting the obligations of any party
thereunder.  All material items of
personal property and assets owned or leased by the Company are in good
operating condition, normal wear and tear excepted, are reasonably fit and
usable for the purposes for which they are being used, are adequate and
sufficient for the Company’s business, and conform in all material respects
with all applicable laws.  The carrying
value of the Company’s assets on the Financial Statements is not overstated in
any material respect.

 

SECTION
2.15               Insurance.    There is in full force and
effect one or more policies of insurance issued by insurers of recognized
responsibility insuring the Company and its properties, business and projects
against such losses and risks, and in such amounts, on both a per occurrence
and an aggregate basis, as are customary in the case of corporations engaged in
the same or similar business and similarity situated.  The Company has not received any notice or
communication, either oral or written (a) regarding the actual or possible
cancellation or invalidation of any of such policies or regarding any actual or
possible adjustment in the amount of premiums payable with respect to any of
said policies, (b) regarding any actual or possible refusal of coverage under,
or any actual or possible rejection of any claim under, any of such policies,
(c) that the Company will be unable to renew its existing insurance coverage as
and when the same shall expire or (d) that the issuer of any such policies may
be unwilling or unable to perform any of its obligations thereunder.  There is no pending claim under any of the
Company’s insurance policies, and no event has occurred or condition or
circumstance exists that might (with or without notice or lapse of time)
directly or indirectly give rise to, or serve as a basis for, any such
claim.  The Company is not in default
with respect to any provision contained 

 

13

 

in
any insurance policy, and the Company has not failed to give any notice or
present any presently existing claims under any insurance policy in due and
timely fashion.  Schedule 2.15
hereto sets forth a list of each insurance policy maintained by the Company
relating to its properties, assets, business or personnel.

 

SECTION
2.16               Taxes.   The Company has accurately and timely filed
all federal, state, county and local tax returns and reports required to be
filed by it within the applicable period, and the Company has paid all taxes
shown to be due by such returns as well as all other taxes, assessments and
governmental charges which have become due or payable.  Such returns and reports are true and correct
in all material respects.  The Company
has established adequate reserves on the Financial Statements for all taxes
accrued but not yet payable.  The
Company’s federal income tax returns have never been audited by the Internal
Revenue Service.  No claim or deficiency
assessment with respect to or proposed adjustment of the Company’s federal,
state, county or local taxes is currently assessed or pending or, to the best
of the Company’s knowledge, threatened, and, to the Company’s knowledge, there
is no basis for any such claim, assessment or adjustment.  There is no tax Lien (other than for current
taxes not yet due and payable), whether imposed by any federal, state, county
or local taxing authority, outstanding against the Company’s assets, properties
or business.  The Company has not
executed any waiver of the statute of limitations on the assessment or
collection of any tax or governmental charge. 
The Company is not a party to any agreement relating to the sharing,
allocation or indemnification of taxes. 
Neither the Company nor any of its present or former stockholders has
ever made an election pursuant to Section 1362 or Section 341(f) of the
Internal Revenue Code of 1986, as amended (the “Code”), that the Company be taxed as a
Subchapter S corporation or a collapsible corporation or any other election
pursuant to the Code (other than elections that relate solely to methods of
accounting, depreciation or amortization) that would result in a Material
Adverse Change.  The Company has withheld
or collected from each payment made to each of its employees, the amount of all
taxes (including, but not limited to, federal income taxes, Federal Insurance
Contribution Act taxes and Federal Unemployment Tax Act taxes) required to be
withheld or collected therefrom, and has paid the same to the proper tax
receiving officers or authorized depositories. 
The Company has properly charged, collected and paid all applicable
sales, use and other similar taxes.

 

SECTION
2.17               Agreements.

 

(a)           The Company is not a party to or
otherwise bound by any written or oral agreement, instrument, commitment or
restriction which, assuming due performance by the parties thereto,
individually or in the aggregate could reasonably be expected to result in a
Material Adverse Change.  Except as set
forth in Schedule 2.17 hereto, the Company is not a party to, nor is it
or any of its assets or properties bound by, any written or oral:

 

(i)         distributor, dealer, marketing,
manufacturer’s representative or sales agency agreement which is not terminable
on less than ninety (90) days notice without cost or other liability to the
Company;

 

(ii)        agreement with any labor union or
collective bargaining agreement;

 

14

 

(iii)       agreement with any supplier containing
any provision permitting any party other than the Company to renegotiate the
price or other terms, or containing any pay-back or other similar provision,
upon the occurrence of a failure by the Company to meet its obligations under
the agreement when due or the occurrence of any other event;

 

(iv)       agreement for the future purchase of
fixed assets or for the future purchase of materials, supplies, services or
equipment in excess of its normal operating requirements or at an excessive
price, or any agreement that will result in a loss to the Company upon
completion of performance;

 

(v)        agreement for the employment of any
officer, employee or other Person (whether of a legally binding nature or in
the nature of informal understandings) on a full-time, part-time or consulting
basis which is not terminable on notice without cost or other liability to the
Company;

 

(vi)       bonus, pension, profit-sharing,
retirement, hospitalization, insurance, stock purchase, stock option or other
plan, agreement or understanding pursuant to which benefits are provided to any
employees, officers, directors, consultants, advisors, agents, stockholders or
representatives of the Company;

 

(vii)      loan agreement, credit agreement,
promissory note, indenture, subordination agreement, letter of credit or other
agreement relating to the borrowing of money or to the mortgaging or pledging
of, or otherwise placing a Lien or security interest on, any asset of the
Company;

 

(viii)     guaranty of any obligation for borrowed
money or otherwise;

 

(ix)        voting trust or agreement, stockholders’
agreement, pledge agreement, buy-sell agreement, first refusal or preemptive
rights agreement relating to any of the Company’s securities;

 

(x)         acquisition, sale or lease agreement
outside of the Company’s ordinary course of business;

 

(xi)        partnership or joint venture agreement;

 

(xii)       agreement (A) which prohibits or requires
consent for (1) a Change of Control (as defined in Section 7.19 hereof)
or merger of the Company, (2) the sale of all or substantially all of the Company’s
assets, (3) the transfer or issuance of any securities of the Company or (4)
the assignment, subletting or other transfer of the rights under such agreement
or (B) which terminates, is subject to termination, is materially and adversely
affected or is subject to being materially and adversely affected as a result
of the occurrence of any event described in subsection (A) hereof;

 

(xiii)      agreement, or group of related agreements
with the same party or any group of affiliated parties, under which the Company
has advanced or agreed to advance money or has agreed to lease any property as
lessee or lessor;

 

15

 

(xiv)     agreement or obligation (contingent or
otherwise) to issue, sell, transfer, assign or otherwise distribute or dispose
of, repurchase, redeem or otherwise acquire, or retire any shares of its
capital stock or any of its other equity securities;

 

(xv)      assignment, license or other agreement
with respect to any form of intangible property;

 

(xvi)     agreement under which it has granted any
Person an exclusive right to market or distribute any of the Company’s products
or services;

 

(xvii)    agreement under which it has granted any
Person any registration rights;

 

(xviii)   agreement under which it has limited or
restricted its right to operate or to compete with any Person in any respect;

 

(xix)      agreement, or group of related agreements
with the same party, involving more than $100,000 or continuing over a period
of more than six (6) months from the date or dates thereof (including renewals
or extensions optional with another party), which agreement or group of
agreements is not terminable by the Company without penalty upon notice of
thirty (30) days or less, or any agreement not made in the ordinary course of
business;

 

(xx)       agreement with any federal, state,
municipal or other governmental body, department, commission, board, bureau,
agency or instrumentality, domestic or foreign;

 

(xxi)      confidentiality agreement or standstill
agreement, other than those made in the ordinary course of business; or

 

(xxii)     binding commitment or agreement to enter
into any of the foregoing.

 

(b)           The Company and to the best
of the Company’s knowledge, each other party thereto: (i) has performed all the
obligations required to be performed by them to date (or each non-performing
party has received a valid, enforceable and irrevocable written waiver with
respect to its non-performance) and (ii) has received no notice of default and
are not in default (or, with due notice or lapse of time or both, would be in
default) under any agreement, contract, license, understanding, evidence of
indebtedness, note, indenture, instrument, commitment, plan or arrangement to
which the Company is a party or by which it or its property or assets may be
bound.  The Company has no present
expectation or intention of terminating or not fully performing any of its
obligations under any agreement, contract, license, understanding, evidence of
indebtedness, note, indenture, instrument, commitment, plan or arrangement, and
the Company has no knowledge of any breach or anticipated breach by the other
party to any agreement, contract, license, understanding, evidence of
indebtedness, note, indenture, instrument, commitment, plan or arrangement to
which the Company is a party.  The
Company is in full compliance with all of the terms and provisions of its
Charter and Bylaws.

 

(c)           No previous or current party to any
agreement or contract listed in Schedule 2.17 hereto has given written
notice to the Company of, or made any claim with respect to, a desire or
intention to exercise any optional termination, cancellation or acceleration
right thereunder, and the Company has no knowledge of any notice of, or claim
with respect to, any such desire or 

 

16

 

intention.  The
Company has delivered or otherwise made available to the Purchaser true,
correct and complete copies of each of the agreements listed in Schedule
2.17 hereto, together with all amendments, modifications, supplements or
side letters affecting the obligations of any party thereunder.  Each of these agreements is valid and
enforceable against the Company in accordance with its terms.

 

SECTION
2.18               Loans and Advances.
  The Company does not have any outstanding loans
or advances to any Person and is not obligated to make any such loans or
advances, except, in each case, for ordinary course advances to employees of
the Company in respect of reimbursable business expenses anticipated to be
incurred by them in connection with their performance of services for the
Company.

 

SECTION
2.19               Assumptions,
Guaranties, Etc. of Indebtedness of Other Persons.   The
Company has not assumed, guaranteed, endorsed or otherwise become directly or
contingently liable for any indebtedness of any other Person (including,
without limitation, liability by way of agreement, contingent or otherwise, to
purchase, to provide funds for payment, to supply funds to or otherwise invest
in such Person, or to otherwise assure any creditor of such Person against
loss), except for guaranties by endorsement of negotiable instruments for
deposit or collection in the ordinary course of business.

 

SECTION
2.20               Significant
Customers and Suppliers.    No
customer or supplier which was significant to the Company during the period
covered by the Financial Statements or which has been significant to the
Company thereafter, has terminated or breached, materially reduced or
threatened to terminate, breach or materially reduce its purchases from or
provision of products or services to the Company, as the case may be.

 

SECTION
2.21               Offerings.    Assuming the accuracy of the
Purchaser’s representations and warranties set forth in Article III hereof, the
Company has complied with the Securities Act and all applicable state
securities laws in connection with (i) the offer, issuance and sale of all
previously issued securities of the Company, (ii) the offer, issuance and sale
of the Shares, the Warrant and Warrant Shares and (iii) upon conversion of the
Shares and Warrant Shares, the issuance and delivery of the Preferred Stock
Conversion Shares, and all of the foregoing issuances are exempt from the
registration requirements of the Securities Act and any applicable state
securities laws, and neither the Company nor any authorized agent acting on its
behalf has taken any action that could cause the loss of such exemptions.  Neither the Company nor any Person authorized
or employed by the Company as agent, broker, dealer or otherwise in connection
with the offering or sale of the Shares, the Warrant, the Warrant Shares, the
Preferred Stock Conversion Shares or any security of the Company similar to the
foregoing has offered the Shares, the Warrant, the Warrant Shares, the
Preferred Stock Conversion Shares or any such similar security for sale to, or
solicited any offer to buy the Shares, the Warrant, the Warrant Shares, the
Preferred Stock Conversion Shares or any such similar security from, or
otherwise approached or negotiated with respect thereto with, any Person or
Persons other than Persons who are “accredited investors” as defined in
Regulation D of the Securities Act. 
Neither the Company nor any Person acting on its behalf has taken or
will take any other action (including, without limitation, any offer, issuance
or sale of any security of the Company under circumstances which might require
the integration of such security with the Shares, the Warrant, the Warrant
Shares or the Preferred Stock Conversion Shares under the Securities Act or the

 

17

 

rules and regulations of the
SEC promulgated thereunder), in either case so as to subject the offering,
issuance or sale of the Shares, the Warrant, the Warrant Shares, and the
Preferred Stock Conversion Shares to the registration provisions of the
Securities Act.  Neither the Company nor
any Person acting on its behalf has offered the Shares, the Warrant, the
Warrant Shares or the Preferred Stock Conversion Shares to any Person by means
of general or public solicitation or general or public advertising, such as by
newspaper or magazine advertisements, by broadcast media, or at any seminar or
meeting whose attendees were solicited by such means.

 

SECTION
2.22               Brokers; Financial
Advisors.    Other
than with respect to fairness opinions, no agent, broker, investment banker,
finder, financial advisor or other Person is or will be entitled to any
broker’s or finder’s fee or any other commission or similar fee from the
Company, directly or indirectly, in connection with the transactions contemplated
by this Agreement and the other Transaction Documents, and, other than with
respect to fairness opinions, no Person is entitled to any fee or commission or
like payment from the Company in respect thereof based in any way on
agreements, arrangements or understandings made by or on the Company’s behalf.

 

SECTION
2.23               Transactions With Affiliates.   Except as set forth on Schedule 2.23
hereto, no employee, officer, director, or Affiliate of the Company, or member
of the family of any such Person, or any corporation, limited liability
company, partnership, trust or other entity in which any such Person, or any
member of the family of any such Person, is an officer, director, trustee,
partner or holder of more than five percent (5%) of the outstanding equity
interests thereof, is a party to, or during the past 24 months has been a party
to, any transaction with the Company, including any contract, agreement or
other arrangement providing for the employment of, furnishing of services by,
rental of real or personal property from or otherwise requiring payments to any
such Person, other than employment-at-will arrangements in the ordinary course
of business.  None of the Persons
described in this Section 2.23 has any direct or indirect ownership
interest in any Person that the Company is an Affiliate of or with which the
Company has a business relationship, or any Person that competes with the
Company.

 

SECTION
2.24               Employees.

 

(a)           To the Company’s knowledge, no key
employee or independent contractor and no group of the Company’s key employees
or independent contractors has any plans to terminate his, her or its
employment or relationship as an employee or independent contractor with the
Company, nor does the Company have any present intention to terminate the
employment of any key employee or independent contractor, or group of employees
or independent contractors.

 

(b)           Schedule 2.24(b) hereto sets
forth a true and complete list of (i) the names of the Company’s officers,
together with the title or job classification of each such Person and the total
compensation anticipated to be paid to each such Person by the Company during
calendar year 2004 and anticipated to be paid in 2005, (ii) the name and amount
of annual compensation of each employee of the Company whose current annual
compensation is, or will be, $100,000 or more, together with such employee’s
job title and amounts and forms of compensation and fringe and severance
benefits and (iii) the name and amount of annual compensation of each
consultant, contractor or subcontractor equivalent of the Company whose
compensation is, or will be, $100,000 or more during calendar year 2004 and for
which a Form 1099 has been, or will be, 

 

18

 

filed.  Except
as set forth on Schedule 2.24(e), none of these individuals has an
employment agreement or understanding with the Company, whether oral or
written, which is not terminable on notice by the Company without cost or other
liability to the Company.

 

(c)           To the Company’s knowledge, no employee of the Company is a party to
or is otherwise bound by any agreement or arrangement (including, without
limitation, confidentiality agreements, noncompetition agreements, licenses,
covenants or commitments of any nature) or subject to any judgment, decree, or
order of any court or governmental body, (i) that would conflict with such
employee’s ability to perform his or her duties that have been assigned to him
or her or (ii) that would conflict
with the Company’s business as now conducted or as proposed to be conducted.

 

(d)           The Company is not delinquent in
payments to any of its employees for any wages, salaries, commissions, bonuses
or other direct compensation for any services performed through the date hereof
or amounts required to be reimbursed to them through the date hereof.  The Company is in compliance with all
applicable federal, state and local laws, rules and regulations respecting
employment, employment practices, labor, terms and conditions of employment and
wages and hours.  The Company is neither
bound by nor subject to (and none of its assets or properties is bound by or
subject to) any written or oral commitment or arrangement with any labor union,
and no labor union has, to the best of the Company’s knowledge, sought to
represent any of the Company’s employees, representatives or agents.  There is no labor strike, dispute, slowdown
or stoppage pending or, to the best of the Company’s knowledge, threatened
against or involving the Company.

 

(e)           Schedule 2.24(e) hereto sets
forth a list of all written employment agreements to which the Company is a
party, each of which is a legal, valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms.  No key employee of or key consultant to the
Company is in violation of any term of any employment contract or any other
contract or agreement relating to the relationship of any such employee or
consultant with the Company.

 

SECTION
2.25               Environmental and
Safety Laws.    The
Company is not in violation of any applicable laws relating to the environment
or occupational health and safety which is likely to result in a Material
Adverse Change and no material expenditures are or will be required in order to
comply with any such existing laws.

 

SECTION
2.26               Employee Benefits.    Except as set forth in Schedule
2.26 hereto, the Company does not have in effect any employment agreements,
consulting agreements with individuals, deferred compensation, incentive
compensation, stock option or other equity-based stock awards, pension or
retirement agreements whether or not subject to the Employee Retirement Income
Security Act of 1974, as amended (“ERISA”), or arrangements, bonus, incentive or
profit-sharing plans or arrangements, or labor or collective bargaining
agreements, written or oral, other than oral at-will employment agreements (“Benefit Plans”).  All Benefit Plans covering employees (the “Plans”), to the
extent subject to ERISA, are in compliance with ERISA, the Code and all other
applicable law.  Each Plan which is an
“employee pension benefit plan” within the meaning of Section 3(2) of ERISA (a
“Pension Plan”)
and which is intended to be qualified under Section 401(a) of the Code, has
received a favorable determination letter from 

 

19

 

the Internal Revenue Service
and the Company is not aware of any circumstances likely to result in
revocation of any such favorable determination letter.  There is no pending or, to the best of the
Company’s knowledge, threatened litigation relating to the Plans.  Neither the Company nor any of its Affiliates
has engaged in a transaction with respect to any Plan that, assuming the
taxable period of such transaction expired as of the date hereof, could subject
the Company or any Affiliate to a tax or penalty imposed by either Section 4975
of the Code or Section 502(i) of ERISA in an amount which would be
material.  No Pension Plan of the Company
or any ERISA Affiliate (as defined below) is, nor has any Pension Plan of the
Company or any ERISA Affiliate ever been, subject to Title IV of ERISA or
Section 412 of the Code. Neither the Company, any of its Affiliates nor an
entity which is considered one employer with the Company under Section 4001 of
ERISA or Section 414 of the Code (an “ERISA Affiliate”) has contributed to a
“multi-employer plan”, within the meaning of Section 3(37) of ERISA.  All contributions required to be made under
the terms of any Benefit Plan have been timely made or have been reflected on the
Financial Statements.  No ERISA Affiliate
maintains or has ever maintained any “employee benefit plan” as that term is
defined in Section 3(3) of ERISA or any other employee benefit policy,
arrangement or the like which could result in any liability of the Company.

 

SECTION
2.27               Foreign Corrupt
Practices Act.   Neither the Company, nor to the best of the
Company’s knowledge, any employees, officers, directors, consultants, advisors,
agents, stockholders or representatives of the Company or other Person acting
on behalf of the Company, has taken any action which would cause the Company to
be in violation of the Foreign Corrupt Practices Act of 1977, as amended (the “FCPA”), or any rules
and regulations thereunder.  Each of the
Company’s internal management and accounting practices and controls are
adequate to ensure compliance with the FCPA. 
There is not now, and there has never been, any employment by the
Company of any governmental or political official in any country in the world.

 

SECTION
2.28               Illegal or Unauthorized
Payments; Political Contributions.    Neither the Company nor, to the best of the
Company’s knowledge, any of the Company’s employees, officers, directors,
consultants, advisors, agents, stockholders or representatives has, directly or
indirectly, made or authorized any payment, contribution or gift of money,
property, or services, in contravention of applicable law:  (a) as a kickback or bribe to any Person or
(b) to any political organization, or the holder of or any aspirant to any
elective or appointive public office, except for personal political
contributions not involving the direct or indirect use of the Company’s funds.

 

SECTION
2.29               Pending Changes.    There is no pending or, to the
Company’s knowledge, threatened change in any law, rule, regulation or order
applicable to its business, operations, properties, assets, products and
services which is likely to result in a Material Adverse Change.

 

SECTION
2.30               Investment Company
Act.    The
Company is not, nor is it directly or to its knowledge, indirectly Controlled
by or acting on behalf of, any Person that is an “investment company” within
the meaning of the Investment Company Act of 1940, as amended.

 

20

 

SECTION
2.31               Product Liability.    The Company has no liabilities
(and, to the Company’s knowledge, there is no basis for any present or future
action against the Company giving rise to any liability) arising out of any
injury to individuals or property as a result of ownership, possession or use
of any product designed, manufactured, sold, leased or delivered by or any
services or procedures performed or delivered by the Company.

 

SECTION
2.32               Passive Foreign
Investment Company.    Except as set forth in Section 2.32,
neither the Company nor any Subsidiary will constitute a Control Foreign
Corporation, a Foreign Personal Holding Company or a Passive Foreign Investment
Company within the meaning of Section 1297 of the Code (“PFIC”) as of the
Closing Date, and neither the Company nor any Subsidiary expects to become a
PFIC, a Control Foreign Corporation (“CFC”) or a Foreign Personal Holding
Corporation after the Closing Date.

 

SECTION
2.33               Registration
Rights.    Except for the rights granted to the
stockholders under the Investors’ Rights Agreement and as set forth on Schedule
2.33, no Person has demand or other rights to cause the Company to file any
registration statement under the Securities Act relating to any securities of
the Company or any right to participate in any such registration statement,
including, without limitation, piggyback registration rights.

 

SECTION
2.34               Books and Records.    The Company’s books of account,
ledgers, order books, records and documents accurately and completely reflect
in accordance with usual and customary prudent business practices all material
information relating to the Company’s business, the location and collection of
the Company’s assets and the nature of all transactions giving rise to the
Company’s obligations and accounts receivable. 
The Company has previously delivered or made available to the Purchaser
and its counsel complete and correct copies of the Charter and Bylaws and all
amendments thereto, as in effect at the time of the Closing and all minutes and
consents reflecting meetings and actions taken by the Company’s Board of
Directors and its stockholders prior to December 31, 2004.

 

SECTION
2.35               Disclosure.   The Company has disclosed to the
Purchaser all facts material to the Company’s business, operations, assets,
liabilities, prospects, properties, condition (financial or otherwise) and
results of operations.  Neither this
Agreement, nor any Schedule or Exhibit to this Agreement, nor any other
statements, documents or certificates made or delivered in connection herewith
or therewith contains any untrue statement of a material fact or omits to state
a material fact necessary to make the statements contained herein and therein
not misleading in light of the circumstances under which such statements were
made.  None of the statements, documents,
certificates or other items prepared or supplied by the Company with respect to
the transactions contemplated hereby contains an untrue statement of a material
fact or omits to state a material fact necessary to make the statements
contained therein not misleading in light of the circumstances under which such
statements were made.  There is no fact
which the Company has not disclosed to the Purchaser and its counsel in writing
and of which the Company is aware which has resulted in, or could result in, a
Material Adverse Change.  As of the date
hereof, no facts have come to the Company’s attention that would, in its
opinion, require the Company to revise or amplify the assumptions underlying
such projections and other estimates or the conclusions derived therefrom.

 

21

 

 

SECTION
2.36               FDA Trials.   The Company is currently in compliance with
the FDA protocols (as modified from time to time) for Phase II clinical trials
with respect to its PresVIEW Scleral Implant and PresVIEW Incision System
(G970152) for the treatment of presbyopia (hereinafter referred to collectively
as the “Procedure”).  The Company has not
received a notice from the FDA that has not been resolved to permit the
continuation of its current clinical trials, and the Company reasonably
believes, as of the date hereof based on the advice of its outside FDA expert,
that the FDA is likely to issue its approval to initiate Phase III of the
clinical trial and to issue its final approval of the Procedure, in each case,
in due course.

 

REPRESENTATIONS,
WARRANTIES AND COVENANTS OF THE PURCHASER

 

SECTION
3.01               Representations
and Warranties of the Purchaser.    The
Purchaser represents and warrants to the Company that:

 

(a)           it is an “accredited investor” within
the meaning of Rule 501 of Regulation D under the Securities Act;

 

(b)           it has sufficient knowledge and
experience in investing in companies similar to the Company in terms of the
Company’s stage of development so as to be able to evaluate the risks and
merits of its investment in the Company and it is able financially to bear the
risks thereof, including a total loss of its investment;

 

(c)           it has received all the information
it considers necessary or appropriate to make an informed investment decision
with respect to the Shares, the Warrant, the Warrant Shares and the Preferred
Stock Conversion Shares to be purchased by the Purchaser under this
Agreement.  The Purchaser further has had
an opportunity to ask questions and receive answers from the Company regarding
the Company and the terms and conditions of the offering of the Shares and the
Warrant.  The foregoing, however, does
not in any way limit or modify the representations and warranties made by the
Company in Article II;

 

(d)           the Shares, the Warrant, the Warrant
Shares and the Preferred Stock Conversion Shares being purchased by it are
being acquired for its own account for the purpose of investment and not with a
view to, or for resale in connection with, any distribution thereof within the
meaning of the Securities Act;

 

(e)           it understands that (i) the Shares,
the Warrant, the Warrant Shares and the Preferred Stock Conversion Shares have
not been registered under the Securities Act or any state securities laws by
reason of their issuance in a transaction exempt from the registration
requirements of the Securities Act and such laws, (ii) the Shares and Warrant
Shares, and, upon conversion thereof, the Preferred Stock Conversion Shares
must be held indefinitely, unless a subsequent disposition thereof is
registered under the Securities Act or is exempt from such registration, and
(iii) the Preferred Stock Conversion Shares will bear the legend to such effect
set forth in Section 3.03 hereof;

 

(f)            this Agreement and the other
Transaction Documents to which it is a party constitutes the Purchaser’s valid
and legally binding obligation, enforceable in accordance with 

 

22

 

its terms.  The
Purchaser represents that it has full power and authority to enter into this
Agreement and each of the other Transaction Documents to which it is a party;
and

 

(g)           this Agreement and each of the other
Transaction Documents to which the Purchaser is a party have been duly executed
and delivered by the Purchaser.

 

SECTION
3.02               Certain Covenants
of the Purchaser.    Without in any way limiting the
representations set forth above in Section 3.01, the Purchaser agrees
not to make any disposition of all or any portion of the Shares, the Warrant,
the Warrant Shares or the Preferred Stock Conversion Shares unless and until:

 

(a)           there is then in effect a
registration statement under the Securities Act covering such proposed
disposition and such disposition is made in accordance with such registration
statement; or

 

(b)           the Purchaser shall have notified the
Company of the proposed disposition and shall have furnished the Company with a
statement of the circumstances surrounding the proposed disposition, and, at
the expense of the Purchaser or its transferee if requested by the Company,
with an opinion of counsel (reputable in securities matters) that such
disposition will not require registration of such securities under the
Securities Act or applicable state securities laws.

 

Notwithstanding
the provisions of paragraphs (a) and (b) above, no such registration statement
or opinion of counsel shall be required for any transfer of Preferred Stock
Conversion Shares by the Purchaser to (A) a partner of such partnership, (B) a
retired partner of such partnership who retires after the date hereof, (C) the
estate of any such partner, or (D) an entity under common Control with the
Purchaser; provided, however, that in each of the foregoing
cases, the transferee agrees in writing to be subject to the terms of this
Article III to the same extent as if the transferee were an original Purchaser
hereunder.

 

SECTION
3.03               Legend.    The Purchaser acknowledges that
the certificates evidencing the Shares, the Warrant Shares and the Preferred
Stock Conversion Shares will bear the legend set forth below or substantially
similar legend:

 

THE
SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE “ACT”), OR UNDER THE SECURITIES LAWS OF CERTAIN
STATES. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND
RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT
AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION
THEREFROM.  THE ISSUER OF THESE
SECURITIES MAY REQUIRE AN OPINION OF COUNSEL (WHICH MAY BE COUNSEL FOR THE COMPANY)
IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY
PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE
STATE SECURITIES LAWS.

 

The
legend set forth above shall be removed by the Company from any certificate
evidencing Shares, Warrant Shares or Preferred Stock Conversion Shares, and the
Company shall issue a certificate without such legend to the holder thereof, if
requested, upon delivery to the Company 

 

23

 

of
an opinion by counsel (which may be counsel for the Company) that such security
can be freely transferred in a public sale without a registration statement
being in effect and that such transfer will not jeopardize the exemption or
exemptions from registration pursuant to which the Company issued the Shares,
Warrant Shares, or Preferred Stock Conversion Shares; provided, however,
that no opinion from counsel shall be required for any dispositions pursuant to
Rule 144(k) under the Securities Act.

 

ARTICLE IV.

 

CONDITIONS
TO THE OBLIGATIONS OF THE PURCHASER AND THE COMPANY

 

SECTION
4.01               Conditions to the
Purchaser’s Obligations at the Closings. 
  The Purchaser’s obligation to purchase and
pay for the Series A-1 Shares and Warrant being purchased by it on the First
Closing Date, and the Series A-2 Shares being purchased by it on the Second
Closing Date is, at its option, subject to the satisfaction, on or before such
Closing Dates, of the following conditions, any of which may be waived in whole
or in part by the Purchaser:

 

(a)           Opinion
of Company’s Counsel.  The
Purchaser shall have received from Jenkens & Gilchrist, counsel for the
Company, an opinion dated such Closing Date, in form and scope reasonably
satisfactory to the Purchaser and its counsel.

 

(b)           Representations
and Warranties to be True and Correct.  The representations and warranties of the
Company under this Agreement shall be true, complete and correct at and as of
such Closing, except with respect to provisions including the word “material”
or words of similar import, and except with respect to materiality, as
reflected under GAAP, in the representations and warranties contained in Section
2.06 relating to the Financial Statements, with respect to which such
representations and warranties must have been on and as of such Closing Date.

 

(c)           Performance.  The Company shall have performed and complied
with all agreements and covenants contained herein required to be performed or
complied with by it prior to or at such Closing Date.

 

(d)           All
Proceedings to be Satisfactory. 
All corporate and other proceedings to be taken by the Company in
connection with the transactions contemplated hereby and all documents incident
thereto shall be reasonably satisfactory in form and substance to the Purchaser
and its respective counsel, and the Purchaser and its respective counsel shall
have received all such counterpart originals or certified or other copies of
such documents as they reasonably may request.

 

(e)           Approvals.  The Company shall have obtained any and all
consents, waivers, registrations, approvals or authorizations, with or by any
governmental body and all consents, waivers, approvals or authorizations of any
other Person required for the valid execution of this Agreement and each of the
other Transaction Documents and for the consummation of the transactions
contemplated hereby and thereby.

 

(f)            No
Injunction.  No governmental
body or any other Person shall have issued an order, injunction, judgment,
decree, ruling or assessment which shall then be in effect restraining or
prohibiting the completion of the transactions contemplated hereby or under any
of the other 

 

24

 

Transaction Documents, nor, shall any such order,
injunction, judgment, decree, ruling or assessment be pending or, to the Company’s
knowledge, threatened.

 

(g)           Investors’
Rights Agreement.  The Company
and the other holders of Preferred Stock named therein shall have executed and
delivered the Investors’ Rights Agreement.

 

(h)           Certificate
of Designation.  With respect
to the First Closing, the Certificate of Designation shall have been filed with
the Secretary of State of the State of Delaware.

 

(i)            Non-Disclosure
and Proprietary Information and Inventions Agreements.  Each employee and independent contractor of
and consultant to the Company will have entered into a Non-Disclosure and
Proprietary Information and Inventions Agreement.

 

(j)            Non-Competition
Agreements.  Each key
employee, consultant or investigative physician of the Company will have
entered into a non-competition agreement in a form acceptable to the Purchaser.

 

(k)           Board
of Directors.  The number of
directors constituting the entire Board shall have been fixed at no more than
ten, one-half of which shall have been designated by the Purchaser (the “Purchaser Directors”),
and one of the Purchaser Directors shall have been elected the vice-chairman of
the Board.  There shall have been
established compensation and audit committees of the Board, each consisting of
up to four members, one of which, at the Purchaser’s option shall be a
Purchaser Director.

 

(l)            Preemptive
Rights.  All stockholders of
the Company having any preemptive, first refusal or other rights with respect
to the issuance of the Shares, Warrant Shares or the Preferred Stock Conversion
Shares (other than those contemplated by the Transaction Documents) shall have
irrevocably waived the same in writing.

 

(m)          Expenses.  The Company shall have paid the fees and
expenses of the Purchaser, including the fees
and disbursements of the Purchaser’s counsel invoiced at such Closing, in
accordance with Section 6.01 hereof.

 

(n)           Key
Person Insurance.  The Company
shall have obtained the life insurance policies described in Section 5.13.

 

(o)           Material
Adverse Change.  In the case
of the Second Closing, there shall not have occurred a Material Adverse Change.

 

(p)           CIBA
Debt Obligations.  At or
before the First Closing Date, the Company will have executed an amendment to
that certain License Transfer and Transition Services Agreement, dated January
30, 2004, by and among the Company, Refocus Ocular, Inc., CIBA Vision and CIBA
Vision Corporation, upon terms reasonably acceptable to The Purchaser.

 

(q)           Second
Closing Milestones.  With
respect to the Second Closing, the Company shall have been authorized in
writing to commence Phase III Clinical Trials for Presbyopia without any
material limitations as evidenced by written approval from the FDA (“Second
Closing Milestones”.)

 

25

 

(r)            Bylaws.  On or before the First Closing Date, the
Bylaws of the Company shall have been amended (i) to permit any Purchaser
Director to call a special meeting of the Board,  (ii) to permit any Purchaser Director or the
holders of at least 51% of the outstanding Series A-1 Preferred Stock, Series
A-2 Preferred Stock and Series A-3 Preferred Stock, together as if a single
class, to call a special meeting of the stockholders, and (iii) to require the
Board to meet bimonthly for one year following the First Closing Date and at
least quarterly thereafter.

 

(s)           Supporting
Documents.  The Purchaser and
its counsel shall have received copies of the following documents:

 

(i)            (A) the Charter, certified as of a
recent date by the Secretary of State of the State of Delaware and (B) a
certificate of said Secretary dated as of a recent date as to the Company’s due
incorporation and good standing and the Company’s payment of all franchise
taxes, and listing all documents of the Company on file with said Secretary;

 

(ii)           a certificate of the Company’s
Secretary dated the applicable Closing Date, certifying:  (A) that attached thereto is a true, correct
and complete copy of the Bylaws as in effect on the date of such certification
and that no amendments or modifications to such Bylaws have been authorized;
(B) that attached thereto is a true, correct and complete copy of all
resolutions adopted by the Board authorizing the execution, delivery and
performance of each of the Transaction Documents, the issuance, sale and
delivery of the Shares and the Warrant, and the reservation of the Warrant
Shares and the Preferred Stock Conversion Shares, and that all such resolutions
are in full force and effect, have not been amended, modified or rescinded and
are the only resolutions adopted in connection with the transactions contemplated
by the Transaction Documents; (C) that the Charter has not been amended since
the date of the last amendment referred to in the certificate delivered
pursuant to clause (i)(A) above; and (D) to the incumbency and specimen
signature of each officer of the Company executing any of the Transaction
Documents, and any certificate or instrument furnished pursuant hereto, and a
certification by another authorized officer of the Company as to the incumbency
and signature of the officer signing the certificate referred to in this clause
(ii); and

 

(iii)          a certificate, executed by an officer
of the Company, dated the applicable Closing Date, certifying to the
fulfillment of the specific conditions set forth in Sections 4.01(b), 4.01(c)
hereto and to the fulfillment of all of the conditions in this Article IV in
general.

 

(iv)          such additional supporting documents
and other information with respect to the Company’s operations and affairs as
the Purchaser or its counsel reasonably may request.  All such documents shall be satisfactory in
form and substance to the Purchaser and its counsel.

 

SECTION
4.02               Conditions to the
Company’s Obligations at each Closing. 
  The Company’s obligation to sell and issue
the Shares and the Warrant on the applicable Closing Date is subject to the
satisfaction, on or before such Closing Date, of the following conditions, any
of which may be waived in whole or in part by the Company:

 

(a)           Representations
and Warranties to be True and Correct.  The representations and warranties of the
Purchaser contained in Article III shall be true, complete and correct at and as 

 

26

 

of such Closing, with the same effect as though such
representations and warranties had been made on and as of such date.

 

(b)           Investors’
Rights Agreement.  The
Purchaser shall have executed and delivered the Investors’ Rights Agreement.

 

(c)           Approvals.  The Purchaser shall have obtained any and all
consents, waivers, approvals or authorizations, with or by any governmental
body and all consents, waivers, approvals or authorizations of any other Person
required for the valid execution of this Agreement and each of the other
Transaction Documents and for the consummation of the transactions contemplated
hereby and thereby.

 

(d)           No
Injunction.  No governmental
body or any other Person shall have issued an order, injunction, judgment,
decree, ruling or assessment which shall then be in effect restraining or
prohibiting the completion of the transactions contemplated hereby, nor, to the
Company’s knowledge, shall any such order, injunction, judgment, decree, ruling
or assessment be threatened or pending.

 

(e)           Purchase
Price Paid.  The Purchaser
shall have paid to the Company the applicable Share Purchase Price and, with
respect to the First Closing, the Warrant Purchase Price.

 

ARTICLE V.

 

COVENANTS
OF THE COMPANY

 

The
Company covenants and agrees with the Purchaser that:

 

SECTION
5.01               Reserve for
Warrant Shares and Preferred Stock Conversion Shares.

 

(a)           The Company shall at all times reserve
and keep available out of its authorized but unissued shares of Series A-3
Preferred Stock, for the purpose of issuing the Warrant Shares upon exercise of
the Warrant and otherwise complying with the terms of this Agreement such
number of its duly authorized shares of Series A-3 Preferred Stock as shall be
sufficient to effect the exercise of the Warrant or otherwise to comply with
the terms of this Agreement.  If at any
time the number of authorized but unissued shares of Series A-3 Preferred Stock
shall not be sufficient to effect the exercise of the Warrant or otherwise to
comply with the terms of this Agreement, the Company will forthwith take such
corporate action as may be necessary to increase its authorized but unissued
shares of Series A-3 Preferred Stock to such number of shares as shall be
sufficient for such purposes.  The
Company will use its best efforts to obtain any authorization, consent,
approval or other action by or make any filing with any court or governmental
or administrative body that may be required under applicable state securities
laws in connection with the issuance of shares of Series A-3 Preferred Stock
upon exercise of the Warrant.

 

(b)           The Company shall at all times
reserve and keep available out of its authorized but unissued shares of Series
A-2 Preferred Stock, for the purpose of effecting the purchase of 

 

27

 

the Series A-2 Shares and otherwise complying with the
terms of this Agreement, such number of its duly authorized shares of Series
A-2 Preferred Stock as shall be sufficient to effect the issuance of the Series
A-2 Shares at the Second Closing or otherwise to comply with the terms of this
Agreement.  If at any time the number of
authorized but unissued shares of Series A-2 Preferred Stock shall not be
sufficient to effect the Second Closing or otherwise to comply with the terms
of this Agreement, the Company will forthwith take such corporate action as may
be necessary to increase its authorized but unissued shares of Series A-2
Preferred Stock to such number of shares as shall be sufficient for such
purposes.  The Company will use its best
efforts to obtain any authorization, consent, approval or other action by or
make any filing with any court or governmental or administrative body that may
be required under applicable state securities laws in connection with the
issuance of shares of Series A-2 Preferred Stock.

 

(c)           The Company shall at all times
reserve and keep available out of its authorized but unissued shares of Common
Stock, for the purpose of effecting the conversion of the Shares and the
Warrant Shares and otherwise complying with the terms of this Agreement, such
number of its duly authorized shares of Common Stock as shall be sufficient to
effect the conversion of the Shares and Warrant Shares from time to time
outstanding or otherwise to comply with the terms of this Agreement. If at any
time the number of authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion of the Shares and the Warrant Shares or
otherwise to comply with the terms of this Agreement, the Company will
forthwith take such corporate action as may be necessary to increase its
authorized but unissued shares of Common Stock to such number of shares as shall
be sufficient for such purposes.  The
Company will use its best efforts to obtain any authorization, consent,
approval or other action by or make any filing with any court or governmental
or administrative body that may be required under applicable state securities
laws in connection with the issuance of shares of Common Stock upon conversion
of the Shares and the Warrant Shares.

 

SECTION
5.02               Corporate
Existence.    The
Company shall preserve and maintain, and, except as otherwise permitted by Section
5.15, cause each Subsidiary to preserve and maintain, its corporate
existence, rights, franchises and privileges in the jurisdiction of its
incorporation, and qualify and remain qualified, and cause each Subsidiary to
qualify and remain qualified, as a foreign corporation in each jurisdiction in
which such qualification is necessary or desirable in view of its business and
operations or the ownership or lease of its properties.

 

SECTION
5.03               Preservation of
Property and Assets.    The
Company shall use its best efforts to secure, preserve and maintain, and cause
any Subsidiary to use its best efforts to secure, preserve and maintain, all
licenses and other rights to use the patents, processes, licenses, permits,
trademarks, trade names, inventions, copyrights or other Intellectual Property
rights owned or possessed by it and deemed by the Company to be material to the
conduct of its business or the business of any Subsidiary.  The Company shall also use its best efforts
to maintain and preserve, and cause each Subsidiary to use its best efforts to
maintain and preserve, all of its other properties and assets necessary for the
proper conduct of its business, in good repair, working order and condition,
ordinary wear and tear excepted, and, from time to time, make all necessary and
proper repairs, renewals, replacements, additions and improvements thereto; and
the Company and its Subsidiaries will at all times comply with each material
provision of all leases to which any of them is a party or under which any of them
occupies property.

 

28

 

SECTION
5.04               Properties,
Business, Insurance.    The
Company shall obtain and maintain and cause each of its Subsidiaries (if any)
to maintain as to its respective properties and business, with financially
sound and reputable insurers, insurance against such casualties and
contingencies and of such types and in such amounts as is customary for
companies similarly situated.

 

SECTION
5.05               Directors and
Officers Insurance.  The Company will obtain and maintain
customary directors and officers liability insurance with coverage limits no
less than $5,000,000 and will at all times maintain and exercise the powers
granted to it by its Charter, its Bylaws, and by applicable law to indemnify
and hold harmless to the fullest extent permitted by applicable law present or
former directors and officers of the Company against any threatened or actual
claim, action, suit, proceeding or investigation made against them arising from
their service in such capacities (or service in such capacities for another
enterprise at the request of the Company).

 

SECTION
5.06               Inspection,
Consultation and Advice.    The
Company shall permit, and cause each any of its Subsidiaries to permit, the
Purchaser and such persons as it may designate, at such holder’s expense, to
visit and inspect any of the properties of the Company and any Subsidiary,
examine their books and take copies and extracts therefrom, discuss the
affairs, finances and accounts of the Company and any Subsidiary with their
officers, employees and public accountants (and the Company hereby authorizes
said accountants to discuss with such holder and such designees such affairs,
finances and accounts), and consult with and advise the management of the Company
and any Subsidiary as to the Company’s affairs, finances and accounts, all at
reasonable times and upon reasonable notice, provided that the Purchaser shall
cause the persons they so designate to maintain any and all information
relating to the Company confidential.  In
the event of the Company’s breach of any of the covenants contained in this
Article V, the Company shall be responsible for the fees and expenses incurred
by such holder in enforcing its rights under this Section 5.06.

 

SECTION
5.07               Restrictive
Agreements Prohibited.    Neither the Company nor any Subsidiary shall
become a party to any agreement that by its terms restricts the Company’s
performance of this Agreement, any of the other Transaction Documents, the
Charter or the Bylaws.

 

SECTION
5.08               Transactions with
Affiliates.   Except for transactions contemplated by this
Agreement or as otherwise approved by the Board, neither the Company nor any
Subsidiary shall enter into any transaction with any director, officer,
employee or holder of more than five percent (5%) of the outstanding capital
stock of any class or series of capital stock of the Company or any Subsidiary,
member of the family of any such Person, or any corporation, partnership, trust
or other entity in which any such Person, or member of the family of any such
Person, is a director, officer, trustee, partner or holder of more than five
percent (5%) of the outstanding capital stock thereof.

 

SECTION
5.09               Compensation and
Expenses.

 

(a)           Directors.  The Company shall promptly reimburse in full
each director of the Company who is not an employee of the Company, for all of
his or her reasonable out-of-pocket 

 

29

 

expenses incurred in attending each meeting of the
Board or any committee thereof.  In
addition, the Company shall pay to the Purchaser Director of the Board who
serves at the vice-chairman of the Board an annual compensation of $50,000.

 

(b)           Purchaser.  The Company shall promptly reimburse in full
the Purchaser for all amounts paid by Purchaser to any Person retained, with
the Company’s approval, in connection with activities conducted on the
Company’s behalf.

 

SECTION
5.10               Use of Proceeds.    The Company shall use the
proceeds from the sale of the Shares for general working capital purposes, to
repay outstanding indebtedness, including, without limitation, the Bridge Loan
and for capital expenditures as approved by the Board, which approval must
include the approval of a majority of the Purchaser Directors.

 

SECTION
5.11               Financial
Reporting.    The
Company shall provide to the Purchaser:

 

(a)           within 90 days after the end of the
fiscal year of the Company a consolidated balance sheet of the Company and its
Subsidiaries as of the end of each fiscal year and the related consolidated
statements of income, stockholders’ equity and cash flows for the fiscal year
then ended, prepared in accordance with GAAP and certified by a firm of
independent public accountants of recognized national standing selected by the
Board or the Audit Committee thereof;

 

(b)           within 45 days after the end of each
quarter in each fiscal year (other than the last quarter in each fiscal year) a
consolidated balance sheet of the Company and its Subsidiaries and the related
consolidated statements of income unaudited but prepared in accordance with
GAAP and certified by the chief financial officer of the Company, such
consolidated balance sheet to be as of the end of such quarter and such
consolidated statements of income to be for such quarter and for the period
from the beginning of the fiscal year to the end of such quarter;

 

(c)           at the time of delivery of each
quarterly statement pursuant to Section 5.11(b), a management narrative
report including a discussion and analysis of such report and, subject to
Regulation FD promulgated by the SEC, explanation of significant variances from
forecasts and all significant current developments; and

 

(d)           subject to Regulation FD promulgated
by the SEC, promptly, from time to time, such other information regarding the
business, prospects, condition (financial or otherwise), operations, property,
assets or affairs of the Company and its Subsidiaries as the Purchaser may
reasonably request.

 

(e)           If the Company fails to comply with
the requirements of Section 5.11(a) through (d), the Purchaser
Directors, in their sole discretion, may appoint an independent accounting firm
to conduct an audit of the Company’s books and records, at the Company’s sole
expense.

 

SECTION
5.12               Non-Disclosure,
Non-Solicitation and Proprietary Information and Inventions Agreement.    The Company shall cause each
officer, director, employee, consultant and independent contractor now or
hereafter employed by it, or its Subsidiaries (if any), to enter into the
Non-Disclosure, Non-Solicitation and Proprietary Information and 

 

30

 

Inventions
Agreement.  The Company shall not amend,
modify, terminate, waive or otherwise alter, in whole or in part, any of the
Non-Disclosure and Proprietary Information and Inventions Agreement without the
consent of a majority of the Purchaser Directors.

 

SECTION
5.13               Key Person
Insurance.    The
Company shall obtain as soon as practicable after the First Closing and
maintain key person life insurance in the amount of $1,000,000 on the lives of
each of Terence A. Walts and Mark A. Cox. 
The Company shall be designated the beneficiary of the foregoing
policies.

 

SECTION
5.14               Payment of Taxes;
Trade Debt.   The
Company shall pay and discharge, and cause each Subsidiary to pay and discharge,
all taxes, assessments and governmental charges or levies imposed upon it or
upon its income, profits or business, or upon any properties belonging to it,
prior to the date on which penalties attach thereto, and all lawful claims
which, if unpaid, might become a Lien or charge upon any properties of the
Company or any subsidiary; provided, however, that neither the
Company, nor any subsidiary, shall be required to pay any such tax, assessment,
charge, levy or claim which is being contested or extended in good faith and by
appropriate proceedings if the Company or any subsidiary shall have set aside
on its books sufficient reserves, if any, with respect thereto.  The Company shall pay and cause any
Subsidiary to pay, when due, or in conformity with customary trade terms, all
lease obligations, all trade debt, and all other indebtedness incident to the
operations of the Company or any Subsidiary, except such as are being contested
in good faith and by proper proceedings if the Company or Subsidiary concerned
shall have set aside on its books sufficient reserves, if any, with respect
thereto.

 

SECTION
5.15               Internal
Accounting Controls.    The
Company shall devise and maintain a system of internal accounting controls
sufficient to provide reasonable assurances that (a) transactions are executed
in accordance with Company management’s general or specific authorization, (b)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with GAAP or any other criteria applicable to such
statements, and to maintain accountability for assets, (c) access to assets is
permitted only in accordance with Company management’s general or specific
authorization, and (d) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.

 

SECTION
5.16               Indemnity.

 

(a)           The Company agrees to indemnify,
defend and hold harmless the Purchaser (and its partners (and each officer and
director thereof), directors, managers, officers, members, stockholders,
employees, Affiliates, agents and permitted assigns) (collectively, “Purchaser Indemnified Parties”)
from and against any and all losses, claims, liabilities, damages,
deficiencies, costs or expenses (including, without limitation, interest,
penalties, reasonable attorneys’ fees, disbursements and related charges and
any costs or expenses that a Purchaser Indemnified Party incurs to enforce its
right to indemnification) (collectively, “Losses”) based upon, arising out of or
otherwise in respect of any material inaccuracy in or material breach of any
representations, warranties, covenants or agreements of the Company contained
in this Agreement or any of the other Transaction Documents.  For the purposes of this Agreement, an
inaccuracy or breach shall be deemed “material” when the Losses arising from
such inaccuracy 

 

31

 

or breach total $25,000 or more or the Losses arising
from all inaccuracies or breaches total $200,000 or more in the aggregate.

 

(b)           The Purchaser agrees to indemnify,
defend and hold harmless the Company and its directors, officers, employees,
Affiliates, agents and control persons) (collectively, the “Company Indemnified Parties”)
from and against any and all Losses based upon, arising out of or otherwise in
respect of any material inaccuracy in or material breach of any
representations, warranties, covenants or agreements of the Purchaser contained
in this Agreement or any of the other Transaction Documents.

 

(c)           The provisions of this Section
5.16 shall not limit or impair any right or remedy arising from breach of
this Agreement or any of the other Transaction Documents.  In addition to any other remedy provided by
law, injunctive relief may be obtained to enjoin the breach, or threatened
breach, of any provision of this Agreement and each party shall be entitled to
specific performance by the others of their obligations hereunder and
thereunder.  All remedies, either under
this Agreement, by law or as may otherwise be afforded to the Purchaser or the
Company, as the case may be, shall be cumulative.

 

(d)           The respective obligations of the
Purchaser and the Company under this Section 5.16 shall expire ninety
(90) days after the delivery by the Company to the Purchaser of the Company’s
audited financial statements for its fiscal year ending December 31, 2005;
provided, however, this Section 5.16(d) shall not release the Purchaser
or the Company from their respective indemnification obligations with respect
to Losses based upon, arising out of or otherwise in respect of any fraud or
intentional breach.

 

SECTION
5.17               Compliance with
Laws.    The
Company shall comply, and cause each Subsidiary to comply, with all applicable
laws, rules, regulations and orders.

 

SECTION
5.18               Keeping of Records
and Books of Account.    The
Company shall keep, and cause each Subsidiary to keep, adequate records and
books of account, in which complete entries will be made in accordance with
GAAP consistently applied, reflecting all financial transactions of the Company
and any Subsidiary, and in which, for each fiscal year, all proper reserves for
depreciation, depletion, obsolescence, amortization, taxes, bad debts and other
purposes in connection with its business shall be made.

 

SECTION
5.19               PFIC Covenant.    The Company and any Subsidiary
shall monitor its respective status as to whether it is a PFIC, a CFC or an
FPHC, and the Company shall promptly notify the Purchaser if the Company or any
of its Subsidiaries is treated as a PFIC, a CFC or an FHPC at any time.  If at any time either the Company or any
Subsidiary becomes a PFIC, such entity shall, at its sole expense, provide the
Purchaser with such information and take such other actions as may be necessary
to permit the Purchaser to make a timely election under Section 1295 of the
Code to treat the Company as a “qualified electing fund.”  Further, at the request of the Purchaser, the
Company shall, at the Company’s expense, timely provide the Purchaser with any
information that the Purchaser reasonably requests for purposes of completing
United State federal, state or local income tax returns, including, without
limitation, with respect to the status as a CFC or an FHPC of the Company or
any Subsidiary.

 

32

 

SECTION
5.20               Publicity.    Except as may be required by
law, the Company shall not issue or cause the publication of any press release,
advertisement or other public communication relating to (a) the Purchaser (or any
Affiliate of the Purchaser) or (b) this Agreement or any of the other
Transaction Documents, without the Purchaser’s prior written consent, which
consent shall not be unreasonably withheld or delayed.

 

ARTICLE VI.

 

ADDITIONAL
COVENANTS OF THE COMPANY

 

For
so long as at least twenty-five percent (25%) of the shares of Series A-1
Preferred Stock originally issued hereunder remain outstanding, the Company
shall not, and the Company shall cause its Subsidiaries not to:

 

SECTION
6.01               Protective
Provisions Requiring Stockholder Approval.   
Without the approval of the holders of at least 75% of the Shares of the
Series A-1 Preferred Stock, Series A-2 Preferred Stock and Series A-3 Preferred
Stock then outstanding, voting together as a single class:

 

(a)           amend the Charter and Bylaws in any
manner that would alter or change any of the rights, preferences, privileges or
restrictions of the Shares, Warrant Shares and Preferred Stock Conversion
Shares;

 

(b)           reclassify any outstanding securities
into securities having rights, preferences or privileges senior to, or on a
parity with, the Shares and the Warrant Shares;

 

(c)           authorize or issue any additional
shares of Preferred Stock (other than to Purchaser in accordance with this
Agreement) or any other stock having rights or preferences senior to, or on a
parity with, the Shares or Warrant Shares;

 

(d)           merge or consolidate with or into any
corporation if such merger or consolidation would result in the stockholders of
the Company immediately prior to such merger or consolidation holding (by
virtue of securities issued as consideration in such transaction or otherwise)
less than a majority of the voting power of the stock of the surviving
corporation immediately after such merger or consolidation;

 

(e)           sell all or substantially all their
respective assets in a single transaction or series of related transactions;

 

(f)            license all or substantially all of
their respective intellectual property in a single transaction or series of
related transactions;

 

(g)           liquidate or dissolve; or

 

(h)           alter any rights of the Purchaser
Directors or the holders of the Shares and the Warrant Shares or change the
size of the Board.

 

33

 

SECTION
6.02               Protective
Provisions Requiring Board Approval.    Without the approval of the
Board, including at least two thirds of the Purchaser Directors:

 

(a)           declare or pay any dividends (other
than dividends payable solely in shares of Common Stock and dividends payable
to the Company or another Subsidiary) on or declare or make any other
distribution, directly or indirectly, on account of any shares of Common Stock
now or hereafter outstanding;

 

(b)           repurchase any outstanding shares of
capital stock (other than repurchases of capital stock from employees of the
Company or any Subsidiary whose employment has been terminated for any reason,
not to exceed $100,000 in the aggregate);

 

(c)           approve or modify by 10% or more the
aggregate amount of any annual or other operating or capital budget, or approve
or modify by 50% or more any single line item of any such operating or capital
budget;

 

(d)           increase the salary of any officer or
pay any bonus to any officer, director or employee not contemplated in a budget
or bonus plan approved by the Purchaser Directors;

 

(e)           retain, terminate or enter into any
salary or employment negotiations or employment agreement with any employee or
any future employee;

 

(f)            incur indebtedness (other than trade
payables) in excess of $50,000 in the aggregate, or enter into contracts or
leases which requires payments in excess of $50,000 in the aggregate;

 

(g)           make or incur any single capital
expenditure in excess of $50,000 or aggregate capital expenditures in excess of
$100,000 per fiscal year;

 

(h)           award stock options, stock
appreciation rights or similar employee benefits or determine vesting
schedules, exercise prices or similar features;

 

(i)            make any material change in the
nature of its business or enter into any new line of business, joint venture or
similar arrangement;

 

(j)            pledge its assets or guarantee the
obligations of any other individual or entity;

 

(k)           recommend amendment of the Company’s
existing restricted stock and stock option plan or approval of any new equity
incentive plan; or

 

(l)            form or acquire any subsidiary,
joint venture or similar business entity.

 

ARTICLE VII.

 

MISCELLANEOUS

 

SECTION
7.01               Expenses.    At each Closing, the Company
shall reimburse the Purchaser for all fees and expenses incurred by it in
connection with its due diligence and the 

 

34

 

negotiation
and documentation of the transactions contemplated hereby, including the
reasonable fees and disbursements of the Purchaser’s counsel.  The Company agrees that the fees and expenses
incurred by the Purchaser through the applicable Closing Date in connection
with the transactions contemplated hereby may be paid directly by the Purchaser
to the attorneys for the Purchaser and deducted from the purchase price payable
at the Closing.  The Company further
agrees to reimburse the Purchaser on demand for the Purchaser’s reasonable
out-of-pocket expenses incurred in connection with any amendment to, or waiver
or enforcement of, this Agreement or the other Transaction Documents.  The Company shall also pay all stamp and other
taxes and duties levied in connection with the issuance of the Shares, the
Warrant, the Warrant Shares and the Preferred Stock Conversion Shares.

 

SECTION
7.02               Survival of
Agreements.    All
covenants, agreements, representations and warranties made in any of the
Transaction Documents or any certificate or instrument delivered to the
Purchaser or the Company pursuant to or in connection with any of the
Transaction Documents shall survive the execution and delivery of all of the
Transaction Documents, the issuance, sale and delivery of the Shares and the
Warrant, and the issuance and delivery of the Warrant Shares and the Preferred
Stock Conversion Shares, and all statements contained in any certificate or
other instrument delivered by the Company or the Purchaser hereunder or
thereunder or in connection herewith or therewith shall be deemed to constitute
representations and warranties made by the Company or the Purchaser, as the
case may be.

 

SECTION
7.03               Entire Agreement.    This Agreement, together with
the Schedules hereto and any certificates, documents, instruments and writings
that are delivered pursuant hereto and thereto, constitute the entire agreement
and understanding of the parties in respect of the subject matter hereof and
supersede all prior understandings, agreements or representations by or among
the parties, written or oral, to the extent they relate in any way to the
subject matter hereof.

 

SECTION
7.04               Assignment;
Binding Effect.    No
party may assign either this Agreement or any of its rights, interests or
obligations hereunder without the prior written approval of the other parties; provided,
however, that without the consent of any other party hereto the rights
of the Purchaser hereunder are assignable to an Affiliate of the Purchaser.  All of the terms, agreements, covenants,
representations, warranties and conditions of this Agreement are binding upon,
and inure to the benefit of and are enforceable by, the parties and their
respective successors and permitted assigns, whether so expressed or not.
Without limiting the generality of the foregoing, all representations,
covenants and agreements benefiting the Purchaser shall inure to the benefit of
any and all subsequent holders from time to time of the Shares, the Warrant,
the Warrant Shares or the Preferred Stock Conversion Shares, as the case may
be.  Nothing in this Agreement shall
create or be deemed to create any third-party beneficiary rights in any Person
not a party to this Agreement except as provided below.  Whether or not any express assignment has
been made, the provisions of this Agreement which are for the benefit of the
Purchaser as a purchaser or holder of the Shares, the Warrant or Warrant Shares
(or any securities pursuant to which the Shares, the Warrant or Warrant Shares
may be converted or exercised into) are also for the benefit of and enforceable
by any subsequent holder of such Shares, Warrant, Warrant Share or other
securities to the same extent they would have been enforceable by such
Purchaser.  Upon any permitted
assignment, the references in this 

 

35

 

Agreement to such Purchaser
shall also apply to any such assignee unless the context otherwise requires.

 

SECTION
7.05               Notices.    All notices, requests and other
communications provided for or permitted to be given under this Agreement must
be in writing and shall be given by personal delivery, by certified or
registered United States mail (postage prepaid, return receipt requested), by a
nationally recognized overnight delivery service for next day delivery, or by
facsimile transmission, as follows (or to such other address as any party may
give in a notice given in accordance with the provisions hereof):

 

If
to the Purchaser:

 

Medcare
Investment Fund III, Ltd.

8122
Datapoint Drive, Suite 1000

San
Antonio, Texas  78229

Fax:
(210) 614-5841

Attn:
Tim Lyles

 

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

 

Akin
Gump Strauss Hauer & Feld LLP

300
Convent Street, Suite 1500

San
Antonio, Texas 78205

Phone:
(210) 281-7000

Fax:
(210) 224-2035

Attn:
Alan Schoenbaum, Esq.

 

If
to the Company:

 

Refocus
Group, Inc.

10300
North Central Expressway, Suite 104.

Dallas,
Texas  75231

Fax:  (214) 368-0332

Attn:  President

 

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

 

Jenkens
& Gilchrist, P.C.

1445
Ross Avenue, Suite 3200

Dallas,
Texas  75202

Phone:  (214) 855-4500

Fax:  (214) 855-4300

Attn:  Robert W. Dockery, Esq.

 

All
notices, requests or other communications will be effective and deemed given
only as follows:  (i) if given by personal
delivery, upon such personal delivery, (ii) if sent by certified or registered
mail, on the fifth business day after being deposited in the United States
mail, (iii) if sent for next day delivery by overnight delivery service, on the
date of delivery as confirmed by 

 

36

 

written
confirmation of delivery, (iv) if sent by facsimile, upon the transmitter’s
confirmation of receipt of such facsimile transmission, except that if such
confirmation is received after 5:00 p.m. (in the recipient’s time zone) on a
business day, or is received on a day that is not a business day, then such
notice, request or communication will not be deemed effective or given until
the next succeeding business day. 
Notices, requests and other communications sent in any other manner,
including by electronic mail, will not be effective.

 

SECTION
7.06               Specific
Performance; Remedies.    Each
party acknowledges and agrees that the other parties would be damaged
irreparably if any provision of this Agreement were not performed in accordance
with its specific terms or were otherwise breached.  Accordingly, the parties will be entitled to
an injunction or injunctions to prevent breaches of the provisions of this
Agreement and to enforce specifically this Agreement and its provisions in any
action or proceeding instituted in any court of the United States or any state
thereof having jurisdiction over the parties and the matter, in addition to any
other remedy to which they may be entitled, at law or in equity.  Except as expressly provided herein, the
rights, obligations and remedies created by this Agreement are cumulative and
in addition to any other rights, obligations or remedies otherwise available at
law or in equity. Except as expressly provided herein, nothing herein will be
considered an election of remedies.

 

SECTION
7.07               Submission to
Jurisdiction; Waiver of Jury Trial.

 

(a)               Submission to Jurisdiction.  Any action, suit or proceeding seeking to
enforce any provision of, or based on any matter arising out of or in
connection with, this Agreement or the transaction contemplated hereby shall
only be brought in any federal court located in the State of Texas or any Texas
state court, and each party consents to the exclusive jurisdiction and venue of
such courts (and of the appropriate appellate courts therefrom) in any such
action, suit or proceeding and irrevocably waives, to the fullest extent
permitted by law, any objection that it may now or hereafter have to the laying
of the venue of any such action, suit or proceeding in any such court or that
any such action, suit or proceeding brought in any such court has been brought
in an inconvenient forum.  Process in any
such action, suit or proceeding may be served on any party anywhere in the
world, whether within or without the jurisdiction of any such court.  Without limiting the foregoing, service of
process on such party as provided in Section 7.05 shall be deemed
effective service of process on such party.

 

(b)               Waiver of Jury Trial.  EACH PARTY ACKNOWLEDGES THAT ANY DISPUTE THAT
MAY ARISE OUT OF OR RELATING TO THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED
AND DIFFICULT ISSUES, AND THEREFORE SUCH PARTY HEREBY EXPRESSLY WAIVES ITS
RIGHT TO JURY TRIAL OF ANY DISPUTE BASED UPON OR ARISING OUT OF THIS AGREEMENT
OR ANY OTHER AGREEMENTS RELATING HERETO OR ANY DEALINGS AMONG THEM RELATING TO
THE TRANSACTIONS CONTEMPLATED HEREBY. 
THE SCOPE OF THIS WAIVER IS INTENDED TO ENCOMPASS ANY AND ALL ACTIONS,
SUITS AND PROCEEDINGS THAT RELATE TO THE SUBJECT MATTER OF THE TRANSACTIONS
CONTEMPLATED HEREBY, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY
CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS.  EACH PARTY REPRESENTS THAT (i) NO
REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY
OR 

 

37

 

OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT IN THE
EVENT OF ANY ACTION, SUIT OR PROCEEDING, SEEK TO ENFORCE THE FOREGOING WAIVER,
(ii) SUCH PARTY UNDERSTANDS AND WITH THE ADVICE OF COUNSEL HAS CONSIDERED THE
IMPLICATIONS OF THIS WAIVER, (iii) SUCH PARTY MAKES THIS WAIVER VOLUNTARILY AND
(iv) SUCH PARTY HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER
THINGS, THE MUTUAL WAIVERS AND REPRESENTATIONS IN THIS SECTION 7.07(b).

 

SECTION
7.08               Headings.    The article and section
headings contained in this Agreement are inserted for convenience only and will
not affect in any way the meaning or interpretation of this Agreement.

 

SECTION
7.09               Governing Law.    This Agreement will be governed
by and construed in accordance with the laws of the State of Texas, without
giving effect to any choice of law principles.

 

SECTION
7.10               Amendments.    This Agreement may not be
amended or modified without the written consent of the Company and the holders
of at least 75% of the Shares outstanding.

 

SECTION
7.11               Extensions;
Waivers.    Any
party may, for itself only, (a) extend the time for the performance of any of
the obligations of any other party under this Agreement, (b) waive any inaccuracies
in the representations and warranties of any other party contained herein or in
any document delivered pursuant hereto and (c) waive compliance with any of the
agreements or conditions for the benefit of such party contained herein.  Any such extension or waiver will be valid
only if set forth in a writing signed by the party to be bound thereby.  No waiver by any party of any default,
misrepresentation or breach of warranty or covenant hereunder, whether intentional
or not, may be deemed to extend to any prior or subsequent default,
misrepresentation or breach of warranty or covenant hereunder or affect in any
way any rights arising because of any prior or subsequent such occurrence.  Neither the failure nor any delay on the part
of any party to exercise any right or remedy under this Agreement shall operate
as a waiver thereof, nor shall any single or partial exercise of any right or
remedy preclude any other or further exercise of the same or of any other right
or remedy.

 

SECTION
7.12               Severability.    The provisions of this
Agreement will be deemed severable and the invalidity or unenforceability of
any provision will not affect the validity or enforceability of the other
provisions hereof; provided that if any provision of this Agreement, as applied
to any party or to any circumstance, is judicially determined not to be
enforceable in accordance with its terms, the parties agree that the court
judicially making such determination may modify the provision in a manner
consistent with its objectives such that it is enforceable, and/or to delete
specific words or phrases, and in its modified form, such provision will then
be enforceable and will be enforced.

 

SECTION
7.13               Counterparts;
Effectiveness.    This
Agreement may be executed in two or more counterparts, each of which will be
deemed an original but all of which together will constitute one and the same
instrument.  This Agreement will become
effective when one or more counterparts have been signed by each of the parties
and delivered to the other parties.  For 

 

38

 

purposes
of determining whether a party has signed this Agreement or any document
contemplated hereby or any amendment or waiver hereof, only a handwritten
original signature on a paper document or a facsimile copy of such a
handwritten original signature shall constitute a signature, notwithstanding
any law relating to or enabling the creation, execution or delivery of any
contract or signature by electronic means.

 

SECTION
7.14               Construction.    This Agreement has been freely
and fairly negotiated among the parties. 
If an ambiguity or question of intent or interpretation arises, this
Agreement will be construed as if drafted jointly by the parties and no
presumption or burden of proof will arise favoring or disfavoring any party
because of the authorship of any provision of this Agreement.  Any reference to any law will be deemed to
refer to such law as in effect on the date hereof and all rules and regulations
promulgated thereunder, unless the context requires otherwise.  The words “include,” “includes,” and
“including” will be deemed to be followed by “without limitation.” Pronouns in
masculine, feminine, and neuter genders will be construed to include any other
gender, and words in the singular form will be construed to include the plural
and vice versa, unless the context otherwise requires. The words “this
Agreement,” “herein,” “hereof,” “hereby,” “hereunder,” and words of similar
import refer to this Agreement as a whole and not to any particular subdivision
unless expressly so limited. The parties intend that each representation,
warranty, and covenant contained herein will have independent significance. If
any party has breached any covenant contained herein in any respect, the fact that
there exists another covenant relating to the same subject matter (regardless
of the relative levels of specificity) which the party has not breached will
not detract from or mitigate the fact that the party is in breach of the first
covenant.

 

SECTION
7.15               Attorneys’ Fees.    If any dispute among any
parties arises in connection with this Agreement, the prevailing party in the
resolution of such dispute in any action or proceeding will be entitled to an
order awarding full recovery of reasonable attorneys’ fees and expenses, costs
and expenses (including experts’ fees and expenses and the costs of enforcing
this Section 7.15) incurred in connection therewith, including court
costs, from the non-prevailing party.

 

SECTION
7.16               Brokerage.    Each party hereto will
indemnify and hold harmless the others against and in respect of any claim for
brokerage or other commissions relative to this Agreement or to the
transactions contemplated hereby, based in any way on agreements, arrangements
or understandings made or claimed to have been made by such party with any
third party.

 

SECTION
7.17               Adjustments for
Stock Splits, Etc.    Wherever in this Agreement there is a
reference to a specific number of shares of the Company’s capital stock of any
class or series, then, upon the occurrence of any subdivision, combination or
stock dividend of such class or series of stock, the specific number of shares
so referenced in this Agreement will automatically be proportionally adjusted
to reflect the effect of such subdivision, combination or stock dividend on the
outstanding shares of such class or series of stock.

 

SECTION
7.18               Aggregation of
Stock.    All
shares of Common Stock owned or acquired by the Purchaser or its Affiliated
entities or persons (assuming full conversion, exchange and exercise of all
convertible, exchangeable and exercisable securities into Common 

 

39

 

Stock) shall be aggregated
together for the purpose of determining the availability of any right under this
Agreement.

 

SECTION
7.19               Certain Defined
Terms.    As
used in this Agreement, the following terms shall have the following meanings
(such meanings to be equally applicable to both the singular and plural forms
of the terms defined):

 

“Affiliate” means, with
respect to any Person, (i) any other Person of which securities or other
ownership interests representing more than fifty percent (50%) of the voting
interests are, at the time such determination is being made, owned, Controlled
or held, directly or indirectly, by such Person, or (ii) any other Person
which, at the time such determination is being made, is Controlling, Controlled
by or under common Control with, such Person. As used herein, “Control”, whether
used as a noun or verb, refers to the possession, directly or indirectly, of
the power to direct, or cause the direction of, the management or policies of a
Person, whether through the ownership of voting securities or otherwise.

 

“Bridge Loan” means
that certain Secured Bridge Note in the principal amount of $500,000, dated
January 27, 2005, executed by the Company and delivered to the Purchaser.

 

“Change of Control”
means (A) the acquisition at any time by a “person” or “group” (as such terms
are used in Sections 13.(d) and 14.(d)(2) of the Exchange Act who or which are
the beneficial owners (as defined in Rule 13(d)-3 under the Exchange Act),
directly or indirectly, of securities representing more than 50% of the
combined voting power of the election of directors of the then outstanding
securities of the Company or any successor of the Company, unless the
acquisition of securities resulting in such ownership by such person or group
has been approved unanimously by the Board; (B) approval by the stockholders of
the Company of any sale or disposition of substantially all of the assets or
earning power of the Company; or (C) approval by the stockholders of the
Company of any merger, consolidation, or statutory share exchange to which the
Company is a party as a result of which the persons who were stockholders
immediately prior to the effective date of the merger, consolidation or share
exchange shall have beneficial ownership of less than 50% of the combined
voting power in the election of directors of the surviving corporation.

 

“FDA” means the United
States Food and Drug Administration.

 

“Fully Diluted Basis”
shall mean, at a given time, all shares of Common Stock, Preferred Stock and
other capital securities of the Company issued and outstanding at such time,
plus all such shares then issuable upon exercise of all then outstanding
options, warrants and other convertible securities, whether or not such
options, warrants or convertible securities are actually exercisable or
convertible at such time, all calculated on an “as converted” to Common Stock basis.

 

“Investors’ Rights Agreement”
shall mean the Investors’ Rights Agreement among the Company, the Purchaser and
the other parties thereto, in the form attached hereto as Exhibit C.

 

“Lien” shall mean a mortgage, deed of trust,
pledge, hypothecation, assignment, encumbrance, lien (statutory or otherwise,
including, without limitation, any lien for taxes), 

 

40

 

security interest, preference,
participation interest, priority or security agreement or preferential
arrangement of any kind or nature whatsoever, including, without limitation,
any conditional sale or other title retention agreement, any financing lease
having substantially the same economic effect as any of the foregoing and the
filing of any document under the law of any applicable jurisdiction to evidence
any of the foregoing.

 

“Material Adverse Change”
shall mean a material adverse change in the Company’s business, operations,
assets, liabilities, prospects, properties, condition (financial or otherwise)
or results of operations.

 

“Person” shall mean an
individual, corporation, trust, partnership, limited liability company, joint
venture, unincorporated organization, government body or any agency or
political subdivision thereof, or any other entity.

 

“Subsidiary” shall
mean, as to the Company, any corporation of which more than fifty percent (50%)
of the outstanding stock having ordinary voting power to elect a majority of
the Board of Directors of such corporation (irrespective of whether or not at
the time stock of any other class or classes of such corporation shall have or
might have voting power by reason of the happening of any contingency) is at
the time directly or indirectly owned by the Company, or by one or more of its
subsidiaries, or by the Company and one or more of its subsidiaries.

 

“Transaction Documents”
shall mean this Agreement, the Warrant, and the Investors’ Rights Agreement.

 

SECTION
7.20               Incorporation of
Exhibits, Annexes and Schedules.    The
exhibits, annexes and schedules identified in this Agreement are incorporated
herein by reference and made a part hereof.

 

[SIGNATURE PAGE FOLLOWS]

 

41

 

SECURITIES PURCHASE AGREEMENT

 

Signature Page

 

IN WITNESS WHEREOF, the Company and the Purchaser have executed this Securities Purchase
Agreement as of the day and year first above written.

 

	
   

  	
  COMPANY:

  
	
   

  	
   

  
	
   

  	
  REFOCUS
  GROUP, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Terence A. Walts

  	
   

  
	
   

  	
  Name:
  Terence A. Walts

  
	
   

  	
  Title:
  President

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  PURCHASER:

  
	
   

  	
   

  
	
   

  	
  MEDCARE
  INVESTMENT FUND III, LTD.

  
	
   

  	
   

  
	
   

  	
  By:
  MEDCARE GP CORP, INC., a Texas

  corporation, General Partner

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Thomas W. Lyles, Jr.

  	
   

  
	
   

  	
   

  	
  Thomas
  W. Lyles, Jr., President

  
						

 

42

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